Escolar Documentos
Profissional Documentos
Cultura Documentos
Features of Auditing
Systematic and scientific examination
Independent examination
By a qualified person (Auditor)
Purpose forming an opinion whether the financial statements (profit and
loss account, balance sheet, cash flow statements) disclose true and fair
view or not.
It involves critical review of the system of accounting and internal control.
It involves inspection, verification, vouching of various documents, vouchers,
minutes books,AOA,MOA, minutes books etc.
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Determinants of Scope
The following are the 4 sources through which scope can be determined
A. Statute
It means the relevant legislation I Act passed in the parliament. In case of Cos,
Banking Cos and insurance Cos the scope of Auditor is determined Act eg.
Companies Act, 2013.
B. Terms of Engagement:
In the case of sole traders/Partnerships, the scope is determined by terms of
engagement arrived at mutually between the Auditor and client. Upon receipt
of appointment letter from the client, the Auditor issues a letter of engagement
to the client laying down his understanding of the scope of the work.
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C. Pronouncements of ICAI
ICAI issues pronouncements on various matters such as Accounting and
Auditing through
1.
2.
3.
4.
AS - Accounting Standards.
AAS - Auditing Assurance Standards.
Guidance Notes.
Statements.
D. Nature of Audit
Whether it is internal audit, statutory audit, tax audit, investigation etc based
on it the scope of auditing would defer.
Can the scope of audit be MODIfied?
The scope determined by statue is minimum requirement and it cannot be
reduced even by passing special resolution or by engagement terms. On the
other hand it can be expanded based on mutual agreement.
Integrity
i) Honest and straight forward
ii)Auditor
not
to
practice
dishonest
means
for
satisfying
clients
requirement
2)
Objectivity:
i)
Refers to purposefulness
ii)
3)
Independence:
i)
ii)
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4)
Confidentiality
i)
ii)
client.
5)
6)
7)
8)
9)
10)
ii)
Audit planning
i)
ii)
iii)
Audit evidence
i)
ii)
iii)
Audit Documentation
i)
ii)
ii)
i)
ii)
iii)
of Audit procedure
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ii)
iii)
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7. What is the difference between True & Correct and True & Fair View?
with
substantial
accuracy
and
therefore auditing
is
mainly
concerned with the reliability of financial statements and true and fair financial
position and operating results of an enterprise.
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Statutory audit means any audit which is required compulsorily under any law.
Here statutory audit refers to mandatory audit to be done as per Companies
Act by a Statutory Auditor
Sec 139 to 147 under Chapter X of the Companies Act,2013 along with the
Companies(Audit and Auditors) Rules, 2014 contain provisions regarding audit
and auditors.
Section 139 contains provision regarding Appointment of auditors.
Removal, resignation of auditor,giving of special notice is provided in Sec 140.
Sec 141 prescribes eligibility, qualifications and disqualifications of auditors.
Section 142 deals with the provisions of Remuneration of auditors.
Powers and duties of auditors and auditing standards is provided in Sec 143.
Section 144 provides a list of certain services which auditor is not to render.
Section 145 deals with signing of Audit Reports.
Section 146 deals with Auditors to atteng General Meeting
Section 147 deals with punishment for contravention
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The first auditor is one who is appointed for the first time after the
If the BOD fails to appoint such auditor, it shall inform the members of
the company, who shall within 90 days at an EGM appoint such auditor who will
hold office till the conclusion of the first AGM.
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(d)
The co. cannot appoint the first auditor by mentioning his name in the
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It may be noted that any firm/LLP which has one or more partners who are
also partners in the outgoing audit firm/LLP cannot be appointed as auditors
during this 5 year period.
There is a transition period of three years, from date of enactment of the
2013 Act, to comply with this requirement. All listed companies or specified
companies will have to comply with the above provisions relating to rotation of
auditors within 3 years from the date of commencement of this Act i.e. within
31st March 2017. (The term of the auditor before commencement of this Act
will be considered)
However there will be no effect on the right of the company to remove an
auditor or the right of the auditor to resign from such office of the company
because of the provisions mentioned above.
