INDEX

S.NO CHAPTER NAME PAGE NO

1 AUDIT CONCEPT 1-15

2 TYPES OF AUDIT 16 - 33

3. INTERNAL AUDIT 34 - 41

4. INTERNAL CONTROL 42-51

5 REVIEW OF INTERNAL CONTROL 52-57

6 AUDIT ENGAGEMENT AND 58-68

DOCUMENTATION
cs urvashi uppal

CH 1 -AUDITING CONCEPTS

AUDITING
The term audit has been derived from a Latin term audire which means to hear. Auditing is a
systematic examination of books and records of the business, in order to ascertain or verify and to
report upon the financial operations and the results thereof.

Auditing as per ICAI

Auditing is defined as a systematic and independent examination of books and records of business
and on this basis forms his opinion which is communicated through his audit report.

The meaning of an Audit contains

(i) An intelligent and critical examination of the books of accounts of business.
(ii) It is done by an independent qualified person.
(iii) It is done with the help of vouchers, documents, information and explanations received from the
clients.
(iv) The auditor satisfies himself with the authenticity of the financial accounts prepared for a particular
period.ITEABJDHJKHDBKKKKKKKKKKKKKKKKKKKKKKM

FEATURES OF AUDITING

1. Audit is a systematic and scientific examination of the books of accounts of a business;

3. Audit is a verification of the results shown by the profit and loss account and the state of affairs as
shown by the balance sheet.
5. Audit is done with the help of vouchers, documents, information and explanations received from the
authorities.
7. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions

OBJECTIVES OF AUDITING
The objectives of auditing may be classified into two parts:
1. The primary objective
2. The secondary or incidental objective.

Primary Objective As per Section 143 of the Companies Act,2013 , the primary objective of the
auditors is to report to the owners whether the financial statements (Balance Sheet & Profit & Loss A/c)
give true and fair view of the affairs of the company.

Secondary objective It is also called the incidental objective which includes :

(i) Detection and prevention of frauds, and
(ii) Detection and prevention of errors.

An auditor should keep in mind the possibility of the existence of frauds or errors in the accounts as
they may mis-state the financial statements.

SCOPE OF AUDITING

1. Audit scope includes the

Page 1
cs urvashi uppal

a)time involved in audit exercise,

b)depth of auditing,
c)aspects to be covered .

2. Factors influencing scope of audit are

a) nature of audit,
b)objectives of audit
c)terms of engagement,
d)applicable legislations and auditing standard.

However the terms of engagement cannot, restrict the scope of an audit in relation to matters which
are prescribed by legislation or by the auditing standard.

BASIC PRINCIPLES GOVERNING AN AUDIT

SA 200 Basic Principals Governing an Audit, describes the basic principles which should be complied
be complied by an auditor while conducting an audit. They are as follows:

(i) Integrity objectivity and independence: An auditor should be honest, sincere, impartial.

(ii) Confidentiality: The auditor should keep the information acquired confidential and should not
disclose the information without the prior permission of the client.

(iii) Skill and competence: He should be competent, skillful and should be updated with the latest
developments and change in laws.

(iv) Work performed by others: If the auditor delegates some work to others and uses work
performed by others , he continues to be responsible for expressing his opinion on the financial
information.

(v) Documentation: The auditor should document matters which are important in providing evidence
for carrying on audit.

(vi) Planning: The auditor should plan his work to conduct the audit in an effective, efficient and timely
manner.

(vii) Audit evidence: The auditor should obtain sufficient & appropriate evidences to form an opinion
on the financial information.

(viii) Accounting System and Internal Control: The management is responsible for maintaining an
adequate accounting system including various internal controls.

(ix) Audit conclusions and reporting: On the basis of the audit evidence, he should ascertain:
1. As whether accounting policies have been applied consistently;
2. Whether financial statements are prepared by following accounting standards and applicable laws;
3. There is adequate disclosure of material matters.

The auditors report should contain a clear written opinion on the financial information. TRUE AND
FAIR VIEW
TRUE AND FAIR VIEW

Page 2
cs urvashi uppal

The main object of audit is to find out whether the financial statements prepared by a company show
the true and fair view of the financial state of affairs of a company

THE ACCOUNTS ARE SAID TO BE TRUE AND FAIR:

1. when all the business transactions are recorded correctly.

2. The books of account have been on the basis of accounting standards and accounting principles.
3. There are no errors and frauds present in the books of account.
4. The financial statements that have been complied with all laws and legislations.
5. Assets and liabilities appearing in the balance sheet shows correct financial position.
6. All material facts are disclosed

ADVANTAGES OF AN INDEPENDENT AUDIT

1. It safeguards the financial interest of persons.

2. It acts as a moral check on the employees.
3. It is helpful in settling liability for taxes, negotiating loans and for determining the purchase
consideration for a business.
4. An audit can also help in the detection of wastage and losses.
5. Audited accounts helps in the settlement of accounts at the time of admission or death of partner.
6.Audited and certificated statement are required for issuing licence for a particular trade.

INVESTIGATION

Investigation is an exercise which is carried out with a specific objective. Investigation exercise is
voluntary in nature and used extensively by Internal and management auditors.

Scope of investigation
Scope of investigation, is limited to the period or area to be covered by the investigator.

AUDIT AND INVESTIGATION DISTINGUISHED

Particulars Audit Investigation

1. Legal binding Audit of annual financial statements of Investigation is not compulsory under
a company is compulsory under the the Companies act, 2013 but voluntary
Companies Act, 2013. depending upon necessity
2. Object in view Audit is conducted to ascertain Investigation is conducted with a
whether the financial statements show particular object in view.
a true and fair view
3. Period Audit is conducted on annual basis It may be conducted for several years at
covered a time
4. Parties for Audit is conducted on behalf of Investigation is usually conducted on
whom shareholders (or proprietor, or behalf of outsiders like prospective
conducted partners). buyers, investors, lenders, etc.

5. Documents Audit is not carried out of audited It may be conducted even though the
financial statements accounts have been audited
6. Extent of work It is normally conducted on test It is a thorough examination of books of
verification basis accounts

Page 3
cs urvashi uppal

7. Report Audit report of a company is addressed Investigation report is addressed to the

to shareholders (or proprietors or party on whose instruction investigation
partners was conducted
8. Person Audit is to be conducted by a person No statutory qualification is prescribed
performing work having prescribed qualification i.e. for Investigation. It may be undertaken
Chartered accountant, Cost by anyone.
accountant.

MATERIALITY IN AUDITING

Materiality is a concept within auditing and accounting relating to the importance of an amount,
transaction which gives transparency or helps in locating any discrepancy.

Materiality can be defined as the magnitude of an omission or misstatement of accounting

information, which makes it possible that the judgment of a person relying on the information can be
changed or influenced by the omission or misstatement.

According to SA 320 Materiality in Planning and Performing an Audit, the auditor requires more
reliable evidence in support of material items.

The concept of materiality is fundamental to the process of accounting. The auditor has to ensure that
material items are properly and distinctly disclosed in the financial statements. Higher the materiality
level, lower the degree of risk and vice versa.

AUDITING STANDARD

Auditing standards refers to the code of best practices which is expected to be followed by an auditor
while conducting an audit which specifies a minimum level of performance.

Auditing standards will help in creation of uniformity in practice and therefore helps in comparison.

In India the Auditing and Assurance Standards Board (AASB) of the ICAI formulates the auditing
standards.

Procedure of issuing auditing standards

1. The AASB identifies the areas where auditing standards are required

2. In the preparation of the auditing standards, the Board is assisted by study groups comprising of
members of the Institute.

3. On the basis of the work of the study groups, an Exposure Draft of the proposed auditing standard is
prepared by the Board and issued for comments of the members.

4. After taking into account the comments received, the draft of the proposed auditing standard is
finalized by the Board and submitted to the Council of the Institute.

5. The Council considers the final draft of the proposed auditing standard and, if necessary, modifies
the same in consultation with the Board.

Page 4
cs urvashi uppal

6. The auditing standard is then issued under the authority of the Council.

While formulating the auditing standards, the Board also takes into consideration the applicable laws,
customs, usages and business environment in the country.

INTERNATIONAL AUDITING STANDARDS

International Auditing standards are issued by the International Auditing and Assurance Standards
Board (IAASB). IAASB is a body of International federation of accountants (IFAC). It is an independent
standard-setting body that serves the public interest by setting high-quality international standards for
auditing.
HARMONIZATION OF INDIAN AUDITING STANDARDS WITH INTERNATIONAL AUDITING
HARMONIZATION OF INDIAN STANDARDS WITH INTERNATIONAL AUDITING STANDARDS

The Institute of Chartered Accountants of India (ICAI) is a founder member of the International
Federation of Accountants (IFAC). Members propagate the pronouncements of IAASB of the IFAC to
contribute towards global harmonization and acceptance of the Standards issued by the IAASB.

With effect from 1st April, 2008, all auditing and assurance standards (AAS) were renamed as
standards on Auditing (SAs)

AUDITING STANDARDS IN INDIA

SA 200: Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing
This Standard establishes the independent auditors overall responsibilities to conduct an audit of
financial statements in accordance with SAs.

