Practices and principles of auditing

1. Principles & Practice of
Auditing
VI Semester B.Com

2. Introduction
The historical records show that ancient Egyptians , the Greeks
and Romans used to get their public accounts audited.
The devt of trade and commerce ,the need for recording
transactions became necessary.
LUCA PACIALI , an Italian , had published double entry system
of book keeping for the first time in 1494.
With the devt of Banking facilities , communication and
transport , the concept of Corporate Management had taken
place.
There was a need of expert who have knowledge of Accounts
and who check the truthfulness of the financial statements. So
the importance of Audit has increased. Bombay Government
was first to start Diploma in Accountancy.

3. Meaning of Auditing
The term audit usually refers to a financial statement audit. A
financial audit is an objective examination and evaluation of
the financial statements of an organization to make sure that
the financial records are a fair and accurate representation of
the transactions
The term “audit” has been derived from the Latin word
“audire,” which means “to hear.” Hence, an auditor is a person
who hears or listens.

4. Audit is a planned and documented activity
performed by qualified personnel to determine by
investigation , verification , examination , or
evaluation of accounts and assets of the
organization.
The term may refer to audits in accounting , quality
management , project management , water
management .

5. Definition of Auditing
“
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.”- The Institute of Chartered Accountant of India
“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.”- J.
R. Batliboi
“Auditing is concerned with the verification of Accounting data
determining the accuracy and reliability of Accounting statements and

6. Auditing involves the following steps:
A study of Orgn and its structure
Analysis and review of systems of accounting and
internal Control
Testing arithmetic accuracy of records and
collection and evaluation of evidence in support of
transactions.
Verification of State of affairs disclosed by the
balance sheet and P/L disclosed by profit and loss
account.
Preparation of report , expressing opinion whether
accounts present a true and fair view.

9. Objectives of Auditing

11. To judge the accuracy of the books of Accounts, the
Auditor must: (Primary objective)
Assess the system of Internal Control
Verify the accuracy of posting, balancing.
Confirm the validity of transaction with supporting
documents
Conform existence of assets and liabilities.
Ascertain whether distinction has been made
between capital and revenue items.

12. Secondary objectives
1. Detection and prevention of Frauds
2. Detection and prevention of Errors
pes of Frauds
Misappropriation of Cash(false payment or excess in books of accounts, theft
h receipts, petty cash, cheques, it is possible in large scale business where th
ntact b/w owner and accountant, cash transactions omitted from the records
orded less , discount allowed are omitted, showing payment of wages to dum
rkers , sale of scrap –bad debts recovered , donation received not recorded )
Misappropriation of Goods:( theft of goods from godown from the employee
oice, stated higher quality than actual)
Manipulations of Account: It is committed by managers, BOD’s , Directors , T
el , ( teaming and lading, omission of receipts, showing low profits than the

13. .
Teeming and lading is a bookkeeping fraud also
known as short banking, delayed accounting. It
involves the allocation of one customer's
payment to another customer's account to make
the books balance, often to hide a shortfall or
theft. Amount received from one customer is
pocketed and money received from another
customer may be shown

14. Secondary objectives
1. Detection and prevention of Fraud
Fraud refers to intentional mispresentation of
financial information by one or more individuals
among management ,employees or third parties.
 Manipulation , falsification or alteration of records
or documents.
 Misappropriation of assets
 Suppression or omission of effects of transactions
from records or documents
 Misapplication of accounting policies.

15. II. Detection and prevention of Errors
It is the result of Carelessness.
• Mathematical mistake
• Mispresentation of Facts
• Misapplication of Accounting policies

16. :

17. Advantages of Auditing

18. 1. For the business and Shareholders:
-- Shareholders can value his business on the basis of Audited accounts.
- -Sale of business and admitting new partners depend on Audited
accounts.
-- Dispute over the correctness of Profits can be avoided.
-- It is useful to value Goodwill for Partnership firms.
-- It helps to judge performance
-- It helps to value shares.
2. For the Management:
-- It helps to detect and prevent errors and frauds.
-- Accounts and Staffs Vigilant ( careful) while preparing Books of
Records.
-- It helps to estimate and Claim due to fire , theft , accident .
-- It helps to compare the performance of previous years.
--- It provides advice and suggestion for the improvement.

