Auditing

AUDITING

AUDITINGPresented By

V.Gopalakrishnan.,M.Com.,M.B.A.,M.Phil.,PGDMM.,Assistant Professor,Department of Commerce,Kamaraj College, Tuticorin.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM22V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMMMeaning - Auditing

The Word Audit is derived from the Latin word Audire which means to hear. In Olden days, some experienced people ordinarily judges the accounts of business people for the purpose of the correctness of accounts.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM3Meaning The general meaning of an audit is a planned and documented activity performed by qualified personnel to determine by investigation, examination, or evaluation of objective evidence, the adequacy and compliance with established procedures, or applicable documents, and the effectiveness of implementation.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM4DefinitionSimple Definition:- Spicer & Pegler

Audit is an examination of accounts & records which is carried out by vouching the evidences, supporting various transactions; by such an examination it is ascertained that the Balance Sheet gives a true & fair view of the state of affairs of business & the Profit & Loss Account gives a true & fair view of the profit or loss of business.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM5Characteristics of AuditingSystematic & Scientific Procedure

Essential Documents are integral part

It is done with the help of vouchers, documents, information and explanations received from the authorities.

Undertaken by an Independent person or Body

Analytical approach

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM6Cont.Art & Science Both

Verification of the results

The Auditor has to satisfy himself with the authenticity

Compliance

10. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the transactions and examine correspondence, Memorandum of Association and Articles of association etc., in order to establish correctness of the books of accounts.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM7Scope of AuditingThe scope of audit is increasing with the increase in the complexities of the business. It is said that long range objectives of an audit should be to serve as a guide to the management future decisions.Today most of the economic activities are largely conducted through public finance. The auditor has to see whether these larger funds are properly used. The scope of audit encompasses verification of accounts with a intention of giving opinion on its reliability. Hence it covers cost audit, management audit, social audit etc. It should be remembered that an auditor just expressed his opinion on the authenticity of the account. He has no power to take action against anybody, in this regard its said that an auditor is a watch dog but not a blood hound.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM8Cont.1. Legal Requirements2. Entity Aspects3. Reliable Information4. Proper Communication5. Evaluation6. Test7. Comparison8. Judgments9. Work10. Evidence11. Misstatement

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM9Principles of AuditingFundamental principles of Auditing

Integrity, Objectivity and IndependenceConfidentialitySkill & CompetenceResponsibility of work performed by othersDocumentation PlanningAudit EvidenceAccounting system & Internal ControlAudit Conclusions Audit ReportV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM10

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM11Detection & Prevention of ErrorsV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM12Detection & Prevention of FraudsV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM13Advantages of AuditingA. Businessman's point of view:-

1. Detection of errors and frauds 2 . Loan from banks 3. Proper valuation of investments4 . Proper valuation of assets 5. Government acceptance 6. Suggestions for improvementBetter ReputationUniformity in accounts

B. Investor's point of view

1 . Protects interest 2. Moral check 3. Builds reputation 4. Good security

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM14Cont.C. Other Advantages

Audited account are detected as an authentic record of transaction.Errors and frauds are detected and rectified.It increases the morale of the staff and thus it prevents frauds and errors.Because of his expertise the auditor may advise on various matters to his clients.An auditor acts as a trustee of his shareholders. Hence he safeguards their financial interest.For taxation purpose auditing of account is a must.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM15Cont.7.In case of any claim is to be made from the insurance company only audited account should be submitted.Even in case of partnership firm auditing of accounts helps in the settlement of claim at the time of retirement/death of a partner.Auditor account helps in managerial decisions.They are useful to secure loan at the of amalgamation, absorption, reconstruction etc.Auditing safeguards the interest of owners, creditors, investors, and workers.It is useful to take certain financial decisions like issuing of shares, payment of dividend etc.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM16Limitations of AuditingTruly speaking, an audit should have no limitations of its own. It is designed to protect the interest of all parties who are interested in the affairs of the business. If there be any shortcoming arising there from, it may be due to its narrow scope of application in its related field of operation and unextended definition of the concept.

