Auditing project M.com project

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PROJECT REPORT ON
“Company Audit & Accounts”
Submitted to
University of Mumbai
In Partial Fulfillment of the Requirement
For
M.Com (Accountancy) Semester IV
In the subject
Advanced Auditing
By
Name of the student : - Vivek Shriram Mahajan
Roll No. : - 15 -9672
Name and address of the college
K. V. Pendharkar College
Of Arts, Science & Commerce
Dombivli (E), 421203
MARCH 2016

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DECLARATION
I VIVEK SHRIRAM MAHAJAN Roll No. 15 – 9672, the student of
M.Com (Accountancy) Semester IV (2016), K. V. Pendharkar College,
Dombivli, Affiliated to University of Mumbai, hereby declare that the
project for the subject Advanced Auditing of Project report on “Company
Audit & Accounts” submitted by me to University of Mumbai, for semester
IV examination is based on actual work carried by me.
I further state that this work is original and not submitted anywhere else for
any examination.
Place:Dombivli
Date:
Signature of the Student
Name: - Vivek Shriram Mahajan
Roll No: - 15 -9672

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ACKNOWLEDGEMENT
It is a pleasure to thank all those who made this project work
possible.
I Thank the Almighty God for his blessings in completing this task.
The successful completion of this project is possible only due to
support and cooperation of my teachers, relatives, friends and well-
wishers. I would like to extend my sincere gratitude to all of them.
I am highly indebted to Principal A.K.Ranade, Co-ordinator
P.V.Limaye, and my subject teacher Supriya Bhalerao for their
encouragement, guidance and support.
I also take this opportunity to express sense of gratitude to my
parents for their support and co-operation in completing this
project.
Finally I would express my gratitude to all those who directly and
indirectly helped me in completing this project.
Name of the student
Vivek Shriram Mahajan

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Table of Contents:
CHAPTER No Topic Page no
CHAPTER 1 Introduction
Introduction to Subject………………………..
History...............................................…………
5
6
CHAPTER 2 Principles & types of Audit
Principles…………………………..
Types of Audit......................................
8
11
CHAPTER 3 Company Accounts
Features of Company......................…… 13
CHAPTER 4 Company Audit
Introduction…………………………………..
Objectives ………………………………….
20
23
CHAPTER 5
Conclusion…………………………………………. 28

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CHAPTER 1: Introduction
Introduction to Subject
Auditing and Assurance Standards (AAS) 1 by ICAI
“Auditing is the independent examination of financial information of any entity, whether
profit oriented or not, and irrespective of its size or legal form, when such an examination
is conducted with a view to expressing an opinion thereon”.
A.W. Hanson
“An audit is an examination of accounting records to establish their reliability and the
reliability of statements drawn there from.”
International Auditing Guidelines
“Auditing is independent examination of finance information of any entity with a view to
expressing an opinion thereon.”
The term ‘audit’ has been derived from the Latin word “audire” which means to hear.
According to Auditing Standards and Guidelines, U.K., “An audit is the independent
examination of an expression of opinion on, the financial statements of an enterprise by
an appointed auditor in pursuance of that appointment and in compliance with any
relevant statutory obligations”.
Audit is designed to reduce the possibility of a material misstatement in the financial
statement of any entity not being detected. Financial audits exist to add credibility to the
implied assertion by an organization's management that its financial statements fairly
represent the organization's position and performance to the company's stakeholders
(interested parties). The principal stakeholders of a company are typically its
shareholders, but other parties such as tax authorities, banks, regulators, suppliers,
customers and employees may also have an interest in ensuring that the financial
statements are accurate.

