Basics of Auditing

1. Auditing and Taxation
T.Y.Bcom Sem I
Dr.Minal Bhandari.
Asst. Professor
Pratibha College of Commerce and Computer Studies, Chinchwad

2. Chapter I – Introduction to Principles of
Auditing and Audit Process
1. Auditing
 Introduction to Auditing
 Terms Book-Keeping, Accountancy, Auditing and Investigation
 Meaning and Definitions
 Nature
 Scope
 Objectives
 Principles
 Importance
 Types or Classes of Audit
 Audit Process
 Advantages of Auditing

3. Introduction to Auditing
 The origin of auditing can be traced to Italy. Around
the year 1494, Luca Pacioli introduced the double entry
system of bookkeeping and described the duties and
responsibilities of an Auditor.
 Book-Keeping, Accountancy and Investigation are
different terms than Auditing.
 Auditing is done for authentication of financial
statements of business organizations by external
qualified person who is called as an auditor and process
is termed as an auditing process.

4. History of Auditing
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 The system of accounting and auditing was in existence
under Mauryas, Chandragupta and other Kings.
 Kautilya on Arthashastra has mentioned about A & A of
state finances.
 Introduction of Companies Act, Establishment of Indian
Accountancy Board, ICAI are some of the milestones in the
evolution of Auditing.

5. Terms : Book Keeping, Accountancy and
Auditing, Investigation
Bookkeeping
 A Bookkeeper records day-to-day transaction in
the books of accounts in a systematic manner.
Bookkeeping includes −
 Journalizing
 Posting to ledger
 Totaling and balancing of ledger accounts

6. Accountancy
 The job of Accountancy begins where bookkeeping ends
and includes the following :
 Rectification of errors
 Preparation of Trial Balance
 Preparation of financial statements
(Trading and Profit & Loss account and Balance Sheet etc.)

7. Auditing
 Preparation of accounts is not the duty of an
Auditor. “Auditing begins, where accountancy
ends”. Auditor is only concerned for checking and
verification of records. Auditor is a qualified
person appointed for the purpose of certification
of work done by others.

8. Investigation
 An investigation may be done with a specific purpose. It
is usually conducted to know the financial position of a
business, extent of fraud and misappropriation and the
earning capacity of any business unit, etc. The time
duration for investigation may also extend beyond one
year. Investigation may not be necessarily done by a
qualified Chartered Accountant.

9. Meaning and Definitions
The word ‘Audit’ came from the Latin word ‘Audire’ which means ‘to hear’. In
organization, an expert is appointed by the owners to find of suspected fraud, to
check accuracy of accounts and to hear explanations given by the person
responsible for such transactions.
The process of verification of the accuracy and correctness of the books of
accounts by independent, external, qualified person is known as Audit.
Definition by ICAI : “Auditing is a systematic and independent
examination of data, statements, records, operations and performances
(financial or otherwise) of an enterprise for a stated purpose.”
In any auditing situation, the Auditor perceives and recognizes the
propositions before him for examination, collects evidence, evaluates
the same and on this basis, formulates his judgment which is
communicated through his audit report.

10.  Definition by J.R.Batliboi : “Auditing is an intelligent and
critical scrutiny of books of accounts of a business with the
documents and vouchers from which they have been written
up, for the purpose of ascertaining whether the working
results of a particular period as shown by Profit and Loss
Account and also the financial position as reflected in the
Balance-sheet are truly and fairly determined and presented
by those responsible for their compilation.”
 Definition by Prof. Montgomery : “Auditing is a systematic
examination of the books of records of organization in order to
ascertain or to verify and to report upon the facts regarding its
financial operations and the result thereof.”

11. Scope of Auditing
 In comparison with earlier days, where the main objective of
auditing was to detect fraud, we now have enhanced ways to
determine a true and fair view of financial statements.
 In recent times, almost every country of the world has
introduced various legislations and framed rules and
regulation of auditing.
 In India also legislations related to Tax Audit, Cost Audit,
Management Audit and operation Audit, etc. are coming up.
 The main purpose of auditing is to certify the correctness of
financial statements and to detect errors and frauds.

12. Scope of Auditing
 Legal compliances
 Company need
 Proper communication
 Reliable and valid information
 Evaluation and test
 Comparison and verification
 Errors and frauds, if any
 Judgments and conclusions
 Opinion

13. Techniques of Auditing
 Checking of posting and casting.
 Physical verification of assets.
 Verification and examination of transactions with available
evidences.
 Scrutiny of the books of accounts,
 Checking of various calculations.
 Checking of carried forward balances in next year.
 Checking of Bank reconciliation statements.
 Auditor can get information from inside and outside sources
of organization.

