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AUDITING

Presented By
V.Gopalakrishnan.,M.Com.,M.B.A.,M.Phil.,PGDMM.,
Assistant Professor,
Department of Commerce,
Kamaraj College, Tuticorin.

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Meaning - Auditing

The Word Audit is derived from the Latin word Audire


which means to hear.
In Olden days, some experienced people ordinarily
judges the accounts of business people for the purpose of
the correctness of accounts.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Meaning
The general meaning of an audit is a planned and documented
activity performed by qualified personnel to determine by
investigation, examination, or evaluation of objective evidence,
the adequacy and compliance with established procedures, or
applicable documents, and the effectiveness of implementation.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Definition
Simple Definition:-

Spicer & Pegler

Audit is an examination of accounts & records which is


carried out by vouching the evidences, supporting various
transactions; by such an examination it is ascertained that the
Balance Sheet gives a true & fair view of the state of affairs of
business & the Profit & Loss Account gives a true & fair view
of the profit or loss of business.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Characteristics of
Auditing
1. Systematic & Scientific Procedure
2. Essential Documents are integral part
3. It is done with the help of vouchers, documents, information
and explanations received from the authorities.
4. Undertaken by an Independent person or Body
5. Analytical approach
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Cont.
6. Art & Science Both
7. Verification of the results
8. The Auditor has to satisfy himself with the authenticity
9. Compliance
10. The auditor has to inspect, compare, check, review,
scrutinize the vouchers supporting the transactions and
examine correspondence, Memorandum of Association and
Articles of association etc., in order to establish correctness
of the books of accounts.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Scope of Auditing
The scope of audit is increasing with the increase in the
complexities of the business. It is said that long range objectives of
an audit should be to serve as a guide to the management future
decisions.
Today most of the economic activities are largely conducted
through public finance. The auditor has to see whether these larger
funds are properly used. The scope of audit encompasses
verification of accounts with a intention of giving opinion on its
reliability. Hence it covers cost audit, management audit, social
audit etc. It should be remembered that an auditor just expressed his
opinion on the authenticity of the account. He has no power to take
action against anybody, in this regard its said that an auditor is a
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watch dog but not a blood hound.
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Cont.
1. Legal Requirements
2. Entity Aspects
3. Reliable Information
4. Proper Communication
5. Evaluation
6. Test
7. Comparison
8. Judgments
9. Work
10. Evidence
11. Misstatement
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Principles of Auditing
Fundamental principles of Auditing
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Integrity, Objectivity and Independence


Confidentiality
Skill & Competence
Responsibility of work performed by others
Documentation
Planning
Audit Evidence
Accounting system & Internal Control
Audit Conclusions
Audit Report
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Detection & Prevention of Errors


Error of Omission
Error of
Commission
Clerical Error
Error of Principle
Compensating
Error

trasanction is to be left out to register,


partial entry of one transaction
Rs. 1500 recorded as Rs. 5100

ommission to post,posting wrong side & amount to


an a/c, double posting,totalling mistake, balance
b/d & c/f

fundamental principle of Accountancy


& Auditing
two errors togather which will be
resulted in trial balance sheet will agree12

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Detection & Prevention of Frauds


Of Cash
By Employees

Misappropriation
Of Goods

Showing more
Profits
By Top
Management

Manipulation of
A/c
Showing less
profit
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Advantages of Auditing
A. Businessman's point of view:-

B. Investor's point of view

1. Detection of errors and frauds


2 . Loan from banks
3. Proper valuation of investments
4 . Proper valuation of assets
5. Government acceptance
6. Suggestions for improvement
7. Better Reputation
8. Uniformity in accounts