The members of a company may also provide for the rotation of auditing
partner and his team at specified intervals in the audit firm appointed by the
company.
The members of a company may also provide that the audit shall be
conducted by more than one auditor.
Removal of Auditors
New Section 140 provides for Removal, Resignation etc. of Auditors.
(i) Under new section 140 an auditor can be removed from his office before
the expiry of his term only after obtaining the previous approval of the Central
Government and after passing a Special Resolution by the Members. For this
purpose the company will have to comply with the prescribed rules.
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(ii) If an auditor resigns from his office, he is required to file, within 30 days,
a statement in the prescribed form with the company and ROC. In the case of a
Government company, this form is also required to be filed with C& AG. In this
statement the auditor has to give reasons and other facts relevant for his
resignation.
For failure to comply with this requirement, the auditor is punishable with a
minimum fine of Rs. 50,000/- which may extend upto Rs. 5 lakh.
(iii) If the auditor is found to have, directly or indirectly, acted in a fraudulent
manner or abetted or colluded in any fraud by the company or any of its
officers, the Tribunal can direct the company to change the auditors.
The auditor who is removed by the Tribunal cannot be appointed as an auditor
of that company for 5 years. Further, under the new section 447 the auditor
who is guilty of fraud will be punishable with imprisonment for a minimum term
of six months which may extend to 10 years and shall also be liable to pay a
minimum fine of an amount involved in the fraud which may extend to 3 times
the said amount. If the fraud involves public interest the minimum period of
imprisonment will be 3 years.
Rules 7 and 8 provide for procedure for removal and resignation of an Auditor
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Remuneration of Auditors:
According to section 142 of the Companies Act 2013, the remuneration of the
auditor of a company shall be fixed in its general meeting or in the manner as
determined in the general meeting.
The remuneration of the first auditor appointed by the board may be fixed by
the Board.
The remuneration shall be in addition to the fee payable to an auditor,
including the expenses, if any, incurred by the auditor in connection with the
audit of the company and any facility extended to him but does not include any
remuneration paid to him for any other service rendered by him at the request
of the company.
1. It should be noted that the auditor shall seek only such information which
is required for conducting the audit.
2. In addition to above AAS-11 (representation by management) also
requires an auditor to obtain a letter of representation from management
duly signed by directors supporting the various matters included in the
financial statements
3. In case an auditor does not obtain information & explanation which is
material in nature he has right to draw the attention of shareholders in his
report.
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and
4. Right of Lien
1. The term lien refers to right of retaining physical possession of properties
belonging to the debtor
2. When the auditor des not receive remuneration, he has a right to retain
possession of books of accounts on which he has exercised due skill, care
and diligence
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The lien shall cover only fees and not out of pocket exps
(b)
The lien shall be exercised only on the books of a/cs and vouchers on
(d)
The lien is a specific and particular lien and shall not be assigned in
The lien extinguishes when the client pays the amount due
(f) The books of a/cs on which lien is exercised shall be relating to the year
for which the client owes money.
(g)
The auditor should get hold of the books of a/cs on the basis of
9.Right of indemnification i.e. the co. has an obligation to reimburse the loss
suffered by auditor while representing as company auditor.
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11. The auditor of a company which is a holding company shall also have the
right of access to the records of all its subsidiaries in so far as it relates to the
consolidation of its financial statements with that of its subsidiaries
The auditor shall make a report to the members of the company on the
accounts examined by him and on every financial statements which are to be
laid before the company in general meeting and the report shall after taking
into account the
- provisions of this Act,
- the accounting and auditing standards and
- matters which are required to be included in the audit report under the
provisions of this Act or any rules made thereunder and
- to the best of his information and knowledge, the said accounts, financial
statements give a true and fair view of the state of the companys affairs
- whether the company has adequate internal financial controls system in place
and the operating effectiveness of such controls;
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- whether the company has disclosed the impact, if any, of pending litigations
on its financial position in its financial statement;
- whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts;
- whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the company.