Auditing suffers from the following shortcomings:1. Want of complete pictureThe audit may not give complete picture. If the accounts are prepared with the intention to defraud others, auditor may not be able to detect them.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM17Cont.2. Problems of dependence:Sometimes the auditor has to depend on explanations, clarification and information from staff and the client. He may or may not get correct or complete information.3. Post-mortem examination:Auditing is a post-mortem examination. There is no use of such examination when events have already been occurred.4. Existence of errors in the audited accounts:It is not possible for the auditor in all cases, to check each and every transaction of an organization. As a result, there may be error in the audited accounts even after the checking by the auditor.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM18Cont.5. Lack of expertise:Auditor has to seek opinion of experts on certain matters on which he may not have experts knowledge. The auditor has to depend upon such reports which may not always be correct.6. Diversified situations:Auditing is considered to be a mechanical work. Auditors may not be in a position to frame audit programme, which can be followed in all situations.7. Quality of the auditor:Success of audit depends on the sincerity with which the auditor has performed his duties. The same audit work can be done by two different auditors with difference in sincerity.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM1919V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMMDifferences Between Accounting & AuditingAccountingAuditingMeaningIt is the process of recording classifying and summarizing the business transactions to monetary TermsIt is the process of review of accounts to establish their reliability and the statements therefromScopeIt entails preparation of financial statements and their interpretationExamination of accounts and recordsObjectIt investigates finding out the operating results and figuring out the financial status of an enterpriseThe object is to judge the correctness and reliability of financial statement prepared by the internal staff of business enterprisesHierarchyAccounting Precedes the AuditingAuditing succeeds accountingV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM20AccountingAuditingQualificationNo formal qualification is insisted for acting as an accountantAuditor should be a qualified charted-accountant. ExpertiseAccountant is expected to be familiar with audit techniques and procedures.Auditor is one who has the expertise to apply not only accounting principles but also auditing techniques and processesNature of EmploymentAccountant is permanent staff of an enterprise. He is an independent outsider. He is working on an assignment basis. RemunerationAccountant receives salary as per Remuneration of auditor is Pre-fixedThe terms of his service.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM21FACTORSINVESTIGATIONAUDITINGDescriptionAudit means the inspection, examination or verification of a person, organization, system, process, enterprise, project or product.Investigation means an inquiry, or is the act of detail examination of activities so as to achieve certain objectives.OwnersAudit is conducted on behalf of owners only and they make the appointment.Investigation may be conducted either by owner of the undertaking or by an outsider.PurposeTo determine the true and fair view.Varies from business to businessProcessRoutine processInvestigation is not a regular processScopeIt includes only an examination of the accounts of a businessIt covers an examination of the accounts bur also covers an inquiry into other matter that are connected with the purpose for which it is undertakenPeriodYear or six monthsMay cover several yearsEmployeesDoes not examine personallyMay examine personallyV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM22Audit ProcedureV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM23Audit ProgrammeAn Audit programme is an outline of all procedures to be followed in order to arrive at an opinion concerning a clients financial statement.

An audit programme is a written scheme prepared by the auditor to distribute the work to be followed during audit;

How much work is to be done?Who is going to do a particular portion of work?What is the duration of the time?V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM24Types of Audit Working ProgrammeV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM25Specimen of Audit ProgrammeM/s.M.BalaMurugan Ltd.,For the year ended on 31.3.2015Particulars of WorkExtent of Work to be DoneActual Work CompletedTime Taken to CompleteCompleted by (Signature)A.Cash Book:

PostingCostingVouching1 month Full3 monthsJuneFullJuly, NovemberB.Debtors Legder:1.Posting2. Costing3. Vouching1 month1 month3 monthAprilMarchMay, OctoberPhysical verificationCashFixed assetsStock

As on 31.3.20As on 31.3.20As on 31.3.20

As on 31.3.20As on 31.3.20As on 31.3.20

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM26Audit Note Book During the course of an audit, the audit staff makes a note of the points that require clarification, explanation or investigation.Contents of the Audit Note Book;Technical Details about the BusinessMissing VouchersFrauds and Errors found in the bookSuggestions made by audit staff

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM27Audit ProceduresV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM28I. Adoption of Distinctive Ticks He should use different types of ticks for different purposes He should issue clear instructions to the members Tick should be small and clear The kinds of ticks used by audit staff The auditor should have the pencils and inks of different colours of pencils every yearV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM29Example of Tick

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM30Routine CheckingRouting checking is the checking of Common records and books or original entry and ledgers with a view of detect clerical errors and frauds of a very simple nature.