Ethical Requirements Relating to an Audit of Financial Statements The auditor should apply the
following fundamental principles of professional ethics relevant when conducting an audit of financial
statements;
(a)Integrity; (b) Objectivity; (c) Professional competence and due care; (d) Confidentiality; and
(e)Professional behaviour

Professional Skepticism Professional skepticism includes being alert to, for example;
(a) Audit evidence that contradicts other audit evidence obtained;
(b) Information that brings into question the reliability of documents
(c) Conditions that may indicate possible fraud;

Professional Judgment Professional judgment is necessary in particular regarding decisions about:

(a) Materiality and audit risk;
(b) The nature, timing, and extent of audit procedures used
(c) Evaluating whether sufficient appropriate audit evidence has been obtained
(d) The drawing of conclusions based on the audit evidence obtained

Sufficient Appropriate Audit Evidence and Audit Risk To obtain reasonable assurance, the
auditor shall obtain sufficient appropriate audit evidence to reduce audit risk. It includes-:

Page 5
cs urvashi uppal

(i) Sufficiency and Appropriateness of Audit Evidence Sufficiency is the measure of

quantity of audit evidence whereas appropriateness is the measure of quality of audit
evidence

(ii) Audit Risk It includes risks of material misstatement which may exists at financial
statement level and assertion level and detection of risk.

SA 210: Agreeing the Terms of Audit Engagements

It deals with pre-conditions for an audit and agreement on audit engagement terms i.e assigning
responsibilities to auditor by management and those charged with governance.

It also includes acceptance of change in the terms of audit engagement and additional considerations
involved in acceptance of engagement.

SA 220: Quality Control for an Audit of Financial Statements

It deals with leadership responsibilities of auditor for quality on audits, relevant ethical requirements,
acceptance and continuance of client relationships and audit engagement, assignment of engagement
teams, engagement performance, monitoring and documentation requirements. This standard
prescribes that Quality control policies and procedures should be implemented at both level of audit
firm and on individual audits.

SA 230: Audit Documentations

Audit Documentation refers to the record of audit procedures performed, audit evidence obtained, and
conclusions made by the auditor.
This Standard deals with the auditors responsibility to prepare audit documentation for an audit of
financial statements. It requires the documentation to be reliable, sufficient and should be prepared on
time. It prescribes that working papers are the property of auditor.

It gives out two essential principles ie period of maintaining working papers and assembly of audit
file by the auditor.

According to this standard, retention period for audit engagements should not be less than 10 years
from the date of auditors report

SA 240: the Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements

Fraud refers to intentional misrepresentation of financial information with the intention to deceive.
Frauds can take place in the form of manipulation of accounts, misappropriation of accounts,
misappropriation of cash and goods.

Management is in a position to directly or indirectly manipulate accounting records, present fraudulent

financial information or override control procedures.

Auditor is responsible for maintaining an attitude of professional skepticism throughout the audit.
Auditor shall identify and assess risks of material misstatement due to fraud at financial statement level,
and at assertion level.

When the auditor identifies a misstatement resulting from fraud, or a suspected fraud, he should
communicate that information to management, those charged with governance.The auditor should also
obtain written representations from management.

Page 6
cs urvashi uppal

SA 250: Consideration of Laws and Regulations in an Audit of Financial Statements

This Standard deals with the auditors responsibility to consider laws and regulations when performing
an audit of financial statements.

It is managements responsibility to ensure that entitys operations are conducted in accordance with
laws and regulations. Auditor is not responsible for preventing noncompliance but he is responsible for
obtaining reasonable assurance that the financial statements, are free from material misstatement,
whether caused by fraud or error.

Auditor should obtain written representations from management regarding disclosure of all known
actual or possible noncompliance with laws which can effect the financial statements.

SA 260: Communication with those Charged with Governance

This Standard deals with the auditors responsibility to communicate with those charged with
governance in relation to an audit of financial statement.

Auditor should communicate about overall scope of audit; changes in significant accounting policies;
any risks involved, material uncertainities.

Auditors should communicate matters of governance interest on timely basis. Auditors communication
can be made oral or in written. In case of oral communication, auditor should document their oral
communications and response thereof

SA 265: Communicating Deficiencies in Internal Control to those Charged with Governance and
Management
This standard supplements the concept of Letter of weakness highlighting DEFICIENCY and
SIGNIFICANT DEFICIENCY in internal control.
Such deficiencies are identified while conducting an audit of financial statements and communicating it
to the management and those charged with governance.

SA 299: Responsibility of Joint Auditors

It states that each joint auditor is responsible only for the work allotted to him, whether or not he has
prepared a separate report on the work performed by him. The SA describes that joint auditor should
divide the work among themselves by MUTUAL DISCUSSION and such decision must be
communicated to the entity.

SA describes the areas for which joint auditors are jointly and severally responsible which includes
-where work is not divided
-Single audit report is prepared
-Matters are communicated among the auditors
-Nature, time, extent of audit procedures

Each joint auditor is entitled to assume that the other joint auditors have carried out their part of the
audit work in accordance with generally accepted audit procedures.
This standard very specifically states that the majority opinion would not be binding upon the other joint
auditor(s). In case of any disagreement on any matter involved, joint auditor can give the separate
report.

SA 300 (Revised): Planning an Audit of Financial Statements

Page 7
cs urvashi uppal

This Standard deals with the auditors responsibility to plan an audit of financial statements. It includes
establishing the overall audit strategy and audit plan to address various matters involved.

Matters to be considered while preparing plan are

- Terms of engagement
- Nature and timing of report
- Laws applicable
- Accounting policies
- Materiality level

SA 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding
the Entity and Its Environment-
The Standard deals with the auditors responsibility to obtain an understanding of the entity and its
environment which helps to identify and assess the risks of material misstatement at the financial
statement level and assertion level.

SA 320: Materiality in Planning and Performing an Audit

This Standard deals with the auditors responsibility to apply the concept of materiality in planning and
performing an audit of financial statements. This SA also deals with the requirements of determining
materiality when planning and performing the audit.

SA 330: the Auditors Responses to Assessed Risks

This Standard on Auditing deals with the auditors responsibility to design and implement responses to
the risks of material misstatement identified and assessed by the auditor in accordance with SA 315. It
includes audit procedures responsive to the assessed risks of material misstatement at the assertion
level, evaluating the sufficiency and appropriateness of audit evidence and documentation.

SA 402: Audit considerations relating to entities using service

This Standard deals with the auditors responsibility to obtain sufficient ,appropriate audit evidence
when a entity uses the services of one or more service organizations. SA 402 also deals with the
aspects like obtaining an understanding of the services provided by a service organisation, including
internal control, responding to the assessed risks of material misstatement, fraud, non-compliance with
laws and regulations and uncorrected misstatements in relation to activities.

SA 450: Evaluation of Misstatements Identified During the Audit

This Standard on auditing deals with the auditors responsibility to evaluate the effect of identified
misstatements on the audit and of uncorrected misstatements, if any,on the financial statements. It also
deals with the communication of such mis-statement to the management and those charged with
governance and correction of such mis-statements involved.

SA 500: Audit Evidence

This Standard deals with the auditors responsibility to design and perform audit procedures to obtain
sufficient,appropriate audit evidence to be able to draw reasonable conclusions on the basis of which
auditors opinion is framed.

SA 501: Audit Evidence Specific Considerations for Selected Items

The Standard deals with specific considerations by the auditor in obtaining sufficient & appropriate audit
evidence in accordance with SA 330, SA 500 with respect to inventory, litigation and claims involving
the entity.

Page 8
cs urvashi uppal

SA 505: External Confirmations

The Standard deals with the auditors use of external confirmation procedures to obtain audit evidence
in accordance with the requirements of SA 330. It also deals external confirmation procedures,
managements refusal to allow the auditor to send a confirmation request, results of the external
confirmation procedures, negative confirmations and evaluating the evidence obtained.

SA 510: Initial Audit Engagements Opening Balances

The Standard establishes the principles regarding audit of opening balances in case of initial
engagements, i.e., when the financial statements are audited for the first time or when the financial
statements for the preceding period were audited by another auditor. This SA also deals with the audit
procedures and audit conclusions and reporting requirements in case of initial audit engagements.

SA 520: Analytical Procedures

Analytical procedures means evaluation of financial information through analysis of relationship among
the financial and non financial data.

It also encompasses such investigation as is necessary of identified fluctuations or relationship that are
inconsistent with other relevant information. The auditors choice of procedures, method and level of
application is a matter of professional judgement.

Following are generally used ratios, trends in analytical procedures:

Ratios over time:
- Turnover- G/P ratio, debtors turnover, stock turnover ratio etc
- Sales return
- Cost
- Interest
- Revenue/ Expenses

Trends over time:

- Comparison to industry
- Comparison to economy
- Reasonable charges in related aspect of operation

Capacity utilization
- Warehouse capacity
- Handling capacity
- Productive capacity
- Physical capacity

Legal restriction:
- Legal life of the product
- Contractual terms
- Labour laws

Financial and non- financial information relationship

- Salary expenses of employees
- Sales figures as to quantity sold
- Sales figures as to capacity utilization

Page 9
cs urvashi uppal

SA 520 Analytical Procedures , deals with the auditors use of analytical procedures as substantive
procedures and as procedures near the end of the audit that assist the auditor when forming an overall
conclusion on the financial statements.

SA 530: Audit Sampling

The Standard applies when the auditor has decided to use audit sampling in performing audit
procedures. It also deals with the auditors use of statistical and non-statistical sampling for performing
tests of controls and tests of details, and evaluating the results from the sample. It also deals with
sample design, size and selection of items, performing audit procedures, cause of deviations and
misstatements.

SA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures
This Standard deals with the auditors responsibilities regarding accounting estimates. It expands on
how SA 315 and SA 330 and other SAs are to be applied in relation to accounting estimates. It also
includes requirements and guidance on misstatements of individual accounting estimates, and
indicators of possible management bias.

SA 550: Related Parties

This Standard deals with the auditors responsibilities regarding related party relationship and
transactions when performing an audit of financial statements.
It includes
- Identification and assessment of risk of material mis-statement associated with related party and
responses to such risks
- Disclosure of such relationship

SA 560: Subsequent Events

The Standard deals with the auditors responsibilities relating to subsequent events in an audit of
financial statements. SA 560 also deals with the events occurring between the date of the financial
statements and the date of the auditors report. Such events are to be evaluated while conducting an
audit and preparing report.