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but not later than 60 days of his knowledge and after following the procedure
indicated herein below:
auditor shall forward his report to the Board or the Audit Committee, as the
case may be, immediately after he comes to knowledge of the fraud, seeking
their reply or observations within 45 days;
on receipt of such reply or observations the auditor shall forward his report
and the reply/observations of the Board or the Audit Committee along with his
comments (on such reply/observations of the Board or the Audit Committee) to
the Central Government within 15 days of receipt of such reply/ observations;
in case the auditor fails to get any reply or observations from the Board or
the Audit Committee within the stipulated period of 45 days, he shall forward
his report to the Central Government along with a note.
The report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by Speed post
followed by an e-mail in confirmation of the same.
The report shall be on the letter-head of the auditor containing postal
address, e-mail address and contact number and be signed by the auditor with
his seal and shall indicate his Membership Number.
The report shall be in the form of a statement as specified in Form ADT-4.
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This is a new provision and there was no restriction of this type in the
Companies Act 1956. Therefore, an auditor or audit firm who or which has been
performing any non-audit services on or before the commencement of this Act
shall comply with the provisions of this section before the closure of the first
financial year after the date of commencement of the Act i.e within 31st March
2015.
It is also provided in this section that the prohibited non-audit services cannot
be rendered by the following associates of the auditor.
(i) If the auditor is an Individual:The Individual himself, his relative any person connected or associated with
him, or any entity in which the Individual has significant influence or control or
whose name or trade mark/brand is used by the Individual.
(ii) If the auditor is a firm or LLP:Such firm/LLP either itself or through its partner or through its parent,
subsidiary or associate or through any entity in which the firm/LLP or its
partner has significant influence or control or whose name, trade mark or brand
is used by the firm/LLP or any of its partners.
Signing of Audit Reports:
Sec 145 of the Companies Act 2013, provides that the statutory auditor shall
sign the auditors report or sign/certify any other document of the company.
It also provides that the qualifications, observations or comments on financial
transactions or matters, which have any adverse effect on the functioning of
the company mentioned in the auditors report shall be read before the
company in general meeting and shall be open to inspection by any member of
the company.
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Penal Provisions:
Section 147 provides for punishment for contravention of the provisions of
sections 139 to 146. These penalty provisions are as under.
If a company contravenes any of the provisions of sections 139 to 146 it
shall be liable to pay minimum fine of Rs. 25,000/- which may extend to
Rs. 5 lakh. Further, every officer who is in default shall be punishable with
imprisonment upto one year or minimum fine of Rs. 10,000/- which may
extend to Rs. 1 lakh or with both.
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Every branch office shall maintain proper books of a/cs for accounting the
transactions which have taken place in the branch.
The branch office may be subjected to audit either by statutory auditor himself
or by an independent auditor.
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Appoinment:
The branch auditor shall be appointed by the shareholders of the co. in the
AGM and the nature of resolution to be passed shall be the same which is
applicable for co. auditor, sometimes the shareholders may pass a resolution
delegating the power to BOD to appoint the branch auditor in consultation with
the statutory auditor.
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Scope
The scope of the branch auditor is restricted to the operations of the branch. He
shall covers same matters which are covered by the co. auditor in his report.
The provisions of Section 143(12) read with rule 12 hereunder regarding
reporting of fraud by the auditor shall also extend to such branch auditor to the
extent it relates to the concerned branch.
Concept of materiality
(b)
Automatic exemption
(b)
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Obligations of Co-Auditors
1. To maintain proper working paper file
2. To draft audit programme covering his area
3. To exercise due skill, care and diligence in performance of audit
4. No to give direction or review the work of other co-auditor
5. To convey the information received during the course of audit which may
be found useful to other co-auditor.
6. To hold discussion with the other auditor regarding matters of common
interest on
a. Compliance with AAS
b. Accounting policies
c. Adjustments arising at the year end
7. To audit the accounts of branches which fall within his jurisdiction
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b. When one co-auditor has conveyed the information to other coauditor in which there is concurrence.
c. Disclosure requirements
d. Compliance with statutory requirements
Limitations
1. Ego problem
2. Sharing of fees
3. Difficulty in fixing responsibility in common areas.
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Qualifications for the internal auditor: The internal auditor shall either be a chartered accountant whether engaged in
practice or not or a cost accountant, or such other professional as may be
decided by the Board to conduct internal audit of the functions and activities of
the company.