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History
The earliest surviving mention of a public official charged with auditing government
expenditure is a reference to the Auditor of the Exchequer in England in 1314. The
Auditors of the Impress were established under Queen Elizabeth I in 1559 with formal
responsibility for auditing Exchequer payments. This system gradually lapsed and in
1780, Commissioners for Auditing the Public Accounts were appointed by statute. From
1834, the Commissioners worked in tandem with the Comptroller of the Exchequer, who
was charged with controlling the issue of funds to the government.
As Chancellor of the Exchequer, William Ewart Gladstone initiated major reforms of
public finance and Parliamentary accountability. His 1866 Exchequer and Audit
Departments Act required all departments, for the first time, to produce annual accounts,
known as appropriation accounts. The Act also established the position of Comptroller
and Auditor General (C&AG) and an Exchequer and Audit Department (E&AD) to
provide supporting staff from within the civil service. The C&AG was given two main
functions – to authorize the issue of public money to government from the Bank of
England, having satisfied himself that this was within the limits Parliament had voted –
and to audit the accounts of all Government departments and report to Parliament
accordingly.
Rationale for an Audit
The objective of an audit of financial statements is to enable the auditor to express an
opinion whether, apart from representing a true and fair view of an entity’s finances; the
financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework.
The underlying objective is to add credibility and enhance the degree of confidence of
Users of management’s financial statements. Access to capital markets, mergers,
acquisitions, and investments in an entity depend not only on the information that
management provides in financial statements, but also on the assurance that the financial
statements are free of material misstatements. This assurance is provided, to a
considerable extent, by an audit. While an audit does not guarantee financial statements’
accuracy, it provides users with a reasonable assurance that an entity’s financial
statements give a true and fair view in conformity with the applicable financial reporting
framework.

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The need for an audit therefore originates from the following factors:
• Requirement of Unbiased and relevant financial information to guide investment
decisions of stakeholders
• Complexity of Financial information
• Remoteness of the users from the financial information generating system and processes
• Financial and Economic consequences of using unreliable information
As per SA 200A, Objective and Scope of the Audit of Financial Statements issued by the
ICAI, The objective of an audit of financial statements, is to enable an auditor to express
an opinion on such financial statements and help in determination of the true and fair
view of the financial position and operating results of an enterprise, the user, should not
assume that the auditor’s opinion is an assurance as to the future viability of the
enterprise or the efficiency or effectiveness with which management has conducted the
affairs of the enterprise.

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CHAPTER 2: Principles & Types of Audit
Basic Principles Governing an Audit
SA 200, Basic Principles Governing an Audit, issued by the ICAI, describes the basic
principles which govern the auditor’s professional responsibilities and which should be
complied with whenever an audit is carried out. These are:-
1. Integrity, Objectivity and Independence
The auditor should be straightforward, honest and sincere in his approach to his
professional work. He must be fair and must not allow prejudice or bias to override his
objectivity. He should maintain an impartial attitude and both be and appear to be free of
any interest which might be regarded, whatever its actual effect, as being incompatible
with integrity and objectivity.
2. Confidentiality
The auditor should respect the confidentiality of information acquired in the course of his
work and should not disclose any such information to a third party without specific
authority or unless there is a legal or professional duty to disclose.
3. Skills and Competence
The audit should be performed and the report should be prepared with due professional
care by persons who have adequate training, experience and competence in auditing.
The auditor requires specialized skills and competence which are acquired through a
combination of general education, technical knowledge obtained through study and
formal courses concluded by a qualifying examination recognized for this purpose and
practical experience under proper supervision. In addition, the auditor requires a
continuing awareness of developments including pronouncements of ICAI on accounting
and auditing matters, and relevant regulations and statutory requirements.
4. Work Performed by Others
When the auditor delegates work to assistants or uses work performed by other auditors
and experts, he will continue to be responsible for forming and expressing his opinion on
the financial information. However, he will be entitled to rely on work performed by
others, provided he exercises adequate skill and care and is not aware of any reason to
believe that he should not have so relied. In the case of any independent statutory
appointment to perform the work on which the auditor has to rely in forming his opinion,