SA 570 Going Concern

The Standard details the auditors responsibility in the audit of financial statements with respect to
managements use of the going concern assumption in the preparation and presentation of the financial
statements.
SA 570 requires the auditor to inquire of management as to its knowledge of events or conditions
beyond the period of managements assessment that may cast significant doubt on the entitys ability to
continue as a going concern.

SA 580: Written Representations

The Standard details the terms of the duties and objectives of the auditors to acknowledge the written
representation by the management that it is fulfilling its responsibility by following accounting standards
and internal control system while preparing and presenting financial statements.

SA 600: Using the Work of another Auditor

This SA discusses the procedures to be applied in situations where an independent auditor uses the
work of other auditor with respect to the financial statements of one or more divisions or branches
included in the financial statement of the entity.

Page 10
cs urvashi uppal

SA 610: Using the work of Internal Auditors

It deals with aspects like determining whether and to what extent to use the work of internal auditor or
the specific work of internal auditor and documentation.

SA 620: Using the Work of an Auditors Expert

SA 620 deals with the auditors responsibilities regarding the use of an individual or organisations work
in a field of expertise other than accounting or auditing. It also deals with the requirement to determine
the need for an auditors expert, nature, timing and extent of audit procedures, capabilities and
objectivity of the auditors expert and reference to the auditors expert in the auditors report. This
standard should be read with SA 500 because Experts opinion also serves as audit evidence in
appropriate cases.

SA 700: Forming an Opinion and Reporting on Financial Statements

SA 700 deals with the auditors responsibilities to form an opinion on the financial statements and the
form and content of the auditors report issued as a result of an audit of financial statements.It also
includes supplementary information presented with the financial statements and the application
guidance of these aspects.

SA 705: Modifications to the Opinion in the Independent Auditors Report

This Standard on Auditing (SA) deals with the auditors responsibility to issue an appropriate report in
forming an opinion in accordance with SA 700, the auditor concludes that a modification to the auditors
opinion on the financial statements is necessary when:

(a) The auditor on the basis of the audit evidence obtained, concludes that the financial statements are
not free from material misstatement; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.

SA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditors Report
This standard on Auditing deals with additional communication in the auditors report when the auditor
considers it necessary to: Draw users attention to a matter or matters presented or disclosed in the
financial statements that are of such importance that they are fundamental to users understanding of
the financial statements.

SA 710: Comparative Information

SA 710 deals with the auditors responsibilities regarding comparative information in an audit of
financial statements. This SA defines the terms Corresponding figures, Comparative information and
Comparative financial statements.

SA 720: The Auditors Responsibility in Relation to Other Information in Documents Containing

Audited Financial Statements
This Standard on Auditing (SA) deals with the auditors responsibility regarding other
information in documents containing audited financial statements and the auditors report thereon.

As per SA 720 the objective of the auditor is to respond when documents contains other information
that can hamper the credibility of those financial statements and the auditors report.

Page 11
cs urvashi uppal

SA 800: Special Considerations Audits of Financial Statements Prepared in Accordance with

Special Purpose Frameworks
It deals with the objective of the auditor, when applying SAs in an audit of financial statements prepared
in accordance with a special purpose framework, is to address appropriately the special considerations
that are relevant to:
(a) The acceptance of the engagement;
(b) The planning and performance of that engagement; and
(c) Forming an opinion and reporting on the financial statements.

SA 805: Special ConsiderationsAudits of Single Financial Statements and Specific Elements,

Accounts or Items of a Financial Statement
This SA deals with special considerations in the application of SAs to an audit of a single financial
statement or of a specific element, account or item of a financial statement which may be prepared in
accordance with a general or special purpose framework. If prepared in accordance with a special
purpose framework, SA 800 also applies to the audit

SA 810: Engagements to Report on Summary Financial Statements

SA 810 deals with the auditors responsibilities when undertaking an engagement to report on summary
financial statements derived from financial statements audited in accordance with SAs by that same
auditor

PRACTICE QUESTIONS & ANSWERS

Q1. Define the term Auditing. Also state the various features of auditing.

Ans. The term audit has been derived from a Latin term audire which means to hear. Auditing is a
systematic examination of books and records of the business, in order to ascertain or verify and to
report upon the financial operations and the results thereof.

Auditing as per ICAI

Auditing is defined as a systematic and independent examination of books and records of business
and on this basis forms his opinion which is communicated through his audit report.

The meaning of an Audit contains

(i) An intelligent and critical examination of the books of accounts of business.
(ii) It is done by an independent qualified person.
(iii) It is done with the help of vouchers, documents, information and explanations received from the
clients.
(iv) The auditor satisfies himself with the authenticity of the financial accounts prepared for a particular
period
FEATURES OF AUDITING

1. Audit is a systematic and scientific examination of the books of accounts of a business;

3. Audit is a verification of the results shown by the profit and loss account and the state of affairs as
shown by the balance sheet.
5. Audit is done with the help of vouchers, documents, information and explanations received from the
authorities.
6. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions

Page 12
cs urvashi uppal

Q2. What do you understand by audit documentation

Ans Audit Documentation refers to the record of audit procedures performed, audit evidence obtained,
and conclusions made by the auditor.
SA 230 deals with the auditors responsibility to prepare audit documentation for an audit of financial
statements. It requires the documentation to be reliable, sufficient and should be prepared on time. It
prescribes that working papers are the property of auditor.

It gives out two essential principles ie period of maintaining working papers and assembly of audit
file by the auditor.

According to this standard, retention period for audit engagements should not be less than 10 years
from the date of auditors report

Q3. In the books of accounts of M/s ABC Ltd. huge differences are noticed between the control
accounts and subsidiary records. The Chief Accounts Officer informs that this is common due
to huge volume of business done by the company during the year. As a company auditor, how
would you deal with the situation?
Ans
The huge differences found between control accounts and subsidiary records in the books
of M/s ABC Ltd. indicate that there may be material misstatements requiring detailed examination by
the auditor to ascertain the cause. The contention of Chief Accounts Officer cannot be accepted simply
because the company has done huge volume of business. Such a phenomenon indicates that
recording of transactions is not being done properly or the accounting system in the company which
might have several branches spread over the country fails to capture all transactions in time. It would
also be interesting to see whether it is a recurring phenomenon or such reconciliation could not be done
at a subsequent date.
Having regard to all these circumstances, it appears from the facts of the case that these differences
indicate the possibility of some kind of material misstatements.

As per SA 240, The Auditors Responsibility to Consider Fraud and Error in an Audit of Financial
Statements when the auditor encounters circumstances that there is material misstatement, the auditor
should perform procedures to determine whether the financial statements are materially misstated. If as
a result of such examination the auditor comes across any material information involving fraud or gross
irregularity the same shall be reported by him appropriately.

Q4. Write a short note on ; True & Fair View.

Ans. The main object of audit is to find out whether the financial statements prepared by a company
show the true and fair view of the financial state of affairs of a company
THE ACCOUNTS ARE SAID TO BE TRUE AND FAIR:

1. when all the business transactions are recorded correctly.

2. The books of account have been on the basis of accounting standards and accounting principles.
3. There are no errors and frauds present in the books of account.
4. The financial statements that have been complied with all laws and legislations.
5. Assets and liabilities appearing in the balance sheet shows correct financial position.
6. All material facts are disclosed

Q5. Write a short note on Responsibility of Joint Auditors.

Ans.

Page 13
cs urvashi uppal

It states that each joint auditor is responsible only for the work allotted to him, whether or not he has
prepared a separate report on the work performed by him. The SA describes that joint auditor should
divide the work among themselves by MUTUAL DISCUSSION and such decision must be
communicated to the entity.

SA 299 describes the areas for which joint auditors are jointly and severally responsible which includes
-where work is not divided
-Single audit report is prepared
-Matters are communicated among the auditors
-Nature, time, extent of audit procedures

Each joint auditor is entitled to assume that the other joint auditors have carried out their part of the
audit work in accordance with generally accepted audit procedures.
This standard very specifically states that the majority opinion would not be binding upon the other joint
auditor(s). In case of any disagreement on any matter involved, joint auditor can give the separate
report.

Q6. A fraud was detected by a company during a regular investigation. The auditor was asked to
explain what procedure he had followed for detection of fraud. The investigator were asked to
see the audit working papers and found that there was no documentation of any planning
discussion, or any inquiries made of management with regard to the risk of fraud. No fraud risk
factors were identified and no specific audit procedures were applied to mitigate fraud risks.
Would this be the violation of auditing standard.
Ans. As per SA 240- the auditors responsibilities relating to fraud in an audit of financial statements ,
there should be audit planning and discussion of audit team to evaluate the susceptibility to fraudulent
financial misstatement. An auditor should make detailed enquiries of management and evaluate risk
based on fraud risk factors.

An auditor should identity fraud risk factors in designing his substantive procedure and to document
fraud risk factors, his response and additional procedure performed.

As per facts given in case, no fraud risk factors were identified and o specific audit procedures were
applied to mitigate fraud risks. Thus, there is violation of auditing standard SA 240.

Q7. Write a short note on : SA 550- Related Parties.

Ans. A related party is management, owner or any other person or entity in a position to influence
significantly the management or operating policies of either the reporting or the other party to
transaction. The following parties are generally considered as related parties.
- Holding and Subsidiaries companies
- Associate companies
- Joint ventures
- Key managerial personnel (KMP)
- Relatives of KMP
- Individual controlling directly or indirectly the reporting enterprises
- Relatives in relation to individual means the spouse, son, daughter, sister, father, mother

Need and Objective of SA- 550: the need of auditing standard arises because related party transactions
may be motivated by other than business consideration, for example, profit sharing,or even fraud. The
purpose of this standard is to prescribe the procedures for identification and verification of related party
transactions and auditors responsibilities in this regard.