The report of internal audit shall be submitted to the Board of the company.
creditors
5. Ensuring correctness of FINANCIAL STATEMENTS through a system of
pre-audit.
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Other Provisions:
All the companies covered under any of the above criteria will have to comply
with the requirements of Section 138 and this rule within six months of
commencement of such section.
The internal auditor may or may not be an employee of the company.
The Audit Committee of the company or the Board shall, in consultation with
the Internal Auditor, formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.
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1. A Management tool:
Internal Audit is management tool performed by the employees of the
organization or the engaged professional firm to check the appropriateness of
internal checks and control in the organisation. The reporting authority is
generally board of directors and audit committee.
2. A continuous Exercise:
Internal Audit is a continuous and systematic process of examining and
reporting the operations and records of a concern by its employees or external
agencies specially assigned for this purpose. It is, in essence, auditing for the
management and its scope may vary depending upon the nature and size of
the concern.
3. A Control System:
It is a control system concerned with examination and appraisal of other control
mechanisms.
4. A Risk Management Tool:
The internal audit work encompasses fostering the creation of a risk
management process and ensuring it addresses key objectives, and the
subsequent evaluation of the process. The internal audit work also
encompasses an identical role in the creation and subsequent evaluation of, the
business continuity planning process, and the information security and privacy
system.
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5. Safeguarding of Assets:
Internal Auditor should verify the existence of assets and should review means
of safeguarding assets.
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2. Term of Office:
Internal auditor appointment is continuous until he is removed or resigns.
However, Statutory auditor(in some cases) is appointed for 5/10 years with
cooling off period of 5 years(rotation provisions).
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3. Qualification:
Qualifications of the statutory auditor are prescribed in the Companies Act,
2013. In case of a company, a Practicing CA or a firm of Practicing CA can only
be appointed as a statutory auditor. There are no fixed qualifications for the
position of an internal auditor.
4. Objects:
The main object of the statutory audit is to form an opinion on the financial
statement of the organization. Auditor has to state that whether the financial
statements are showing the true and fair view of the affairs of the organization
or not. The main object of the internal audit is to detect and prevent the errors
and frauds.
Proprietary oriented approach towards auditing by internal auditor.
Compliance oriented approach towards auditing by statutory auditor.
5. Scope:
The scope of the statutory audit is fixed by the Companies Act. It cannot be
changed by mutual consent between the auditor and the management of the
audited business unit. The scope of the internal audit is fixed by the mutual
consent of the auditor and the management of the unit under audit.
6. Report:
The statutory auditor submits his report to the shareholder of the company in
its general meeting. The internal auditor submits his report to the management
of the company who is also his appointing authority.
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7. Removal:
The procedure of removal of the statutory auditor is very complex. Only the
company in the general meeting can remove the auditor. It also has to take the
permission of the central government. The management of the entity can easily
remove internal auditor. No permission of Central Government is required.
8. Audit Ceiling
Internal audit is not considered for upper ceiling under Companies Act, whereas
statutory audit is considered for ceiling limit.
ii.
Review of Controls
iii.
Testing controls
iv.
Account Details
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5. Internal Audit ensures the adequacy, reliability and accuracy of financial and
operational data by conducting appraisal & review from an independent angle.
6. Internal Audit is an integral part of Management by System.
7. Internal Audit can break through the power ego and personality factors and
possible conflicts of interest within the organization.
8. It ensures compliance of accounting procedures and accounting policies.
9. Internal Auditor can be of valuable assistance to management in acquiring
new business, in promoting new products and in launching new projects for
expansion or diversification of business
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2. To plan, organize and carry out the internal audit function including the
preparation of an audit plan which fulfils the responsibility of the department,
scheduling and assigning work and estimating resource needs.
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8. To coordinate coverage with the external auditors and ensure that each
party is not only aware of the others work but also well briefed on areas of
concern.
10. To review and report on the accuracy, timeliness and relevance of the
financial and other information that is provided for management.
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In
case of company having share capital + reserves at Rs.50 Lacs or the average
annual turnover has crossed Rs. 5 Crores for last 3 financial years.