1 . Protects interest
2. Moral check
3. Builds reputation
4. Good security

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Cont.
C. Other Advantages
1. Audited account are detected as an authentic record of
transaction.
2. Errors and frauds are detected and rectified.
3. It increases the morale of the staff and thus it prevents frauds
and errors.
4. Because of his expertise the auditor may advise on various
matters to his clients.
5. An auditor acts as a trustee of his shareholders. Hence he
safeguards their financial interest.
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6. For taxation purpose auditing of account is a must.
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Cont.
7. In case of any claim is to be made from the insurance
company only audited account should be submitted.
8. Even in case of partnership firm auditing of accounts helps in
the settlement of claim at the time of retirement/death of a
partner.
9. Auditor account helps in managerial decisions.
10. They are useful to secure loan at the of amalgamation,
absorption, reconstruction etc.
11. Auditing safeguards the interest of owners, creditors,
investors, and workers.
12. It is useful to take certain financial decisions like issuing of
shares, payment of dividend etc.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Limitations of Auditing
Truly speaking, an audit should have no limitations of its
own. It is designed to protect the interest of all parties who are
interested in the affairs of the business. If there be any
shortcoming arising there from, it may be due to its narrow
scope of application in its related field of operation and
unextended definition of the concept.
Auditing suffers from the following shortcomings:
1. Want of complete picture
The audit may not give complete picture. If the accounts are
prepared with the intention to defraud others, auditor may not be
able to detect them.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Cont.
2. Problems of dependence:
Sometimes the auditor has to depend on explanations,
clarification and information from staff and the client. He may or
may not get correct or complete information.
3. Post-mortem examination:
Auditing is a post-mortem examination. There is no use of
such examination when events have already been occurred.
4. Existence of errors in the audited accounts:
It is not possible for the auditor in all cases, to check each
and every transaction of an organization. As a result, there may
be error in the audited accounts even after the checking by the
auditor.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Cont.
5. Lack of expertise:
Auditor has to seek opinion of experts on certain matters on
which he may not have experts knowledge. The auditor has to
depend upon such reports which may not always be correct.
6. Diversified situations:
Auditing is considered to be a mechanical work. Auditors
may not be in a position to frame audit programme, which can be
followed in all situations.
7. Quality of the auditor:
Success of audit depends on the sincerity with which the
auditor has performed his duties. The same audit work can be
done by two different auditors with difference in sincerity. 19
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Differences Between Accounting & Auditing


Accounting

Auditing
Meaning

It is the process of recording


classifying and summarizing the
business transactions to monetary
Terms

It is the process of review of accounts


to establish their reliability and the
statements therefrom
Scope

It entails preparation of financial


statements and their interpretation

Examination of accounts and records


Object

It investigates finding out the


operating results and figuring out the
financial status of an enterprise

The object is to judge the correctness


and reliability of financial statement
prepared by the internal staff of
business enterprises

Hierarchy
Accounting Precedes the Auditing

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Auditing succeeds accounting

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Accounting

Auditing
Qualification

No formal qualification is insisted for


acting as an accountant

Auditor should be a qualified chartedaccountant.

Expertise
Accountant is expected to be familiar
with audit techniques and procedures.

Auditor is one who has the expertise to


apply not only accounting principles
but also auditing techniques and
processes

Nature of Employment
Accountant is permanent staff of an
enterprise.

He is an independent outsider. He is
working on an assignment basis.

Remuneration
Accountant receives salary as per
The terms of his service.

Remuneration of auditor is Pre-fixed

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

FACTORS

INVESTIGATION

AUDITING

Description

Audit means the inspection,


examination or verification of a person,
organization, system, process,
enterprise, project or product.

Investigation means an inquiry,


or is the act of detail
examination of activities so as
to achieve certain objectives.

Owners

Audit is conducted on behalf of owners


only and they make the appointment.

Investigation may be conducted


either by owner of the
undertaking or by an outsider.

Purpose

To determine the true and fair view.

Varies from business to


business

Process

Routine process

Investigation is not a regular


process

Scope

It includes only an examination of the


accounts of a business

It covers an examination of the


accounts bur also covers an
inquiry into other matter that
are connected with the purpose
for which it is undertaken

Period

Year or six months

May cover several years

Does not examine personally

May examine personally

Employees

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Audit Procedure
Audit
Programme

Test
checking

Routing
Checking

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Audit Note
Book

Working
Papers

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Audit Programme
An Audit programme is an outline of all procedures to
be followed in order to arrive at an opinion concerning a
clients financial statement.
An audit programme is a written scheme prepared by the
auditor to distribute the work to be followed during audit;
i.
ii.
iii.

How much work is to be done?


Who is going to do a particular portion of work?
What is the duration of the time?

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Types of Audit Working


Programme

Fixed Audit
Programme Flexible Audit
Programme
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Specimen of Audit Programme


M/s.M.BalaMurugan Ltd.,
For the year ended on 31.3.2015
Particulars of
Work

Extent of
Work to be
Done

Actual Work
Completed

Time Taken to Completed by


Complete
(Signature)

A.Cash Book:
June
Full
July, November

1. Posting
2. Costing
3. Vouching

1 month
Full
3 months

B.Debtors
Legder:
1.Posting
2. Costing
3. Vouching

1 month
1 month
3 month

April
March
May, October

As on 31.3.20
As on 31.3.20
As on 31.3.20

As on 31.3.20
As on 31.3.20
As on 31.3.20

Physical
verification
1. Cash
2. Fixed assets
3. Stock

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Audit Note Book


During the course of an audit, the audit staff makes a
note of the points that require clarification, explanation or
investigation.
Contents of the Audit Note Book;

Technical Details about the Business


Missing Vouchers
Frauds and Errors found in the book
Suggestions made by audit staff
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Audit Procedures