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such as in the case of the work of branch auditors appointed under the Companies Act,
1956, the auditor’s report should expressly state the fact of such reliance.
The auditor should carefully direct, supervise and review work delegated to assistants.
The auditor should obtain reasonable assurance that work performed by other auditors or
experts is adequate for his purpose.
5. Documentation
The auditor should document matters which are important in providing evidence that the
audit was carried out in accordance with the basic principles.
6. Planning
The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner. Plans should be based on knowledge of the client’s business.
Plans should be made to cover, among other things:
(a) Acquiring knowledge of the client’s accounting system, policies and internal control
procedures;
(b) Establishing the expected degree of reliance to be placed on internal control;
(c) Determining and programming the nature, timing, and extent of the audit procedures
to be performed; and
(d) Coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of the audit.
7. Audit Evidence
The auditor should obtain sufficient appropriate audit evidence through the performance
of compliance and substantive procedures to enable him to draw reasonable conclusions
there from on which to base his opinion on the financial information.
Compliance procedures are tests designed to obtain reasonable assurance that those
internal controls on which audit reliance is to be placed are in effect.
Substantive procedures are designed to obtain evidence as to the completeness, accuracy
and validity of the data produced by the accounting system. They are of two types:
(i) Tests of details of transactions and balances;
(ii) Analysis of significant ratios and trends including the resulting enquiry of unusual
fluctuations and items.

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8. Accounting System and Internal Control
Management is responsible for maintaining an adequate accounting system incorporating
various internal controls to the extent appropriate to the size and nature of the business.
The auditor should reasonably assure himself that the accounting system is adequate and
that all the accounting information which should be recorded has in fact been recorded.
Internal controls normally contribute to such assurance.
The auditor should gain an understanding of the accounting system and related internal
controls and should study and evaluate the operation of those internal controls upon
which he wishes to rely in determining the nature, timing and extent of other audit
procedures.
Where the auditor concludes that he can rely on certain internal controls, his substantive
procedures would normally be less extensive than would otherwise be required and may
also differ as to their nature and timing.
9. Audit Conclusions and Reporting
The auditor should review and assess the conclusions drawn from the audit evidence
obtained and from his knowledge of business of the entity as the basis for the expression
of his opinion on the financial information. This review and assessment involves forming
an overall conclusion as to whether:
(a) The financial information has been prepared using acceptable accounting policies,
which have been consistently applied;
(b) The financial information complies with relevant regulations and statutory
requirements;
(c) There is adequate disclosure of all material matters relevant to the proper presentation
of the financial information, subject to statutory requirements, where applicable.
The audit report should contain a clear written expression of opinion on the financial
information and if the form or content of the report is laid down in or prescribed under
any agreement or statute or regulation, the audit report should comply with such
requirements. An unqualified opinion indicates the auditor’s satisfaction in all material
respects with the matters dealt with in above paragraph or as may be laid down or
prescribed under the relevant agreement or statute or regulation, as the case may be.
When a qualified opinion, adverse opinion or a disclaimer of opinion is to be given or
reservation of opinion on any matter is to be made, the audit report should state the
reasons therefore.

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Types of Audit
It is well known that no any day of the year, there will be at least one auditor working in
the bank branch. The following are the popular types of audits conducted in a bank
branch. The titles may be modified in some banks especially for Internal Audit and
system Audit but the content remains the same.
I. Statutory Audit:
This is an annual audit determined by statute and done normally at the end of the
financial year while some of the larger branches are similarly audited half yearly. A
bank’s statutory audit is essentially a balance sheet audit including the Long Audit Report
though there is no scope restriction of the statutory auditor to perform certain actions of
other auditors as part of his duty or if some findings lead him into the domain of the
auditors such as Revenue, inspector and even concurrent. The statutory auditor performs
the following functions.
Verifies the classification of items of the Balance Sheet to assure their correct placement
Basel II accord, which has influenced the prudential norms, has included the statutory
auditor as an active member to assure the proper execution of the prevailing prudential
norms. The direct result of an accurate classification is the appropriateness of income
recognition and thus the effect on the profitability of the Bank.
II. Concurrent Audit:
In the beginning of the 1990’s, the Great Banking Scam or the Harshad Mehta Scam
rocked the nation. This brought into limelight special category of audit called concurrent
audit or continuous audit. This stemmed from the need of filling in the gap between the
annual statutory audits and the intervening period between two inspections, which is a
period sufficiently large to cause damage to the Bank. Now, RBI who insisted that at
least 50% of the business of the Bank should be covered under concurrent controlled the
spotlight of the concurrent audit. While some Banks covered very large branches under
the umbrella of concurrent audit. Some banks took the excurse for improvement by
including weak branches though having low volume of business. Concurrent audit in one
sentence will mean checking yesterday’s transactions today. Let us see the broad areas
covered by the Concurrent Auditor.
A. Revenue Aspects:
1. Interest earned and service charges earned by the Bank
2. Interest Paid
3. All charges paid like cancellation charges, compensation under Court Directive etc.

