This document provides an overview of auditing concepts including: - The definition, objectives, advantages, and limitations of auditing. - The qualifications required of an auditor including personal qualities, statutory qualifications, and professional expertise. - The differences between auditing and investigation and the importance of ethical conduct for auditors. - Common types of errors and frauds that can occur, and techniques auditors use to detect errors and frauds such as verifying records and financial statements. - The development of auditing over time from its origins to statutory recognition to modern standards and practices.

1. Auditing Introduction:
Definition-General Objectives of Auditing-Advantages and
Limitations of Auditing-Auditing and Investigation-
Qualification of an Auditor – Auditors Vis-a Vis Errors and
Frauds. Various types of audit-Continuous audit-Final Audit-
interim audit-Balance Sheet audit-Merits and Demerits.

2. 
 System of check
 Upon persons
 In the course of work
 Receipts and expenditure of money belonging to
others
 Household accounts of early rulers kept by at least
two persons
 Mauryan, Greek and Roman empires: fool-proof
system of control over public revenue and
expenditure
Origin of auditing

3. 
 Renaissance in Italy ; rapid growth in industry and
trade.
 Multitude and complexity of transactions ;
necessitated independent and expert review of the
accuracy and reliability of business records.
 Advent of joint stock company, marketing separation
between ownership and management of business
were other reasons
Cont.…….

4. 
 Statutory recognition for Professional Accounting;
British Business Companies Act 1862.
 With main objective of “detection of fraud”.
 In US, (1900)-ascertaining of ‘actual financial
condition and earning of an enterprise’
 In India
 Followed British Model
 The Joint Companies act of 1857- Provision for
annual audit of companies (Optional)
 Compulsory audit – Companies Act ,1913
 Maintenance of books of accounts
 Contents of the balance sheet
 Qualifications, duties and rights of an auditor,
procedure of appointment
Cont.…..

5. 
 1918 - Govt. of Bombay training of professional accountants
with name Government Diploma in Accountancy (GDA)
 1930 - Accounting Profession brought under Central
Government .
Post- Independence developments
1949- Enacted Charted Accountants Act
- Set up Institute of Chartered Accountants of India (ICAI)
- Controlled and Managed by council
- Standards of education, training, professional conduct and
discipline
- Issued statements on auditing, standard auditing practices
(SAPs) and Accounting Standards (AS)
The companies act, 1956 - additional provisions for maintenance of
accounts and audit, cost audit –companies, certain assessees- audit
under Income tax Act 1961
Cont.…..

6. 
 Increase in size and complexity of business
organisations
 Divorce between ownership and management
 Legislative control
 Judicial pronouncements
 Statements and standards by professional bodies
 Electronic data processing
Development of Auditing

7. 
 Derived from Latin word “Audire” which means ‘to
hear’.
 Auditing is the verification of financial position as
disclosed by the financial statements.
 It is an examination of accounts to ascertain whether the
financial statements give a true and fair view financial
position.
 Auditing is the intelligent and critical test of accuracy,
adequacy and dependability of accounting data and
accounting statements profit or loss of the business.
Meaning of Auditing

9. 
 Institute of Chartered Accountants of India:
 Auditing is systematic and independent examination
of data, statements, records, operations and
performances (financial or otherwise) of an
enterprise for a stated purpose.
Definition

10. 
Classified under two heads:
1) Main objective
2) Subsidiary objectives
Objectives of Auditing

11. 
 Main Objective:
Main objective of auditing is to form an independent
judgement and opinion about the reliability of accounts
and truth and fairness of financial state of affairs and
working results.