Adoption of
Distinctive
Ticks

Routing
Checking

Test
Checking

Difference
in Balance
Books

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

I. Adoption of Distinctive Ticks


He should use different types of ticks for different purposes
He should issue clear instructions to the members
Tick should be small and clear
The kinds of ticks used by audit staff
The auditor should have the pencils and inks of different
colours of pencils every year
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Example of Tick

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Routine Checking
Routing checking is the checking of Common records and
books or original entry and ledgers with a view of detect
clerical errors and frauds of a very simple nature.
Advantages:
Detection of errors and frauds
Checking of postings
Checking of final accounts
Arithmetical accuracy of entries
Simple Job
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Test Checking
Test Checking is also known selective verification
Sampling Process Test checking is a substitute for
detailed checking.
Advantages

Saves Time and energy

Useful & Purposive

Easy for the auditer


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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Various Techniques of
Audit

Routine checking
Test Checking
Vouching
Valuation
Physical examination
Confirmation
Inquiry
Confirmation
Examination of subsidiary Books
Analysis of Financial Statements

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Internal Check
A System of Internal check is an arrangement of duties
where by no one person is allowed to carry through and
to record every aspect of a transaction.
Objectives

To allocate the duties & responsibilities of clerk

To minimize the Errors & Frauds

To detect error of fraud easily it is committed

To prepare final a/c

To exercise moral pressure over staff


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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Internal Control

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Advantages Disadvantages
Internal Check
Advantages

Proper distribution of work

Detection of errors and frauds

Minimization of errors and frauds

Increase the deficiency


Disadvantages

No Seriousness

Carelessness

Expensive

Disorder
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Vouching

Vouching means checking of entries with the help of


documentary evidences. For each entry it is to be
ascertained which is properly authorised
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Precautions to be taken by the auditor


while examining vouchers
Each voucher should be consecutively numbered
Voucher should be inspected and cancelled by the
auditor
Voucher name should be correctly mentioned
Auditor verify the voucher date and time
Auditor verify the official seal & Authorized sign
When voucher is missing, the auditor should satisfy
himself with regard to the reason of its being lost and
demand for duplicate copy
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Verification - Meaning
Verification means truth proving or confirming the Truth.
Verification signifies Proving the truth or
Confirmation.
Verification includes the following,

Existence

Valuation

Ownership

Possession
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Valuation - Meaning

Valuation of assets is an important part of their verification.


Valuation means to test exact value of an asset on the basis of
its Utility.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Classification of Assets
Fixed Assets Plant & Machinery, Land, Buildings
Current Assets Stock in hand
Wasting Assets Coal, Mines
Intangible assets Goodwill, paten right, copyright
Fictitious Assets - Shares
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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Company Audit
Company audit is conducted is accordance with the
provisions of the Companies Act,1956.
To Conduct a Company audit, a company must appoint
qualified Auditor.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Qualification of Auditor

A person shall not be qualified for appointment as


auditor unless he is Charted Accountant within the
Meaning of CA Act, 1949
A Person who holds restricted Auditors Certificate (Part
B) 1956
An Auditor must possess adequate educational
qualification
He is independent of all influences
A Charted Accountant means a person who is a member of the
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Institute of Charted Accountants of India.
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

QUALITIES OF AN AUDITOR

Independence
Integrity
Objectivity
Ability for expression and communication
Tactfulness
Awareness

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

RIGHTS & POWERS OF AN AUDITOR


Right of access at all times to
books, accounts, and vouchers
of the company
Right to receive notice and to
attend general meetings
Right to obtain information and
explanations
Right to visit branches

Right to sign audit report

Right to receive remuneration


V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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DUTIES OF AN AUDITOR
1) Compliance with Audit Standard
2) Duty to Report Fraud
3) Duty not to render certain services
He can not render "consulting and specialized services" which
means any one or combination of) Accounting and Book keeping services
) Internal Audit
) Design and implementation of any financial information system
) actuarial services
) investment advisory services
) investment banking services
) management services
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) any other kind of consultancy services
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

4) Duty to sign audit reports etc.


5) Duty to attend General meeting
6) Duty to Report
Under section 143 of the Act the auditor has a duty to report to
the members of the company on:
accounts examined by him
every financial statement laid before a general meeting during his
tenure
7) Duty to Enquire Secures loans and advances
transactions represented merely by book entries
personal expenses
issue of shares for cash
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loans and advances made by the company etc.
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

APPOINTMENT OF AN
AUDITOR

WHO CAN BECOME AN


AUDITOR?
Chartered Accountant
in practice
Partnership firm of
CAs in practice
Holder of a certificate
in Part B States
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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DISQUALIFICATIONS OF AN AUDITOR

A body corporate
An officer or employee of the company under audit
A person who is a partner, or who is in the employment of
an officer or employee of the company
A person who is indebted to the company for an amount
exceeding Rs.1000
A person holding security of that company
A person who has been disqualified for appointment as an
auditor of a company on above mentioned grounds, shall
also not be eligible for appointment with any other body
corporate which may be that companys subsidiary or that
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companys holding company.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

WHO CAN APPOINT AN AUDITOR?


