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.

3
 Meanin
g
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.
4
 Definitio
n
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.
5
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
6
approach
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
of accounts.
books 7
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 watch dog but not a blood hound”. 8
 Cont
.2. Entity Aspects
1. Legal Requirements

3. Reliable Information
4. Proper Communication
5. Evaluation
6. Test
7. Comparison
8. Judgments
9. Work
10. Evidence
11. Misstatement
9
 Principles of
Auditing
Fundamental
1. Integrity, principles
Objectivity of Auditing
and Independence
2. Confidentiality
3. Skill & Competence
4. Responsibility of work performed by others
5. Documentation
6. Planning
7. Audit Evidence
8. Accounting system & Internal Control
9. Audit Conclusions
10. Audit 10
Report
11
Detection &Prevention of
Errors
• trasanction is to be left out to register,
Error of Omission partial entry of one transaction

Error of • Rs. 1500 recorded as Rs.

5100
Commission
• ommission to post,posting wrong side & amount to
Clerical Error an a/c, double posting,totalling mistake, balance
b/d & c/f

• fundamental principle of
Error of Principle Accountancy
& Auditing
Compensating • two errors togather which will be

Error resulted in trial balance sheet will agree12

Detection &Prevention of
Frauds
Of Cash

Misappropriation By Employees

Of Goods

Showing more
Profits
Manipulation By Top
of A/c Management
Showing less
profit
13
 Advantages of
Auditing
A. Businessman's point of B. Investor's point of
view:- view

1. Detection of errors and 1 . Protects interest

frauds 2 . Loan from banks 2. Moral check
3. Proper valuation of 3. Builds reputation
investments 4 . Proper valuation 4. Good security
of assets
5. Government acceptance
6. Suggestions for improvement 14
7. Better Reputation
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.
6. For taxation purpose auditing of account is a 15
must.
Cont
. company only audited account should be submitted.
7. In case of any claim is to be made from the insurance

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.
16
 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
able to detect them.
be 17
 Cont
. Sometimes the auditor has to depend on explanations,
2. Problems of dependence:

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
18
.
 Cont
. Auditor has to seek opinion of experts on certain matters on
5. Lack of expertise:

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
 Differences Between Accounting & Auditing
Accounting Auditing
Meaning
It is the process of recording It is the process of review of accounts
classifying and summarizing the to establish their reliability and the
business transactions to monetary statements therefrom
Terms
Scope
It entails preparation of financial Examination of accounts and records
statements and their interpretation
Object
It investigates finding out the The object is to judge the
operating results and figuring out the correctness and reliability of
financial status of an enterprise financial statement prepared by the
internal staff of business enterprises
Hierarchy

20
Accounting precedes auditing Auditing succeeds accounting
 Accounting Auditing
Qualification
No formal qualification is insisted for Auditor should be a qualified charted-
acting as an accountant accountant.
Expertise
Accountant is expected to be familiar Auditor is one who has the expertise
with audit techniques and to apply not only accounting
procedures. principles but also auditing
techniques and processes
Nature of Employment
Accountant is permanent staff of an He is an independent outsider. He is
enterprise. working on an assignment basis.
Remuneration
Accountant receives salary as per Remuneration of auditor is Pre-
fixed The terms of his service.

21
FACTORS INVESTIGATION AUDITING
Description Audit means the inspection, Investigation means an
examination or verification of a inquiry, or is the act of detail
person, organization, system, examination of activities so as
process, enterprise, project or to achieve certain objectives.
product.
Owners Audit is conducted on behalf of owners Investigation may be
only and they make the appointment. 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 It covers an examination of the
the accounts of a business 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

Employees Does not examine personally

May examine personally 22
Audit Procedure
Audit
Programme

Test Audit Note

checking Book

Routing Working
Checking Papers
23
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. How much work is to be done?

ii. Who is going to do a particular portion of work?
iii. What is the duration of the time?
24
Types of Audit Working
Programme

Fixed
Audit Flexible
Programme Audit
Programme
25
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
27
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM
Audit Procedures

Adoption of Difference
Routing Test
Distinctive in
Ticks Checking Checking Balance
Books

28
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

29
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM
Example of Tick

30
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
31
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

32
Various Techniques of
Audit
• Routine checking
• Test Checking
• Vouching
• Valuation
• Physical examination
• Confirmation
• Inquiry
• Confirmation
• Examination of subsidiary Books
• Analysis of Financial Statements 33
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
34
Internal Control

35
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 36
Vouching

• Vouching means checking of entries with the help of

documentary evidences. For each entry it is to be
ascertained which is properly authorised

37
38
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
39
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
40
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.

41
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

42
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.

43
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
Institute of Charted
A Charted Accountants
Accountant means ofaIndia.
person who is 44
a member of the
 QUALITIES OF AN AUDITOR
• Independence
• Integrity
• Objectivity
• Ability for expression and communication
• Tactfulness
• Awareness

45
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

46
 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
• any other kind of consultancy services 47
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
• loans and advances made by the company etc.
48
APPOINTMENT OF AN
AUDITOR
WHO CAN BECOME AN
AUDITOR?

Chartered
Accountant in
practice

Partnership firm of
CA’s in practice

Holder of a certificate
in Part ‘B’ States
50
 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 other51
or thatcorporate
body company’s holding
which maycompany.
be that company’s
subsidiary
WHO CAN APPOINT AN AUDITOR?
• Appointment by directors

• Appointment by shareholders

• Appointment by the Central Government

• Appointment by the Comptroller

and Auditor General
52
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.
53
 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 in a
general meeting. 54
 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.
APPOINTMENT BY THE COMPTROLLER
AND AUDITOR GENERAL

In case of Government Companies, the Comptroller and

Auditor General appoints or re-appoints the auditor.
56
 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 57
4. Appointment of some other person

5. Unable to comply with the ceiling on

no. of audits

58
Ceiling on Number of
Audits
Provisions of the
Act

Objective of the
Ceiling in case of ceiling
Partnership firm

Ceiling in case of Compliance

individuals

59
REMUNERATION OF THE AUDITOR
CONSTITUENTS OF REMUNERATION

1. Fees to the Auditor

2. Expenses
3. Cost of any facility
provided to the
auditor

61
WHO CAN FIX REMUNERATION?
• In case of first auditor
Board of appointed by the board of
directors

Directors
Shareholders • In case of auditors appointed
by the shareholders in the
in the General general meeting
Meeting

Shareholders • In case of auditors

in the General appointed by the CAG
for government company
Meeting 62
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

64
 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. 65
• 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
by passing an ordinary resolution, remove such an
 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.

67
 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
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 69
 70
V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM
71