Internal
effectiveness
auditor
of
recommendations.
the
should
examine
internal
control
However,
the
and
contribute
system
internal
to
through
auditor
is
the
ongoing
evaluation
not
vested
and
with
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The Companies Act 2013 has introduced a new requirement of Secretarial Audit
for bigger companies, which has been prescribed under Section 204 of the Act.
The provisions regarding secretarial audit of the company according to section
204 of the Companies Act, 2013 and the Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014 are discussed below-
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Other Provisions:
It shall be the duty of the company to give all assistance and facilities to the
PCS, for auditing the secretarial and related records of the company.
If a company or any officer of the company or the PCS, contravenes the
provisions of this section, the company, every officer of the company or the
PCS, who is in default, shall be punishable with fine which shall not be less than
Rs.1 lakh but which may extend to Rs.5 lacs. As per Section 143(14), all
provisions regarding rights, duties and obligations of statutory auditors shall
also apply to Company Secretary in Practice conducting secretarial audit.
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The Cost Accountant in practice who shall be appointed by the Board on such
remuneration as may be determined by the members in such manner as may
be prescribed: Provided that statutory auditor of the company cannot be a cost
auditor.
Provided further that the auditor conducting the cost audit shall comply with
the cost auditing standards(issued by ICWAI)
An audit conducted under this section shall be in addition to the audit
conducted under section 143(Secretarial audit).
The qualifications, disqualifications, rights, duties and obligations applicable
to auditors under this Chapter shall, so far as may be applicable, apply to a
cost auditor also.
The report on the audit of cost records shall be submitted by the cost
accountant in practice to the Board of Directors of the company.
A company shall within 30 days from the date of receipt of cost audit report
furnish to the Central Government such report along with full information and
explanation on every reservation or qualification contained therein.
If, after considering the cost audit report the Central Government is of the
opinion that any further information or explanation is necessary, it may call for
such further information and explanation and the company shall furnish the
same within such time as may be specified by that Government.
If any default is made in complying with the provisions of this section,
(a) the company and every officer of the company who is in default shall be
punishable in the manner as provided in sub-section (1) of section 147;
(b) the cost auditor of the company who is in default shall be punishable in the
manner as provided in sub-sections (2) to (4) of section 147.
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Question 3: Write a note on Special Audit (Sec 233A of Companies Act, 1956)
1. Meaning
Special audit is ordered by C.Govt in some cases and therefore it is not
mandatory for all the companies.
Special audit may be ordered by CG without providing an opportunity of being
heard to the company.
(b) the company is being managed in such a manner that it would cause
serious injury or damage to the interests of the trade, industry or business to
which it pertains; or
(c) the financial position of the company is such as to endanger its solvency
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4. Scope
The scope of special auditor is determined by sec 227 of cos Act,(which is the
same the regular auditor), however, Central Govt may direct the special auditor
to extend his scope to other areas.
6. Reporting
The special auditor addresses his report to the central govt. The copy of the
report need not addressed to company.
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Propriety Audit
Kohler has defined propriety as that which meets the test of public interest,
commonly accepted customs and standard of conduct and particularly as
applied to professional performance, requirements of Government regulations
and professional codes. Propriety Audit carry out to check, mean whether the
transactions have been done in conformity with established rules, principles
and established standard.
The Propriety Audit means the verification of following main aspects to find out
whether:
(i) Proper recording has been done in appropriate books of accounts.
(ii) The assets have not been misused and have been properly safeguarded.
(iii) The business funds have been utilized properly.
(iv) The concern is yielding the expected results.
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The CAG should bring out cases of improper avoidable expenditure even though
they are as per the rules.
To protect the interest of public, mere regular audit of expenditure is
inadequate.
It should be subject to principle of propriety i.e. whether it is wasteful in
nature.
Audit
should
look
into
the
wisdom,
faithfulness
&
economy
of
govt.
transactions.
The following broad principles are normally followed:
a. Expenditure should not be prima facie more than the occasion demands.
b. The Government officials not to sanction expenditure that will directly or
indirectly accrue advantage to them.
c. Public money should not be wrongly utilized for a particular person or section
of community.