Advantages:Detection of errors and fraudsChecking of postingsChecking of final accountsArithmetical accuracy of entriesSimple JobV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM31Test Checking Test Checking is also known selective verification Sampling Process Test checking is a substitute for detailed checking. AdvantagesSaves Time and energyUseful & PurposiveEasy for the auditerV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM32Various Techniques of Audit Routine checking Test Checking Vouching Valuation Physical examination Confirmation Inquiry Confirmation Examination of subsidiary BooksAnalysis of Financial Statements

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM33Internal CheckA System of Internal check is an arrangement of duties where by no one person is allowed to carry through and to record every aspect of a transaction. ObjectivesTo allocate the duties & responsibilities of clerk To minimize the Errors & FraudsTo detect error of fraud easily it is committedTo prepare final a/c To exercise moral pressure over staffV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM34Internal Control

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM35Advantages Disadvantages Internal CheckAdvantagesProper distribution of workDetection of errors and fraudsMinimization of errors and fraudsIncrease the deficiency DisadvantagesNo SeriousnessCarelessnessExpensiveDisorderV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM36VouchingVouching means checking of entries with the help of documentary evidences. For each entry it is to be ascertained which is properly authorised

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM37

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM38Precautions to be taken by the auditor while examining vouchers Each voucher should be consecutively numbered Voucher should be inspected and cancelled by the auditor Voucher name should be correctly mentioned Auditor verify the voucher date and time Auditor verify the official seal & Authorized sign When voucher is missing, the auditor should satisfy himself with regard to the reason of its being lost and demand for duplicate copy

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM39Verification - Meaning Verification means truth proving or confirming the Truth. Verification signifies Proving the truth or Confirmation.

Verification includes the following,ExistenceValuationOwnershipPossession

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM40Valuation - MeaningValuation of assets is an important part of their verification. Valuation means to test exact value of an asset on the basis of its Utility.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM41Classification of Assets Fixed Assets Plant & Machinery, Land, Buildings Current Assets Stock in hand Wasting Assets Coal, Mines Intangible assets Goodwill, paten right, copyright Fictitious Assets - Shares

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM42Company AuditCompany audit is conducted is accordance with the provisions of the Companies Act,1956.

To Conduct a Company audit, a company must appoint qualified Auditor.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM43Qualification of Auditor A person shall not be qualified for appointment as auditor unless he is Charted Accountant within the Meaning of CA Act, 1949 A Person who holds restricted Auditors Certificate (Part B) 1956An Auditor must possess adequate educational qualificationHe is independent of all influencesA Charted Accountant means a person who is a member of the Institute of Charted Accountants of India.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM44QUALITIES OF AN AUDITOR

IndependenceIntegrityObjectivityAbility for expression and communicationTactfulnessAwareness

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM45RIGHTS & POWERS OF AN AUDITOR

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM46DUTIES OF AN AUDITORCompliance with Audit StandardDuty to Report FraudDuty not to render certain services He can not render "consulting and specialized services" which means any one or combination of-Accounting and Book keeping servicesInternal AuditDesign and implementation of any financial information systemactuarial servicesinvestment advisory servicesinvestment banking servicesmanagement servicesany other kind of consultancy servicesV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM474) Duty to sign audit reports etc.5) Duty to attend General meeting6) Duty to Report Under section 143 of the Act the auditor has a duty to report to the members of the company on:accounts examined by himevery financial statement laid before a general meeting during his tenure7) Duty to Enquire-Secures loans and advancestransactions represented merely by book entriespersonal expensesissue of shares for cashloans and advances made by the company etc.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM48APPOINTMENT OF AN AUDITORWHO CAN BECOME AN AUDITOR?V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM50DISQUALIFICATIONS OF AN AUDITORA body corporate An officer or employee of the company under auditA person who is a partner, or who is in the employment of an officer or employee of the companyA person who is indebted to the company for an amount exceeding Rs.1000A person holding security of that companyA person who has been disqualified for appointment as an auditor of a company on above mentioned grounds, shall also not be eligible for appointment with any other body corporate which may be that companys subsidiary or that companys holding company.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM51WHO CAN APPOINT AN AUDITOR?V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM52APPOINTMENT BY DIRECTORSFIRST AUDITORS : The board of directors shall appoint the first auditor(s) of the company within One Month of the Date Of Registration of the company.

