Auditing objective of auditing types of auditing bba bcom 5 th sem

1. Chapter 1
Introduction to Auditing
Introduction to Auditing
The industrial revolution and the resulting explosion in growth of trade and
commerce p rise to various types of business organisations. It was at that time, the Joint Stock
Company took birth This company form resulted in large scale of operations requiring huge
amount capital which cannot be provided by the individual proprietors. As such, these compani
started raising capital from the general public. This type of organization is managed by the board
of directors other than the proprietors (Shareholders) Since shareholders do not took part in the
management, this necessitates the managers to present the accounts at regular intervals by means
of annual accounts. The directors of unsuccessful companies in order to hide their inefficiencies
started adopting fraudulent accounting practices. Therefore, the Governments made legal
provisions that the accounts should be examined by a person independent of the owners and
management in order to provide true and fair financial results and profit and loss of the
undertakings. That person came to be known as an 'Auditor'. In this way, auditing concept was
developed
MEANING OF AUDITING
The word Audit has been derived from Latin word 'Audire' which means 'to hear. In the middle
ages, an auditor used to listen to the accounts read over by an accountant in order check them
Meaning: Auditing
Auditing simply means verification and examination of accounts. It is done to ascertain the
reliability and validity of information. The auditing process can be started only when accounting
ends In other words, an audit is an attempt to find out whether the financial statement reflect the
true and fair result and financial position of the company or institution

2. DEFINITION OF AUDITING
According to A.W Hanson, "An audit is an examination of such records to establish their
reliability and the reliability of the statement drawn from them"
According to Montgomery, a well-known author, "auditing is a systematic examination of the
books and records of a business or the organization in under to ascertain or verily and to report
upon the facts regarding the financial operationand the result thereof”
MEANING OF AUDITOR
An auditor is a trained professional who is responsible to review and verify the accounting data
of any business undertaking pertaining to ta business activities. An auditor may be internal
auditor or external auditor. Internal auditors are those auditors who are appointed by the
empanyeinaively for their company's audit. Whereas, external auditors are independent auditors
having firms who are hired by the companies suljet to an
OBJECTIVES OF AUDITING
Audit objectives are broad statements developed by auditors and define intended audit
accomplishments. The detailed objectives of auditing are simply shown in the following chart.
1. Primary Objectives: The primary objectives of an audit are as follows.
 To express an appropriate opinion as to whether the financial statements present fairly, in
all material respects, the financial position, the results of operations, and the cash flows
of the company's business.
 The auditor is also concerned with verifying how far the accounting system is successful
in correctly recording transactions. He should see whether the accounts are prepared in
accordance with recognized accounting policies and practices and as per statutory
requirements
2. Secondary Objectives: An auditor may come across some errors and frauds while examining
the books of accounts in order to report the true financial condition of the business. This
detection and prevention of frauds and errors are the secondary objectives of auditing. These
objectives are classified into following types:
A Detection and Prevention of Errors.
B Detection and Prevention of Frauds.

3. Detection of and Prevention of Errors:
Errors refers to the mistakes which are committed unintentionally because of carelessness,
ignorance etc. Errors are of different types:
 Clerical Errors
 Error of Principle
Clerical Errors: Clerical errors refer to those errors which arise due to wrong posting,
ignorance, carelessness etc. If these errors are discovered in the process of audit, the auditor
should get them rectified. Clerical errors mainly are of three types
 Errors of Omission: These are the types of errors which arise on accountof transaction
omitted to be recorded in books of accounts wholly or partially This omission of
transaction does not affect the agreement of trial balance; hence it is more difficult to find
out Example Furniture purchased for Cash Rs 5000 not recorded in the books of accounts
 Errors of Commission: These are the types of errors which arises due to wrong posting to
ledger accounts, wrong totaling, wrong calculations or balancing in the books of accounts
wholly or partially. These errors affect the agreement of trial balance Example: Cash
sales Rs 10,000 recorded as Rs 1,000.
 Compensating Errors: When an error is counterbalanced with another error, such an error
is known as compensating errors. These errors will not disturb the agreement of trial
balance. Example: Geetha's account which was to be debited for Rs. 6,000 was credited
for Rs 6,000 and similarly, Seetha's account which was to be credited for Rs. 6,000was
debited for Rs 6,000. These two errors will nullify the effect of each other.
iii. Error of Principle: When transactions are not recorded in accordance with the fundamental
principles of accounting, such errors are known as Errors of Principle. Example: Furniture
purchased for Rs.5.000 debited to Purchases a/c. This is anerror of principle.
Location of errors: Auditors are appointed to audit the books not to identifythe errors but in
many cases they are called to find out the difference in the books of accounts. The auditor should
follow the following procedure in this regard
a) Trial balance must be checked.
b) He should compare the list of debtors and creditors with the trial balance.
c) He should compare the names of account appearing in the ledger with the names of accounting
in the trial balance

4. d) He must check the totals and balances of all accounts and see that they have been properly
shown in the trial balance.
e)He should also check the posting of entries from various books into ledger.
Detection and Prevention of Frauds: Fraud refers to the intentional and deliberate
misrepresentation of accounting records for a financial gain. These frauds are intended to
deceive, to mislead or to conceal the truth or the material facts. They are more serious than
errors. If these fraude are not detected it me affect the opinions of the auditor on the financial
condition and the results of the organisation. Hence, utmost care has to be taken by the auditor in
respect detecting the frauds Frauds are of three types
I. Embezzlement or Misappropriation of cash
II. Misappropriation of goods
III. Manipulation of accounts
i)Embezzlement of cash: In big business organisations, where there is separate existence
between ownership and management, it is impossible by the individual owners to have direct
control over receipts and payments of cash Hence misappropriation of cash is more frequent in
these organisations. This is very less in small organisations as there is direct control over the
affairs of the business Cash can be misappropriated by various ways which are as follows:
I. Recording of fictitious payments
II. Recording more amount than the actual amount of payment
III. Suppressing receipts
IV. Recording fewer amounts than the actual amount of payment.
In order to prevent these frauds, there should be strict control over receipts and No payments of
cash known as "Internal check system" For detecting these frauds the auditor should check the
cash book with original records, bills register, invoices chers, counterfoils or receipt books, wage
sheets, salesman's diary, bank statements etc.
ii) Misappropriation of goods: The companies which are dealing with high value ds are prone
to this kind of frauds. These kinds of frauds are difficult uns there are proper records of stock
inward and outwards. Hence, proper have to be maintained. The auditor can detect this fraud by
checking the ark ronds and physical verification of goods
iii) Misappropriation or Falsification of accounts: Responsible persons who are in the top
management of the organisation will manipulate the accounts in order specific objectives These
frauds are intentional, predetermined and i detect. The accounts are presented in such a manner
that they ling true picture of the financial activities of the business. As such profits are reduced

5. and true picture of the organisation are concealed. This is known as ‘window dressing’. The
following are some of the ways used in manipulating accounts.
1. inflating or deflating expenses and income.
2. Writing offer less bad debts.
3. Over-valuation or under-valuation of closing stock.
4. Charging excess or less depreciation.
5. Charging capital expenditures to revenue and vice-versa.
6. Providing for excess or less doubtful debts.
7. Suppressing sales and purchase or showing fictitious sales and purchases etc.
These frauds are very difficult to detect as they are committed by directors, managers, financial
controllers who are the top responsible persons in the organisation. In order to locate these
frauds, the auditors should be vigilant and should make searching enquiries to arrive at the true
position.