Performance Audit
It covers efficiency, economy and effectiveness audit.
Efficiency audit looks into whether the Government projects are executed &
their operations are conducted as per the expected results. Efficiency indicates
how best an organization uses its given resources . Efficiency audit focuses on
input, output and productivity. It refers to comparing and analyzing actual
output with the desired/expected output.
It brings out deficiencies/negatives in the system and how it can be improved.
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Economy audit looks into whether the Government has acquired the financial,
human and physical resources in an economical manner and also whether
sanctioning authorities have observed economy.
Effectiveness audit refers to appraisal of the performance of the projects with
reference to a predetermined target.
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Audit against rules and regulation to see that the expenditure incurred was in
conformity with the laws, rules and regulations framed to regulate the
procedure for expending public money.
Audit of sanctions to expenditure to see that every item of expenditure was
done with the approval of the competent authority in the Government for
expending the public money.
Propriety Audit which extends beyond scrutinizing the mere formality of
expenditure to it wisdom and economy and to bring to light cases of improper
expenditure or waste of public money.
While conducting the audit of receipts of the Central and State Governments,
the Comptroller & Auditor General satisfies himself that the rules and
procedures ensure that assessment, collection and allocation of revenue are
done in accordance with the law and there is no leakage of revenue which
legally should come to Government.
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with
internal
procedures/rules/regulations/policies/standards,
corporate
external
regulatory
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Outputs are goods and services produced to meet client needs. Outputs are
defined in terms of quantity and quality and are delivered within parameters
relating to level of service.
Quantity refers to the amount, volume, or number of outputs produced.
Quality refers to various attributes and characteristics of outputs such as
reliability, accuracy, timeliness, service courtesy, safety, and comfort.
Productivity is the ratio of the amount of acceptable goods and services
produced (outputs) to the amount of resources (inputs) used to produce them.
Productivity is expressed in the form of a ratio such as cost or time per unit
of output.
Efficiency is a relative concept. It is measured by comparing achieved
productivity with a desired norm, target, or standard. Output quantity and
quality achieved and the level of service provided are also compared to targets
or standards to determine to what extent they may have caused changes in
efficiency. Efficiency is improved when more outputs of a given quality are
produced with the same or fewer resource inputs, or when the same amount of
output is produced with fewer resources.
Efficiency audit refers to comparing the actual results with the desired or
projected results. It is directed towards the measurement of whether plans
have been effectively executed. It is concerned with the utilisation of the
resources in economic and most remunerative manner to achieve the
objectives of the concern. It comprises of studying the plans of organisation,
comparing actual performance with plans and investigating the reasons for
variances to take remedial action
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demonstrate the scope for lowering the cost of delivering programs without
reducing the quantity or quality of outputs or the level of service;
increase the quantity or improve the quality of outputs and level of service
without increasing spending; and
identify needed improvements in existing controls, operational systems, and
work processes for better use of resources
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All of the above stated benefits help to promote a situation where the financial
statements present a true and fair view. A good system of internal control will
make life easier for the auditor.
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b) Examination in depth
It means examination of a few selected transactions from the beginning to the
end.
Flowcharts are
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resort to
examination and evaluation of the internal control that exist in the organization
so that his entire audit programme may be formulated only after he satisfies
himself that such control systems are adequate and in consonance with the
requirements of the business.
After a thorough examination and review of internal controls, if the auditor
becomes aware of weaknesses in such internal controls, he should make the
client aware of material weaknesses that have come to his attention. Such
communication is normally sent to the management in writing, which is termed
as a letter of weakness or management letter.
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The main objective of internal check is prevention of errors and frauds and/or
detection of errors and frauds at the earliest. Internal check is a continuous
process and is part of the day-to-day routine. It relates to all the transactions
that take place every day. Internal check is achieved by complementary
allocation of duties and by independent verification of the work of one person
by another.
Internal check is a part of internal control system. It ensures that all financial
transactions are properly recorded.
It also ensures efficiency of the accounting system followed by the organization
and enables easy preparation of financial statements. It achieves its main
object of minimizing errors and frauds.