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B. Expenditure:
1. Salary payments
2. Branch expenses like printing and stationary, temporary employees etc.
3. Rent of premises etc.
C. Documentation and other aspects of advances department:
1. Documentation correctness of ALL new advances granted during the period
2. Validity of all old advances to ensure that they are not time barred.
3. Currency of insurance cover of stock machinery etc.
4. Whether the inspections of units and stock have been carried out at the pre-set
intervals.
D. Administrative and other aspects:
1. Correctness of attendance and leave records
2. Cash Department working including security aspects with periodic surprise inspection
by the auditor
3. Stock check at regular intervals of all security documents like Blank cheque books,
Demand Drafts, Pay orders, Pass Books etc.
III. RBI Audit:
The Central Bank of the country also sends its own auditors to the Banks for their own
inspection. Their actions cannot be covered in this project because it is more of a
supervisory implementation of a Government Policy existing from time to time. The
primary aim of this audit is as follows.
Overall assessment of the assets and liabilities of the Bank, whether its financial position
is satisfactory, whether it is in position to pay its depositors in full as and when their
claims accure, and in the event of loss, whether it has sufficient cushion of owned funds
to safeguard the interests of depositors.
Soundness of Bank’s policies and procedures and effectiveness of the management to
safeguard point No.1 mentioned above as also whether they are on approved lines and in
conformity with socio-economic objectives.

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CHAPTER 3: COMPANY ACCOUNTS
Company is voluntary and autonomous association of persons. This is made for
achieving business objectives. It acts like human being. Company can purchase assets or
sell it. It can take also debt. It can open bank account. It is fully free from its members.
Company is operated through board of directors.
Indian Company law 1956’s section 3(1) (i) define company, “Company is the
organization which is formed and registered under this law or any previous law”
Features of Company:-
1. Separate legal entity
It is the feature of company that company is not just association of persons but it
has separate legal entity. It is an artificial person in the eye of law. Its asset is not the
asset of shareholder. It can contract with members.
2. Separate Property
It is also feature of company that property of company is different from its members. It
can purchase or sell property without the permission of shareholders. In other words,
assets of company are not the assets of members like partnership.
3. Limited Liability
Limited liability is also another important feature of company. It is the reason that large
number of investors invest in limited liability companies. It is the liability of company to
repay not the liability of its members. Members’ liability is only limited up to the
purchased value of shares. They have to pay balance amount of their shares.
4. Perpetual Succession
The life of company is very stable that human being’s life. There is no effect of changing,
death, insolvency of respected member on company. Its existence is not affected by
members’ existence. Shares can easily transfer from one member to another member, so
liquidation of company is only possible by law.

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5. Common Seal
Company cannot sign on any contract because it is artificial person and it works with
common seal. Every document of contract with company is only valid, if there is
common seal of company on it.
6 Right to Sue
Company can sue on other parties like natural person for protecting its assets and
properties. Other persons can also charge on the company.
Financial statements of the company:
Financial statements are reports prepared and issued by company management to give
investors and creditors additional information about a company's performance and
financial standings. This is the fundamental purpose of financial accounting – to provide
useful financial information to users outside of the company.
Understanding business financial statements is the first critical step investors and
creditors can take to learn about the earnings and profitability, asset and debt levels, uses
of cash, total investments by company owners for a specific time period and determine
whether the company is healthy enough to invest in or loan money to.
Statement of Profit and Loss:
A profit and loss statement (P&L) is a financial statement that summarizes the revenues,
costs and expenses incurred during a specific period of time, usually a fiscal quarter or
year. These records provide information about a company's ability – or lack thereof – to
generate profit by increasing revenue, reducing costs, or both. The P&L statement is also
referred to as "statement of profit and loss", "income statement," "statement of
operations," "statement of financial results," and "income and expense statement."