6. DIFFERENCES BETWEEN ACCOUNTING AND AUDITING
Usually an auditor restricts his work only to the verification of accounts. In small organisations
he may also be asked to finalize the accounts. In this case he acts both as an accountant and as an
auditor but the audit work commences only when the accounting work is over. Hence, it as said
that "Audit begins where accounting ends". There are certain differences between accounting and
auditing which are as follows:
Sl.
No
Points of
Difference
Accounting Auditing
1 Meaning It is concerned with recording
of business transactions
systematically.
It is concerned with verification of
accounts prepared by the
accountant.
2 Objective The objective is to know the
financial result of the business
The objective is to verify the truth
and fairness of the accounts.
3 The scope of accounting is
limited to the preparation of
financial statements.
The auditing is concerned with
checking of accounts.
4 Status Accountant is an employee of
an organization.
An auditor is an independent
auditor who does not belong to the
organization.
5 Benefit Accountant gets the salary for
his work.
Auditor gets fees for his work
known as audit fees.
6 Period of work Accounting work is carried
throughout the year.
It is done usually at the end of the
year
7 Qualification There is no formal
qualification for accounting
work.
To become a company auditor one
should be a qualified chartered
accountant.
8
Dependence
Accountancy is not dependent
on auditing
Auditing can be started only after
accounting ends and it dependent
on accounting
9 Nature of work Accountancy is a constructive
work.
Auditing is an analytical work.
10 Accountability The accountant is accountable
to management
Auditor is accountable to
shareholders

8. TYPES OF AUDIT
Auditing is a comprehensive and multi-dimensional discipline. The process of auditing depen
upon the type of audit requirements of the company. Hence, there is a need to know abo types of
audit which are classified as follows:
Classification on the basis of the organisation:
The audits under this classification are further divided into two types
 Statutory Audits
 Voluntary or Non-statutory Audits.
a) Statutory Audit: Statutory audit refers to the audit of an organisation performed under a
statute. For Certain business organisation or institutions, audits are mandatory, such
organisations comes under this category. In this type of audit, the rights, powers, duties and
responsibilities of auditors are laid down by the statute which cannot be altered or curtailed by
the client or auditor himself. The following are some of the organisation which requires statutory
audits:
 Companies-According to Companies Act 1956.
 Banking Companies - According to The Banking Regulations Act, 1949.
 Co-operative Societies - The Co-operative Societies Act, 1912.
 Insurance Companies - The Insurance Act, 1938.
 Public and Charitable Trusts-Various Religious and Other Endowment Acts.
b)Voluntary or Non-statutory Audits: Voluntary audit refers to the audit performed by the
auditors because the proprietors or the Government bodies of the organisation wants their
accounts to be audited as it provides the assurance on the reliability of accounts and the financial
results of the organisations. These audits are also known as Private Audits'. In this type of audit,
the duties, powers and responsibilities are decided as per the agreement between the auditor and
the client. The following are some of the organisations which go for voluntary audits:
 Proprietary Concerns.
 Partnership firms.
 Unregistered clubs and societies.
II)Classification on the basis of the Functions: The function of the auditor depends upon the
capacity of conducting the work by the auditor Based on this, the audit is classified into two
types:

9.  Internal Audit
 External Audit.
a) Internal Audit: Internal audit is a type of audit conducted by the own staff of the
organisation specially assigned for that purpose. In this type of audit, thorough
examinations of the accounting transaction as well as the system according to which
transactions are recorded are conducted. It is done to verify the reliability and authenticity
of the financial accounting and other records presented to management. The scope and
objectives of this type of audit vary widely and a dependent on the size and nature of the
business.
b)External Audit: It is a type of audit performed by the auditors outside business organisations.
They are no way related with the preparation of accounts or management of the organisation.
Qualified Chartered Accountants appointed as external auditors of the organisation. This audit is
conducted order to fulfill the legal requirement of the business. The various procedure relating to
this type of audit is laid down in the concerned statute.
III. Classification on the basis of Audit Approach:
Time basis;
 Continuous Audit
 Interim Audit.
 Periodical or Final Audit.
b. Scope basis;
 Complete Audit
 Partial Audit
C. Objective basis;
 Balance sheet Audit.
 Occasional Audit.
a) Time Basis: Further audit can be divided on the time basis which is as follow Continuous
Audit: Continuous audit is also known as 'Detailed Audit. Under this type of audit,
detailed examinations of books of accountsconducted at regular intervals say weekly,
monthly or once in three month The auditor checks and verifies each and every
transaction by visiting clients place regularly during the financial year This type of audit
is carried large organisations where bulk and variety of transactions are involved.

10. b) Interim Audit: It is a type of audit which is conducted in betweenannual audits with a
view to find out the interim profits. It is done for thenpurpose of declaring interim
dividend to the shareholders. In simple wordit is an audit which is conducted between
two balance sheet audits.
c) Periodical or Final or Complete Audit: It is a type of audit where I checking and
verification of books of accounts are conducted only a end of the accounting period It is
taken up by the auditor whe transactions for the year are completely recorded, balanced
and final accounts have already been prepared In this case, the auditor visits the clients
place once in a year and takes up his work until it is completed for the whole period It is
also known as 'Complete Audit
b)Scope basis: The types of audit on the basis of its scope are as follows.
1. Partial Audit: It is a type of audit where an auditor is asked to check and verify only few
books of accounts for a particular work This type of audit curtails the work of auditor According
to Companies Act the duties of an auditor of a company cannot be curtailed Hence this type of
audit is not permitted in limited companies. The auditor should mention that he has done partial
audit as per the instructions of the clients in his reports in order to avoid dispute
c) Objective basis: On the basis of the objective of audit, it can be classified into two types
1. Balance Sheet Audit: This type of audit is of recent origin Under this type of audit, the
checking and verification of books of accounts starts from the balance sheet and working back to
the original books of entry and other related documents. In this audit, all the balance sheet
accounts and the related items are verified. This is more widely used type of audit
2. Occasional Audit: It refers to a type of audit which is carried out whenever the clients desires
it and whenever there is need. This type of audit cannot be carried out in case of joint stock
companies, Banking, Insurance companies. Only proprietary concerns can opt for this type of
audit
V. On the Basis of Audit Dimension
1. Tax Audit: A tax audit refers to examining of an organisations or individuals incomes or
expenses and claims of deductions or exemptions for the purpose of assessment of tax. It
is compulsory in addition to financial audit. It has to be done by the qualified Chartered
Accountant.