12. 
1. Detection and prevention of fraud:
Fraud refers to intentional misrepresentation of financial
information. Fraud may involve:
a. Manipulation, falsification or alteration of records or documents
b. Misappropriation of assets.
c. Suppression of effect of transactions from records or documents.
d. Recording of transactions without substance.
e. Misapplication of accounting policies
2. Detection and prevention of errors: Auditing ensures that there
is no mis-statement in the financial statements. Errors can be
detected through checking and vouching thoroughly books of
accounts, ledger accounts, vouchers and other relevant
information.
Subsidiary objectives:

13. 
a. Audited accounts help a sole trader in knowing
the value of the business for the purpose of sale.
b. Dispute over correctness of profits can be
avoided.
c. Shareholders, who do not know about day-to-
day administration of the company , can judge the
performance of management from audited
accounts.
d. It helps management in detecting and
preventing errors and frauds.
e. Management gets advice on financial affairs
from the auditors.
Importance of Auditing

14. 
f. Long and short term creditors depend on audited financial
statements while taking decision to grant credit to business
houses.
g. Taxation authorities depend on audited statements in assessing
the income tax, sales tax and wealth tax liability of the business.
h. Audited accounts are useful for the government while granting
subsidies etc.
i. It can be used by insurance companies to settle the claims arising
on account of loss by fire.
j. Audited accounts serve as a basis for calculating purchase
consideration in case of amalgamation and absorption.
k. It safe guards the interests of the workers because audited
accounts are useful for settling trade disputes for higher wages or
bonus.
Cont.…….

15. Parameter of Comparison Bookkeeping Accounting
Definition
Bookkeeping is related to the recording,
measuring, and identifying the financial data
of a company.
Accounting is the process wherein the
company’s financial data is summarized, and a
report is prepared for the same.
Management
Management doesn’t take any financial
decisions by analyzing the records of
bookkeeping.
Management decides upon financial decisions
after reading the summary report obtained by
accounting.
Purpose
To store and organize the financial data of a
company
To analyze the financial data and make future
financial decisions accordingly.
Financial statement
The financial statement is not prepared using
the information obtained from bookkeeping.
The financial statement is prepared using
accounting information.
Skills
Bookkeeping doesn’t need the bookkeeper to
have any special skill set to handle and
manage the financial records.
An accountant needs special skills to record,
interpret, and analyze the financial data to
prepare reports.
Analysis No analysis is carried.
Accounting uses the record from bookkeeping
to analyze the financial data to prepare reports.
Types Single entry and double entry. Cost accounting and managerial accounting.
Employee
An accountant oversees the work of a
bookkeeper.
An accountant that is certified doesn’t need
guidance.
Entry
A bookkeeper records the financial data on a
daily basis.
The accountant prepares the financial summary
at the end of the month or on a yearly basis,
depending on the type of report and demands
of the company.

17. AUDITING INVESTIGATION

19. 
Principles of auditing
 Skills and competence: Acquired through education and
training.
 Integrity and objectivity:
 Integrity ; honesty and incorruptibility
 Objectivity; fair, impartial and unbiased
 Confidentiality
 Reliance on audit work performed by others
 Documentation; evidence for mode and manner of doing any
work
 Independence
 Independence of auditor is crucial to his acceptability by interested
third parties
 Independence is a state of mind

20. 
 Purpose or scope of audit
 Statutory
 Non-statutory for some specific purpose
Eg: Making an investment, valuation of assets and liabilities,
locating error and fraud, filing of tax returns etc…
 Nature of business
 Inflow of information
 Critical business processes and financial reporting process
 Information processing / technology
 Organisation structure
 Authority-responsibility relationship within an organisation
 Accounting system and internal controls
 Responsibility of the management
Audit Planning

21. 
 Nature of evidence- Internal or external
 Type of evidence – visual, oral or documentary
 Adequacy of evidence
 Evidence cannot constitute absolute proof
Audit evidence

22. 
 Financial statements comply with accepted financial
practices
 Information in financial statements is consistent with
legal requirements
 Financial statements contain adequate disclosure of
all important information
Audit conclusion

23. 
 Audit report expresses opinion about adequacy of
information on financial position of business.
 Report should clearly state auditor’s opinion about
state of financial affairs of business.
Audit report

24. 
 Auditor must work honestly, diligently and with
integrity
 Arthur Anderson – Enron story- Lack of honesty,
diligence and integrity may bring ruin to both
auditor and his client.
Ethical conduct