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Basic Formula:
Revenues – expenses = net profit.
Revenues
- Operating (variable) expenses
= Gross profit (operating) margin
- Overhead (fixed expenses)
= Operating income
+/– Other income or expense (non-operating)
= Pre-tax income
- Income taxes
= Net income (after taxes)
P&L statements generally follow this format:
Notes
2013
USD
Revenue 16 xxxxxx
Cost of Sales 17 (xxxxx)
Gross Profit xxxx
Other Income 18 xxxx
Distribution Cost 19 (xxxx)
Administrative Expenses 20 (xxxx)
Other Expenses 21 (xxxx)
Finance Charges 22 (xxxx)
(xxxx)
Profit before tax xxxx
Income tax 23 (xxxx)
Net Profit xxxx

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Balance Sheet:
Balance Sheet As On 31st March, 2015
Particulars Note
No.
As at 31st March, 2015
Rs.
A EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share capital 1 -
(b) Reserves and surplus 2 -
2 Non-current liabilities
(a) Long-term borrowings 3 -
(b) Deferred tax liabilities
(net)
xxxx
3 Current liabilities
(a) Short Term Borrowings 4 -
(b) Trade payables 5 -
(c) Other current liabilities 6 -
(d) Short-term provisions 7 -
TOTAL 0.01
B ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets 8 -
(b) Non-current investments 9 -
2 Current assets
(a) Inventories 10 -
(b) Trade receivables 11 -
(c) Cash and cash equivalents 12 -
(d) Short-term loans and
advances
13 -
TOTAL -

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Preparation of balance sheet of company is very necessary, because Indian Company law
1956 gives strict instruction about the format of balance sheet of a company. A company
can make balance sheet according to the form given in Part I of schedule VI of company
law 1956. A company can also make balance sheet summary form, but it has to attach its
schedule in which explanation of different components are given. We are explaining
different components of balance sheet of company which will be helpful for students to
prepare balance sheet of company.
Assets Side of Balance Sheet
Assets are written in right side of company’s balance sheet. In these assets, we include.
1. Fixed Assets
I) Land
II) Building
III) Plant and Machinery
IV) Furniture and Fixture
V) Leasehold assets
VI) Development of property
VII) Vehicles
VIII) Live stocks
IX) Railway sidings
X) Equipment
We also include intangible assets in fixed assets head. Following are the main examples
of intangible assets.
I) Goodwill
II) Patents
III) Trade marks and design
Depreciation is charged on every fixed asset except land, because value of land will
increase after some time. Here, students are given advice that they should calculate the
value of net fixed assets, if different fixed assets are purchased or sold during the year.
The following table will be the part of working note.

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Liabilities Side of Balance Sheet
Liabilities are written in left side of company’s balance sheet. In these liabilities, we
include.
1. Share Capital
In share capital of company, we have to show authorized capital, subscribed capital,
called up capital and paid up capital. For calculating paid up capital, we will deduct calls
unpaid and add original paid up amount of forfeited shares.
2. Reserves and Surplus
Following reserves will be shown in liabilities side of balance sheet of company.
i) Capital reserves
ii) Share premium account
iii) Other reserves
iv) Surplus balance in profit and loss account after providing dividend, bonus or reserves.
v) Sinking fund
3. Secured Loan
If any loan is taken by company after keeping any asset as security, then it will be shown
in secured loan head. Its detail is given below.
 Debentures
 Loan and advances from subsidiarie
 Other loan and advances
 Interest payable on secured loan
4. Unsecured loan
Following will be the unsecured loan.
i) Fixed deposits of public
ii) Short term loans and advances
iii) Other loans

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5. Current Liabilities and Provisions
All liabilities which is payable within one year, will be included in current liabilities
head.
A) Current Liabilities
i) Acceptance or bill payables
ii) Sundry creditors
iii)Interest payable other than on loan
iv)Outstanding expenditures
B) Provisions
i) Provisions for taxations
ii) Proposed dividend
iii) Provision for provident fund
iv) Provision for insurance, pension and other staff benefit schemes
v) Other provisions
6. Contingent liabilities
These types of liabilities will not be shown in balance sheet. But a simple footnote is
made for its detail. Following may be the contingent liabilities of company.
i) Claims against the company not acknowledge as debts
ii) Uncalled liability on shares paid
iii) Areas of fixed cumulative dividends
iv) Any other contingent liability of company