11. 2. Management Audit: Management audit is one of the techniques of management control.
It refers to the systematic examination of the activities of management at all levels of
management. It covers all the areas of management such as Planning, Organising,
Directing, Controlling ote This type of audit helps in improving the efficiency of
management.
3. Cost Audit: Cost audit simply means audit of cost records. In other words, it refers to
detailed checking and verification of correctness of cost accounts, costing techniques and
system. It acts as an effective managerial tool for detection of frauds, errors and
inconsistencies of cost records.
4. System Audit: System audit refers to an audit concerned with evaluation accounting
practices which is directed to ascertain whether they are up-to-date and economical It
also involves ascertainment of whether the existing accounting practices are required to
be modified so as to carry on the work quicker, better and at less cost.
5. Cash Audit: Cash audit involves the evaluation of all the cash transactionsthe
organisation for a given period of time. In this type of audit, the auditor wil check all the
cash receipts and payments with the vouchers and documents. It is the oldest concept of
auditing.
6. Social Audit: This type of audit is concerned with examination of performance of an
organisation or an entity towards the fulfillment of social obligation. The purpose of this
audit is to present the organisational image among the public a to how an organisation
has discharged its responsibility to the society But this i not much in practice in India.
7. Energy Audit: It is of new origin. It is an important factor for the present day world to
conserve the energy resources. This type of audit aims at evaluating whether the right
type of energy is used in the organisation and also confirming that there is no waste of
energy due to human difference.
8. Proprietary Audit: Proprietary audit aims at examining the allocation of resources and
also ascertaining whether there is any violation of legal, economic or financial aspects of
the organisation. This audit ensures the public money ha not been utilized for the benefit
of a particular person or a community.
9. Performance Audit: In this type of audit, the auditor examines the growth of the
organisation in terms of production, sales and profitability of the organisation The
purpose of this audit is to evaluate and compare the optimum return with the amount of
capital invested.
10. Secretarial Audit: This is also a new concept of auditing. It is an audit which ensures
that the corporate body's legal requirements have been duly complied with and in time. If
there is any non-compliance noticed by the auditor, the management will have time to
rectify the situation with less problem and cost.
ADVANTAGES OF AUDITING

12. It is compulsory for all the organizations registered under the companies act must be audited re
are advantages in auditing the accounts even when there is no legal obligation for g so. Some of
the advantages of auditing are as follows:
1. Verification of Books and Statement: The main object of audit is the verification of the
books and the financial statements of the company concerned.
2. Detection and Prevention of errors and frauds: The main advantage of auditing is to
detect errors and frauds. It is the duty of auditors, while examining the books, they should
find out various kinds of errors and frauds. Therefore, audit is very useful inpreventing
and detecting the errors and frauds.
3. Moral check: When each employee of the company knows that this financial transactions
will be examined by the auditor then he fears to do the fraud. The fear oftheir detection
acts as a moral check on the employees of the company
4. Independent Opinion: Auditing is very useful to obtain the independent opinion ofthe
auditor about the business condition. If the accounts are audited by the independent
auditor, the report, of the auditor will be a true picture and it will be very important for
the management. Keeping in view the report, owner of the business will be able to
prevent frauds and errors in future.
5. Protects the interest of shareholder: Audit protects the interest of shareholders in the case
of Joint Stock Company Through audit shareholders are assured that the accounts of the
company are maintained properly and their interest will not suffer
6. Check on Audit acts a check upon the directors and precaution againstfraud on the part of
the management.
7. Valuable Advice:The auditor has expert knowledge about the accounts and
financeproblems, so he will be the right to consult about these problems.
8. Advantage for General Public: Audited financial statements present the real position of
the company before the general public Keeping in view the position of a company one
can do the investment.
9. Useful for Tax Department: Assessment of tax becomes very easy job for the tax
department. Keeping in view the audited accounts they impose the taxes.
10. Information about Economic Condition: Economic conditions of various companies can
be judged through their audited accounts. If these companies are improving their
economic condition, it mean it is a good sign for the economy.
PREPARATION BEFORE THE COMMENCEMENT OF NEW AUDIT

13. The processing of audits is a multi-step process and fairly complex For effective execution of the
audit work, proper planning is needed. Hence, an auditor should pay proper attention to the
following before taking up a new audit
1. Receiving appointment letter:Generally, the auditors of the companies are appointed by
the shareholders in the annual general meeting Therefore, an auditor should get and
examine the copy of resolution passed by the shareholders in the general meeting to
confirm and should receive the appointment letter before starting a new audit.
2. Communication with the existing auditor: In case of an audit proposal is for an existing
business, the proposed auditor mu communicate with the previous auditor to know
whether he has any objections to raise. It also an official requirement as per the Institute
of Chartered Accountants and has to adhered to by the Chartered Accountants.
3. Acceptance of appointment:If the auditor is satisfied of the communication with the
previous auditor, the auditor should confirm his acceptance through a letter of
acceptance.
4. Ascertaining the scope of audit:An auditor should know the nature of audit of his client
before starting the work. If th nature of audit is a statutory audit, the scope of audit work
should be in accordance with the statute In other types of audit, an auditor should discuss
with his clientregarding the nature of audit work.
5. Knowledge about the organization:Before determining a basic approach to audit, an
auditor must have knowledge abou the organisation. He must familiarize himself with
detailed knowledge of business, it activities and visit the location at which it operates.
This helps him to know the natur of transactions which are recorded in the books of
accounts.
6. Knowledge about accounting system:The system of accounting employed by the client
should be examined by the audito before taking up the audit He should obtain list of all
books maintained by thiorganisation for recording its accounting transactions. He must
also acquire completeinformation about the internal control system of the organisation.
7. Knowledge of technical details:The auditor must ensure that he has grasped all the
technicalities peculiar to the business. Then only he will be in a position to identify the
transactions of the accounting records.
8. Complete list of Principal officers: The auditor should take the complete list of all the
principal officers with their nameduties and powers. He should also get their specimen
signatures.
9. Observation of the previous auditor's report: If the company not a new but old, in this
situation auditor should also inspect the report of previous auditor. This will help him in
understanding the nature of accounts,important areas to which detailed checking is
required and the techniques to be used toconduct the audit work efficiently.
10. Instructions to the client: After completing all the above steps, the auditor should issue
clear instructions to the client that the accounts should be finalized and kept ready for
audit.

