The document provides an introduction to auditing, focusing on its objectives, definitions, types of errors and fraud, and the principles guiding the audit process. It discusses the importance of true and fair views in financial statements, detailing advantages and limitations of auditing, as well as various audit types, including statutory and non-statutory. Key qualities of auditors and the concept of materiality in relation to auditing are also emphasized throughout the content.

1. Module 1:
Introduction
to
Auditing
Dr. Hemal Vora
Asst. Professor
Gurukul College of Commerce,
Ghatkopar, Mumbai.

3. FINANCIAL STATEMENTS INCLUDES:
 Balance sheet
 Statement of Profit & Loss
 Cash Flow Statement
 Explanatory Notes
 Supplementary Schedules and Information

4.  USERS OF FINANCIAL STATEMENTS

5. Definition’s
According to Spicer & Pegler, “Auditing is such an
examinationof books of accounts and vouchers of business, as
will enable the auditor to satisfy himself that the balance-sheet
is properly drawn up, so as to give a true and fair view of the
state of affairs of business and that the Profit & loss Account
gives true and fair view of the Profit & loss for the financial
period, according to the best of information and explanation
given to him and as shown by the book, & if not, in what
respect he is not satisfied.”

6.  According to R.K.Mautz, “Auditing is concerned
with verification of accounting data, with
determining the accuracy and reliability of
accounting statement and Reports.”
Objectives of Auditing:
1. Primary Objective - True and FairView
2. Incidental Objective - Detection of Error & Fraud

7. Unintentional /
Bonafide mistake
TYPES
Error of Principle Clerical Errors
1. Errors of Omission
2. Errors of Commission
 Posting error
 Casting error (Totaling Error)
 Mathematical Errors
3. Errors of Compensation
4. Errors of Duplication
1. Overvaluation
(Assets / Liabilities / Stocks /
Depreciation)
2. Undevaluation
3. Capital as Revenue
4. Revenue as Capital
5. Ignorance
(Prepaid / Outstanding / Receipts)

8.  Fraud – Intentional / Malafide Mistake.
 TYPES OF FRAUD:
1. Misrepresentation of cash
a) Cash received (No Entry / Teeming & Lading)
b) Cash Payments (Dummy / Excess payments)
c) Cash Balance (Theft)
2. Misrepresentation of Goods
a) Goods received (No Entry / Teeming & Lading)
b) Goods Dispatched (Dummy / Excess payments)
c) Stock Balance (Theft)
3. Falsification of records
a) Not recording transactions
b) Dummy transactions
c) Intentional Window Dressing / Secret Reserve

9.  Teeming & Lading
(iskiTopi Uske Sar)
1. An attempts to hide loss of cash received from
one customer by using cash received from another
customer to replace it.
2. This is also called short Banking / Lapping / delayed
accounting of money received.
3. A method to cover past frauds by present receipts.

10.  Window Dressing
Skill of presenting account in a way that
creates good impression. Showing better
position than actual position over stating
profits and net worth. Financial position seems
to be better in the market.
 Why ?
1. Mislead Investors
2. Hide Losses
3. Higher Commission
 How ?
1. Over statements of Assets
2. Under statements of
Liabilities

11.  Secret Reserves (only allowed to
banks)
Secret Reserve means Part of Profit Secretly reserve
for future use. It is not shown in the Balance Sheet. It
means Understating Net worth.
 Why ?
1. Mislead competitors
2. High abnormal profits
3. Banks only
How ?
1. Under Statement of
Assets
2. Over statements of
liabilities

12.  Objections
1. No true & FairView
2. Shareholder suffer
3. Hides Inefficiency of Management
4. Against Companies Act, 2013
 Auditors Duty
1. Disclose in Audit Report
2. Report to central Government
3. Verify Assets & Liabilities
4. Verify Incomes & Provisions
5. Verify Closing stock
6. Prevent Omission of liabilities
7. Disclose change in method of Accounting

13.  Advantages of Auditing
1. True and Fair views
2. Tally with the books of accounts
3. As per accounting standards and standards of
Auditing
4. Disclose all material facts
5. Detection and prevention of errors and fraud
6. Moral check on employee
7. Advise on system,Taxation and finance

14.  Disadvantages / Limitation of Auditing
1. Not possible to check each and every transaction
2. Evidence is not the conclusion
3. No assurance on future profitability and prospects or
efficiency of management
4. Intended dependability on documentation &
information
5. Auditors supposed to be Independent but may not be
6. Misstatements may remain undiscovered

15.  Principles of Audit (SA 200)
1. Integrity, Objectivity & Independence
2. Confidentiality
3. Skill & Competence
4. Work performed by others
5. Documentation
6. Planning
7. Evidence
8. Systems and Controls
9. Conclusion
10. Reporting

16.  Types of Audit
 Statutory Audit – Compulsory Audit (Joint Stock
Companies, Banks, Insurance, Co-operative
Societies,Trusts, Electricity Boards,Tax Payers)
 Non – Statutory Audit – Voluntary Audit (Small
Entities - Sole trading, Joint Hindu, Partnership)
Conduct
Of
Audit
Interim
Continuous
Final

17. Continuous Audit – Large Volume of
transactions, Weak or new system, Regular / Frequent
visits
• Quick Preparation of Final
Accounts
• Early Dividends
• Updated for Bankers / Investors
• Moral Check
• Familiarity with Clients Business
• Thorough Utilised Audit Staff
Advantages
• Expensive
• Audit in Installments
• Disturbance in Routine
• Malafied in Books Already Checked
• Undue Reliance on Auditors
Disadvantages

18.  Interim Audit – Average Volume of
transactions, betweenTwo Annual Audits
• Quarterly Results
• Quick Preparation of Final
Accounts
• Interim Dividends
• Updated for Bankers / Investors
• Check on Employees
• Thorough Utilised Audit Staff
Advantages
• Expensive
• Audit in Installments
• Disturbance in Routine
• Malafied in Books Already Checked
Disadvantages

19. Final / Annual Audit – Less volume of
transactions, @ the end of the year.
• Inexpensive
• Audit at Stretch
• No Disturbance in Routine
• Less Falsification in Books
Advantages
• Delay in Final Accounts
• Late Dividends
• Stale Accts for Bankers / Investors
• No Moral Check
• No Familiarity with Clients Business
• Sample Check with Uneven Load
Disadvantages

20. Qualities of Auditor
 Chartered Accountant
 Skills and Competence
 Honest
 Knowledge of Business
 Confidential
 Watchdog but not Bloodhound
 Independent
 Judgement
 Methodical

21.  Materiality (SA-320)
Planning and Performance in conducting an
Audit, “Materiality means information and
matters relatively important for True
& Fair Presentation of financial
statements.”
Materiality
Legal
Requirements
Professional
Requirements

22.  Legal Requirements:
1. Material Items as per schedule 3 of Indian
Companies Act 2013
2. Non Recurring items
3. Previous year figures
4. Quantitative Information
5. Percentage Cutoffs
 Professional Requirements:
1. Extra ordinary Items as per A/S-5
2. Ordinary Items on the Profit & Loss statement
as per A/S-5
3. Prior period Items
4. Changes in Accounting Policies

23.  True & FairView (SA-700)
Accounts prepared by the organization are used by different
categories of people for reference and reliability. Opinion as to
whether the financial statements represent the actual
financial position.
It is said to be True & Fair When:-
1. P&L A/c is true & fair
2. Neither window dressing nor secret reserve
3. Valuation of assets and liability is true & fair
4. As per financial reporting frame work
5. In accordance with company Laws