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CHAPTER 4: COMPANY AUDIT
Company Audits
The provisions for company audits are contained in the Companies Act 1956 and
Companies Act 2013 as applicable. Every company, irrespective of its nature of business
or turnover, must have its annual accounts audited each financial year. For this purpose,
the company and its directors must first appoint an auditor at the outset. Thereafter, at
each annual general meeting (AGM), an auditor is appointed by the shareholders of the
company who will hold the position from one AGM to the conclusion of the next AGM.
After the completion of the term, the auditor must be changed.
Only an independent chartered accountant or a partnership firm of chartered accountants
can be appointed as the auditor of a company. The following persons are specifically
disqualified from becoming an auditor per the Companies Act:
 A body corporate
 An officer or employee of the company
 A person who is partnered with an employee of the company, or employee of an
employee of the company
 Any person who is indebted to a company for a sum exceeding INR1,000 or who
has guaranteed to the company on behalf of another person a sum exceeding
INR1,000
 A person who has held any securities in the company after one year from the date
of commencement of the Companies (Amendment) Act, 2000
The auditor is required to prepare the audit report in accordance with the Company
Auditor’s Report Order (CARO) 2003. CARO requires an auditor to report on various
aspects of the company, such as fixed assets, inventories, internal audit systems, internal
controls, and statutory duties, among others. The audit report must be obtained before
holding the AGM, which itself should be held within six months from the end of the
financial year.

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Audit Reporting
As discussed earlier, audits are conducted to ensure a company’s financial statements
present a true and fair view of its financial affairs. Therefore, the auditor’s opinion
expressed in the ultimate report is based on the information gathered during the audit and
the verification of financial statements. Upon completing the report, the auditor may
express one of the following four opinions:
 Unqualified Opinion
 Qualified Opinion
 Disclaimer of Opinion
 Adverse Opinion
Unqualified Opinion
An unqualified opinion is expressed when the auditor concludes that the financial
statements give a true and fair view in accordance with the financial reporting framework
used for the preparation and presentation of the financial statements. It confirms that:
 Generally accepted accounting principles are consistently applied in the
preparation of financial statements
 Financial statements comply with the relevant statutory requirements and
regulations
 There is adequate disclosure of all material matters relevant to the proper
presentation of financial information (subject to statutory requirements)
Qualified Opinion
A qualified opinion is expressed when the auditor concludes that an unqualified opinion
cannot be expressed, but that the effect of any disagreement with management is not so
material and pervasive as to require an adverse opinion, or the limitation of scope is not
so material and pervasive as to require a disclaimer of opinion. A qualified opinion
should be expressed as being “subject to’” or “except for” the effects of the matter to
which the qualification relates.
Disclaimer of Opinion
A disclaimer of opinion is expressed when the possible effect of a limitation on scope is
so material and pervasive that the auditor has not been able to obtain sufficient and
appropriate audit evidence and is, therefore, unable to express an opinion on the financial
statements.

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Adverse Opinion
An adverse opinion is expressed when the effect of a disagreement is so material and
pervasive to the financial statements that the auditor concludes that a qualification of the
report is not adequate to indicate the misleading or incomplete nature of the financial
statements.
1. Where the accounting is open and documented it is there to handle special situations.
Where it is hidden or disguised, it is a case of a company hiding its true position. And
given the annual financial statements that the shareholders receive, hiding the true
position of a company is simply misleading the owners of the company and should be
regarded as fraud.
2. At the same time, there is a strong case for strengthening the requirements for exercise
of due diligence by auditors in carrying out audit of the financial affairs of the company,
with negligence or willful default being suitably punished in a deterrent manner. The
public interest aspect of the auditor’s role is undeniable.
3. The swelling incidents of accounting frauds have brought out the need for investigative
accounting. While the accounting scandals have created a crisis of confidence, on the one
hand, they have heralded a boom of forensic business, on the other. Now, technology can
be used and due diligence exercises can be undertaken to uncover accounting frauds.
Over the past few years, prevention of financial statement frauds has risen to the top of
the corporate agenda.
4. The development of a broad ranging fraud risk management program is also an
important step in managing this challenge. Organizations undertaking the effort should
begin by assessing how well they are managing fraud risk. Identifying known risks and
existing controls is an important first step. Then the organization can determine its ideal
future state, perform an analysis, and prioritize activities that will help enable the
development of a company-specific antifraud program. Such a program will not only help
enable appropriate compliance with regulatory mandates but also help the organization
align its corporate values and performance as well as protect its many assets, including its
reputation