14. AUDIT NOTEBOOK
An audit note book is a book maintained by the audit staff in which large variety of matters
observed during the course of audit are recorded It contains those information which requires
further clarification and explanation. It is a kind of permanent book available to the auditor.
Objectives of Audit Notebook
1. The audit notebook of current year will help the auditor for starting audit for the next
year.
2. It provides evidence about the extent of work done by the auditor.
3. It helps in preparation of audit report.
4. It helps the auditor to know about the progress of audit work and the efficiency of his
staff in audit work.
5. It also helps the auditor for the settlement of audit queries.
Contents of Audit Notebook
1. List of books maintained by the clients.
2. The names of the Principal Officers, their powers, duties and responsibilities.
3. The technical terms used in the business.
4. The points which require further clarifications.
5. The particulars of missing vouchers.
6. The mistakes and errors discovered.
7. The points to be incorporated in the audit report.
8. Accounting method followed in the business.
9. Date of commencement and completion of audit.
10. Particulars of accounting and financial policies followed
AUDIT WORKING PAPERS
Audit working papers refers to the audit papers which records the audit evidence result from the
audit work performed to provide support for the auditor's opinion including ti representation.
They are the direct aid in the planning, performance and supervision of the audit.
Purpose of audit working papers:
1. They show the extent of adhereance to accounting principles and accounting standards.
2. They are useful as evidence against the charge of negligence.

15. 3. They assist the auditor in co-ordinating and organising the work of audit assistants.
4. They ensure the possibilty of quick preparation of audit report.
5. They can be used as a permanent record for future references.
6. They helps in controlling the ongoing audit work.
Contents of working papers
1. Audit programme
2. Audit notebook
3. Audit appointment letter
4. Correspondence done in relation to the audit programme.
5. List of debtors and creditors.
6. Opening and closing trial balance.
7. A copy of the audit report.
8. Rules of the organisation, memorandum of association, articles of association,prospectus
etc.
9. List of cost vouchers.
10. Documents relating to depreciation.
AUDIT PROGRAM
An auditor prepares a plan after the selection of senior and junior staffs allocating the jobs to
them, mentioning when to start, how to do the work etc. This plan is known as audit program An
auditor should include all the procedures in written form, objectives of each sector and all the
directions which are to be given to the staffs which helps to control their works and helps to
implement such program into action
Definition Audit Program
In the words of Howard Settler. "An audit program is an outline of all procedures to be followed
in order to arrive at option concerning the client's financial statements”.
Types of Audit Program
1 Fixed Audit Program
Generally auditor prepares audit program on the suggestions and recommendation of stant staffs
but such program cannot be changed during the rourse of audit which known as fixed madit
program Such program, due to pace of time or change in the situation and size of the client needs
to change even though it cannot be changed Pixed audit Program can be used in all the
organizations.
2.Flexible Audit Program

16. An audit program which can be changed as per the need, time, nature of business and auditing
standard is known as flexible audit program. Such program should be reviewed on the
recommendations and suggestions of assistants Such change can be made due to change in
number of work, nature of business, change in management and their feelings. Its just taken as
helping part but assistants can use their knowledge, caliber and intelligence
Objectives of Audit Program:
1. Audit program helps to check systematically the books of accounts which helps to
conduct fair audit.
2. Audit program specifies the time period clearly, which helps to complete the work of
audit in less time.
3. Assistant should sign after the completion of work which specifies theresponsibility and
accountability of staffs. It also helps to prove the completion of task.
4. Review of proposed scope of audit preparing proper plan.
5. Audit program shows the way to the new staffs to perform work of audit.
AUDIT REPORT
Meaning: An audit report is a statement through which an auditor submits his findings an
expresses his opinion on the state of affairs of the company's business. It is the medium through
which an auditor expresses his opinion on the financial statements of a business
Characteristics of Audit Report
1. It is the medium through which an auditor expresses his opinion on the financial
statement and conditions of a business
2. It is the end product of audit, as it summarizes the results of the audit work conducted by
an auditor.
3. It is based on factual information.
4. It is may be short or long.
5. It may be in the form of a letter or mere statement is attached to the balance sheet.
Importance or Significance of Audit Report:
1. It is a statutory requirement in the case of company audit.
2. It summarizes the results of the audit work done by the auditor.
3. It is the medium through which an auditor submits his findings and expresses his
opinions on the state of affairs of the client's business.
4. It is an evidence of the auditor's work.

17. 5. It is a tangible proof of the financial state of affairs of the company
DIGITAL AUDITING AND FORENSIC AUDIT
A digital auditing is a process of business document which outlines all the audit activities and
efforts an organization undertakes on digital channels. It mostly details the execution and results
rather than describing strategy or plans. A digital audit contains key information to help define or
evaluate a digital audit strategy. It can identify opportunities such as new reveal insight into
competitor activities and performance.
In the absence of anudit, businesses don’t usually ask themselves these are pinted questions that
are crucial to refining a strategy and ensuring their efforts and dollars are gg invested in the right
direction"- Michael Georgiou, Imagination The audit should include every digital marketing
channel the organization has a presenceon, all content performance, all paid performance, owned
assets, competitor performance, channel-specific trends and areas for optimization
WHY DIGITAL AUDITING IMPORTANT?
A digital audit will give you the knowledge you need to enhance online story, presence,
credibility and accessibility, and to build meaningful engagements. A digital audit is something
that will help us generate leads, increase credibility, and solve issue which won't stop one from
success.
FORENSIC AUDIT
A forensic audit is an analysis and review of the financial records of a company or person to
extract facts, which can be used in a court of law. Forensic auditing is a speciality in the
accounting industry, and most major accounting firms have a department forensic auditing
Forensic audits include the experience in accounting and auditing practices as well as expert
knowledge of forensic audit's legal framework.
A forensic andit comprises the following steps:
1. Planning the Investigation: The forensic auditor and the team will plan their investiga in order
to meet their objectives.
2. Collecting Evidence: The evidence gathered should be sufficient to prove in court the identity
of the fraudster(s), reveal the details of the fraud scheme and document financial loss suffered
and the parties affected by the fraud

18. 3. Reporting: "A forensic audit will need a written report on the crime to be given to clent, so
that if they desire, they can continue to file a legal case.
4. "Court Proceedings: During court proceedings, the forensic investigator must be pr to clarify
the evidence collected and how the suspect(s) were found by the team
OBJECTIVES OF THE FORENSIC AUDIT
1. Identify cases of fraud.
2. Prevent and reduce cases of fraud through the implementation of recommendation advice,
through internal control actions in the company.
3. Participate in the design and creation of fraud prevention programs.
RECENT TRENDS IN AUDITING
1. Tax Audit
Tax Audit involves verification and confirmation of certain facts, figures and information that
are generally required by the tax authorities in the course of assessment proceeding
Definition: Tax Audit
Tax audit can be defined as "an examination of financial records to assess correctness of
calculation of taxable profits, to ensure compliance with the provisions of the Income Tax Act
and also to ensure fulfillment of conditions for claiming deductions under the tax act
The income tax act 1961, contains several provisions which require audit for tax purposes
sections 12A, 33AB, 35D, 35E, 44AB, 80IB, SOLA and 142(2A)
Compulsory tax audit U/s 44AB
Under section 44AB provides for the compulsory audit of accounts of certain persons on
business and profession, states as under
1. In case the total sales (turnover) or gross receipts exceeds Re 40 lakha of a business the
previous year .