CASUAL VACANCY: The directors have been empowered to fill any casual vacancy in the office of an auditor, except which is caused by prior resignation of an auditor.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM53APPOINTMENT BY SHAREHOLDERSFIRST AUDITORS : In case the directors fail to appoint the first auditor(s), the shareholders shall do so at a general meeting by passing a resolution.SUBSEQUENT AUDITORS: (i) By Ordinary Resolution (ii) By Special Resolution

CASUAL VACANCY: If a casual vacancy in the office of an auditor arises by his resignation, such vacancy should only be filled by the company in a General Meeting. The company shall within 7 days give intimation to the auditor so appointed. The auditor shall inform in writing to the Registrar of Companies within 30 days of his appointment.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM54APPOINTMENT BY CENTRAL GOVERNMENT If a company, at an annual general meeting, fails to appoint or re-appoint an auditor, the Central Government may appoint a person to fill the vacancy.

The company has to give notice of the above fact to the Government within 7 days of the Annual General Meeting.The appointment by the Central Government is made from the panel of names suggested by the applicant company.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM55APPOINTMENT BY THE COMPTROLLER AND AUDITOR GENERALIn case of Government Companies, the Comptroller and Auditor General appoints or re-appoints the auditor.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM56The retiring auditor shall NOT be re-appointed in the following cases:RE-APPOINTMENT OF AN AUDITORV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM57V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM58Ceiling on Number of AuditsV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM59REMUNERATION OF THE AUDITORFees to the AuditorExpensesCost of any facility provided to the auditorCONSTITUENTS OF REMUNERATION

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM61WHO CAN FIX REMUNERATION?V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM62REMOVAL OF AUDITORREMOVAL OF AUDITOR BEFORE THE EXPIRY OF HIS TERMSection 224(7)

The purpose of this section is to make the removal of an independent and conscientious auditor difficult.Removal of First AuditorRemoval of Subsequent Auditor

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM64APPOINTMENT OF AN AUDITOR IN PLACE OF A RETIRING AUDITOR

Section 225

SPECIAL NOTICE OF THE RESOLUTION: For appointing a person other than the retiring auditor, a special notice of such a resolution should be given to the company at least fourteen days before the meeting.RIGHT OF RETIRING AUDITOR TO MAKE REPRESENTATION: The retiring auditor has a right to make representations in writing to the company, not exceeding a reasonable length, and request for their notification to the members.V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM65RIGHT TO GET REPRESENTATION CIRCULATED: The company, on receipt of the representation, shall mention the fact of the representation in the notice of the meeting and send a copy thereof to every member to whom the notice of the meeting is sent.GROUND FOR EXEMPTION: If the Central Government, on the application, is satisfied that the auditor is securing needless publicity of a defamatory matter, it can exempt the company from sending the copy of representations to the members.OTHER RIGHTS: Besides the rights mentioned, the retiring auditor also has a right to be heard at the meeting.PASSING OF RESOLUTION: The general meeting may by passing an ordinary resolution, remove such an auditor.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM66PENALTY FOR NON-COMPLIANCE

According to section 232 of the Companies Act, 1956, if default is made by a company in complying with any of the provisions contained in section 225, the company and every officer of the company who is in default, shall be punishable with fine which may extend up to five thousand rupees.

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM67Audit ReportA Report is a statement of collected and considered facts so drawn up as to give clear and concise information to persons who are not already in possession of the full facts. Kinds of Audit ReportFinal Report Interium Report Partial Report

V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM68Characteristics of a Good Audit Report It should be unbiased It should be expressed in clear It should be accurate It should be in simple style It should be brief It should be coherentV.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM69

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