19. 3. For the creditors:
-- Based on the audited accounts only creditors will grant loans.
-- Based on the audited accounts only creditors will grant loans.
4. For the government
-- It is used as an evidence in the court of Law.
-- It is useful for the government to grant subsidies.
5. For the society:
-- Audits are important in the economy and it increase trust,
strengthening accountability and confidence in financial reporting.
-- Therefore, audits improves economic prosperity, that individuals might
be willing to engage in.
-- This provides invaluable credibility and confidence to your
organisation's customers/clients, stakeholders, investors or lenders and
even potential buyers.

20. Classification of Audits

21. On the basis of Scope:
1. General Audit : It can be Independent or Internal.
2. Specific Audit : It concentrates on a Particular area , object ,period.
On the basis of Nature of activity:
1. Commercial : When the audit is for profit motive organizations can be
called Commercial audit.
2. Non- Commercial : When the audit is for non- profit motive
organizations can be called Commercial audit.
On the basis of Form of Organization:
1. Private Audit :It is not compulsory. It is conducted at the desire of the
owners. ((Insider/ Outsourcing)
2. Government: It is conducted to check the performances of Govt
Entities.

22. On the basis of who conducts it:
1. Independent Audit: It is conducted by Exteral qualified person.
2. Internal : It is conducted by Employee of the orgn.
On the basis of Legal Necessity:
1. Statutory Audit: Some Act require Statutory Audit.
Ex: Co’s Act , Banking Act ….
2. Non Statutory Audit: Audit is conducted without any legal necessity
is called Non statutory Audit.
On the basis of Method of examination:
1. Continuous Audit: Auditors staff attends the work regular intervals
say weekly, monthly , quarterly. They check each and ever Transaction.
2. Periodical Audit: ( B/S Audit, Annual audit , Final Audit )
Audit is conducted at the end of the year. It consider the B/S items.

23. 1. Partial Audit:
(Audit only certain category of transactions i.e only payments)
2. Balance sheet Audit:
( Balance sheet items)
3. Management Audit:
(Verification of all the objectives , policies , procedures and
functions of Magt)
4. Performance Audit:
( Efficiency of the Orgn)
5. Occasional Audit:
( conducted only on some special events)

24. 6. Standard Audit:
(It is a sample checking after satisfactory and detailed checking of
some of the items)
7. Audit in depth:( detailed stepwise verification )
8. Post and Vouch Audit:
( Each and every individual transactions are verified like posting,
totalling , balancing etc.)
9. Operational Audit:
It helps in achieving objectives.
10. Interim Audit: ( conducted between two annual audits)
11. Cost Audit: ( verification of cost accounts and costing methods)

25. Continuous Audit:
Meaning:
Auditors staff attends the work regular intervals say weekly, monthly
, quarterly. They check each and ever Transaction.
Definition:
A continuous or detailed audit involves a detailed examination of all
the transactions by the auditor attending at regular intervals say
weekly , monthly , during whole period of Trading.
T R Batliboi
It is required when the transactions is very large.

26. Advantages of Continuous Audit:
-- Complete checking of all the records
-- Proper planning
-- Preparation of Interim Accounts
-- Early detection of frauds and errors
-- Up- to- date accounts
--Valuable suggestions
Demerits:
-- Expensive
-- Frequent ( Unhealthy relationship)
-- Waste of time if the size of the company is small
-- Alteration of Figures
-- Disturbance of Clients work

27. How to avoid shortcomings of Continuous audit:
-- Surprise check
-- Brief Review ( Past work)
--Alteration of Audited work should be avoided.
-- Audit of a particular transaction must be completed in one
sitting.