19. 2. If gross professional receipts exceeds Rs 10 lakhs in the previous year in the case
profession.
3. In case of business, if the profits and gains from the business are deemed to be thprofits
and gains of a person under section 44AD (business of civil construction)
Section 44AE (business of plying. hiring or leasing of goods and carriage) and section
44AF (business of retail trade) and sections 44BB or 44BBB and that person has claim his
income in each case to be lower than the presumptive income. It is obligatory on th part of such
person to get the accounts audited by a specified date and submit the prescribed details and
report of such audit in the prescribed form duly signed and verifi by an accountant It should be
noted that if such person is required to get his accounts audited under an other law, he will then
be required to get accounts of such business or profession auditsunder that law before the
specified date and obtain a report of the auditor and also audit report under sec 44AB before the
specified date in the prescribed manner
Purpose of Tax Audit
The purpose of Tax Audit is to ensure that books of Accounts have been maintained in
accordance with the provisions of the Income Tax Act. Accordingly a proper audit for tax
purposes would ensure that proper records are being maintained, and that the accounts properly
reflect the income reported by the Assesse This audit effectively curbs Tax Evasion and ensures
Tax Compliance Tax Audit also ensures that the Accounts are properly being presented to the
Assessing Officers when called for The precious time of the Assessing Officers is also saved
from the routine and ineffective verifications like checking of totals and vouching of Purchase
and Sales transactions. They can devote their time in more important investigation aspects of a
Case Thus Tax Audit saves considerable time to the Income Tax Department
2. Cost Audit
The term 'cost audit' refers to the audit of cost records. The cost auditor is appointed to check the
cost accounting records in order to ascertain their accuracy and also to ensure that cost
accounting plan as laid down by the company is carried out Cost audit is an audit of actual
performances Cost audit acts as an effective managerial tool for the detection of errors, frauds,
inconsistencies and irregularities in cost accounting records. Cost audit is different from the
financial audit as the latter is an examination of financial books and records in order to see
whether or not the financial statements represent a true and fair view of the state of affairs of the
organization while the former is the verification of cost accounts and a check on adherence to the
cost accounting plans.

20. Objectives of Cost Audit
1. To establish the accuracy of costing data This is done by verifying the arithmetical
accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and
these are strictly adhered in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauda and wrong
practice in the existing system.
4. To check up the general working of the costing department of the organizationand to
make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters ie to
determine the actual cost of production when the goods are ready.
6. To reduce the amount of detailed checking by the external auditor if effective internal
cost audit system is in operation
Advantages of Cost Audit
A)Advantages of Cost Audit to the Management
1. Cost audit provides reliable cost data for managerial decisions
2. Cost audit helps management to regulate production.
3. Cost audit acts as an effective managerial tool for the detection of errors, frauds and
irregularities so that reliable and smooth functioning of the system continued.
4. Cost audit reduces the cost of production through plugging loopholes relating to wastage
of material, labor and overheads.
5. Cost audit can fix the responsibility of an individual wherever irregularities or wastage
are found.
6. Cost audit improves efficiency of the organization as a whole and costing system in
particular by constant review, revision and checking or routine procedures and methods.
B) Advantages of Cost Audit to the Shareholders
1. Cost audit ensures that proper records are maintained as to purchases, utilization of
materials and expenses incurred on various items Le wages and overheads etc. It also
makes sure that the industrial unit has been working efficiently and economically.
2. The cost audit enables shareholders to determine whether or not they are getting a fair
return on their investments. It reflects managerial efficiency or inefficiency.

21. 3. Cost audit ensures a true picture of company's state of affairs. It reveals whether the
resources like plant and machinery are being properly utilized or not.
C) Advantages of Cost Audit to the Society
1. Cost audit tells the true cost of production. From this the consumer may know whether
the market price of the article is fair or not. The consumer is saved from the exploitation.
2. Cost audit improves the efficiency of industrial units and thereby assists in economic
progress of the nation.
3. Since price increase by the industry is not allowed without justification as to increase in
cost of production, consumers can maintain their standard of living.
D. Advantages of Cost Audit to the Government
1. Cost audit assists the "Tariff Board' in deciding whether tariff protection should be
extended to a particular industry or not.
2. Cost audit helps to ascertain whether any particular industry should be given any subsidy
in order to develop that industry.
3. Cost audit provides reliable data to the government for fixing up the setting prices of the
various commodities.
4. Cost audit helps the government to take necessary measures to improve the efficiency of
sick industrial units.
5. Cost audit can reveal the fraudulent intentions of the management.
3. Management Audit
Management audit is an emerging concept of auditing Management audit is an act of evaluation
of all the activities of all the departments with a view to provide appropriate suggestions to the
management to help their work. In other words management auditing is a future oriented task
which evaluates timely in all the levels of management like production management, sales
management etc. The main objective of management audit is to improve the profit earning
capacity, work of management, objectives of program, social objectives and human resource
development so that organizational goal can be easily attained. It refers to the existence of
control system, compliance of rules and regulations, process of managerial decisions etc.
Functions:
1. Management audit identifies the objectives of an organization if such objectives are not
set up.
2. Management audit allocates the overall objectives of an organization in parts.

22. 3. Management audit reviews the structure of organization and asset of the organization and
decides whether goals can be obtained or not
4. Management audit examines all the scope of work and liability centers.
5. Management audit provides valuable suggestions to the management after the evaluation
of all above facts.
Objectives of Management Audit:
1. To formulate the goal of an organization.
2. To ensure the fulfillment of goals.
3. To help management to improve the activities and procedures.
4. To help all the members of management to make effective discharge of their duties.
5. To help in the improvement of profits
Advantages of Management Audit
1. Management audit provides information about strong and weak points of the
management after reviewing policies and programs. So, it helps to the smooth operation
of an organization.
2. Management audit provides suggestions to the management which helps to maintain
effective management.
3. Management audit helps the management providing suggestions to attain goal of an
organization
Disadvantages of Management Audit
1. Management auditor cannot understand the practical problems So, the suggestions
provided by them are theoretical but not practical.
2. Scope of management audit is vague So, it does not help to achieve specific goal.
3. Generally management gives more emphasis on maintaining books of accounts rather
than concentrating on other factors. So, it consumes time of farsighted management
COMPANY AUDITOR
The auditor is an individual who is trained to review and verify that the accounting data provided
by an audited company accurately corresponds to the activities that have been taken by the
company. The auditor's job is to write a report at the conclusion of the audit which be determines
the level of accuracy and clarity that the organization has accounted for.