Page 14
cs urvashi uppal

Q8. No documentation evidencing the performance of analytical procedures (ratios/trend

analysis, etc) at the planning stage, before commencement of field work, exits in the audit file of
the auditor. Can this be treated as violation of relevant auditing standards.
Ans. SA 520 Analytical Procedures requires that an auditor should apply analytical procedures in the
planning of an audit. The application of analytical procedures i.e. calculation of various ratios, trends
and use of non- financial information can assist the auditor in planning the nature, timing and extent of
other procedures. By applying the analytical procedures in planning stage, the auditor can identify the
area of potential risk.

Thus, no documentation evidencing the performance of analytical procedures at the planning stage is
violation of SA 520 Analytical Procedures

Q9. Describe the concept of Materiality in auditing.

Ans.Materiality is a concept within auditing and accounting relating to the importance of an amount,
transaction which gives transparency or helps in locating any discrepancy.

Materiality can be defined as the magnitude of an omission or misstatement of accounting

information, which makes it possible that the judgment of a person relying on the information can be
changed or influenced by the omission or misstatement.

According to SA 320 Materiality in Planning and Performing an Audit, the auditor requires more
reliable evidence in support of material items.

The concept of materiality is fundamental to the process of accounting. The auditor has to ensure that
material items are properly and distinctly disclosed in the financial statements. Higher the materiality
level, lower the degree of risk and vice versa

Q10. Write a short note on Scope of audit.

Ans. 1. Audit scope includes the
a)time involved in audit exercise,
b)depth of auditing,
c)aspects to be covered .

2.Factors influencing scope of audit are

a) nature of audit,
b)objectives of audit
c)terms of engagement,
d)applicable legislations and auditing standard.

However the terms of engagement cannot, restrict the scope of an audit in relation to matters which
are prescribed by legislation or by the auditing standard

Page 15
cs urvashi uppal

Ch 2- Types of Audit
AUDIT OF COMPANIES UNDER THE COMPANIES ACT 2013

The Companies Act, 2013 is focused on transparency and disclosure. The various types of audits
prescribed under the Companies Act, 2013 are:
Statutory Audit
Internal Audit
Secretarial Audit
Cost Audit

APPOINTMENT OF AUDITORS

1. Appointment of first auditor (Section 139 (6) ):

The first auditor of the company shall be appointed by the Board of Directors with in 30 days
from the date of registration of the company. If the Board of Directors fail to appoint such
auditor, it shall inform the member of the company, who shall within 90 days at an EGM appoint
auditor and such auditor shall hold office till the conclusion of first AGM.

2. Appointment of first auditor by Government company (Section 139 (7) ):

In case of government company or any other company owned or controlled directly or indirectly,
by the Central or State government(s), the auditor shall be appointed by the Comptroller &
Auditor General (CAG) within 60 days from the date of registration of the company.

If CAG doesnot appoint auditor within 60 days , the Board of Directors shall appoint auditor
within the next 30 days and in case of failure of appointment by the Board of Directors with in
next 30 days, it shall inform the members of the company who shall appoint such auditor with in
60 days at an EGM, who shall hold office till the conclusion of first AGM.

3. Subsequent appointment of auditor

Every company shall, at the first AGM, appoint an individual or a firm as an auditor who shall
hold office from the conclusion of that AGM till the conclusion of its sixth AGM and thereafter
till the conclusion of every sixth meeting.

4. Subsequent appointment of auditor in Government company (Section 139 (5) ):

In case of government company or any other company owned or controlled directly or indirectly,
by the Central or State government(s), the Comptroller & Auditor General of India shall appoint
an auditor duly qualified, within a period of 180 days from the commencement of the Financial
year.

Provisions relating to appointment of auditor of a company

Appointment of auditor (Section 139 (1) ): Every company whether it is public or private limited shall
have an auditor to audit its accounts. The appointment of auditor is mandatory in the Annual General
Meeting(AGM).

Page 16
cs urvashi uppal

Every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor
who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.

Before the appointment of auditor is made, the written consent of the auditor to such appointment, and
a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as
may be prescribed, shall be obtained from the auditor.

The company shall inform the auditor concerned of his or its appointment, and also file a notice of such
appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed. As
per Rule 4 (2) of the Companies (Audit & Auditors ) Rules, 2014, such notice is required to be filed in
Form ADT- 1.

Recommendations of audit committee (Section 139(11) ): If a company is required to constitute an

Audit Committee u/s 177, all appointments, including the filling of a casual vacancy of an auditor shall
be made after taking into account the recommendations of such committee.

Rotation of auditors by the company

As per Section 139(2) Listed company or a company belonging to such class or classes of company
as may be prescribed, shall not appoint or re-appoint-

(a) An individual as an auditor for more than one term of 5 consecutive years , and
(b) An audit firm as an auditor for more than two terms of 5 consecutive years.

However, an individual auditor who has completed a term of 5 years shall not be eligible for re-
appointment as an auditor in the same company for 5 years from the completion of his term.

In case of an audit firm which has completed two terms of 5 years shall not be eligible for re-
appointment as auditor in the company for 5 years from the completion of such term.

It is further provided that as on the date of appointment no audit firm having a common partner or
partners to the other audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of 5 years.

The other class of companies (specified companies) shall mean the following classes of
companies excluding one person companies and small companies as prescribed under Rule
5 of the Companies (Audit and Auditors) Rules.

(a) All unlisted companies having paid up share capital of Rs 10 crore or more
(b) All private limited companies having paid up share capital of Rs 20 crore or more
(c) All companies having public borrowings from financial institutions, banks or public deposits of
Rs 50 crore or more.

Manner and procedure of selection and appointment of auditors

A company shall follow the procedure prescribed under the Rule 3 of the Companies (Audit and
Auditors) Rules, 2014 for the selection and appointment of auditors under section 139(1).

Page 17
cs urvashi uppal

A company that is required to constitute an Audit Committee under section 177, such committee and
where such committee is not required, the Board, shall take into consideration the qualifications and
experience of the individual or the firm proposed to be considered for appointment as auditor.

While considering the appointment, the Audit Committee or the Board, as the case may be, shall have
regard to any order or pending proceeding relating to professional matters of conduct against the
proposed auditor before the Institute of Chartered Accountants of India or any competent authority or
any Court.

Where a company is required to constitute the Audit Committee, the committee shall recommend the
name of an individual or a firm as auditor to the Board for consideration and in other cases; the Board
shall consider and recommend an individual or a firm as auditor to the members in the annual general
meeting for appointment.

If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the
appointment of an individual or a firm as auditor to the members in the annual general meeting.

If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the
recommendation to the committee for reconsideration citing reasons for such disagreement.

If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its
original recommendation, the Board shall record reasons for its disagreement with the committee and
send its own recommendation for consideration of the members in the annual general meeting; and if
the Board agrees with the recommendations of the Audit Committee, it shall place the matter for
consideration by members in the annual general meeting.

The auditor so appointment shall be subject to ratification in every annual general meeting till the sixth
such meeting by way of passing of an ordinary resolution. If the appointment is not ratified by the
members of the company, the Board of Directors shall appoint another individual or firm as its auditor or
auditors after following the procedure laid down in this behalf under the Act.

The auditor appointed in the annual general meeting shall hold office from the conclusion of that
meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such
appointment has been made being counted as the first meeting:

Remuneration of Auditors
According to section 142 of the Companies Act 2013, the remuneration of the auditor of a company
shall be fixed in its general meeting or in the manner as determined in the general meeting.

The remuneration of the first auditor appointed by the board may be fixed by the Board.
The remuneration shall be in addition to the fee payable to an auditor, include the expenses, if any,
incurred by the auditor in connection with the audit of the company and any facility extended to him but
does not include any remuneration paid to him for any other service rendered by him at the request of
the company.

Powers or Rights of Auditors

Section 143(1) provides for powers or rights of auditors.

Page 18
cs urvashi uppal

1. Every Auditor of a company shall have a right of access at all times to the books of account
and vouchers of the company, whether kept at the registered office of the company or at any
other place

2. Auditors right to attend general meeting

Section 146 of the Companies Act 2013, provides that all notices of, and other communications
relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall
attend either by himself or through his authorised representative, who shall also be qualified to be an
auditor, any general meeting and shall have right to be heard at such meeting on any part of the
business which concerns him as the auditor.

3. He can acquire from the officers of the company such information and explanation as he may
consider necessary for the performance of his duties as auditor and amongst other matters
inquire into the following matters, namely:

(a) whether loans and advances made by the company on the basis of security have been properly
secured ;
(b) whether transactions of the company which are represented merely by book entries are prejudicial
to the interests of the company;
(c) whether loans and advances made by the company have been shown as deposits;
(d) whether personal expenses have been charged to revenue account;
(e) where it is stated in the books and documents of the company that any shares have been allotted
for cash

4. The auditor of a company which is a holding company shall also have the right of access to the
records of all its subsidiaries.

Duties of Auditors
-Section 143(2), 143(3) and 143(4) provides for the duties of auditors.
-The auditor shall make a report to the members of the company on the accounts examined by him and
on every financial statements which are to be laid before the company in general meeting.

The auditors report shall state

(a) whether he has sought and obtained all the information and explanations which to the best of his
knowledge;
(b) whether, in his opinion, proper books of account as required by law have been kept by the company
(c) whether the report on the accounts of any branch office of the company audited by a person other
than the companys auditor has been sent to him;
(d) whether the companys balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards;

Qualifications and Disqualifications of Auditors

The section 141 of the Companies Act 2013 deals with the eligibility, qualifications and disqualifications
of auditors.

