Auditing BBA VI Sem BBA N 605 Unit 1st Notes

 

BBA- VI Semester

 BBA N  605                                                                                                                        Auditing

 Unit I

 Introduction: Meaning and objectives of Auditing, Types of Audit, Internal Audit, Audit Programme, Audit Notebook, Routine Checking and Test Checking.

 

                                                                                     

 Introduction: Meaning and objectives of Auditing

Meaning  

The term audit has been derived from the Latin word “Audire” which means “to hear”

        Definition- According to Auditing Standards and Guidelines UK

 “An audit is the independent examination of,and expression of opining on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligations”

According to Institute of chartered Accountants of India (ICAI) “An audit 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 opining thereon.”

 

 

The Objectives of Audit

The objective of an audit can be divided into two parts:

1-   Primary objectives.

2-   Secondary objectives.

3-   Detection and prevention of frauds and errors.

 

1-   Primary objectives

The primary objective of an audit is to enable the auditor to express opinion (report) on the:

a-   Truth and fairness of the financial position shown by the balance sheet.

b-  Truth and fairness of the trading results or the results of operations shown by the profit and loss account.

c-    Adequacy of information required to be disclosed in the financial statements.

d-   Accuracy and reliability of account and underlying records from which the financial statements have been prepared.

2-   Secondary objectives

a-   To deduct errors and frauds, if any.

b-  To prevent errors and frauds by the deterrent effect of audit.

c-    To provide allied services in the nature of consultancies in accounting treatment, accounting systems, taxation, financial problems etc.

3-   Detection and prevention of frauds and errors:

Through detection and prevention of frauds and errors is primarily the responsibility of management the auditors in order to perform his duties in regard to secondary objectives of audit should have fairly good knowledge and understanding about the nature of frauds and errors that are likely to occur in an entity which he is auditing.

 

 

Types of Audit, Internal Audit,

Classification of audits

1-    Statutory and Non Statutory audit (voluntary or private audit)

The audits can be broadly classified in two categories Statutory and Non Statutory audits audit is obligatory for certain business organisations or institutions.

Audit of an organisation performed under a statute is called statutory audit. In this the scope, duties and responsibilities of auditors are laid down by the relevant statute which cannot be modified the client.

Likes Companies- the companies act 1956

Corporation ( LIC,FCI)-under the act of parliament

Statutory Audit: - Statutory audit refers to the audit of accounts of a business

enterprises carried out compulsorily under the provisions of a statute or law. It is

is the audit carried out compulsorily under any statute any law.

Features of statutory audit are:

1. Statutory audit is compulsory under law.

2. Statutory audit is required to be conducted by a qualified auditor.

3. In the case of Statutory audit, the rights, duties and liabilities of the auditor

are governed by the statute or law applicable to the undertaking.

4. Statutory audit is an independent audit.

5. Statutory audit is an external audit.

6. Statutory audit must be a complete or full audit. It cannot be partial.

     In the non statutory (voluntary) category are the audits of:

a-    Proprietary concerns.

b-    Partnership firms.

c-     Unregistered clubs and societies, etc.

Non Statutory audits are performed by auditors because the owner or the governing bodies of organizations desire them to be audited not because the law requires but because it provide them an assurance of reliable accounts and financial state affairs

 These are also known as private audits many of such enterprises as a matter of internal rules require their accounts to be audited.    

Advantages of private audit

1. Audit assures to the owners that the accounts of the business are properly

maintained and there are no irregularities.

2. It provides a moral check on the employees.

3. It helps the owners of the business to know the real profitability and the

state of affairs of their business.

4. Audited accounts serve as a basis for assessment of tax liability.

5. Audited accounts facilitate the process of raising loans from banks and

other financial institutions.                  

6. Audited accounts help in the settlement of dispute and claims between the

partners of a firm

 

 2-      Internal Audit and external audit

 

Characteristically audit can be external audit or an internal audit. External audit is performed by duly qualified professional accounts while internal audits usually is performed by entity‘s own staff specially assigned to conduct the audit of the entity in terms of the scope and objective of the audit formulated by the management.

            Internal audit is review of functions and operations of the business to see whether they are performed in accordance with management policies and resultant procedures and to see whether or not avoidable losses and wastage are taking place.

 

1. Internal audit

2. External audit

 

Internal audit: -Internal audit is a continuous and systematic review of the

accounting, financial and other operations of a concern by the staff specially

appointed for the purpose. In other words, it is the audit of accounts by the staff

specially appointed for the purpose.