28. Interim Audit:
It means Half yearly. It is conducted between 2 annual audits / 2 annual
general meetings.
Merits:
-- Errors and frauds can be detected at the earliest.
-- It helps the auditor in final audit.
-- It facilitates the declaration of Interim Dividend.
--It helps to complete final Audit quickly
-- It alert the staff members.
De-merits:
-- Expensive
-- Difficult
-- Waste of time if the size of the company is small
-- Alteration of Figures
-- Increase the Clients work

29. Government Audit:
Audit of Government offices and departments is covered. A separate dept
is maintained by govt as Account and Audit dept. This dept is headed by
Comptroller and Auditor General of India( CAGI). It works for govt dept
not Non govt concerns.
Objectives:
-- To check that all the payments made as per rules.
-- To check proper valuation of stock
-- To check the stock registers are maintained.
-- It is the systematic process of collecting, recording, classifying,
summarizing and interpreting the financial transactions relating to the
revenues and expenditures of government offices.
--It reveals how public funds have been generated and utilized for the
welfare of the general public.
--

31. Annual/ Periodical Audit:
It is conducted after the close of financial year.
Definition:
A periodical Audit or B/S audit is one where the auditor attends only at the end
of the financial period , and certifies the final statement of accounts after
scrutinizing the same with the books of account, vouchers and documents.
Merits:
-- Disturbance of Clients work can be avoided
-- Minimization of alteration of accounts
-- less expensive
--Time saving
-- It gives satisfactory results in case of small concerns.

32. Disadvantages:
-- It is not suitable for big concerns.
-- It may get delayed
-- Auditors may not be able to check all the transactions
-- Delay in declaration of dividends

36. Preparations Before Commencement of
A New Audit

37. Instruction given by the auditor to his clients:
A list of books and employees
T/B and Final Accounts
Supporting Vouchers
An auditor should pay proper attention to the following points
before taking up a new audit:
Appointment letter of an auditor:
Verification of Memorandum
Verification of Articles
Verification of Incorporation Certificate
List of Books
Prospectus
Minute Book
Documents
Timings
Audit Programme

39. Audit Programme
Meaning
An audit program is a set of directions that the auditor and its team
members need to follow for the proper execution of the audit. ... Thus,
an auditor prepares a program that contains detailed information about
various steps and audit procedures to be followed by the auditor.
After preparing an audit plan, the auditor allocates the work and
prepares a program which contains steps that the audit team needs to
follow while conducting an audit.
Audit program objectives include:
To contribute to the improvement of a management system and its
performance.
To fulfill external requirements, e.g., certification to a management
system standard.
To verify conformity with contractual requirements

41. Audit working papers are the documents which record during
the course of audit audit evidence obtained during financial
statements auditing, internal management auditing,
information systems auditing, and investigations. ... That the
evidence is sufficient and appropriate to support
the audit opinion.
Audit working papers refer to the documents that prepare by or
use by auditors as part of their works. Those
documents include the summary of the client's nature of the
business, business process flow, audit program, documents or
information obtained from the client as well as audit testing
documents.
Audit working papers

42. Permanent File:
Working papers are the record of various audit procedures
performed, audit evidence obtained, allocation of work
between audit team members etc. Audit working papers are the
documents and evidence that an auditor collects and retains
with himself during the audit.
Current file audit:
This book generally includes the errors found out during the
course of audit, difficulties observed and doubtful queries of
various accounting records, etc. This note book usually forms
a part of the permanent audit file.

43. Audit working papers have the following details:
• Schedule of debtors and creditors.
• Trial Balance.
• Certificate of officials regarding certain important matters
like bad debts, valuation of stock, unpaid expenses, accrued
incomes, etc.
• Statement of depreciation.
• Correspondence between the auditor and the debtors,
creditors, etc. of the client.
• Investment Schedules.
• Confirmation by the bank regarding the bank balances of the
client.
• Bank Reconciliation Statement.
• Important extracts from the minute books such as agreement
with vendors, hire purchasers, selling agents, etc.

44. Cost Auditing
The Institute of Cost and Works Accountants of India defines
“cost audit of efficiency of minute details of expenditure while
the work is in progress and not a post-mortem examination.
Cost Audit is mainly a preventive measure, a guide for
management policy and decision, in addition to being a
barometer of performance.”
Objectives :
1. To verify that the cost accounts are correctly kept in accordance with
the principles of costing employed in the industry;
2. To ensure that the cost accounting routine laid down by the business is
properly carried out;
3. To detect errors and prevent frauds and possible misappropriation.