The section 141 (1) and (2) of the 2013 Act, in addition, provides-

Page 19
cs urvashi uppal

A firm of Chartered Accountants or Limited Liability Partnership (LLP) can be appointed as an auditor
of a company only if majority partners practising in India are qualified for appointment as an auditor of a
company.

Where a firm including a limited liability partnership is appointed as an auditor of a company, only the
partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.

The Companies Act 2013 has also made addition in the list of disqualifications of auditors.

According to the section 141 (3) of the Companies Act 2013, the following persons shall not be eligible
for appointment as an auditor of a company:

(a) a body corporate

(b) an officer or employee of the company;

(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;

(d) a person who, or his relative or partner

is holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company: Provided that the relative may hold security or
interest in the company of face value not exceeding Rs 1,000;

is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of
such holding company in excess of Rs 5,00,000 or

has given a guarantee or provided any security in connection with the indebtedness of any third
person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such
holding company in excess of Rs 1,00,000.

(e) a person or a firm who, whether directly or indirectly, has business relationship with the company,
or its subsidiary, or its holding or associate company or subsidiary of such holding company or
associate company.

(f) a person whose relative is a director or is in the employment of the company as a director or key
managerial personnel;

(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than 20 companies;

(h) a person who has been convicted by a court of an offence involving fraud and a period of ten
years has not elapsed from the date of such conviction;

(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the
date of appointment in consulting and specialised services as provided in section 144.

A person who is appointed as an auditor of a company incurs any of the disqualifications mentioned
above after his appointment, he shall vacate his office as such auditor and such vacation shall be

Page 20
cs urvashi uppal

deemed to be a casual vacancy in the office of the auditor according to section 141(4) of the
Companies Act 2013.

Filling of casual vacancy of auditors

1. (a) As per Section 139(8)(i) , any casual vacancy in the office of an auditor shall be filled by the
Board of Directors with in 30 days.

(b) If such casual vacancy is a result of resignation of the auditor, such appointment shall be
approved by the members of the company at general meeting convened within 3 months from
the recommendation of the Board.
And the person so appointed , in any of the situation, shall hold the office till the conclusion of
the next AGM.

2. As per Section 139(8)(ii), in the case of a government company, any casual vacancy in the
office of an auditor shall be filled by the CAG with in 30 days. If the CAG does not fill the
vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days.

Manner and procedure for removal of auditors

(i) Under section 140 an auditor can be removed from his office before the expiry of his term only after
obtaining the approval of the Central Government and after passing a Special Resolution by the
Members. The outgoing auditor shall be given a reasonable opportunity of being heard.

(ii) (a)As per Rule 7(1) of the Companies (Audit & Auditors) Rules,2014, the application to the Central
Government for removal of the auditor shall me made in Form ADT-2 along with prescribed fees.
(b)The application shall be made to the Central Government within 30 days of the resolution
passed by the Board.

(c)The company shall hold the general meeting within 60 days of the receipt of approval of the
Central Government for passing the special resolution.

Fraud reporting by auditors

Fraud in relation to affairs of a company,includes any act, omission, concealment of any fact or abuse
of position committed by any person or any other person with intention to deceive, to gain undue
advantage from, or to injure the interests of, the company or its shareholders or its creditors or any
other person, whether or not there is any wrongful gain or wrongful loss.

Under section 143 (12), if an auditor of a company in the course of the performance of his duties as
auditor, has reason to believe that an offence of fraud involving such amount as prescribed, has been
committed in the company by its officers or employees, the auditor shall report the matter to the Central
Government.

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the
matter to the audit committee constituted under section 177 or to the Board in other cases within such
time and in such manner as may be prescribed.

Page 21
cs urvashi uppal

Provided further that the companies, whose auditors have reported frauds under this sub-section to the
audit committee or the Board but not reported to the Central Government, shall disclose the details
about such frauds in the Boards report in such manner as may be prescribed.

Prohibition on the services to be rendered by the auditors

Section 144 provides that an auditor appointed under this Act shall provide to the company only such
other services as are approved by the Board of Directors or the audit committee, as the case may be,
but which shall not include any of the following services rendered directly or indirectly to the company
or its holding company or subsidiary company, namely:
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed:

Signing of Audit Reports

Section 145 of the Companies Act 2013, provides that the person appointed as an auditor of the
company shall sign the auditors report or sign or certify any other document of the company.
It also provides that the qualifications, observations or comments on financial transactions or matters,
which have any adverse effect on the functioning of the company mentioned in the auditors report shall
be read before the company in general meeting and shall be open to inspection by any member of the
company.

Companies (Auditors Report) Order, 2015

Applicability
Every report made by the auditor under section 143 of the Companies Act for the financial year
commencing on or after 1st April, 2014 will be made according to the Companies (Auditors Report)
Order, 2015. The order applies to every company except the companies which are excluded, including
a foreign company as defined in section 2(42) of the Companies Act, 2013.

Companies excluded from Companies (Auditors Report) Order, 2015

(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
(ii) an insurance company as defined under the Insurance Act,1938 ;
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under section 2(62) of the Companies Act and a small company
asdefined under section 2(85) of the Companies Act;
(v) a private limited company
with a paid up capital and reserves not more than Rs 50 lakh and
which does not have loan outstanding exceeding Rs 25 lakh from any bank or financial institution and
does not having a turnover exceeding Rs 5 crore at any point of time during the financial year.

Matters to be included in the auditors report

As per the Companies (Auditors Report) Order, 2015, an auditor should include a statement on the
following matters in the auditors report on the account of companies covered under this order-

Page 22
cs urvashi uppal

(i) Fixed assets

(ii) Inventory
(iii) Granting of loans to certain parties
(iv) Internal control system
(v) Acceptance of deposits
(vi) Maintenance of cost records
(vii) Deposit of statutory dues
(viii) Accumulated Losses and Cash Losses
(ix) Default in repayment of dues
(x) Guarantee for loans taken by others from bank or financial institutions
(xi) Application of term loans
(xii) Fraud Reporting

Auditing Standards and National Financial Reporting Authority (NFRA)

The Companies Act, 2013 provides that every auditor shall comply with the auditing standards. The
auditing standards will be prescribed by the Central Government recommended by the Institute of
Chartered Accountants of India in consultation with and after examination of the recommendations
made by the NFRA. Until any auditing standards are notified, any standard or standards of auditing
specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing
standards..

Penal Provisions
Section 147 provides for punishment for contravention of the provisions of sections 139 to146. These
penalty provisions are as under.

If a company contravenes any of the provisions of sections 139 to 146 it shall be liable to pay
minimum fine of Rs. 25,000 which may extend to Rs 5,00,000. Further, every officer who is in default
shall be punishable with imprisonment upto 1 year and minimum fine of Rs. 10,000 which may extend
to Rs 1,00,000 or with both.

If an auditor of a company contravenes any of the provisions of sections 139, 143 144 or 145, the
auditor shall be punishable with minimum fine of Rs. 25,000 which may extend to Rs.5,00,000.

If it is found that the auditor has contravened the provisions of sections 139, 143 144 or 145,
knowingly or willfully with the intention to deceive the company, its share holders, creditors or tax
authorities, he shall be punishable with imprisonment for a term upto one year and with a minimum fine
of Rs. 1,00,000 which may extend upto Rs. 25 lakh.

where any auditor has been convicted he shall be liable to-

(a) refund the remuneration received by him to the company and

(b) pay for damages to the company, statutory bodies/authorities or to any other persons for loss
arising out of incorrect or misleading statements of particulars made in his audit report.

Where, in case of audit of a company being conducted by an audit firm, it is proved that the partners
of the audit firm have acted in a fraudulent manner or abetted or colluded in any fraud then they are
liable jointly and severally.

Page 23
cs urvashi uppal

BRANCH AUDIT

ISection 143(8) provides the provisions for branch audit of companies. These provisions are-

Where a company has a branch office, the accounts of that office shall be audited either by the
auditor appointed for the company (the companys auditor) or by any other person qualified for
appointment as an auditor of the company under this Act.

Where the branch office is situated in a country outside India, the accounts of the branch office shall
be audited either by the companys auditor or by an accountant or by any other person duly qualified to
act as an auditor of the accounts of the branch office in accordance with the laws of that country.

The branch auditor shall prepare a report on the accounts of the branch examined by him and send it
to the auditor of the company who shall deal with it in his report in such manner as he considers
necessary.

Duties and powers of the companys auditor with reference to the audit of the branch and the branch
auditorT
The duties and powers of the companys auditor with reference to the audit of the branch and
the branch auditor shall be same as the duties and powers of the auditors for the audit of the
company under sub section 1 to 4 of section 143.
The branch auditor shall submit his report to the companys auditor.
The provisions of sub-section (12) of section 143 read with rule 12 hereunder regarding
reporting of fraud by the auditor shall also extend to such branch auditor to the extent it relates
to the concerned branch.L

INTERNAL AUDIT
The provisions regarding internal audit of the company according to section 138 of the Companies Act,
2013 and the Companies (Accounts) Rules, 2014 are discussed below-

Qualifications for the internal auditor: The internal auditor shall either be a chartered accountant
whether engaged in practice or not or a cost accountant, or such other professional as may be decided
by the Board to conduct internal audit of the functions and activities of the company.

Report of the internal audit: The report of internal audit shall be submitted to the Board of the
company.