Objectives of Internal audit: -

1. To ascertain whether internal check and accounting systems are adequate

and effective.

2. To ascertain whether predetermined policies, plans and procedures have

been complied with.

3. To ascertain the reliability of the accounting and other data.

4. To evaluate the performance of the personnel.

5. To ascertain whether the properties of the concern are safeguarded.

6. To suggest to the management the improvements desired in the internal

check systems, accounting system etc.

Features of Internal audit: -

1. It is generally undertaken by large concerns.

2. It is not compulsory.

3. The scope of internal audit may vary, depending upon the nature and size

of the concern.

4. It may be in addition to external audit.

5. It is conducted by the staff of the concern.

6. The techniques and methods of auditing employed in internal audit are the

same as those in external audit.

7. It is an integral part of internal control.

8. The staff engaged in internal audit is appointed by the management. They are responsible to the management.

Importance and advantages of internal audit

1. It is helpful to the management to ascertain whether the internal check

and accounting systems are adequate and effective to prevent errors

and frauds.

2. It helps the management to ascertain whether the predetermined

policies, plans and procedures have been complied with.

3. It is helpful to ascertain the reliability of the accounting and other data

complied within the organization.

4. It is helpful to evaluate the performance of the personnel.

5. It helps to ascertain whether the properties of the concern are

safeguarded.

6. It covers the review of accounting and non accounting matters.

Disadvantages

It is conducted by staff who may not be a qualified one.

1) It is optional.

2) Quality depends upon the decisions of management.

2. External Audit.

Audit conducted by independent qualified person and examines the books

of accounts and report to the management.

                                    

Distinction between the internal auditor and external auditors 

 

3-      Interim, final and continuous audit

 1. Continuous Audit.

Continuous audit is one where the auditor’s staff is occupied continuously

on the accounts whole the year round and performs interim audit. It is an audit

under which detailed examination of the books of accounts is conducted

continuously throughout the year. It is continuous review of the accounts of the

organization. It is generally applicable to banking company and insurance

company.

Advantages.

1) Easy and quick discover of errors and frauds.

2) Technical knowledge.

3) Quick presentation of accounts.

4) Keep the client staff regular.

5) Moral check on the client’s staff.

6) Efficient audit.

7) Preparation of interim accounts is very easy.

8) Audit staff can be kept busy.

Limitations.

1) Alteration of figures.

2) Dislocation of the work of the client staff.

3) Expensive.

4) Queries may remain outstanding

5) Extensive note taking may be necessary.

6) Chance for collusion between client staff and audit staff.

7) Mechanical and monotonous.

2- Final Audit or Annual or periodical audit

It is an audit carried out after the preparation of financial statement. It is an

audit where the auditor takes up his work of checking the books of accounts only

at the end of the accounting year. In this case, the audit work is commenced and

completed in a single uninterrupted session.

Advantages:              

1) Cost of audit is less than that of continuous audit.

2) Audit work is completed in one continuous sitting.

3) Not causing any dislocation of client work

4) No possibility of alteration of figures.

5) It is not mechanical and monotonous.

6) Less chance for collusion between client staff and audit staff.

7) There is no lose the thread of the work.

Limitations

1) Errors and frauds remains in the accounts for long period of time.

2) Postmortem examination of accounts.

3) Little time for checking.

4) Rely upon test checking.

5) Not suitable for imposing moral check on the client staff.

6) Not helpful for preparing interim accounts.

7) Not suitable for large size organizations

3-Interim Audit.

It is an audit conducted between two annual audits. In other words, it is the

audit conducted in the middle of the financial year. It is carried out for some

specific purpose for declaring interim dividend, ascertaining interim profit.

Advantages.

1) Quick discovery of errors and frauds.

2) Imposes moral check on client staff.

3) Helpful for speedup the final audit.

4) Useful for publication of interim figures.

5) Audit becomes easy and can be completed without lapse of time.

Kinds of audit

1-    Secretarial audit

 

This is also a relatively new concept ad is coming to be recognised with growing complexities in the corporate law .A secretarial audit assures the corporate body that legal requirement haves been duly completed with and in time government want to ensure proper compliance and also provide professional support to such companies which may not have employed their own qualified company secretaries.

2-    System based audits

 

In this approach auditor firstly evaluating  the accounting system  and internal; control and then testing them to ascertain  their reliability.

If the system is found to be satisfactory the details checking could be short. But if the system is weak then detail cheeking would be perform.

