Principles & practices of auditing

1. Unit 1
Principles & Practice of Auditing
Prepared & Presented by
Ms. Himani R.

2. Layout of the presentation
• Introduction
• Meaning
• Definition
• Objectives
• Differences between accountancy & auditing
• Types of audit
• Advantages of auditing
• Preparation before commencement of new audit
• Audit notebook
• Audit working papers
• Audit program
• Recent trends in auditing
• Nature & Significance of Tax audit
• Cost audit
• Management audit 2Prepared by: Ms. Himani R.

3. Introduction
• Latin word “audire”
• ‘One who hears’
• The system of checking public accounts has been in existence for a long
time.
• Luca Pacioli -1494
• Two aspects that is receiving and giving aspects.
• Luca also defined the duties and responsibilities of an auditor since then it is
evolving and increasing
• 16th, 17th and 18th century
• 19th century
• Joint stock companies
• 1913, Companies Act-made it obligatory
• 1918, Govt. of Bombay-training professional accountants
• 1949- Chartered Accountants Act-ICAI was set up
3Prepared by: Ms. Himani R.

4. Definition
• Spicer & Pencer
– An audit is such an examination of books,
accounts and vouchers of a 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 the business and whether the profit and
loss account gives a true and fair view of the
P/L for the financial period according to the
best of his information and explanations given
to him and as shown by the books and if not
in what respect he is not satisfied. 4Prepared by: Ms. Himani R.

5. Meaning
• Book keeping (Recording & Balancing)
– Journalizing, posting to ledgers, totaling
accounts and balancing.
• Accountancy (Summary & Analysis)
– Checking the work of the book keeper,
preparation of trial balance, preparation of P&L
account & passing entries for rectification of
errors & making adjustments.
• Auditing (Examination of Records)
– Checking the work done by accountant &
preparing a report about the correctness of FS
5Prepared by: Ms. Himani R.

6. Difference
Sr. No. Accountancy Auditing
1 Concerned with collection,
classification, summarization &
communication
Concerned with analytical and critical
examination
2 To ascertain the trading results To certify the FS prepared by the a/c
3 An employee of a business on a
monthly salary basis
An independent outsider at an agreed
remuneration
4 Not expected to have knowledge of
auditing
Necessary to possess thorough
knowledge of accountancy
5 Permanent employee of a business Can be changed from year to year
6 Does not have to submit a report Does have to submit a report
7 Need not be a CA Must be a CA
8 Undertaken throughout the year Only at the end/periodically
9 Accounting is the primary step It begins where accountancy ends
6Prepared by: Ms. Himani R.

7. Advantages of Auditing
• Ensure correctness of the accounts
• Detection & prevention of frauds
• Keep all the records up-to-date
• Enable the comparison of accounts
• Accepted by banks in obtaining additional capital
• Fire /theft compensation can be claimed
• For valuation of property
• For tax assessment
• For the settlement of accounts at the time of death, admission or retirement
• For prospective investors
• For court of law
• Reducing taxable income, cost control, social responsibility
• Useful for settling trade disputes, negotiations, bonus
• Detecting weaknesses inherent in the system
7Prepared by: Ms. Himani R.

8. Limitations of Auditing
• If the auditor gets the biased information the
accounts will not reveal the true picture
• A detailed checking is not possible
• It is more useful for the future but less for the
past
• Auditing has nothing to do with the policies,
ethics and efficiency
• If the auditors are not bold enough to point out
the drawbacks, it may not serve the real purpose
8Prepared by: Ms. Himani R.

9. Objectives of Auditing
• To determine the fairness of the financial
statements
• To uncover the frauds and errors
• To study and evaluate the internal control
• To evaluate the efficiency of managers.
• The subsidiary objectives of auditing are:
– Detection of errors
– Detection of frauds
– Prevention of errors and frauds
9Prepared by: Ms. Himani R.

10. Subsidiary objectives of Auditing
Detection
of errors
Compensating
errors
Errors of
duplication
Errors of
commission
Errors of
omission
GoodsCash
Manipulation
of accounts
Misapprop
riation of
Detection
of frauds
Prevention
of errors &
frauds
Clerical/
technical
errors
Errors of
principle
10Prepared by: Ms. Himani R.

