Chapter 1.


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Chapter 1.

  1. 1. INTRODUCTION TO AUDITINGProf. Dicksee defines the term as “ An examination of accounting recordswith a view to establish whether they correctly & completely reflect the transactions to which they purport to relate “. Objectives : a) Reporting b) Detection & prevention of frauds & errors Conclusion : The objective of auditing can further be extended dependsupon the specific terms of reference. In case of internal audit. The obj is also examine whether the policies & procedures laid down by the topmanagement are properly adhered to. In case of audit by sole trade obj may be to obtain bank loan, Insurance Claim etc.
  2. 2. WRITE SHORT NOTES ON FINANCIAL STATEMENT & USER OF FINANCIAL STATEMENTS• Statement of performance = profit and loss account;• Statement of financial position = Balance Sheet;• Statement of movement of funds = Funds Flow & cash Flow statements.• Users of financial Statements : Users Purpose Management For day to day decision making & performance evolution. Proprietor a) To analyze performance, profitability & financial Position. shareholders b) Prospective Investors are interested in the track record of the company. Lenders – Banks & financial To determine the financial position of the company , debt service , Coverage, etc. institutions Suppliers To determine the Creditworthiness of the company. Customers To know the general business viability before entering into long term contract and arrangement. Goverments a) To ensure prompt Collection of Direct and Indirect Tax revenue b) To evaluate performance and contribution to social objectives. Research Scholars For study ; Research and analysis purposes.
  3. 3. WRITE SHORTNOTE ON INHERENT LIMITATIONS OF AUDIT• INHERENT LIMITATION of audit as per AAS – points out that the opinion expressed the auditor is neither an assurance as to the future viability of the enterprise nor efficiency and effectiveness with which management has conducted affairs of the enterprise. This is bcoz the process of auditing suffers from the following inherent limitations :• A) Judgment.• B) Nature of Evidence.• C) Internal Control.• D) Test Checking.
  4. 4. WHAT IS ERROR ? EXPLAIN DIFFERENT TYPES OF ERRORS• Innocent mistakes in bookkeeping & accountancy are called as ERRORS.• An error can be defined as “ unintentional mis-statement or mis- description made in the books of accounts or records”.• Errors may be broadly classified into 2 categories : CLERICAL ERRORS ERRORS OF PRINCIPLE Errors of Omission. - Errors of Commission. - Compensating Errors. - Errors of Duplication. -
  5. 5. WHAT IS FRAUD ? EXPLAIN ITS TYPES ?• “The false representation or untrue entry made in the books of accounts, intentionally or without belief in its truth with a view to defraud some body”.• All errors made intentionally are frauds as there is an intention to decieve or to mislead the proprietors or somebody else. Fraud also includes willful misrepresentation & an act to conceal the truth.• Types : - Misappropriation of cash or Misappropriation of Goods Fraudulent Manipulation of embezzlement of cash. Accounts When cash is received Issuing more quantity of Benefits of showing more goods dn invoiced profits When cash is paid Showing as damaged Benefits of showing less profits
  6. 6. WRITE NOTES ON TEAMING N LADING & WINDOW DRESSING• It is a type of fraud in which the amount collected from the customer is misappropriated n the amt subsequently received from another customer is used to conceal the amount so misappropriated by crediting d amt to the earlier customers. (teaming and lading).• Window dressing is an art of showing financial position of a company at much better level than the existing one. A sound financial position is painted on the face of Balance Sheet by concealing the actual state of affairs. In window dressing, assets are over – valued, liabilities are under – valued and profit is overstated or if there is loss, it is understated.• DIFFERENT WAYS OF DOING WINDOW DRESSING :• Charging inadequate depreciation on fixed assets than actually required.• Providing inadequate reserve for bad and doubtful debts.• Charging revenue expenditure to capital account.• Over – valuating closing stock at the end of the year.• Showing actual liabilities are contingent liabilities.• Showing fictitious credit sales and thereby over – valuating debtors.• Showing fictitious assets.
  7. 7. PRINCIPLES OF AUDIT EVIDENCEAUDIT • Audit evidence refers to any information, verbal or written, obtained by the Auditor during the course of audit to arrive at the conclusion on which he bases his opinion on financial statements.Integrity , objectivity & • Need of audit evidence :independence. • Judgment formation. • Nature of evidence to be obtained.Confidentially. • Process of judgment based on evidencesSkills and competence. step PROCEDURESWork preformed by others. 1 identify the assertion to be examined.Documentation. 2 Evaluate the assertions as to their materially & relative importance.Planning. 3 Collect d necessary information or evidence about the assertions.Audit Evidence. 4 Analyze & evaluate the evidence into valid or invalid, relevant orAccounting system and irrelevant, sufficient or insufficient, appropriate or inappropriate,internal control. confirmatory of conclusive etc.Audit conclusions & reporting 5 Formulate the judgment on financial statements as to the fairness if assertions to be considered. • Factors influencing audit evidence : • Risk of misstatement. • Materiality. • Previous experience. • Results of work. • Information. • Analytical reviews.