25. 
 Personal qualities
 Statutory qualifications
 Chartered accountant
 (Chartered accountant Act of 1949)
 Examination conducted by Institute of Chartered
Accountants
 Certificate to practice of accountancy
Holding a certificate under the Restricted Auditor’s
Certificate (Part B States) rules 1956
Qualifications and Qualities of
auditor

26. 
 Professional Expertise
 Knowledge of accounting
 Knowledge of cost accounting
 Knowledge of accounts of business under audit
 Knowledge of business laws
 Knowledge of economics
 Knowledge of production systems
 Knowledge on mathematics and statistics
 Knowledge of general management
 Knowledge of financial management
 Knowledge of marketing management

27. 
 Honesty and Integrity
 Tactfulness
 Vigilance
 Judgement
 Responsibility
 Diligence
 Communication
 Common sense
General qualities

28. 
 For the Enterprise
 Regular, careful and systematic work by employees
 Prompt detection of errors and fraud- Acts as a moral check
 Reliable index to the states of affairs – easy availability of loan and
credit
 Determination of liability for income tax, wealth- tax, sales tax etc.
 Easy determination of purchase consideration
 Basis of resolution of disputes – wages and bonus
 Determination of claims against insurers- loss or damage to
business property
 Detection of weaknesses in internal check and internal control and
remedial measures.
 Maintenance of registers and books of accounts as per legal
requirements.
 Professional competence and experience of the auditors
Advantages of Audit

29. 
 For sole proprietary business ; Audited statements
provide as a proof of all business transactions have been
duly accounted for, and there is no error or fraud.
 Partnership firms; evidence of proper management of the
affairs of business by the active partners and employees
of the firm.
 Joint stock company; shareholders can satisfy themselves
that the affairs of the company are being smoothly run
and their investment is safe
 Trusts, co-operative societies : Evidence for the
beneficiaries / members etc. that their interests are being
properly and efficiently looked after.
 For others: Banks, Insurers, tax authorities
Advantages: For owners of the enterprise

30. 
 Conceptual restriction.
 Post-mortem on prepared accounts
 Dependence on inside information
 In adequate or faulty external evidence
 Application of faulty techniques
 Formation of faulty judgement
Limitations of auditing

31. 
 According to SAP -4, “Fraud and Error” issued by
ICAI, an error may be defined as any unintentional
mistake or mis-conception in the books of account or
records whether by way of –(a) mathematical or
clerical mistakes in the records and data ; (b)
oversight or misinterpretation of facts ; or (c )
misapplication of accounting policies.
 An error is generally taken to be innocent and not
deliberate. Where it appears to be wilfully made, it
assumes the character of a fraud.
Errors and Frauds

32. 
Errors may be classified as
1. Clerical errors which may be two types
a) Errors of omission
b) Errors of commission
2. Errors of principle
3. Compensating errors
4. Errors of duplication

33. CLERICAL
ERRORS
RECORDING OF ORIGINAL
ENTRY
POSTING A TRANSACTION
TO THE LEDGER
TOTALLING OR
BALANCING OF A LEDGER
ACCOUNT

34. ERRORS OF
COMMISSION
Where a transaction recorded incorrectly partially or fully.
Where a transaction has been incorrectly posted to the ledger
Where ledger accounts are incorrectly totalled or balanced
Where an error is made in entering balances in the trial balance

35. ERROR OF
PRINCIPLE
Where items of revenue expenditure are shown as capital
expenditure
Where the identity of an item of expenditure is camouflaged
Where an expenditure is shown as benefit granted
Where valuation of assets is not as per generally accepted
accounting principles

36. Compensating errors: It results in compensating
or blacking out, either wholly or partially, the
effect of other errors.
Errors of duplication: It occurs when the same
transaction is recorded twice in the books of
original entry.