Appointment by directors

Appointment by shareholders

Appointment by the Central Government

Appointment by the Comptroller and


Auditor General

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

APPOINTMENT BY
DIRECTORS
FIRST AUDITORS :
The board of directors shall appoint the first auditor(s) of
the company within One Month of the Date Of
Registration of the company.
CASUAL VACANCY:
The directors have been empowered to fill any casual
vacancy in the office of an auditor, except which is caused
by prior resignation of an auditor.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

APPOINTMENT BY SHAREHOLDERS
FIRST AUDITORS :
In case the directors fail to appoint the first auditor(s), the
shareholders shall do so at a general meeting by passing a resolution.
SUBSEQUENT AUDITORS:
(i) By Ordinary Resolution
(ii) By Special Resolution
The company shall within 7 days give intimation to the auditor so appointed.
The auditor shall inform in writing to the Registrar of Companies within 30
days of his appointment.

CASUAL VACANCY:
If a casual vacancy in the office of an auditor arises by his
resignation, such vacancy should only be filled by the company 54
in a
General
Meeting.
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

APPOINTMENT BY CENTRAL GOVERNMENT


If a company, at an annual general meeting, fails
to appoint or re-appoint an auditor, the Central
Government may appoint a person to fill the
vacancy.

The company has to give notice of the above fact to the


Government within 7 days of the Annual General Meeting.
The appointment by the Central Government is made from
the panel of names suggested by the applicant company.55
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

APPOINTMENT BY THE COMPTROLLER


AND AUDITOR GENERAL

In case of Government Companies, the Comptroller and


Auditor General appoints or re-appoints the auditor.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

RE-APPOINTMENT OF AN AUDITOR
The retiring auditor shall NOT be re-appointed in the following cases:
1. Not qualified

2. Unwilling

3. Passing of a special
resolution
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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4. Appointment of some other person

5. Unable to comply with the ceiling on


no. of audits

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Ceiling on Number of Audits


Provisions of the
Act

Ceiling in case of
Partnership firm

Ceiling in case of
individuals

Objective of the
ceiling

Compliance

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

REMUNERATION OF THE AUDITOR

CONSTITUENTS OF REMUNERATION
1. Fees to the Auditor
2. Expenses
3. Cost of any facility
provided to the
auditor

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

WHO CAN FIX REMUNERATION?


Board of
Directors
Shareholders
in the General
Meeting

In case of first auditor


appointed by the board of
directors

In case of auditors appointed


by the shareholders in the
general meeting

Shareholders In case of auditors


in the General appointed by the CAG
for government company
Meeting
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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REMOVAL OF
AUDITOR

REMOVAL OF AUDITOR BEFORE THE


EXPIRY OF HIS TERM
Section 224(7)
The purpose of this section is to make the removal of an
independent and conscientious auditor difficult.
Removal of First Auditor
Removal of Subsequent Auditor

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

APPOINTMENT OF AN AUDITOR IN
PLACE OF A RETIRING AUDITOR
Section 225
SPECIAL NOTICE OF THE RESOLUTION: For
appointing a person other than the retiring auditor, a special
notice of such a resolution should be given to the company
at least fourteen days before the meeting.
RIGHT OF RETIRING AUDITOR TO MAKE
REPRESENTATION: The retiring auditor has a right to
make representations in writing to the company, not
exceeding a reasonable length, and request for their
notification to the members.
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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

RIGHT TO GET REPRESENTATION CIRCULATED:


The company, on receipt of the representation, shall
mention the fact of the representation in the notice of the
meeting and send a copy thereof to every member to whom
the notice of the meeting is sent.
GROUND FOR EXEMPTION: If the Central
Government, on the application, is satisfied that the auditor
is securing needless publicity of a defamatory matter, it can
exempt the company from sending the copy of
representations to the members.
OTHER RIGHTS: Besides the rights mentioned, the
retiring auditor also has a right to be heard at the meeting.
PASSING OF RESOLUTION: The general meeting may
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by passing an ordinary resolution, remove such an auditor.
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

PENALTY FOR NON-COMPLIANCE


According to section 232 of the Companies Act, 1956, if
default is made by a company in complying with any of the
provisions contained in section 225, the company and every
officer of the company who is in default, shall be punishable
with fine which may extend up to five thousand rupees.

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

Audit Report
A Report is a statement of collected and considered facts
so drawn up as to give clear and concise information to
persons who are not already in possession of the full
facts.
Kinds of Audit Report
Final Report
Interium Report
Partial Report
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

68

Characteristics of a Good Audit Report


It should be unbiased
It should be expressed in clear
It should be accurate
It should be in simple style
It should be brief
It should be coherent
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM

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V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM