Unit 1 3 analysis of financial statements accounts and audit -gfsu-mba-forensic-accounting
1. Lecture Series Unit No. 1:
Topic: (3) Accounting and Audit
(Course: Forensic Accounting & Homeland Security,
CA Vikram Shankar Mathur
BA (Eco) Hons, FCA, DISA (ICAI), FAFP (ICAI)
Contact No: +91-9998090111 or +91-8460890111.
Email: email@example.com or firstname.lastname@example.org
Website: http://vsmathur.co.in and http://ahmedabadfca.com
FB Profile(s): http://fb.me/vsmathurco or http://fb.me/vsm.ahmfca
FB Page: http://fb.me/fcavsmathur.faculty
2. Quick Recap of the last lecture (1/2)
Accounting is the principal means of measuring and reporting business condition and
performance. It is a system for recording, summarizing, analyzing and reporting information
about a firm in financial terms.
The framework of accounting is based on a number of principles. The important principles are
(a) entity (b) money measurement (c) stable monetary unit (d) going concern (e) cost (f)
conservatism (g) dual aspect (h) accounting period (i) realization (j) matching (k) accrual and
The two principal financial statements are the balance sheet and the income statement.
The balance sheet shows the financial position of a business at a particular point of time, in
terms of assets and liabilities, the format is as per the Companies Act, 2013 for a company.
Assets may be divided into (a) fixed assets (b) intangible assets (c) investments (d) current
assets (e) loans and advances and (f) others.
Liabilities may be broadly classified as follows (a) share capital (b) reserves and surplus (c)
secured loans (d) current liabilities and (e) provisions.
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 2
3. Quick Recap of the last lecture (2/2)
Technically, the income statement is an adjunct of the balance sheet because it
provides details relating to net income which represents the net change in
owners equity. Yet it is sometimes considered more important because it sheds
light on the performance of the company during the year.
Important items in the income statement are (a) net sales (b) cost of goods sold
(c) gross profit (d) operating expenses (e) operating profit (f) non-operating
surplus / deficit (g) profit before interest and tax (PBIT / EBIT) (h) interest (i) profit
before tax (PBT / EBT) (j) tax and (k) profit after tax (PAT/ EAT).
Financial ratio analysis is the principal tool for analysis of financial statements
Financial ratios may be broadly divided into four types: liquidity, turnover,
leverage and profitability.
Financial ratios have the predictive ability, particularly in signaling a business
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 3
4. Accounting and Audit
Introduction to Managerial Accounting
Accounting Mechanics: Basic Records
Accounting Mechanics: Preparation of Financial Statements
Some Complex Considerations in preparation of Financial Statements
Legal Requirements relating to Accounting and Auditing
Origin of Audit – Audit & Investigation – Detection of Frauds –Types of
Audit – Conduct of Audit
Independence of Auditors – Professional Conduct and Ethics
Audit Methodology – Audit Programmes & Questionnaires
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 4
5. Introduction to Managerial Accounting
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 5
Accounting is commonly referred to as the “language of business”.
Defined as “the art of recording, classifying and summarizing on a
significant manner and in terms of money, transactions and events
which are, in part at least, of financial character and interpreting the
Book-Keeping and Accounting are sometimes used synonymously,
however, difference is significant. Book-keeping is an activity
complementary to Accounting, which is concerned with the
recording of financial data relating to business in a significant and
Internal and External users of Accounting
6. Accounting Mechanics: Basic Records
Generally speaking, mechanics of accounting can be said to follow
1. Business transaction takes place
2. The transaction is recorded in a document (usually a voucher) providing details
3. The transaction is analyzed to decide which accounts to debit and credit.
4. The transaction is then recorded in one of the special journals like cash book,
sales day book, purchase day book or journal book.
5. The respective account ledger is then posted with the transaction
Once the full year’s transactions are posted in the above manner, the
result is reflected in the summarization of the General Ledger in the
form of the “Trial Balance” of the organisation at the end of the financial
period (March 31st, 20XX, usually).
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 6
7. Accounting Mechanics: Preparation of Financial
From the “Trial Balance (TB)” the next logical step is preparation of the Financial Statements,
namely (i) Balance Sheet, (ii) Profit and Loss Account, and (iii) The Cash Flow Statement.
After ensuring the arithmetical accuracy and matching the debit-credit summation(s) from the
various daybooks to the TB, the following adjustments would be required to be made:
Recording of accrued expense and revenue
Allocating revenues received in advance
Allocating expenses incurred in advance
Adjusting Cost of Goods Sold
Providing for bad debts
Writing off bad debts
Amortising Preliminary Expenses and other Deferred Expenses, if any.