37. 
How to detect errors
 Check and recheck the totals of the trial balance.
 Divide the amount of difference in the trial balance by 2 ( check for
the same amount of items o debit side has been wrongly entered in
the credit side and vice versa)
 Confirm transfer of all ledger accounts’ balance have been
transferred to the trial balance.
 Ascertain on the basis of the nature of certain accounts.
 Check the totals of various ledger accounts
 Check correctness of all entries in the original books of account.
 Check opening balances of the accounts
 Make an year wise comparison of items of trial balance
 Check journal entries whether total of debit = total of credit
 If the errors are still not located, it may be due to
 Difference is divisible by 9; misplacement of figures
 If error of a round sum; mistake of totalling

38. 
 A fraud includes any deception , cunning or trickery with
an intention to deceive or cheat another.
Essential elements of a fraud
 False material representation
 Representation made with the for-knowledge of its falsity
or without any knowledge of its truth.
 Intended to be acted upon by the persons to whom it has
been made.
 Concerned persons have relied and acted on the basis of
the representation.
 Concerned persons have suffered a loss as a result of so
relying and acting
Detection and Prevention of fraud

39. 
SAP-4 “Fraud and Error”,
Fraud may be committed
 Misappropriation or embezzlement of cash
 Non-recording of cash sales
 Making false entries in the accounts of customers
 Entering cash received from one customer against another.
 Showing payments against purchase never made
 Non- recording of credit notes for purchase returns.
 Non- recording of bills of exchange discounted
 Non recording of cash received against unusual sales
 Non- recording of unusual money receipts such as donations
 Recording payments which are never made.
Types of fraud

40. 
 Detection of fraud:
 Compare entries in the cash book with rough cash
book, counterfoils in the money receipt book and
original evidence in the form of vouchers, invoices,
salary register, wage sheet etc.

41. 
 Misappropriation of goods
 Committed by recording purchases of large quantities
than actually supplied and by appropriating the
balance quantity in each case for unlawful personal
gain.
 Detected by proper maintenance of accounts as to
purchase and sales, regular stock taking, strict check
on incoming and outgoing goods and periodic
comparison between the percentage of gross profit to
sales in respect of different periods.

42. 
 Fraudulent manipulation or falsification of accounts
 Makes or causes a false entry in the business records
 Alters, erases, removes or destroys a true entry in
violation of his duty
 Prevents the making of a true entry or causes omission
thereof.
It is done to overstate or understate the profits or
financial position.

43. 
 Overstatement of profits may be done by way of
 Providing lower or no depreciation
 Over valuation of assets or understatement of
liabilities
 Showing revenue expenditure as capital
 Omitting items of expenditure
 Accounting past or future years income in the current
years’ expenditure

44. 
 The practice of arranging the disposition of assets and
liabilities in such a way that affairs of the business as
shown in a subsequent balance sheet does not truly
represent the normal financial position of the business.
 It may be done in any of the following ways:
 Recording of sales and income of the following year in the
current year.
 Recording of goods sent on “sale on return” basis as regular
sales.
 Entering loans given to directors and other managerial
persons as repaid at the end of the year, and then showing
the same as having been advanced to the same personnel.
 Treatment of normal revenue expenditure as deferred
revenue expenditure.
 Provision of less depreciation on assets.
Window dressing

45. 
Auditor’s position as regards fraud and errors
SAP -4, “Fraud and Error” by ICAI ; responsibilities are
Prevention and detection of fraud and error is the responsibility of
management.
Audit planning is expected to detect material misstatements
Inherent limitations of auditing: sampling checking and detection
of fraud is more difficult than to detect errors.
Increased risk of fraud and error is due to
Weak internal control system non-compliance with control
procedures
Doubts about integrity and competence of management
Unusual internal pressures like scarcity of working capital,
need of a rising profit trend etc.
Unusual transactions at the year-end
Problems in obtaining sufficient appropriate evidence

46. 
 The auditor can avoid responsibility for any
subsequent discovery of material misstatement
resulting from fraud and error;
 Adhere to the basis principles of audit
 Modify the existing procedures
 Upon the confirmation of fraud, it should be corrected

47. 
 Duty of reasonable care requires the auditor
 To make an intensive check of the system of internal control
and check and devise his audit and testing procedure
accordingly
 To make all verifications personally or through an
experienced representative
 To ensure that the financial statements fully conform to the
generally accepted accounting procedures and relevant
legal requirements
 In case the financial statements disclose a situation hinting
at fraud, to pursue the lead to its logical conclusion.