14. Objectives
of Auditing
Primary
To give an opinion
about truth and
fairness of fin. affairs
Detection and
Prevention of Errors
and Frauds
Secondary

15. Principles governing an efficient audit:
1. Principle of Competency (Member of ICAI)
2. Principle of Independence
3. Principle of Integrity (Moral character and honesty)
4. Principle of Confidentiality
5. Principle of Planning (Audit Programme)
6. Principle of Documentation
7. Principle of Audit Evidence
8. Principle of Study of Internal Control system (Accounting and
administrative)
9. Principle of true and fair audit conclusions & Report

16. Types of
Audit
1. Ownership
2. Periodicity
3. Objectives
4. Scope
5. Employer of
Audit
6. Manner of
Checking

17. 1. On the Basis of Ownership
 Private : Sole proprietorship, Partnership Firms and non-
trading organizations. There is no statutory compulsion to
private organizations. In case of
Sole ownership: Exceed turnover (Tax Audit), Partnership
firms to settle financial disputes, NGO for Govt. Grants
Government: Union of India, Govt. Departments, Govt.
undertakings and local bodies. Government (C &A G)are
appointed as per the provisions contained in the
Constitution of India.
Statutory: An audit conducted as per statutory
requirements . Bank, Insurance, Companies, JSC,
Cooperatives and Trust conducts statutory audit.

18. 2. On the Basis of Periodicity
1. Continuous
2. Annual
3. Interim
4. Occasional
5. Concurrent

19. 3. On the Basis of Objectives
1. Financial
2. Operational
3. Cash
4. Management
5. Tax
6. Social
7. Environment
8. Propriety
9. Performance
10.Secretarial

20. 4. On the Basis of Scope
A.Complete or Detailed Audit
(Similar to Annual Audit)
B.Partial Audit

21. 5. On the Basis Employer of Audit
A. Internal Audit
B. External Audit

22. 6. On the Basis of Manner of Checking
A. Standard
B. Balance Sheet
C. Post and Vouch Audit

23. Types of
Errors
Clerical
Errors of
Omission
Partial
Omission
Complete
Omission
Errors of
Commission
Principle Compensating Duplication

24. Types of
Frauds
Employee
Fraud
Embezzlement
of Cash
Misappropriation
of Goods
Management
Fraud

25. Management Fraud
Manipulation of
Accounts
Misapplication
of Accounting
Policies
Omission of
Events
Internal
Control
Systems Over
ridden

26. What is audit process
 Audit of every company or project is unique as per the
size, nature and type of company, but the basic
 is similar. It normally consists of four stages:
1. Planning (sometimes called Survey or Preliminary
Review)
2. Fieldwork (Conduct of Audit)
3. Audit Report
4. Follow-up Review.

27.  Kya pakana hai ----- homework i.e. planning and
agenda/programme
 Kitne logonka banana hai
 Accordingly resources, team
 Kaise complete karna hai, time management
 Actually starting of decided work i.e actual conduct of
work
 To see kam jitna aur jaise bola tha huva ya nahi
Customers ko pasand aya ya nahi i.e feedback (Submission of
audit report about the quality of work)
TO GIVE TRUE AND FAIR OPINION ABOUT THE FINANCIAL
STATEMENTS OF THE COMPANY
Accordingly we can take further decisions

28. Steps in Process of Audit
Scope of
Audit
Knowledge
of Client
Audit
Programme
Manpower
Audit
Evidence
Examination
Coordination
Documentatio
n
Determination
of true and
fair view
Submission of
report
Planning Conduct
of Audit
Audit
Report

29. Step I Planning

30. Audit Programme
An audit programme is a detailed plan
of the auditing work to be performed.
 It specifies the procedures to be
followed by the team of audit in the
conduct of audit more efficiently.
The auditor outlines the whole
procedure of audit from beginning till
the finalization of audit report.

31. Content or Elements of Audit Programme
 Area or Scope of Auditing
 Legal requirements
 Scope or type of audit
 Examination of last 2-3 years financial
statements and audit report
 Division of work and responsibility
 Evaluation of internal check and internal
control system
 Preparation of audit report within

32. Advantages of Audit Programme
Division of work
Assurance of
process of work
Charge
of
negligence
in work
Final
review
Ascertainment
of
responsibility
A basis
for next
audit

33. Limitations of Audit
Programme
Mechanical
Rigidity
Not needed to
small
organization
Loss of initiative
due to
structured
nature of work

34. Audit Programme: Purchases
Sr.
No.
Procedures Check List
1 Check purchase requisition for serial
numbering
2 Check whether purchase requisitions were
signed by authorized person
3 Were quotations called by authorized
person?
4 Obtain evidence of comparative statement
prepared by authorized person
5 Whether goods ordered were same as
mentioned in purchase requisition, if not
then ask clarification and document

35. Step II Conduct of Audit

36. Audit Notebook
It is a systematic record of the queries
made by the auditor and his assistant
and the replies received accordingly.
It is maintained by the assistants of
chief auditor.
It can be maintained in the form of
register/file.