Companies required to appoint internal auditor: The following class of companies shall be required
to appoint an internal auditor or a firm of internal auditors, namely:-
(a) every listed company;

(b) every unlisted public company having-

paid up share capital of Rs 50 crores or more during the preceding financial year; or

turnover of Rs 200 crore or more during the preceding financial year; at any point of time during the
preceding financial year; or

Outstanding deposits of Rs 25 crore or more at any point of time during the preceding financial
year;or

Page 24
cs urvashi uppal

.Outstanding loans or borrowings from banks or public financial institutions exceeding Rs 100 crore or
more during the preceeding financial year, and

(c) every private company having-

turnover of Rs 200 crore or more during the preceding financial year; or

outstanding loans or borrowings from banks or public financial institutions exceeding Rs 100 crore or
more at any point of time during the preceding financial year:

SECRETARIAL AUDIT

The provisions regarding secretarial audit of the company according to section 204 of the Companies
Act, 2013 and the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014
are discussed below-

Companies required conducting secretarial audit:

(1) Every listed company and

(2) Company belonging to other class of companies: The other class of companies are
every public company having a paid-up share capital of Rs 50 crore or more; or
every public company having a turnover of Rs 250 crore or more.

Qualifications for the secretarial auditor: A Secretarial Audit has to be conducted by a Practising
Company Secretary in respect of the secretarial and other records of the company.

Report of the secretarial audit: A secretarial audit report shall be annexed with the Boards report of
the company. The Board of Directors, in their report made in terms of sub-section (3) of section 134,
shall explain in full any qualification or observation or other remarks made by the company secretary in
practice in his report under sub-section (1). The format of the Secretarial Audit Report shall be in Form
No.MR.3.

Other Provisions:
It shall be the duty of the company to give all assistance and facilities to the company secretary in
practice, for auditing the secretarial and related records of the company.

If a company or any officer of the company or the company secretary in practise, contravenes the
provisions of this section, shall be punishable with fine which shall not be less than Rs 1,00,000 but
which may extend to Rs 5,00,000.

COST AUDIT
Section 148 of the Companies Act provides that the Central Government may, by order, in respect of
such class of companies engaged in the production of such goods or providing such services as may
be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of
cost as may be prescribed shall also be included in the books of account kept by that class of
companies:

Provided that the Central Government shall, before issuing such order in respect of any class of
companies regulated under a special Act, consult the regulatory body constituted or established under
such special Act.

Page 25
cs urvashi uppal

If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that
the audit of cost records of class of companies, which are covered under sub-section (1) and which
have a net worth of such amount as may be prescribed or a turnover of such amount as may be
prescribed, shall be conducted in the manner specified in the order.

The audit shall be conducted by a Cost Accountant in practice who shall be appointed by the Board
on such remuneration as may be determined by the members in such manner as may be prescribed:
Provided that no person appointed under section 139 as an auditor of the company shall be appointed
for conducting the audit of cost records:
The auditor conducting the cost audit shall comply with the cost auditing standard.

An audit conducted under this section shall be in addition to the audit conducted under section 143.

The qualifications, disqualifications, rights, duties and obligations applicable to statutory auditors ,so
far as may be applicable, apply to a cost auditor appointed.
It shall be the duty of the company to give all assistance and facilities to the cost auditor for auditing the
cost records of the company.
The cost audit report shall be submitted by the cost accountant to the Board of Directors of the
company.

Within 30 days from the date of receipt of a copy of the cost audit report from the cost auditor, the
company shall furnish the cost audit report to the Central Government ,along with full information and
explanation on every reservation or qualification contained therein.

If, after considering the cost audit report and the information and explanation furnished by the
company , the Central Government is of the opinion that any further information or explanation is
necessary, it may call for such further information and explanation and the company shall furnish the
same within such time as may be specified by that Government.

JOINT AUDIT
Meaning of Joint Audit: when two or more auditors are appointed for the execution of same audit
assignment, it is termed as joint audit. Joint auditors are mainly appointed for audit assignment of public
enterprises and big companies.
Institute of Chartered Accountants of India (ICAI) has issued SA 299 on Responsibility of Joint
Auditors

Division of Work - Where joint auditors are appointed, they should, by mutual discussion, divide the
audit work among themselves in terms of audit of specified areas. If due to the nature of the business of
the entity under audit, such a division of work may not be possible the division of work may be with
reference to items of assets or liabilities or income or expenditure or with reference to periods of time.
The division of work among joint auditors as well as the areas of work to be covered by all of them
should be adequately documented and preferably communicated to the entity.

Coordination
Where, in the course of his work, a joint auditor comes across matters which are relevant to the
areas of responsibility of other joint auditors or which require disclosure or require discussion with, or
application of judgement by, other joint auditors, he should communicate the same to all the other joint
auditors in writing. This should be done by the submission of a report or note prior to the finalisation of
the audit.

Page 26
cs urvashi uppal

Reporting Responsibilities
Normally, the joint auditors are able to arrive at an agreed report. However, where the joint auditors are
in disagreement with regard to any matters to be covered by the report, each one of them should
express his own opinion through a separate report.

A joint auditor is not bound by the view of the majority of the joint auditors regarding matters to be
covered in the report and should express his opinion in a separate report in case of disagreement.

Relationship among Joint auditors

In respect of audit work divided among the joint auditors, each joint auditor is responsible only for the
work allocated to him, whether or not he has prepared as separate report on the work performed by
him.

On the other hand, all the joint auditors are jointly and severally responsible:

(a) In respect of the audit work which is not divided among the joint auditors and is carried out by all of
them;

(b) In respect of decisions taken by all the joint auditors concerning the nature, timing or extent of the
audit procedures to be performed by any of the joint auditors.

(c) In respect of matters which are brought to the notice of the joint auditors by any one of them and on
which there is an agreement among the joint auditors;

(d) For examining that the financial statements of the entity comply with the disclosure requirements of
the relevant statute; and

(e)For ensuring that the audit report complies with the requirements of the relevant statute.

The issues such as appropriateness of using test checks or sampling should be decided by each joint
auditor in relation to his own area of work. This responsibility is not shared by the other joint auditors.

In the case of audit of a large entity with several branches, including those required to be audited by
branch auditors, the branch audit reports/returns may be required to be scrutinised by different joint
auditors in accordance with the allocation of work. In such cases, it is the specific and separate
responsibility of each joint auditor to review the audit reports/returns of the divisions/branches allocated
to him and to ensure that they are properly incorporated into the accounts of the entity.

CAG AUDIT
CAG Audit is known as audit of public enterprises done by Comptroller and Auditor General of India. In
India, government audit is performed by an independent constitutional authority, i.e. Comptroller and
Audit General of India (C&AG), through the Indian Audit and Accounts Department. The Constitution of
India gives a special status to the C&AG and contains provisions to safeguard his independence.

Article 148 of the constitution provides that the C&AG shall be appointed by the President and can be
removed from the office only in a like manner and on the like grounds as a judge of the Supreme Court.

Page 27
cs urvashi uppal

Article 151 of the Constitution requires that the audit reports of the C&AG relating to the accounts of the
Central/State Government should be submitted to the President/Governor of the State who shall cause
them to be laid before Parliament/State Legislative.

The Comptroller and Audit Generals (Duties, Power and Conditions of Services) Act, 1971, prescribes
that the C&AG shall hold office for a term of six years or upto the age of 65 years, which is earlier. He
can resign at any time through a resignation letter addressed to the President.

The organisations subject to the audit of the Comptroller and Auditor General of India are:-
All the Union and State Government departments and offices including the Indian Railways and Posts
and Telecommunications.

About 1500 public commercial enterprises controlled by the Union and State governments, i.e.
government companies and corporations.

Around 400 non-commercial autonomous bodies and authorities owned or controlled by the Union or
the States.

Over 4400 authorities and bodies substantially financed from Union or State revenues

Audit of Government Companies (Commercial Audit)

There is a special arrangement for the audit of companies where the equity participation by
Government is 51 %or more. The primary auditors of these companies are Chartered Accountants,
appointed by the CAG, who gives the directions to the auditors on the manner in which the audit should
be conducted by them. The CAG of India is also empowered to comment upon the audit reports of the
primary auditors. In addition, the CAG of India conducts a test audit of the accounts of such companies
and reports the results of his audit to Parliament and State Legislatures

Nature of Audit
While fulfilling his Constitutional obligations, the Comptroller & Auditor General examines various
aspects of Government expenditure. The audit done by C&A G is broadly classified into Regularity
Audit and Performance Audit.

Regularity Audit (Compliance)

Audit against provision of funds to ascertain whether the moneys shown as expenditure in the
Accounts were authorized for the purpose for which they were spent.

Audit to see that the expenditure incurred was in conformity with the laws, rules and regulations
framed to regulate the procedure for expending public money.

Audit to see that every item of expenditure was done with the approval of the competent authority in
the Government for expending the public money.

While conducting the audit of receipts of the Central and State Governments, the CAG satisfies himself
that the rules and procedures ensure that assessment, collection and allocation of revenue are done in
accordance with the law and there is no leakage of revenue which legally should come to Government.

Regularity Audit (Financial)

Page 28
cs urvashi uppal

In regularity (financial) audit and in other types of audit when applicable, auditors analyze the financial
statements to establish whether acceptable accounting standards for financial reporting and disclosure
are complied with.

Performance Audit
Performance audit is done to see that Government programmes have achieved the desired objectives
at lowest cost and given the intended benefits.

Action on Audit Reports

The Annual Accounts and the Audit Reports of public enterprises and government companies are
scrutinized by the Parliament. Since parliament has limited time for discussion on the issue of national
importance, therefore the Parliament and the State Legislatures have, constituted specialized
Committees like the Public Accounts Committee (PAC) and the Committee on Public Undertakings
(COPU) for review and scrutiny of audit Reports and Annual Accounts of public enterprises and
government companies.