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OBJECTIVES OF AUDITING
AAS 2 issued by ICAI states that the objective of an audit of financial statement is to
enable an auditor to express an opinion on such financial statements. A financial audit
has a basic objective of examining whether the accounts are true and fair. It has an
incidental objective of detecting errors and frauds.
Primary objectives of Audit (Auditor’s Report)
• Truth and fairness of the financial position shown by the balance sheet.
• Truth and fairness of the trading results or the results of operations shown by the profit
and loss account.
• Adequacy of information required to be disclosed in the financial statements.
• Compliance with statutory requirements.
• Accuracy and reliability of books of account and underlying records from which the
financial s statements have been prepared.
Secondary objectives of Audit (Auditor’s Report)
• To detect errors and frauds, if any.
• To prevent errors and frauds by the deterrent effect of audit.
Documentation of the Audit Procedures performed and Audit Evidence obtained
The form, content and extent of audit documentation depend on factors such as:-
 The size and complexity of the entity.
 The nature of the audit procedures to be performed.
 The identified risks of material misstatement.
 The significance of the audit evidence obtained.
 The nature and extent of exceptions identified.
 The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit evidence
obtained.
 The audit methodology and tools used

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Audit documentation may be recorded on paper or on electronic or other media.
Examples of audit documentation include:-
 Audit programmes.
 Analyses.
 Issues memoranda.
 Summaries of significant matters.
 Letters of confirmation and representation.
 Checklists.
 Correspondence (including e-mail) concerning significant matters.
The auditor may include abstracts or copies of the entity’s records (for example,
significant and specific contracts and agreements) as part of audit documentation. Audit
documentation, however, is not a substitute for the entity’s accounting records.
The auditor need not include in audit documentation superseded drafts of working papers
and financial statements, notes that reflect incomplete or preliminary thinking, previous
copies of documents corrected for typographical or other errors, and duplicates of
documents.
Audit Procedures for Obtaining Audit Evidence
Inspection: - Inspection involves examining records or documents, whether internal or
external, in paper form, electronic form, or other media, or a physical examination of an
asset. Inspection of records and documents provides audit evidence of varying degrees of
reliability, depending on their nature and source and, in the case of internal records and
documents, on the effectiveness of the controls over their production. An example of
inspection used as a test of controls is inspection of records for evidence of authorisation.
Some documents represent direct audit evidence of the existence of an asset, for example,
a document constituting a financial instrument such as a stock or bond. Inspection of such
documents may not necessarily provide audit evidence about ownership or value. In
addition, inspecting an executed contract may provide audit evidence relevant to the
entity’s application of accounting policies, such as revenue recognition.
Inspection of tangible assets may provide reliable audit evidence with respect to their
existence, but not necessarily about the entity’s rights and obligations or the valuation of
the assets. Inspection of individual inventory items may accompany the observation of
inventory counting.