37. Contents of an Audit Notebook
 Technical details, accounting methods followed by company
 Provisions of Articles of Association or Memorandum of Association
 Queries and concerned department
 Explanations asked to specific employee
 Information received
 Discussion points on special matter with authority
 Bank reconciliation statement, balances of certain books of account
 Errors and frauds found, if any
 Particulars of missing vouchers, documents
 The points needed to refer while preparation of audit report

38. Advantages of
Audit Note Book
Limitations of
Audit Note Book
 Documents can be
preserved.
 Can save from the
claim for
negligence.
 In the absence of
any assistance, work
can be continued.
 Helps in preparation
of audit work.
 Many times
entries made in
audit note book
are incomplete or
not clear.
 Improper audit
note book shows
the negligence of
audit work.

39. Audit Working Papers
 All documents prepared or obtained and retained by the auditor
during the course of audit and conclusions are termed as audit
working papers.
 Audit working papers help the auditor as a reference to draw the
conclusions about accounts and to prepare audit report.
 The ownership belong to the auditor but he can give copy to the
client on demand
 Auditor can’t disclose these papers without the consent of
management under the principle of confidentiality, except when
required by law.
 Auditor may retain working papers with him for ten years after
submission of audit report.

40. Examples of Audit Working Papers
 Audit programme
 Correspondence between auditor and
stakeholders
 Details of investments, banks, assets
 Stock valuation certificate
 Photo copies of necessary documents
 Abstracts from minute book,
references from articles of association

41. Step III Audit Report

42. Audit Report
An audit report is a written opinion
of an auditor which is concerned to
an organization’s financial
statements.
An audit report is prepared as per
the standard format prescribed by
GAAS (Generally Accepted
Accounting Principles)

43. Internal control, Internal Check and
Internal Audit

44. Internal Control
 Internal controls are the mechanisms, rules, and
procedures implemented by a company to ensure the
integrity of financial and accounting information,
promote accountability, and prevent fraud.
 Internal controls system includes a set of rules,
policies, and procedures an organization implements
to provide direction, increase efficiency and
strengthen adherence to policies.

45. Definition
 The Oxford Dictionary states,
“The measures an organization employs to ensure that opportunities for
fraud or misfeasance are minimized.”
 The internal control structure of a company consists of the policies and
procedures established to provide reasonable assurance that specific
entity objectives will be achieved.

48. Areas of
Internal
Control
Accounting
Control
Administrative
Control

49. Accounting Control
 To attain the following:
1. Efficient and orderly conduct of accounting
transactions.
2. Safeguarding the assets.
3. Prevention and detection of errors and frauds.
4. Ensuring accuracy, competencies, reliability and
timely preparation of accounting data

50. Administrative Control
To achieve adherence to management policy in various
areas of business operations:
1. Efficient and orderly system may be established to
ensure that ‘ABC’ control over material is
followed.
2. Timely supply of reliable management information.
3. Maintenance programme for machines.

51. Limitations of Internal
Control
 Negligence by employees (Human error)
 Possibility of fraud by group
 Manipulation by management
 Discussion of different examples….

52. Internal Check
 One of the method of internal control system.
 An accounting procedure whereby routine entries
for transactions are handled by more than one
employee in such a manner that the work of one
employee is automatically checked against the
work of another for detection of errors and
irregularities.

53. Definition of Internal Check
 L.R. Disksee : “Internal Check is an arrangement of
accounting routine that errors and frauds are
automatically prevented or discovered by the very
operation of book-keeping itself.”
 F.R.M De Paula, “An internal check means practically
a continuous internal audit carried on by the staff
itself, by means of which the work of each individual is
independently checked by the other members of the
staff ”.

54. Features of Internal Check
1. Division of work
2. Separation of custody of assets like cash
and its recording
3. Clear cut hierarchy
4. Application Job rotation in accounting and
administration department
5. Reconciliation and checking
6. Usage of electronic applications
7. Periodical review
8. Proper system of filing and documentation

55. Objectives Of Internal Check
 To take precautions regarding
carelessness, inefficiency and fraud by
employees.
 To ensure about adequate and
reliable accounting information.
 To keep moral check over staff.
 To minimize the possibility of errors and
frauds
 To detect them at its initial stage if it is
committed.

56. Internalaudit
 Internal audit is a part of internal control system.
 Internal audits evaluate a company’s internal controls,
including its corporate governance and accounting
processes. These audits ensure compliance with laws and
regulations and help to maintain accurate and timely
financial reporting and data collection. Internal audits also
provide management with the tools necessary to attain
operational efficiency by identifying problems and
correcting lapses before they are discovered in an
external audit.
 In addition to ensuring a company is complying with laws
and regulations, internal audits also provide a degree of risk
management and safeguard against potential fraud, waste,
or abuse.

57. Thank you!