 

3- Tax Audit: - It means audit for tax purpose. Audit required to be carried out

of income tax act of 1961. It is conducted by certified Chartered Accountant.

There are certain circumstances in which tax audit is necessary.

1. Compulsory tax audit under section 44 AB of the Income tax Act 1961

2. Tax audit for claiming deductions and Reliefs under the Income Tax Act.

3. Tax audit for Tax Consultancy and Representation.

4- Balance sheet audit : - Balance sheet audit is a type audit which

concentrates mainly on the verification of the items in the balance sheet such as

capital, reserves, profit and loss account balance, liabilities and provisions and

all the assets of the business.

5-. Management Audit.

It is the critical examination, scrutiny and appraisal of plans, policies,

procedures, objectives, means and operational area of the organization.

It is the audit of managerial actions and decisions. It is the audit of activities of

various level of the managers.

Objectives of Management audit: -

1. To identify the overall objectives of an organization.

2. To pinpoint the deficiencies and defects in functional areas and suggest

remedies for improvement.

3. To assist the various level of management in discharge their duties.

4. To help the management in achieving co- ordination among the various

departments.

5. To ensure that management objectives are achieved.

Advantages of Management Accounting: -

1. It identifies the overall objectives of the organization.

2. It reviews plans, policies, procedures and controls.

3. It assesses the performance in each functional area

4. It also ascertains the motivational system in operation in the

business.

5. Suggesting ways and means for the attainment of management goals.

Criticism against management audit: -

1. It is argued by some managers and accountant that management audit is a

vague concept and so, it serves no material purpose.

2. Management audit may discourage the managers from undertaking tasks

which are useful to the organization.

3. It is argued that it will adversely affect to the efficiency and production.

6-. Social Audit: - Social audit is a systematic study and evaluation of a business

enterprise’s social performance as distinguished from its economic performance.

Social audit is intended to evaluate the social performance or social contribution

of a business organization. TISCO firstly adopted social audit.

7. Cost Audit.

It is a thorough examination of the cost accounting records of a company by

a cost auditor to ensure that they are accurate and they also follow to the cost

accounting principles, procedures and plans.

Objectives.

1) Verifying the accounting entries related in the cost books.

2) To find out whether the cost records have been properly maintained.

3) To verify whether the cost accounting principles are complied with.

4) To find out whether the cost statements are properly dream up.

5) To verify the items of cost expenditure are correctly incurred.

6) To find out the efficiency and inefficiency of handling of material, labour

and other expenses.

7) To check up the overall working of the cost accountant.

8) To reduce the volume of work of the external auditor.

9) To detect errors and frauds.

 

 Audit Programme

An audit programme consists of a series of verification procedures to be applied to the financial statements and accounts of a given company for the purpose of obtaining sufficient evidence to enable the auditor to express an informed opinion on such statements.

 

FACTORS  OF AUDIT PROGRAMME

While construction an audit programme, the Auditor should keep

the following points in his mind-

1. to operate within the scope and limitations of the assignment.

2. to determine the avidence reasonably available and identify the best

avidence for deriving the necessary satisfaction.

3. to apply only those steps and procedures, which are useful in

accomplishing the verification purpose in the specific situation.

4. to consider all possibilities of error.

5. to co-ordinate the procedures to be applied to related items.

ADVANTAGES OF AUDIT PROGRAMME

a. It provides the assistant carrying out the audit with total and clear set

of instructions of the work generally to be done.

b. It is essential, particularly for major audits, to provide a total

perspective of the work to be performed.

c. Selection of assistants for the jobs on the basis of compatibility

becomes easier when the work is rationally planned, defined and

segregated.

d. Without a written and pre-determined programme, work is necessarily

to be carried out on the basis of some ‘mental’ plan. In such a

situation there is always a danger of ignoring or overlooking certain

books and records. Under a properly framed programme, the danger

is significantly less and the audit can proceed systematically.

e. The assistance, by putting their signature on programme, accepts the

responsibility for the work carried out by them individually and, if

necessary, the work done may be traced back to the assistant.

f. The principal can control the progress of the various audits in hand by

examination of audit programmes initiated by the assistants deputed

to the jobs for completed work.

g. It serves as a guide for audits to be carried out in the succeeding

year.

 

DISADVANTAGES OF AUDIT PROGRAMME

a. The work may become mechanical and particular parts of the

programme may be carried out without any understanding of the object of

such parts in the whole audit scheme.

b. The programme often tends to becomes rigid and inflexible following

set grooves; the business may change in its operation of conduct, but the

old programme may still be carried on. Changes in staff or internal control

may render precaution necessary at points different from those originally

decided upon.

c. Inefficient assistants may take shelter behind the programme i.e.,

defend deficiencies in their work on the ground that no instructions in the

matter is contained therein.