Public Accounts Committee

The Committee on Public Accounts is constituted by Parliament each year for examination of accounts
showing the appropriation of sums granted by Parliament for expenditure of Government of India, the
annual Finance Accounts of Government of India, and such other Accounts laid before Parliament as
the Committee may deem fit, such as accounts of autonomous and semi-autonomous bodies (except
those of Public Undertakings and Government Companies which come under the purview of the
Committee on Public Undertakings).

Constitution of the Committee

The Committee consists of not more than 22 members comprising 15 members elected by Lok Sabha
every year from amongst its members according to the principle of proportional representation by
means of single transferable vote and not more than 7 members of Rajya Sabha elected by that House
in like manner are associated with the Committee. The Chairman is appointed by the Speaker from
amongst its members of Lok Sabha.
A Minister is not eligible to be elected as a member of the Committee. If a member, after his election to
the Committee is appointed a Minister, he ceases to be a member of the Committee from the date of
such appointment.

The Public Accounts Committee satisfies itself:-

(a) that the money shown in the accounts as having been disbursed were legally available for, and
applicable to the purpose to which they have been applied or charged;

(b) that the expenditure conforms to the authority which governs it; and

(c) That every re-appropriation has been made in accordance with the provisions made in this behalf
under rules framed by the competent authority.

It is also the duty of the PAC to examine the statement of accounts of autonomous and semi-
autonomous bodies, the audit of which is conducted by the CAG either under the directions of the
President or by a Statute of Parliament.

Committee on Public Undertakings

Page 29
cs urvashi uppal

The Committee on Public Undertakings exercises the same financial control on the public sector
undertakings as the Public Accounts Committee exercises over the functioning of the Government
Departments.
The functions of the Committee are:-

(a) To examine the reports and accounts of public undertakings.

(b) To examine the reports of the CAG on public undertakings.

(c) To examine the efficiency of public undertakings and to see whether they are being managed in
accordance with sound business principles and prudent commercial practices.

The examination of public enterprises by the Committee takes the form of evaluation of performance of
the undertaking. It involves a thorough examination, including evaluation of the policies, programmes
and financial working of the undertaking.

The objective of the Financial Committees, in doing so, is not to focus only on the individual irregularity,
but on the defects in the system which led to such irregularity, and the need for correction of such
systems and procedures.

CAGs Role in functioning of financial committees of Parliament

-The CAG of India plays a key role in the functioning of the financial committees of Parliament and the
State Legislatures.

- He has come to be recognised as a friend, philosopher and guide of the Committee.

-He scrutinizes the notes which the Ministries submit to the Committees and helps the Committees to
check the correctness.

-The Financial Committees present their Report to the Parliament/ State Legislature with their
observations and recommendations.

-In respect of those cases in Audit Reports, which could not be discussed in detail by the Committees,
written answers are obtained from the Department / Ministry concerned and are sometimes
incorporated in the Reports presented to the Parliament / State Legislature.

PRACTICE QUESTIONS & ANSWERS

Q1.Whether the following persons can be appointed as the auditor of a company?

1. Mr. X who is a Chartered Accountant of the Canadian Institute of Chartered Accountants but is not a
member of the Institute of Chartered Accountants of India.

2. Mrs. P is a member of the Institute of Chartered Accountants of India. The directors of a limited
company say that she being a lady can not be appointed as an auditor of the company.

3. Mr. A owes Rs. 1,000 to ABC Ltd. of which he is an auditor.

Page 30
cs urvashi uppal

4. A, a partner in the firm of M/s Rama & Co., Chartered Accountants, is the Secretary of C Ltd. Can A
or Rama & Co., be appointed as the Company Auditor?

5. A, a Chartered Accountant, is a director of A Ltd., which is a subsidiary of B Ltd. The Board of

Directors of B Ltd. proposes to appoint Mr. A as the auditor of B Ltd.
Discuss.
Ans
1. Mr. X cannot be appointed an auditor of a limited company in India. He must be a chartered
accountant within the meaning of the Chartered Accountants Act, 1949.

2. Mrs. P can be appointed as an auditor of the company. There is no bar on a lady.

3. Mr. A is not disqualified. He will be disqualified only if he owes an amount in excess of 1,000.

4. A, being an Officer of the Company is disqualified. Also, M/s Rama & Co., is not qualified to be
appointed as auditor as one of its partners is an employee of the Company.

5. A is not qualified to be appointed as auditor of B Ltd., because a person who is not qualified to be the
auditor of a company would also not be qualified to be auditor of such companys subsidiary, or holding
company.

Q2. Mr Abhishek is appointed as an auditor in X Ltd. Further, Mr Abhishek is a relative of a

director of X Ltd. Comment.
Ans Section 141 of the Companies Act, 2013 deals with the eligibility criteria, qualifications and
disqualifications of an Auditor. Sub-section (3) (f) of the Section 141 of the Act, explicitly
disqualifies a person from being appointed as an auditor of a company whose relative is a
director or is in the employment of the company as a director or key managerial personnel.

In the instant case, Mr. Abhishek is the relative of a Director of the company, therefore he
should not accept the appointment as an auditor of that company.

Q3. X, Y and Z together are forming a new company. They wish to include the following clause in the
Articles of Association of the company. The first auditors of the company will be M/s RS & Co,
Chartered Accountants who will hold office for five years. They seek your advice in the matter.
Ans .The above clause will not be valid. As per section139 (6) of the Companies Act, 2013 the
first auditors can be appointed only by a resolution of the board of directors within 30
days from the date of registration of the company, or by the shareholders who shall within
90 days at an extra ordinary general Meeting appoint the first auditors if the board fails
to do so. Moreover, the first auditors can hold office only until the conclusion of the first
annual general meeting (provided they are not removed by the shareholders earlier at a
general meeting by passing special resolution).

Q4. Discuss the provision relating to rotation of auditors under the Companies Act, 2013.
Ans
Rotation of auditors by the company

As per Section 139(2) Listed company or a company belonging to such class or classes of company
as may be prescribed, shall not appoint or re-appoint-

(c) An individual as an auditor for more than one term of 5 consecutive years , and

Page 31
cs urvashi uppal

(d) An audit firm as an auditor for more than two terms of 5 consecutive years.

However, an individual auditor who has completed a term of 5 years shall not be eligible for re-
appointment as an auditor in the same company for 5 years from the completion of his term.

In case of an audit firm which has completed two terms of 5 years shall not be eligible for re-
appointment as auditor in the company for 5 years from the completion of such term.

It is further provided that as on the date of appointment no audit firm having a common partner or
partners to the other audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of 5 years.

The other class of companies (specified companies) shall mean the following classes of
companies excluding one person companies and small companies as prescribed under Rule
5 of the Companies (Audit and Auditors) Rules.

(e) All unlisted companies having paid up share capital of Rs 10 crore or more
(f) All private limited companies having paid up share capital of Rs 20 crore or more
(g) All companies having public borrowings from financial institutions, banks or public deposits of
Rs 50 crore or more.

Q5. Mr. Raja, a practicing chartered accountant, holds 35 company audits including 15 public
companies, 7 other companies out of which 5 are private companies having paid capital exceeding One
hundred crores rupees and 2 are small companies and the rest are auditof branches of companies. Has
Mr. Raj violated any provisions of the companies Act, 2013 or is he guilty of professional misconduct?
Ans
Audits which are taken for counting as per Section 141 (3) (g) read along with Section 143 (8) of the
Companies Act, 2013:
Public companies 15
Private Companies (> one hundred crore rupees, 5
excluding small companies)

The audits are within the ceiling limit (i.e. 20 excluding small companies, branches etc.)
prescribed by the Act. Therefore there is no violation of the act.

Q6. Mr. X, who was appointed as the first auditors, of the company, was removed without the prior
approval of the Central Government before the expiry of their term, by calling an EGM.
Ans
As per section 140 (1) which says that, the auditor appointed may be removed before the expiry of his
term only by a special resolution of the company, after obtaining the prior approval of the Central
Government in that behalf in the prescribed manner.
So in the instant case, the company has to obtain Central Government approval for removal of X before
the expiry of his term.

Q7 .Due to the resignation of the existing auditor(s) the board of directors of X Ltd appointed
Mr. Om as the auditor. Is it valid?
Ans

Page 32
cs urvashi uppal

The resignation of the existing auditor(s) would give rise to a casual vacancy. As per section 139(8),
casual vacancy can be filled by the Board of Directors, provided such vacancy has not been caused by
the resignation of the auditor.
The appointment shall be approved by the company at a general meeting convened within3 months of
the recommendation of the Board and he/she shall hold the office till the conclusion of the next annual
general meeting.
So in the given case the above procedure has to be followed by X Ltd.

Q8 .AB Ltd. does not send to its auditors the notice of an extraordinary general meeting on the plea that
accounts are not being discussed at the aforesaid meeting.
Ans
This is not correct since the requirements of section 146 of Companies Act, 2013 provides that all
notices of, and other communications relating to, any general meeting shall be forwarded to the
auditors of the company, and the auditor shall, unless otherwise exempted by the company, attend
either by himself or through his authorized representative, who shall also be qualified to be an auditor,
any general meeting and shall have right to be heard at such meeting on any part of the business which
concerns him as the auditor.
So this section applies to all general meetings held during the period when the auditor holds his office.