45. Income Tax Audit
Objectives:
• Ensure proper maintenance and correctness of books of accounts and
certification of the same by a tax auditor
• Reporting observations/discrepancies noted by tax auditor after a
methodical examination of the books of account
• To report prescribed information such as tax depreciation, compliance
of various provisions of income tax law etc.
• All these enable tax authorities in verifying the correctness of income
tax returns filed by the taxpayer. Calculation and verification of total
income, claim for deductions etc. also becomes easier.
The Income Tax audit is an examination of an individual's
/organisation's tax returns by any outside agency to verify that all
the income, expenditure and deduction information are filed correctly

46. Management Audit
A management audit is an assessment of how well an
organization's management team is applying its strategies and
resources. A management audit evaluates whether
the management team is working in the interests of
shareholders, employees, and the company's reputation
Objectives :
(a)To ensure optimum utilization of human resources and available
physical facilities.
(a)To point out deficiencies in objectives, policies, procedures and
planning.

47. Audit notebook
Definition of Audit Note Book
E.L. Kohler formulated a detailed definition for the term.
According to him, “Audit note book is a record, used chiefly
in recurring audits, containing data of work done and
comments outside the regular subject matter of working
papers. It generally contains such items as the audit
programme, notations showing how sections of the audit are
carried out during successive examinations, information
needed for the auditor’s office and for staff administration,
personnel assignment, time requirements and notations for use
in succeeding examination”.

48. Importance of Audit Note Book
1. Audit note book shall be taken as reliable evidence even by
the Court of law in case of dispute or if the auditor is
charged with negligence.
2. It is useful for drawing the audit programmes.

49. Contents of Audit Note Book
An audit notebook generally consists of the following information:
1. The nature of the business and summary of
important documents relating to the constitution of the
business such as Memorandum of Association,
Articles of Association or Partnership Deed, etc.
2. A list of the books of accounts maintained.
3. Particulars as to the system of accounts followed
and the system of internal check in force.
4. Names of principal officers, their duties and
responsibilities.

50. Advantages of Audit Note Book
1. Facilitates Audit Work:
2. Preparation of Audit Report
3. Serves as Documentary Evidence:
4. Serves as a Guide
5. Fixation of Responsibility:

51. Disadvantages of Audit Note Book
1. Fault-finding Attitude:
2. Misunderstanding:
3. Improper Preparation:

55. Internal control, as defined in accounting and auditing, is a process for assuring
achievement of an organization's objectives in operational effectiveness and efficiency,
reliable financial reporting, and compliance with laws, regulations and policies.
Objectives / Principles of a Good Internal Control System (CROSSASIA)
• Competent & trustworthy personnel
• Records
• Organizational Plans
• Segregation of duties
• Supervision
• Authorization
• Sound Practices
• Internal Audit
• Arithmetic & Accounting Controls
UNIT -2 Internal Control

56. Internal Check. : 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.
Internal audit is an independent, objective assurance and consulting
activity designed to add value to and improve an organization's
operations. ... Professionals called internal auditors are employed by
organizations to perform the internal auditing activity.
Internal Check
Internal Audit
Internal Control

58. Internal Check
• Internal Check with regards to Cash
Sales
• Internal Check with regards to Cash
Purchases
• Internal Check with regards to Wages

59. Vouching
• Meaning:
Voucher is known as the evident for the support of a transaction
in the books of account. It may be bill, receipts, requisition form,
agreement, decision, bank paying slip etc.
Types of Vouchers:
Primary Voucher: Primary voucher refers to the written
evidence in original. Examples of primary voucher are purchase
invoice, cash memo, bills, confirmation of balances, bank
statements, contracts, etc
Secondary vouchers/Collateral vouchers are those which are
not related to business but also used as an evidence. Such as
duplicate bills, carbon copies etc... .