23. For instance, if all accounting moves made by the company are reflected in the books (such as
the general ledger), and all data that appears in the records correspond to the course of business
in the company, then the audit will have shown no misstatements. The auditor has a
responsibility to plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement, whether caused by error or fraud. Because
of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain
reasonable, but not absolute, assurance that material misstatements are detected. The auditor has
no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements,
whether caused by errors or fraud, that are not material to the financial statements are detected.
Meaning of Company Auditor
The Companies Act has not defined the term 'auditor' But one can define an audi a qualified
Chartered Accountant appointed for the purpose of examining the accounts of Joint Stock
Company and giving the report thereon to the shareholders every year annual general meeting In
other words, he is an agent or servant of the shareholders w required to the assure the
shareholders that the annual accounts of the company are fide, and they give true and fair view of
the state of affairs of the company
APPOINTMENT OF AN AUDITOR
 First Auditor:
The first auditor of a company is appointed by the board of directors within
one month of the registration of the company. The auditor so appointed will hold office till the
conclusion of the first annual general meeting of the company. If the board of directors fails to
appoint the first auditor, the shareholders may appoint the first auditor in the first general
meeting. The auditor so appointed will not only hold office till the conclusion of the first annual
general meeting of the company, but may also automatically reappointed at the first annual
general meeting of the company.
 Subsequent Auditor:
Every subsequent auditor is appointed every year at every annual general
meeting by shareholders. The auditor so appointed may be the old or previous auditor or a new
and Further, such auditor will hold office till conclusion of the next annual general meeting.

24.  Appointment of Auditor by the Central Government:
If a subsequent auditor is not appointed by the shareholders at the annual gen
meeting, the company must bring it to the notice of the Central Government within seven of the
conclusion of the annual general meeting. If the company fails to give such a nede company and
every officer of the company in default will be punishable with a fine, which muy extend up to
Rs 500. On receiving the notice of non-appointment of a subsequent auditor at any annual
general meeting, the Central Government may appoint an auditor to fill the vacancy
 Appointment in case of casual vacancy:
Any casual vacancy in the office of an auditor can be filled up by the board of
directors. However, casual vacancy caused by the resignation of an auditor cannot be filled up by
the board of directors. It can be filled up only by the shareholders at the general meeting. An
auditor so appointed can hold the office till the conclusion of the next annual general meeting
 Appointment by Special Resolution:
The appointment or re-appointment of an auditor shall be made by a special
resolution in the case of a company in which not less than twenty-five percent of the subscribed
capital is held, whether singly or in any combination with financial institutions or Government
company or the Central Government or any State Government
A nationalized bank or an insurance company carrying on general insurance business If a special
resolution has not been passed for the appointment of an auditor, it shall be deemed that the
appointment has not been made, and Central Government will get the night to make the
appointment.
RE-APPOINTMENT OF RETIRING AUDITOR
Retiring auditor can be reappointed in the AGM, if he is
 Qualified for reappointment.
 He has not given notice to the company in writing about his unwillingness to be
reappointed.
 A notice or resolution has not been passed in the AGM to appoint another person in the
place of retiring auditor
(Note:No individual or firm shall hold office as auditor for more than 20 companies)

25. STATUTORY QUALIFICATION AND PROFESSIONAL QUALITIES OF AN
AUDITOR
An auditor must possess certain professional qualities apart from professional qualific to perform
his audit work efficiently. The statutory qualifications and professional quali an auditor are
explained below
Statutory Qualification:
 Only Chartered Accountant is qualified to act as an auditor of the company.
 A firm can be appointed as the auditor of the company, if all partners are practicing
Chartered Accountant in India.
 A person, who holds a certificate under restricted auditors certificate rules, 1956, is a
qualified to act as an auditor of the company
Disqualifications of an Auditor:
 A body corporate.
 An officer or employee of the company.
 A director or a member of a private company or partner of a firm, who is the manage
agents or the secretary and treasurer of the company.
 A person who is indebted to the company for an amount exceeding Rs 1,000 or a
personwho has given any guarantee to any third party regarding the repayment of any
debt exceeding Rs 1,000 due to the company.
 A holder of shares exceeding 5% in nominal value of the subscribed capital, of anybody
corporate, who is the managing agents or secretary and treasurer of the company.
In the context of disqualifications, it may be noted that, when an auditor become disqualified
after his appointment on any of the above grounds, he is deemed to have vacati his office
immediately after the disqualification
PROFESSIONAL QUALITIES
1. He should have knowledge of principles and practice of General Acting Cost Accounting
and Management Accounting.
2. He should have knowledge of provisions rilating to Income Tax Sales Tax Wealth Tax.

26. 3. He should have knowledge of Economics, Business Law Mathematics, Statistics,
Business Management, Financial Management etc.
4. He must have the ability to draft the report clearly, correctly, concisely and forcefully.
5. He should be vigilant and alert is his work.
6. He must be methodical and systematic.
7. He must not disclose the confidential information about the business of his client to
others.
8. He should be independent and impartial 9 He is a watch dog but not blood hound.
9. He should convey information but not means of information.
10. To sum up, the professional qualification and qualities will help him in conducting the
audit work smoothly and in maintaining the high tradition of the professions.
RIGHTS AND POWERS OF A COMPANY AUDITOR
1. Right to of access to books of account and vouchers
An auditor of a company has a night to of access, at all times, to the hooks of accounts and
vouchers of the company, whether they are kept at the head office of the company, or elsewhere.
The auditor of the company may examine the books and vouchers whenever he likes For this
purpose, he may pay even surprise visits to the company's office without informing the directors
in advance. But, in practice, generally, an auditor informs the directors before be pays his visit
2. Right to obtain information and explanations
An auditor of a company has a right to obtain from the directors and officers of the company
such information and explanations as he may think necessary for the performance of his duties as
an auditor the directors or officers of the company refuse to supply any information un v ground
that, in their opinion it is not necessary to furnish it, the auditor has a right to m that fact in his
report
3. Right to comment on the inadequacy of the accounting system in his report
If the system of maintaining accounts is inadequate, auditor can advise the directors amend the
system of accounting However, if his advice or suggestion is not carried our the directors, he has
a right to mention the fact in his report. He has to state in his report proper books of accounts
have not been maintained by the company
4. Right to receive notices and other communications of general meeting

27. An auditor of a company has a right to receive notices and other communications relati to any
general meeting, like any other member of a company, irrespective of the fact whethe accounts
are discussed or not at that meeting.
5. Right to have legal, technical or expert advice
An auditor has a right to take legal, technical or expert advice on any matter relating the business
in order to perform his work satisfactory. This right of the auditor was upheld the case of London
and General Bank. It may be noted that, no doubt, the auditor has the right to seek legal,
technical or expert advice. But, in his report, he must give his own opinion, and not that of the
expert
6. Right to receive remuneration for his audit work
An auditor of a company has a right to receive remuneration for his audit work provide he has
completed the work which he undertook. It may be noted that, if the remuneration payable to the
auditor is fixed in the form of an annual fee, he is entitled to full year's fer even if he is dismissed
during the year (Homer vs Quilter).
7. Right to be indemnified
An auditor of a company has a right to be indemnified, out of the assets of the company for any
liability incurred by him in defending himself against any civil or criminal proceeding by the
company, provided the judgment is in his favor
8. Right to sign the audit report
An auditor has this right to sign the audit report. It may be noted that only a person appointed as
an auditor of the company may sign the auditor’s report.
9. Right to make representation and to speak in the general meeting when he is asked vacate
office. An and has de right to make representation in writing and also to speak in the general
meeting in all cases when he asked to vacate his office
10. Right to refuse to start the audit work until the hooks of account of the business is balanced
by the management.
An auditor has the right to refuse to start the audit work until the books of accounts of business
are balanced by the management
In order to enable as auditor of a company to discharge his duties effectively, the Companies Act
of 1956 has given certain rights and powers to him. It may be noted that the night and powers
given to an auditor of a company by the Companies Act cannot be restricted either by the articles
of association of the company or by the resolution of the embers of the company (Newton vs
Birmingham)