A sound system of internal check increases the reliability of financial
statements. Internal check discourages fraud and collusion among employees
by instilling a fear of detection in their minds. Internal check assigns
responsibilities to persons and enables maintenance of records and documents
properly and thereby ensures smooth flow of work.
Internal check is a part of Internal control system. Internal check refers to the
whole system established within the organization by which work of one
employee is automatically (& continuously, objectively, independently) checked
by another ensuring that the process accounting information is accurate.
Internal check vs. Internal Control System
Internal check is a smaller concept compared to a broader concept of internal
control. Internal check is a part of internal control system. Internal control
includes internal check, internal audit, quality control etc
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2)
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3)
4)
The auditor carries out auditing in depth and surprise check for this
purpose
5)
Existence of system
2)
Effectiveness of system
3)
Continuance of system
2. Substantive test
1)
2)
It refers to
a)
b)
Analytical test
Existence
2)
3)
Valuation
4)
Disclosure
Occurrence of transaction
b)
Measurement of transaction
c)
Disclosure
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audit plans. There may be similary changes for which change may be required
in audit plan.
(e) Changes in the accounting system
The introduction of computers such that when a company introduces significant
changes in its operating procedures will require a review and evaluation of the
system of internal control.
(f) Deadlines established for the submission of audit report
Where a client has set deadlines for its statutory activities such as the annual
general meeting, it is important for the auditor to work in line with such
programmes.
(g) Use of Rotational Testing and Verification
In practice, the auditor may not carry out a hundred percent testing or
verification of the clients transactions or segments of the business. Where
rotational testing or verification is adopted, it will be necessary for the auditor
to determine ahead of the date of the engagement which aspects of the
business should be selected for testing or verification. An example of rotational
testing could be applied on the clients branches to be visited.
Coverage of Audit planning
It covers the following aspects:1)
2)
3)
4)
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Advantages:
1. Replaces mental plan
2. Effective monitoring device
3. Coverage (wide)
4. Systematic approach to audit
5. Source of planning for future
6. It provides guidance to audit staff
7. Acts as evidence in the court of law.
8. Enables fixation of responsibility on the audit staff
9. Ensures continuity of audit
10.
Limitations:
1. Rigidity
2. Monotony
3. Does not encourage creativity
4. Provides an easy way of escape for inefficient staff
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Vouching
Vouching is referred to as The art of examining vouchers. The objective of
vouching is to establish the authenticity of the transactions recorded in the
primary books of accounts. This is done by
a. Verifying transactions recorded in the books of account with relevant
documentary evidence (vouchereg cheque, invoices, goods received
note,challans,agreements,counterfoil,minutes book,MOA,AOA, deeds,bank
statement,registers).
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b. Verifying the authority on the basis of which the entry has been made
c. Confirming that the amount mentioned in the voucher has been posted
to appropriate account
The following are the essential points to be kept in mind while examining a
voucher:
a. Vouchers should be numbered
b. Voucher should be dated and fall within the accounting period
c. Vouchers should be Authorized
d. Should relate to clients business
e. Accounted under proper a/c that would clearly disclose the character of
the receipts or payments posted
f. Alterations in the voucher should be authorized
g. Amount in words and figures should match.
h. Cancelled vouchers should be retained in the book
i. Unused vouchers should be kept under lock and key
Objective of vouching to ensure genuine,valid,complete transactions are
properly recorded in the books and they have evidence in the form of vouchers.
To ensure only transactions relating to business are recorded. In the process of
vouching frauds and errors might be detected.
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Techniques of verification
Inspection physical inspection of assets
Observation observing the verification done by others
Confirmation getting written confirmation from outsiders regarding the
existence of the assets.
Distinction between Vouching and Verification (look into your ICSI for
detail of each point) Points of differences - Meaning, Nature, Person,
Time
Meaning
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(ii)
Purpose
Permanent file
Kept at Auditors office
Contains documents which are required for Audit of recurring nature
Members of Audit team refer to this for updating basic information about client.