  8. 8. • Review and assess the conclusions drawn from the audit evidence obtained from his knowledge : • a ) The financial information has been prepared using Size & nature of the business. acceptable accounting policies, which have been consistently Adequate accounting system. applied; • b ) d financial information complies with relevant regulations Internal controls. & statutory requirements. Different procedures. • c ) Adequate disclosure of all materials matters relevaNT • An audit report should contain a clear written expression of Evaluation of various internal opinion on the financial information & in the form or content controls for greater likelihood of the report is laid down. • Audit report is a means of communicating the results of an of material misstatements. audit. This principle explains the various concepts relating to an audit report.Audit involves exercise of judgmentUnavoidable risk that some materialmisstatements may remain undiscovered.Cannot be relied upon the discovery of allfrauds or errors .Material either individually or as a group.Constraints.
  9. 9. A continuous audit is one in Balance sheet audit means verification of all the itemswhich audit works is carried out appearing in the balance sheet such as assets, capitalalmost simultaneously with the reserves & liabilities of the business. Under therecording of the transactions. balance sheet audit the auditor commence audit onUnder this, auditor visits his the basis of the balance sheet and he works back toclients throughout the year is the books of original entry and other evidence bcozperiodical intervals, which may be balance of profit & loss account appears In the balanceregular say monthly or two sheet. Thus, in balance sheet audit all the d itemsmonthly or weekly or fortnight. contained in d balance sheet and other related items are verified completely.Interim audit is one, which isconducted between the twoannual audits in order to • Final audit is one which is undertaken at theascertain profit to declare close of the financial year when the finalinterim dividend. It involves a accounts are ready. In annual or final audit visitscomplete examination and his clients only once a year and the entire auditreview of the accounts and work is completed in one time ir in a singlerecords of business upto the uninterrupted of interim audit. It may beordered for six months.
  10. 10. QUALITIES OF AUDITORCONCURRENT AUDIT • Expert in fundamental principles and theory of accounting. • Knowledge of the company law and mercantile law.Concurrent audit is a • Knowledge of industrial management, financialcomprehensive, continuous administration & Business Organisation.and systematic examination of • Honest & tactful and always exercise reasonable skill &all transactions of an entity, care in a person other than • Not adopt the attitude of suspicion.involved in the operations, to • Intelligent questions to his clients.ensure accuracy , authenticity& due compliance with the • Not influenced directly or indirectly.internal systems, procedures • Not disclose secrets of his clients to others.& guidelines. • Necessary courage and ability to write his report correctly. • Knowledge of the principles of economics andINFERENCE : economic laws.Concurrent audit is a • Possess a pleasing personality and other qualities likemanagement process and tact, judgment, self control, dignity and diligence.looks into the establishment • Methodical, hardworking and accurate.of sound internal functions • Knowledge of principles of accounting.and effective control systems. • Possess knowledge of computer.
  11. 11. ADVANTAGES OF INDEPENDENT AUDITTRUE AND FAIR VIEW OR USE OF AUDIT ACCOUNTAS PER THE SECTION 227(2) of • Protection of Interest.the companies act, 1956 theauditor of a limited company has • Moral report to the shareholders • Tax Liability.whether the accounts, give true • Credit Negotiation.and fair view.1) In case of the balance sheet • Trade Dispute Settlement. of the state of company’s • Control over Inefficiency. affairs at the end of the • Funds in Trust. financial year. • Arbitration.2) In case of the profit and loss account of the profit or loss • Appraisal. for the financial year. • Partnership cases. section 209 (3) states that the • Assistance to Government. books of accounts would be so kept as are necessary to give a true and fair view of the state of affairs of the company or its branch office, as the case may be and to explain its transactions.
  12. 12. GOING CONCERN MATERIALITYTHE GOING CONCERN IS THE • MATERIAL MEANS IMPORTANT OR ESSENTIAL.BASIC IDEA THAT THE BUSINESS The convention of materiality is the common ruleWILL COONTINUE FOR A LONG followed by all accountants of separatelyTIME, followed by all accountants, recording and reporting the material details ofwhile recording and reporting thebusiness transactions. The going business transactions. Many business decisionsconcern concept is known as the are based on the details available in theconcept of continuity. accounts. Material details mean details whichA business may be set up for a might influence a business decision. Thus what Isparticular work material depends upon the facts of each case.Going concern concept assumes • Effect on Accounts.that the business would continue • Recording only material details.for a long time.The accounts are kept on the • Separate Record in Individual Accounts.basis that business will go on and • Reporting only Material Details.on and will not be closed down orstopped in the near future.