11. Types of Audit
• Statutory Audit: Made compulsory by law
– For Companies Act (1956), Banking co., Insurance co., Co-operative So.,
Public and Charitable Trusts, Electricity Co.,
• Continuous Audit: goes for the whole year round at regular /irregular
intervals
• Periodic/ Final/ Annual Audit: Only once a year
• Partial Audit: Audit for the part of the books/ for part of the year
• Cash Audit: Auditing for the receipts & payments of cash and bank
• Interim Audit: conducted between 2 annual audits to find interim p/l.
• Balance Sheet Audit: follow the backward process especially for Banks
• Cost Audit: An audit for cost records
• Performance Audit: To find out whether the internal activities are carried
out efficiently or not
• Occasional Audit: in case of business org. where audit is optional
• Social Audit: To measure the effectiveness of co’s social performance11Prepared by: Ms. Himani R.

12. New audit
• Factors to be considered on a new audit:
– To know about the scope of duties
– Nature of business
– Knowledge about the accounting system
– Knowledge about the internal control & internal audit
– Study of the important documents
– Organization structure
– Information about the principal officials
– Change of Auditors
– Previous year’s audited BS
– To know about the policy of the BODs 12Prepared by: Ms. Himani R.

13. Audit notebook
• It is prepared by the audit staff to note down all
the unclear queries which he/she may find in the
course of audit and requires further clarification
and explanation.
• It contains information regarding day-to-day
work performed by the audit staff on any
particular date.
• Points which are to be discussed with the
auditor/ clients and those that are to be
incorporated in the report are noted down.
13Prepared by: Ms. Himani R.

14. Continued
• Advantages:
–No need to repeat tasks
–Helps to get clearance against the case
of negligence
–Helps to refer in the future
–To share the method with the new staff
–Helps to measure efficiency of the staff
14Prepared by: Ms. Himani R.

15. Audit working papers
• These are the written private materials which an auditor
prepares for each audit.
• They describe the accounting information which an auditor
receives from his clients, the method of examination used,
his conclusions & Financial statements
• It provides an evidence of the work carried out by the
auditor.
• It provides the basis for planning the audit.
• Records the evidence accumulated and results of the audit
tests
• Data for determining the proper type of audit report.
• Basis for review by supervisors and partners
15Prepared by: Ms. Himani R.

16. Audit program
• Audit programs are lists of audit procedures to be performed by
audit staff in order to obtain sufficient appropriate evidence.
• The individual procedures are determined after obtaining an
understanding of the accounting system and determining the audit
strategy to be followed
• The audit program reflects the understanding of the system and will
incorporate a mix of tests that the auditor intends to perform
• The audit program is an important part of the auditors working
papers and records a significant part of the audit evidence required
to justify the audit opinion.
• The purpose of the audit program is to have a report of the audit
procedures to be adopted, the audit objectives, timing, sample size
and basis of selection of each criteria.
16Prepared by: Ms. Himani R.

17. Tax audit
• Tax audit can be defined as “An examination of financial
records to assess the correctness of calculation of
taxable profit, to ensure compliance with provisions of
the Income Tax Act, 1961 and also to ensure fulfillment
of conditions for claiming deductions under the said act.”
• The main objective of the Tax audit is to compute the
taxable income according to the law and for maintaining
transparency in the financial statements filed with the
income tax dept.
• The tax audit u/s 44AB of the Income-Tax Act 1961 is
significant practice area for Chartered Accountants.
17Prepared by: Ms. Himani R.

18. Management audit
• It is a systematic examination of decisions and actions of the
management to analyse the performance.
• It involves the review of managerial aspects like organizational
objectives, policies & procedures, structure, control and system in
order to check the efficiency or performance of the management
over the activities of the co.
• Unlike financial audit, management audit mainly examines the non-
financial data to audit the efficiency of the management.
• Conducting management audit:
– Enquiry
– Examination
– Confirmation
– Observation of pertinent activities & conditions
– Correlation of information
18Prepared by: Ms. Himani R.

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