28. DUTIES AND RESPONSIBILITIES OF A COMPANY AUDITOR
1 Statutory duties, Le, duties imposed by the Companies Act
II Contractual duties arising out of the auditor's contract with the cheat
Il Certain cities imposed by legal or court decisions
IV. Duties arising out of professional ethics.
I Statutory Duties (a, duties imposed by the Companies Act)
Statutory duties refer to the duties imposed by the statute se, by the Companies Act. It y be noted
that the startery duties of an auditor cannot be restricted either by the articles of association of
the company or by any resolution of the members of the comp directors of the company.
(Newton vs Birmingham)
The various statutory duties of an auditor under the Companies Act of 1956 are as follows:
A. Duty to make certain enquiries
An auditor of a company should make the following enquiries: Whether loans and advances
made by the company on the basis of securities b properly secured.
2 Whether the terms on which loans have been made are not prejudicial to the in the company or
its members.
3 Where the company is not an investment company, whether the shares, debenture other
securities of the company have been sold at a price less than its purchase p
4. Whether loans and advances made by the company have been shown as deposit
5. Whether the position as stated in the books is correct, regular and not misleading
B. Duty to sign his audit report
It is the duty of an auditor to sign the audit report prepared by him. In the case of auditors, any
partner of the firm can sign the audit report.
C. Duty to assist investigators or inspectors
It is the duty of the auditor of a company to preserve and produce all books an relating to the
company under investigation to the investigators or inspectors and to s all assistance in
connection with investigation.

29. D. Duty to assist the Central Government in connection with prosecution
An auditor of a company is required to give the Central Government all n assistance in
connection with the prosecution of directors, managing director or othe of the company.
E. Duty to certify the statutory report
The auditor of the company should certify the statutory report as correct after it has been
certified more correct by not less than two directors, one of whom should be the managing
director
F. Duty to report
An auditor of a company should make a report to the shareholders on the accounts examined by
him. The report, so submitted should contain the following
1. Whether he has obtained all the information and explanations to the best of his
knowledge and belief and which were necessary for the purpose of his audit.
2. Whether, in his opinion, proper books of accounts, as required by law, have been kept by
the company and proper returns necessary for the purpose of his audit have been received
from branches not visited by him.
3. Whether the company's balance sheet and profit and loss account are in agreement with
the books of accounts and returns.
4. Whether, in his opinion and to the best of his information and according to the
explanations given to him, Whether the balance sheet and profit and loss account have
been drawn up according to the requirements of the Companies Act and exhibits a true
and fair view of the state of affairs of the company
II Duties Arising out of Common Law (ie., under his Contract with the Company):
An auditor is appointed by an agreement with his client, ie, the company. So, he has some duties
arising out of the common law or the law of contract:
1. If he is requested to perform certain special duties under the contract with the company,
say, conduct of efficiency audit or propriety audit, he has to perform them:
2. An auditor is required to perform his contractual duties with reasonable care and
diligence in order to avoid his liability for breach of contract
III Duties imposed by Legal or Court Decisions
1. He is not bound to be a detective or to approach his work with suspicion or with foregon
conclusion that there is something wrong. He is a watchdog. but not a blood hound. He

30. justified in believing the responsible officials of the company and is entitled to rely upon
their representations, provided he takes reasonable care (Kingston Cotton Mills Ltd.)
2. An auditor should correspond in writing with the previous auditor in whose place he ha
been appointed as an auditor of the company. (B. N. Mohan vs K.C.J. Satyawadi)
IV Duties Arising Out of Professional Ethics:
1. It is the duty of an auditor not to practice as an auditor unless he is a member of the
Institute of Chartered Accountants, and a holder of a certificate of a practice from the
Council of the Institute (Joint Secretary to the Ministry of Trade and Industry,
Governmen of India vs AC Kaher).
2. An auditor should comply with the rules and regulations formulated by the Institute of
Chartered Accountant of India.
3. He must be honest, sincere, technically competent and carry on his duties with due regard
to public interest, and not in his personal interest Further, He should disclose full and fair
information about the working and the financial position of the company to all the
stakeholders.
LIABILITIES OF THE COMPANY AUDITOR
A company auditor is appointed under the Companies Act. So, his liabilities are determmed by
the Companies Act It may be noted that the liabilities of a company auditor laid down in the
Companies Act cannot be curtailed or restricted Further, Under the Companies Act, the liabilities
of a company auditor can be grouped under two heads.
They are Civil liabilities and Criminal liabilities.
Liability of an auditor to pay damages is known as Civil liabilities. The Civil liabilities of a
company auditor may be grouped under two heads They are Liability for negligence and
Liability for misfeasance
1. Civil Liability of an Auditor for Negligence
An auditor of a company is appointed by the shareholders. As such, he becomes an agent of the
shareholders. As an agent of the shareholders, he must safeguard the interest of the company To
safeguard the interests of the company, he must exercise reasonable care and skill in the
performance of his duties. If he fails to do so, and as a consequence thereof, if the company
suffers any loss, the auditor will be held liable to compensate the loss suffered by the company

31. The civil liability of an auditor for negligence has been confirmed in several leading cases. Some
of the leading cases confirming the civil liability of an auditor for negligence are follows:
1. London Oil Storage Co. vs. SeearsHasluck and Co. In this case, the auditor failed to verify the
existence of petty cash. As a result, the company suffered loss It was held that, if the auditor of
the company fails to verify the existence of assets as shown in the balance sheet, he is liable to
pay damages to the company
2. Leeds Estates Building and Investment Co. vs. Shepherd. In this case, It is the duty of the
auditor not to confine himself merely to the task of ascertaining the arithmetical accuracy of the
balance sheet, but to see that it is a true and accurate representation of the company's affairs. It
was no excuse that the auditor has not seen the articles when he knew of their existence.
3. Irish Woolen Co. vs. Tyson and Others. In this case, there was considerable understatement of
trade liabilities, and suppression of some of the purchase invoices. The falsification of accounts
might have been discovered by the auditor, if he had called for the creditors' statements and
checked the same with the pective ledger accounts. But the auditor did not care to check the
creditors' statements. As result, dividends were paid out of capital. The auditor was sued for
negligence in the performance of his duties I was held by the court, "An auditor shall be liable
feadeigtained by a company by reason of falsification which might have been do by the exercise
of reasonable care and skill in the performance of audir
II. Civil Liability of an Auditor for Misfeasance
The civil liability of the auditor of company for misfeasance has been con several cases. Some of
the leading cases in which the civil liability of an misfeasance has been confirmed are:
1. London and General Bank Ltd.
In this case, the assets of the company were over valued. As a result, dividend was out of capital.
The auditor was aware of the over valuation of the assets. But he did report the matter to the
shareholders in clear terms It was held that an auditor is liable misfeasance, if he fails to bring to
the notice of the shareholders in clear terms abou unsatisfactory state of affairs of the company,
when he knew the company assets were valued
2. Union Bank of Allahabad
In this case, the manager of a bank had borrowed large sums of money from the la for himself
and his relatives without providing proper securities. The auditor of the bank blad signed the