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Observation: - Observation consists of looking at a process or procedure being
performed by others, for example, the auditor’s observation of inventory counting by the
entity’s personnel, or of the performance of control activities. Observation provides audit
evidence about the performance of a process or procedure, but is limited to the point in
time at which the observation takes place, and by the fact that the act of being observed
may affect how the process or procedure is performed.
External Confirmation:- An external confirmation represents audit evidence obtained
by the auditor as a direct written response to the auditor from a third party (the
confirming party), in paper form, or by electronic or other medium. External
confirmation procedures frequently are relevant when addressing assertions associated
with certain account balances and their elements. However, external confirmations need
not be restricted to account balances only. For example, the auditor may request
confirmation of the terms of agreements or transactions an entity has with third parties;
the confirmation request may be designed to ask if any modifications have been made to
the agreement and, if so, what the relevant details are. External confirmation procedures
also are used to obtain audit evidence about the absence of certain conditions, for
example, the absence of a “side agreement” that may influence revenue recognition.
Recalculation: - Recalculation consists of checking the mathematical accuracy of
documents or records. Recalculation may be performed manually or electronically.
Reperformance: - Re-performance involves the auditor‟s independent execution of
procedures or controls that were originally performed as part of the entity‟s internal
control.
Analytical Procedure: - Analytical procedures consist of evaluations of financial
information made by a study of plausible relationships among both financial and non-
financial data. Analytical procedures also encompass the investigation of identified
fluctuations and relationships that are inconsistent with other relevant information or
deviate significantly from predicted amounts.
Inquiry: - Inquiry consists of seeking information of knowledgeable persons, financial
and non- financial, within the entity or outside the entity. Inquiry is used extensively
throughout the audit in addition to other audit procedures. Inquiries may range from
formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an
integral part of the inquiry process.

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Management’s responsibilities in an audit
The words, “The financial statements are the responsibility of management,” appear
prominently in an auditor’s communications, including the audit report.
Management’s responsibility is the underlying foundation on which audits are conducted.
Simply put, without management having responsibility for the financial statements, the
demarcation line that determines the auditor’s independence and objectivity regarding the
client and the audit engagement would not be as clear.
It is important for a company’s management to understand exactly what an audit is – and
what an audit does and does not do. The auditor’s responsibility is to express an
independent, objective opinion on the financial statements of a company. This opinion is
given in accordance with auditing standards that require the auditors to plan certain
procedures and report on the results of the audit, while considering the representations,
assertions and responsibility of management for the financial statements.
As one of their required procedures, auditors ask management to communicate
management’s responsibility for the financial statements to the auditor in a representation
letter. The auditor concludes the engagement by using those same words regarding
management’s responsibility in the first paragraph of the auditor’s report.
Auditors cannot require management to do anything or to make any representation.
However, to conclude the audit with the hope of a “clean” unqualified opinion issued by
the auditor, management has to assume the responsibility for the financial statements.
Auditing standards are very clear that management has the following responsibilities
fundamental to the conduct of an audit:
1. To prepare and present the financial statements in accordance with an applicable
financial reporting framework, including the design, implementation and maintenance of
internal controls relevant to the preparation and presentation of financial statements that
are free from material misstatements, whether from error or fraud
2. To provide the auditor with the following information:
All records, documentation and other matters relevant to the preparation and presentation
of the financial statements

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Any additional information the auditor may request from management
Unrestricted access to those within the organization if the auditor determines it necessary
to obtain audit evidence objectivity.
It is not uncommon for the auditor to make suggestions about the form and content of the
financial statements, or even assist management by drafting them, in whole or in part,
based on information provided by management. In those situations, management’s
responsibility for the financial statements does not diminish or change.

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CHAPTER 5: CONCLUSION
From the overall information, it is concluded that the main aim of Audit is to give true
and fair view of financial statements and reports of the company to its many users like
shareholders, employees, banks, financial institutions, lenders, costumers etc. However
detection and prevention of errors and frauds are the secondary objective of the audit.
While conducting an audit auditor should have to consider all audit standards.
The development of a broad ranging fraud risk management program is also an important
step in managing this challenge. Organizations undertaking the effort should begin by
assessing how well they are managing fraud risk. Identifying known risks and existing
controls is an important first step. Then the organization can determine its ideal future
state, perform an analysis, and prioritize activities that will help enable the development
of a company-specific antifraud program. Such a program will not only help enable
appropriate compliance with regulatory mandates but also help the organization align its
corporate values and performance as well as protect its many assets, including its
reputation.
At the same time, there is a strong case for strengthening the requirements for exercise of
due diligence by auditors in carrying out audit of the financial affairs of the company,
with negligence or willful default being suitably punished in a deterrent manner. The
public interest aspect of the auditor’s role is undeniable.

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Bibliography
 http://www.slideshare.net
 http://www.icai.org/
 http://www.bankexamstoday.com/