A hard and fast audit programme may kill the initiative of efficient and

enterprising assistants.

All these disadvantages may be eliminated by imaginative supervision of

the work carried on by the assistants; the auditor must have a receptive

attitude as regards the assistants; the assistants should be encouraged to

observed matters objectively and bring significant matters to the notice of

supervisor/principal.

,Audit Notebook

Audit Files and working papers

An auditors in norder to maintain high standered of work should standardise his audit files and working papers. The working papers are required to control audits and to provide evidence of work performed.

Types of Audit Files

A Permanent Audit File

A permanent audit file normally includes

♦ Information concerning the legal and organizational structure of the

entity. In case of a company, this includes the memorandum and

Article of association. In the case of a statutory corporation, this

includes the act and regulations under which the corporation

functions.

♦ Extracts or copies of important legal documents, agreements and

minute relevant to the audit.

♦ A record of the study and the evaluation of the internal controls

related to the accounting system. This might be in the form of

narrative descriptions, questionnaires or flow charts, or some

combination thereof.

♦ Copies of audited financial statements for previous years.

♦ Analysis of significant ratios and trends.

♦ Copies of management letters issued by the auditor, if any.

♦ Record of communication with the retiring auditor, if any, before

acceptance of the appointment as auditor.

♦ Notes regarding significant accounting policies.

♦ Significant audit observations of earlier years.

The Current File

The current file normally includes

♦ Correspondence relating to acceptance of annual reappointment.

♦ Extracts of important matters in the minutes of board meetings and

general meetings as relevant to audit.

♦ Evidence of the planning of the audit and audit programme.

♦ Analysis of transactions and balances.

♦ A record of the nature, timing and extent of auditing procedures

performed, and the results of such procedures.

♦ Evidence that the work performed by assistants was supervised and

reviewed.

♦ Copies of communication with other auditors, experts and other third

parties.

♦ Letters of representation or confirmation received from the client.

♦ Conclusions reached by the auditor concerning significant aspects of

the audit, including the manner in which exceptions and unusual

matters, if any, disclosed by the auditor’s procedures were resolved or

treated.

♦ Copies of the financial information being reported on the related audit

reports.

 

, Routine Checking and Test Checking.

 1. Routine checking.

It is the checking and casting common books of accounts by the auditor. It

involves following activities.

a) Checking, casting and sub casting of such books.

b) Checking of posting into ledger book.

c) Checking the balances transferred from one book to another

Common Books.

Sales ledger, private ledger, wage sheet , general ledger, debit note, credit

note, all subsidiary books like cash book, purchase book, journal proper etc..

Advantages of routine checking

1) It facilitate through checking of books of original entry.

2) Posting under routine checking, posting are completely checked.

3) Thorough checking of casting and posting are involved.

4) Verifying the arithmetical accuracy in the entries.

5) Clerical errors and ordinary frauds are located through routine checking.

6) It constitutes the basis of entire audit.

7) It ensures there is no alteration of figures.

Limitations of routine checking

1) It is purely a mechanical checking.

2) It is not important in an organization where self balancing system is in

operation.

3) Simple type of errors and frauds can be located

 

2. Test Checking.

Testing of test checking means to select and examine a representative

sample from large number of similar items. The main objective of test checking is

to select representative item and examining it and conclusion is drawn from all of

the items.

Essentials of Test Checking

1) The success of test checking depends upon the system of internal check in

operation.

2) The sample should be selected at random.

3) Transaction should be selected only representative of the whole of the

group.

4) Homogeneous transactions are taken into account.

5) Selection of sample should be made without bias.

6) Test checking is not applicable in cash book transactions.

7) No indication should be given to small organization.

8) It is not applicable to first month and last month transactions.

9) It is not applicable to checking of opening and closing balance.

10) If the transactions are non-recurring in nature it is not applicable.

Advantages.

1) Complete the audit work in a short time.

2) The volume of work of the auditor is reduced to certain extent.

3) It ensures better accuracy of the book of account if selection is made on

properly.

4) It ensures examination of efficiency of the internal check system of the

organization.

Limitations

1) All of the errors and frauds cannot be detected.

2) Test checking increase the responsibility of the auditor.

3) The staff of the client may become careless.

4) The current financial position cannot be revealed.