Providing for Depreciation
Providing for Income-Tax & Dividend
Retaining undistributed earnings to Reserves
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 7
8. Legal Requirements relating to Accounting and
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 8
Some of the Accounting Standards that are mandatory in nature:
Revenue Recognition method
Matching of Revenues and Expenditures – Inventory pricing and valuation
(See Next Slide)
Fixed Assets & Depreciation Accounting
Treatment of intangible assets (Goodwill and R&D Expenses)
Companies Act 2013 & CARO 2016 compliances (in the case of
companies) – Statutory Books & Registers – Assets – Equities &
Liabilities – Revenues – Expenses – Opening & Closing Stock
10. Origin of Audit
The word “Audit” is derived from the latin word “audire” which means “to
After the introduction of large-scale production in consequence to the
Industrial Revolution during the 18th century, audit in the present sense
The first treatise “Double Entry System of Book-Keeping” was published
by Italian, Loca Pacialo in the year 1494.
Spicer and Pegler have defined auditing as “such an examination of the
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 for the financial period, according to the best of his
information and the explanations given to him and as shown in the books;
and if not, in what respect his is not satisfied.”
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 10
11. Audit & Investigation – Detection & Prevention of
Investigation means a searching enquiry into the profit earning
capacity of the financial position of a concern or to find out the
extent of the fraud if there is a suspicion about it, etc. Audit, on the
other hand, is conducted to find out whether the balance sheet is
properly drawn up and exhibits a true and fair view of the state of
affairs of the concern. These two terms are therefore, not to be
Detection and Prevention of Fraud: A fraud is said to take place
when a false representation or entry made intentionally or without
belief in it’s truth with the view to misappropriate the funds.
Following are the main methods by which frauds may be committed
(a) Embezzlement of Cash (b) Misappropriation of Goods, and (c)
Fraudulent manipulation of the accounts
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 11
12. Types of Audit – Conduct of Audit
TYPES OF AUDIT
Audit of a Sole Proprietary concern
Audit of a Partnership concern
Audit of a Joint Stock Company
Audit of Trust Accounts
Audit of Government Accounts
CONDUCT OF AUDIT
Balance Sheet Audit
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 12
13. Accounting vs Auditing
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 13
1. It’s a continuous process carried out
throughout the year.
1.It’s a one time activity after the closure of
1. No prescribed qualification is required to
be an accountant.
2. He must be the member of Institute of Chartered
Accountants of India to become an auditor.
1. An accountant is a employee of the
3. An auditor is an independent professional.
1. An accountant gets regular salary for his
4. He gets remuneration for his professional work.
1. Accounting is concerned with recording of
business transactions systematically.
2. Accounting precedes, auditing.
5. Its concerned with verification of accounts
prepared by the accountant.
6. Auditing succeeds accounting.
14. Qualities of an auditor
Conversant with Business
Conversant with Taxation
Tact and Diplomacy
Secrecy & Confidentiality
Patience & Perseverance
Critical, yet not impractical
Bold & Courageous
Courteous and Independent
Common Sense with intelligence
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 14
15. Independence of Auditors – Professional Conduct
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 15
Various laws govern the concept of the independence of auditors,
because there are a number of third party organizations, like creditors,
stock exchanges, banks and financial institutions that depend upon the
results published about the concerned organization.
At the same time, the Institute of Chartered Accountants of India (ICAI)
have laid down a set of Professional Code Conduct and Ethics that have
to be followed by the members of the ICAI.
Some of the salient features of the above are:
No person who is indebted to the concern for a sum exceeding Rs. 1,000/- can
become it’s auditor;
The incoming auditor is duty bound to take a no-objection certificate from the
outgoing auditor before expressing any opinion of the accounts of the concern, etc.
16. Audit Programmes & Internal Control
Audit methodology, or the way an audit should be carried out, differs from region
to region. Broadly speaking there are only two methods that are currently being
followed (a) Audit Programmes and (b) Internal Control Questionnaires (ICQ).
While in the case of an Audit Programme, the auditor studies the functioning of
the organisation to be audited and draws up the detailed steps to be carried out
in case of each of the functional areas of the concerned organisation, in terms of
the frequency and the quantum of the checking or vouching to be carried out by
him or his staff. Each year, the same are scrutinized for any additional work to be
carried out, if any.
In the case of ICQ’s, there are various levels of the checking that are carried out
during different times of the year, i.e. monthly, quarterly and annually, and they
are also based on the flow-charts and flow diagrams of the concerned
organisation – but additionally, the risks involved in the various areas are also
quantified and accordingly the ICQ’s are drawn up. These ICQ’s are reviewed on
a periodic basis, for example three years or more, as appropriate.
11-Aug-2016CA Vikram S. Mathur (GFSU - Lecture series) 16
18. Thank you for your
CA Vikram Shankar Mathur
+91-9998090111 / +91-8460890111
(Available on WhatsApp on both numbers, anytime)
FB Page: http://fb.me/fcavsmathur.faculty