49. Audit
General audit Specific audit
Independent audit
Internal audit
Governmental audit
1. Interim audit
2. Occasional audit
3. Partial audit
4. Standard audit
5. Audit in depth
6. Post and vouch audit
7. Operational audit
8. Performance audit
9. Cost audit
10. Management audit

50. On the basis of method of
examination
• Continuous audit
• Periodical / annual / Final /
Completed audit
• Balance sheet audit

51. General audit
Independent audit Internal audit Governmental audit
Statutory
1 . Companies
2 .Trusts
3.Co-operative societies
4. Societies registered under
Societies Registration Act
5. Electricity supply
companies
6. Statutory corporations
Private
1. Sole Proprietorship
2. Partnership firms
3. Clubs, etc.
1. Govt.
Departments
2. Statutory
corporations
3. Govt.
Companies

52. 
Statutory Audit
 Audit is made compulsory by law, it is called
statutory audit
 Companies
 Banking companies
 Electricity supply companies
 Co-operative societies
 Public and charitable trusts
 Societies
 Corporations set up under an act of Parliament or state
legislatures like LIC.

53. 
 Shareholders/ owners cannot make it optional even
by unanimous vote and cannot restrict scope of audit
 Audit conducted by qualified person
 The rights, duties and liabilities of an independent
auditor are governed by law
 An independent auditor is, to all intents and
purposes, not a representative of the shareholder/
owners.
 Audit cannot be partial or incomplete in any respect.
Features

54. 
 Audit, not compulsory by law, opted by the
enterprise in view of the several benefits resulting
from it, it is called private audit.
 Sole proprietorship, Partnership firms, joint Hindu
family businesses etc. (tax audit is compulsory where
gross turn over < Rs. 40 lacs )
Private Audit

55. 
 Part of internal control operated by management
 Independent appraisal activity within an organisation,
performed by an employee of the organisation or an
outside agency, appointed for the purpose.
 Scope and objects of internal audit serve the interests of
business organisation.
 Not compulsory, management defines its scope and
objects:,
 CARO 2003 requires auditor of “specified company “ to
report that its internal audit is in place and appropriate.
Internal audit

56. 
 Specified company
 A company whose paid up capital and reserve exceed
Rs. 50 lakh
OR
 Average annual turnover for the three financial years
preceding the present financial year exceeds Rs. 5
crore
 Includes:
 Chit fund company
 “nidhi”company
 Mutual benefit company
 Finance company
 Investment company
 Manufacturing company
 Processing company

57. 
 Does not include :
 Banking Company
 Insurance company
 Companies u/s 25 of companies Act
 Private company (Paid up capital< Rs. 25 Lakh ),
Outstanding Loan <Rs. 25 Lakh or average annual
revenue does not exceed Rs. 5 Crore

58. 
 Study and evaluation of the adequacy and effectiveness of
accounting, financial and operating control,
 Ascertaining the degree of compliance with
predetermined policies, Plans and procedures,
 Accounting for business assets and measures for their
safety,
 Examining the reliability of accounting and other data
compiled within the organisation,
 Evaluation of the quality of performance in performance
of duties assigned to individuals and departments.
 Keeping the management posted with objective analysis,,
comments and recommendations as regards activities of
the business organisation.
Objectives of internal audit

59. 
A. Audit of Government departments
 Audit of government offices and departments is covered
under this heading.
 A separate department is maintained by government of
India known as Accounts and Audit Department.
 This department is headed by the Comptroller and Auditor
General of India. This department works only for the
government offices and departments. This department
cannot undertake audit of non-government concerns.
 Its working is strictly according to government rules and
regulations.
Governmental audit

60. 
B. Audit of statutory corporations
A. Audit done either by CAG or Professional
Chartered Accountants
c. Audit of Government companies (Govt. holds more
than 51% of shares)
A. Audit done by auditors appointed by Company Law
board on the advice of CAG.

61. 