Cannot be taken to clients location
Contents are updated periodically
CONTENTS OF PERMANENT FILE (few examples)
1)
2)
3)
4)
5)
6)
7)
Organizational charts
8)
9)
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10)
11)
12)
Current file
1)
2)
3)
4)
5)
6)
2)
Audit programme
3)
Inventory sheet
4)
Confirmation letters
5)
6)
7)
8)
Management representation
9)
10)
Audit conclusions
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Current File
of audit
3. It is useful for Audit staff to conduct Useful for Auditor to support his
Audit
Audit conclusion
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Materiality depends on the size and nature of the item, judged in the particular
circumstances of its misstatement.
It could either be
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The audit should be planned so that audit risk is kept at an acceptably low
level. On assessment of the inherent and control risks, he should consider the
level of detection risk which he could afford and based upon his judgement,
select appropriate substantive audit procedures. The auditor reduces detection
risk by performing substantive procedures. The more extensive the procedures
performed, the lower the detection risk.
Audit Sampling (AAS 15)
In an audit, sampling procedures are used because it is not practical to
examine every single item in a population. For example, the auditor may select
an audit sample of non-current assets, and verify their existence, condition and
value. It would not be practical for the auditor to track down every single asset
on the books.
But, if all the items in the audit sample are verified then it may be appropriate
to draw the conclusion that all the assets are correctly recorded in the books
(assuming the audit sample has been selected correctly and is of sufficient size)
It means carrying out audit procedures in less than 100% of items within an
account balance or class of transactions. When using sampling methods, the
auditor should design and select an audit sample, perform audit procedures
thereon, and evaluate sample results so as to provide sufficient and appropriate
audit evidence. There are two methods in which the size of the sample and the
selection of individual items of the sample are determined. They are 1.
Judgemental sampling and 2. Statistical sampling.
Judgemental sampling
The auditor, on the basis of his personal experience and professional
judgement, will determine the size of the sample and express it in terms of
number of accounts or transactions to be checked. However, whether the
sample selected on the above basis would represent the population in order
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Statistical Sampling
It is a method of audit testing which is more scientific than testing based
entirely on the auditors own judgement because it involves use of theory of
probability. The sample should be selected in such a manner that it is truly
representative of the population from which it is being selected. Each item in
the population should have an equal chance of being included in the sample.
The most important method of selecting a sample using a statistical approach is
Stratified Sampling.
Stratified sampling
Stratification refers to the process of dividing a population into sub-populations,
each of which is a group of sampling units, which have similar characteristics.
Each such sub-population is known as a stratum. Each stratum is treated as if
it was a separate population and proportionate items are selected from each of
this stratum. From these groups, the auditor may pick up different percentage
of items for checking / verification or for applying his audit procedures.
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2. Tolerable error is the maximum error in the population that the auditor
would be willing to accept and still concludes that the result from the sample has
achieved the audit objective. Tolerable error is considered during the planning
stage and, for substantive procedures, is related to the auditors judgement about
materiality. The smaller the tolerable error, the greater the sample size will need
to be.
3. Expected Error
If the auditor expects error to be present in the population, a larger sample than
when no error is expected ordinarily needs to be examined to conclude that the
actual error in the population is not greater than the planned tolerable error.
Smaller sample sizes are justified when the population is expected to be error
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Auditors Liability
If any errors are found in the accounts the auditor cannot take the shield against
the fact that he conducted test check. The auditor should very carefully select the
items for test check and ensure on the whole that the accounts show a true and
fair view of the Profit/Loss in the case of the Profit & Loss Account and of the
state of affairs of the organisation in the case of Balance Sheet.
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final audit file. It outlines about vesting of property of working papers with the
Auditor.
This Standard spells out two essential principles viz. period of maintaining
working papers and assembly of audit file by the auditor.
According to SA 230, Audit Documentation refers to the record of audit
procedures performed, relevant audit evidence obtained, and conclusions the
auditor reached. Preparing sufficient and appropriate audit documentation on a
timely basis helps to enhance the quality of audit and facilitates effective review
and evaluation of audit evidence obtained and conclusions reached before
finalizing auditors report. According to this standard, retention period for audit
engagements ordinarily is no shorter than ten years from the date of auditors
report, or, if later, the date of group auditors report
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