60. Objective of vouching is to find out the regularity or irregularity of
transactions, frauds and errors. Regularity means maintaining
record and performing the work compliance with the rules,
regulation and law. But irregularity means doing the work crossing
to the line of rules, regulation and laws
Some of the major objectives of vouching are given below:
1. To Detect Errors And Frauds
2. To Know The Truth Of Account
3. To Find The Unrecorded Transactions
4. To Know That All The Transactions Are Authorized
5. To Know That Only The Business Transactions Are Recorded

61. Verification
Verification means "proving the truth" or "confirmation". Verification is an auditing
process in which auditor satisfy himself with the actual existence of assets and
liabilities appearing in the Statement of Financial position. Verification is usually
conducted through examination of existence, ownership, title, possession, proper
valuation and presence of any charge of lien over assets.
Thus, verification includes verifying::
• The existence of the assets and liabilities.
• Legal ownership and possession of the assets
• Correct valuation, and
• Ascertaining that the asset is free from any charge
• Verification in an audit process can be done offsite or onsite. Offsite verification
means verification by checking documents, official records, photos and by
questioning staff responsible or otherwise trusted to be a reliable source for the
facility in verification. Onsite verification means the verifying party is physically
visiting the facility, getting introduced into due facts about it on the site where the
facility is located and operated. The process may be regulated by law in certain
countries.
•

62. Valuation
Meaning
Valuation means finding out correct value of the assets on a particular date. It is an
act of determining the value of assets and critical examination of these values on the
basis of normally accepted accounting standard
. Valuation is the primary duty of company officials. Auditor can rely upon the
valuation of concerned officer but it must be clearly stated in the report because an
auditor is not a technical person. Without valuation, verification of assets is not
possible.
Definition
R.Batliboi, “A company’s Balance Sheet is not drawn for the purpose of showing
what the capital would be worth if the assets were realized and liabilities paid -off,
but to show how the capital stands invested”.
Objectives of Valuation
1. To assess the correct financial position of the concern.
2. To enquire about the mode of investment of the capital of the concern.
3. To assess the goodwill of the concern.
4.To evaluate the differences in the value of the asset as on the date of purchase and
on the date of Balance Sheet.

63. Classification Of Assets:
Fixed Assets(purchase for long term)
Current Assets(converted into cash with in a year)
Liquid Assets(convert cash without loss-bank notes,cash,bonds,securities,invt)
Wasting Assets( limited life-expiry period)
Intangible Assets( cont see n touch-gw,cr,pr)
Fictitious Assets(advt –exp/income )priliminery exp not recorded
Methods Of Valuation
Valuation of various assets can be made by using different methods of
valuation of fixed assets. Some of the major methods are as follows
1. Cost Price Method
2. Market Value Method
3. Standard Cost Method
4. Book Value
5. Going concern or Historical Value or Conventional Value or Token Value
6. Scrap Value

64. Provisions of appointment of Company Auditor
(u/s 139 of Companies Act 2013)
*Sec 139 (1) Appointment of auditor by members
*Sec 139 (2) Period for which appointment to be made
*Sec 139 (3) Rotation of partner of audit firm or conduct of
audit by more than one partner
*Sec 139 (5) Appointment of auditors of Government
Companies
* Sec 139 (6) Appointment of first auditor by Board of
Directors
*Sec 139 (7) First auditor of Government Companies
*Sec 139 (8) Casual Vacancy of an Auditor
*Sec 139 (9) Reappointment of a retiring auditor
*Sec 139 (10) Where no auditor has been appointed or
reappointed at AGM
*Sec 139 (11) Recommendations of Audit Committee

65. Qualification of a Company Auditor:
According to Provisions of Section 141(1) of the Companies Act,
2013 “a person shall be eligible for appointment as an auditor of a
company only if he is a chartered accountant within the meaning of
Chartered Accountants Act, 1949 and holds a valid Certificate of
Practice.
A person shall appointed as an auditor if he is chartered accountant
within the meaning of Chartered Accountants Act, 1949 and holding
valid certificate of practice and acting in capacity as
a) Individual
b) Partnership Firm
c) Limited Liability partnership
It has been further provided that only partners who are Chartered
Accountants will be authorised to sign on behalf of the firm.

66. Rights of Company Auditor
• Rights to access the books and records.
• Right to obtain information & explanations from company
staff.
• Right to receive notice of general meetings.
• Rights to sign the audit report
• Right to visit branches.
• Right to seek legal and technical advises.
• Right to be indemnified.
• Right to claim remuneration.
• Right to refuse to commence the audit.

67. Professional Ethics of An Auditor
Integrity.
Independence
Objectivity.
Confidentiality.
Technical Standards
Professional competence.