32. balance sheet, as he had full trust in the manager of the bank. He was held hi for misfeasance, as
he had signed a false balance sheet by blindly trusting a dishon manager and secretary of the
bank
3. The City Equitable Fire Insurance Co. Ltd.
In this case, it was held that it is the duty of an auditor to satisfy himself that securities of the
company reality exist, and are in safe custody. He is liable for misfeasance he does not verify the
existence of the investments and merely accepts the certificate stock broker.
Criminal Liabilities
Criminal liability of an auditor arises out of an act constituting a crime, say, mis- representation
of facts, falsification of facts, issue of false certificates, making of false statement, destruction of
any voucher or document or doing of any other act, with an intent to deceive others. The penalty
for any criminal liability of an auditor may be fine, imprisonment. ce both
The criminal liabilities of an auditor may arise under the Companies Act, 1956, the Indian Penal
Code, the Income-tax Act, 1961 and the Chartered Accountants Act of 1949.
1. Criminal Liabilities of an Auditor under the Companies Act of 1956
 Where the prospectus issued by a company includes any untrue statement or mis-
statement by the auditor, the auditor becomes criminally liable. In this case, he may be
punishable with imprisonment for a term which may extend to two years or with fine
which may extend to rupees five thousand or both.
 If as auditor intentionally gives false evidence upon any examination about the winding
up of the company, he becomes punishable with imprisonment for a term which may
extend to seven years and also to fine.
 An auditor of the company becomes liable for criminal prosecution, if he, in any return,
report, certificate, makes a false statement, particularly knowing it to be false or omits
any material fact, knowing it to be material. The punishment on conviction will be
imprisonment for a term which may extend to two years and also fine.
 If an auditor destroys, mutilates or makes alterations in any books, papers or securities
belonging to the company with intent to defraud or deceive any person at the time of the
winding up of the company, he becomes punishable with imprisonment for a terms which
may extend to seven years and also to fine.
 When a company is wound up, the court may the auditor of the company, who is known
or suspected to be in possession of any property, books or papers of the company, to

33. appear before the court and to return to the court the property, books or papers of the
company. If the auditor fails to appear before the court, he can be imprisoned.
 If the Central Government takes action and prosecutes any officer connected with the
affairs of the company, the auditor is required to assist the prosecution. If he fails to do
so, he becomes punishable with imprisonment for six months or with fine up to Rupees
for hundred or with both.
 If the auditor of a company does not give the required assistance to an inspector appoin
by the Central Government to investigate the affairs of a company, the auditor is punisha
with imprisonment up to six months or with fine up to Rupees ten thousand or with both
II. Criminal Liability of an Auditor under the Indian Penal Code
If an auditor issues or signs any certificate, knowing or believing that such certificate false in any
material point, he becomes punishable in the same manner as if he gives fal evidence.
III. Criminal Liabilities of an Auditor under the Income-tax Act of 1961
If an auditor induces in any person to make and deliver to the income-tax authorities false
statement or declaration relating to any income chargeable to tax, he becomes punishab with
simple imprisonment which may extend to six months or with fine which may extend Rupees
one thousand or with both.
IV. Criminal Liabilities of an Auditor under the Chartered Accountants Act
If a person, not being a chartered accountant, acts as an auditor of a company and sign any
document, he becomes liable for criminal prosecution
If a company has suffered any loss, it is only the company which can sue the auditor fe damages
and an individual shareholder has no right to do so. Further, the court has power relieve an
auditor either partly or wholly, if a case is proceeding against him for negligence misfeasance,
provided it is satisfied that the auditor acted honestly and reasonably.
PROFESSIONAL ETHICS OF AN AUDITOR

34. The Chartered Accountants Act, 1949, set out the acceptable forms of behavior of themembers of
the profession. All the members are required to adhere to the requirements of thepaning of
Professional Ethics
The "Code of Conduct" is essentially a set of professional ethical standards regulating
relationship of Chartered Accountants with their clients, employers, employees; fall members of
the group and the public generally
In other words, professional ethics refers to the behavior of a member of a professional body
towards the other members of his profession and towards the members of the public.
Meaning of Professional Misconduct
It means any failure to perform a duty according to accepted professional standard. Such gross
negligence gives rise to a civil liability to pay damages to the party who has suffered a Joss
Professional Ethics
1. Practicing member prohibited from allowing any person other than his partner or
employee to practice in his name.
2. Practicing member prohibited to pay or allow any share, commission or brokerage or
profits of his professional business, to any person other than a member of the Institute or
a partner or retired partner or the legal representative of deceased partner.
3. Practicing member prohibited to accept or agreeing to accept any part of the profits of
theprofessional work of lawyer, auctioneer, broker or other agent who is not a member of
theInstitute
4. Practicing member prohibited to enter into partnership with any person other than a
practicing member or members of recognized foreign professional bodies.
5. Practicing member prohibited from securing professional business through person not
qualified to be his partner.
6. If a member fails to furnish information asked for or does not comply with the
requirements asked for by the council.
7. Practicing member prohibited from advertising his professional attainments or services.
8. Practicing member prohibited from accepting a position previously held by another
chartered accountant without first communicating with him in writing.
9. Practicing member prohibited from accepting an appointment as auditor of a company
without first ascertaining, whether the requirements of the Companies Act, 1956 in
respect of such appointment have been duly complied with.
10. Practicing member prohibited from charging or offering to charge any proper
employment fees which are based on a percentage of profits except permitted by
regulations
11. Practicing member prohibited from engaging in any business or occupation other than
profession of chartered accountants unless permitted by the Council so to engage.

35. 12. Practicing member prohibited from allowing a person not being a member of the Institute
a member not being his partner to sign on his behalf or on behalf of his firm, any balance
sheet, profit and loss account, report or financial statements.
13. Practicing member prohibited from disclosing information acquired in the course of i
professional engagement to any person other his client, without the consent of his client
14. Practicing member should disclose a material fact known to him which is not
disclosedfinancial statement, but disclosure of which is necessary to make the financial
statement not misleading.
15. Practicing member should keep moneys of his client in a separate banking account or use
such moneys for purposes for which they are intended.
16. Practicing member must be vigilant in the conduct of his professional duties. If a member
contravenes any of the provisions of the act, he will be considered as guilty a professional
misconduct and will be liable for penalty or imprisonment or both.
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