Q9. A company has a branch office which recorded a turnover of Rs. 1, 20,000 in the financial year
2014-15. No audit of the branch has been carried out. The statutory auditor of the company has made
no reference of the above branch in his report. The total turnover of the company is Rs. 10 crores for
the year 2014-15. Comment on the issue.
Ans
As per section 143(8) of the Companies Act, 2013 if a company has a branch office, the accounts of
that office shall be audited either by the auditor appointed for the company under this Act or by any
other person qualified for appointment as an auditor of the company under this Act and appointed as
such under section 139, or where the branch office is situated in a country outside India, the accounts
of the branch office shall be audited either by the company's auditor or by an accountant or by any
other person duly qualified to act as an auditor of the accounts of the branch office in accordance with
the laws of that country.
Therefore, the company has to get its branch audited. In case no branch audit has been carried out,
companys auditor is required to mention this fact in the audit report and deal appropriately.

Q10. What are the services which cannot be rendered by a statutory auditor of a company
under section 144 of the Companies Act, 2013?
Ans
An Auditor cannot render to a company the following services under section 144 of the Companies Act,
2013:-
- Accounting & Book-keeping
- Internal Audit
- Financial Information System
- Actuarial Services
- Investment Advisory Services
- Investment Banking Services
- Outsourced Financial Services
- Management Services and
- Any other kind of services as may be prescribed.

Page 33
cs urvashi uppal

Ch 3 - INTERNAL AUDIT.

PROPRIETY AUDIT

Kohler has defined propriety as that which meets

- test of public interest

- Commonly accepted customs and code of conduct
- Government regulations and professional codes.

The Propriety Audit means the verification of following main aspects to find out whether:
(i) Proper recording has been done in appropriate books of accounts.
(ii) The assets have not been misused and have been properly safeguarded.
(iii) The business funds have been utilized properly.
(iv) The concern is providing the expected results.

The system of Propriety Audit is applied in respect to Government companies, Government

Department because public money and public interest are involved therein.

COMPLIANCE AUDIT

Compliance audit is a comprehensive review of an organizations adherence to regulatory guidelines. It

represents the strength and thoroughness of compliance preparations and ensures that the company is
following regulations and avoiding sanctions.

Objectives of Compliance Audit

The objective of compliance audit is to determine whether the company is following prescribed laws,
regulations, policies, or procedures. These audits can be performed for internal purposes or on demand
by outside groups, particularly government.

Benefits of Compliance Audit

1. Improvement of internal processes and technologies

2. Maintenance of certifications
3. Adherence to government regulations
4. Cost recovery
5. Early fraud awareness
6. Helps in managing risk areas

EFFICIENCY AUDIT
Efficiency indicates how well an organization uses its resources to produce goods and services. It
focuses on resources (inputs), goods and services (outputs), and the rate (productivity) at which inputs
are used to produce or deliver the outputs.

Inputs are the resources (e.g., human , financial, equipment, material ) used to produce outputs.

Outputs are goods and services produced . Outputs are defined in terms of quantity and quality.

Page 34
cs urvashi uppal

Productivity is the ratio of amount of acceptable goods and services produced to the amount of
resources (inputs) used to produce them.

Efficiency is a relative concept and is measured by comparing achieved productivity with a desired
norm, target, or standard.

Efficiency audit refers to comparing actual performance with plans and investigating the reasons for
variations to take remedial action.

OBJECTIVES OF EFFICIENCY AUDIT

The objectives of auditing efficiency can include assessing one or more of the following:
1. The level of efficiency achieved by an organization or operation
2. The adequacy and reliability of systems .
3. It is concerned with the utilization of the resources in the economic manner
4. It is directed towards the measurement of whether plans have been effectively executed

ADVANTAGES OF EFFICIENCY AUDIT

1. Auditing efficiency enables the management to know whether the departments and agencies
manage resources with efficiency.
2. It can help departments and agencies to identify opportunities to provide more or better services
at lower cost.
3. It underline the importance of measuring efficiency and of using that information for managing
operations and providing accountability
4. It helps in improving the quality of outputs
5. Identify the areas where improvements are required for better use of resources.

INTERNAL AUDIT
Internal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organisations operations. It helps an organization to improve the effectiveness of
risk management, control and governance processes.

Features of Internal Audit

1. It is an independent appraisal activity within the organization.
2. It can be conducted by the staff of the entity or by an independent professional appointed for
that purpose.
3. It is conducted for review of accounting, financial and other operations and controls established
within an organization.
4. It is conducted as a service to the organization.
5. It helps in providing effective control at low cost.

Nature of Internal Audit

1. A Management tool: It is a management tool performed by employees of the organization or
the engaged professional firm to check the appropriateness of internal checks and control in the
organization. The reporting authority is generally board of directors and audit committee.
2. A Continuous exercise: it is a continuous and systematic process of examining and reporting
the operations and records of a concern
3. A Control system : It is a control system for examination and appraisal of other control
mechanisms.
4. A Risk Management Tool: The internal audit work helps in the creation of a risk management
process and ensures the evaluation of the process.

Page 35
cs urvashi uppal

Advantages of Internal Audit

Internal Audit has become an important management tool for the following reasons:
1. Internal Auditing is a specialized service to look into the efficiency of business operation.
2. Internal Auditing can evaluate various problems regarding management control and helps in
improvement
3. Internal Audit can ensure the reliability and adequacy of MIS.
4. It ensures compliance of accounting procedures and accounting policies.
5. Internal Auditor can provide assistance to management for expansion or diversification of business.

Process of Internal Audit

Audit Planning Conducting Audits Improvement Actions
Feedback

1. The Scope and objectives for the audit is required to be established and then
communicated to the management.
2. Review of documents is done with the help of Flow charts and narratives.
3. Identify the key risks facing the business activities.
4. Identify the control procedures to control the above risks.
5. Report problems or any deviations identified.
6. Follow-up on reported findings at appropriate interval of time.

Scope of Internal Audit

It is defined as the examination and evaluation of the adequacy and effectiveness of organizations
system of internal control and the quality of actual performance.
Internal audit involves five areas of operations
1. Reliability and Integrity of Financial and Operating information:
Internal auditors should review the reliability and integrity of financial and operating information
2. Economical and Efficient use of Resources:
Internal auditor should ensure the economic and efficient use of resources available.
3. Compliance with Laws, Policies, Plans, Procedures, Regulations:
Internal auditor should ensure the compliance of policies, plans, procedures, law and
regulations which have a significant impact on operations and should determine whether the
organization has complied it.
4. Accomplishment of Established Goals for Operations:
Internal auditor should ascertain whether actual results are consistent with the established
objectives and goals.
5. Safeguarding of Assets
Internal auditor should verify the existence of assets and should review means of safeguarding
assets.

Techniques of Internal Audit

An internal auditor uses Internal Audit tools/techniques to ensure that controls, processes and policies
are adequate and effective
The techniques which are usually used by an internal auditor are
1. Review of Operating Environment
For carrying out the audit effectively, it describes the business practices, leadership styles and
ethical qualities of the company.

Page 36
cs urvashi uppal

2. Review Controls
An internal auditor determines how a companys controls techniques operate by reading
previous audit reports or working papers. An auditor applies Generally Accepted Auditing
Standards (GAAS) to detect procedures, tools and methods that build controls.

3. Test Controls
An internal auditor tests a business organizations controls, policies, guidelines to ensure that
such controls are designed adequately and are operating effectively and efficiently.

4. Account Details
An internal auditor performs tests of account details to ensure that financial statements of a
business entity are not materially misstated.

Limitations of Internal Audit

Despite numerous benefits, internal audit has got some limitations
1. The installation and operation of internal audit involve extra expenditure which cannot be met by
many small concerns.
2. The limitation of internal audit starts when there is time lag between recording and checking of
entries.
3. If the internal auditing staff is not efficient or are biased ,then it fails to help the managers .
4. Internal audits are conducted within the organization which can hamper their independence and
objectivity.

Roles/Responsibilities of Internal Auditor

Major roles and responsibilities of internal auditor are

1) To plan, organise and carry out the internal audit function.
2) To provide support to company anti-fraud programmes.
3) To evaluate the business activities facing risks.
4) To review and report the internal control deficiencies and risk management issues to the audit
committee.
5) To review and report on the accuracy, timeliness and relevance of the financial and other
information.

Terms of reference

The overall status and work of internal audit should be formalized in terms of reference , which is
known as audit charter, and approved by the board, normally through the audit committee.
Internal audits terms of reference or charter should provide clarity about its:
Strategy and objectives;
Role and responsibilities within the organisation;
Scope of work;
Accountability to the audit committee;
Reporting lines for line management purposes;
Accessibility to the board and the audit committee; and
Access to all information, people and records across the organisation.
The terms of reference should make it clear that internal audit should not be put in a position where it
has to review its own work.

Page 37
cs urvashi uppal

Relationship between internal auditor and statutory auditor.

Statutory Auditor and Internal Auditor both are independent entity. A statutory Auditor of a company
cannot be the internal auditor of the same company. In certain cases, statutory auditor refers the report
of internal auditor and he expresses his opinion based on the report of internal auditor. Similarly in
certain cases, internal auditor also refers the report of statutory auditors. The relationship between
statutory auditor and internal auditor may be summed up as given below:

1. Comment on the Internal Audit System in place: the statutory auditor evaluate and comment
upon the effectiveness and suitability of internal audit system laid down by the management.

2. Evaluation of the actual work of internal auditor: Actual work of the internal auditor should be
evaluated as statutory auditor has to make use of the work of internal auditor and for this he need to
have faith in the work of internal auditor.

3. Relying on the work of internal auditor: Statutory auditor has to decide that up to what extent he
can rely upon the work of the internal auditor.If he feels that internal auditor has properly done his work
he can reduce the extent of his checking.

4. No reduction in responsibility: Relying on work of internal auditor in no way reduces the

responsible for the discharge of his duties as statutory auditor. For all his works statutory auditor would
remain responsible.

Difference between Internal Audit and Statutory Audit

Points Statutory Audit Internal Audit
Meaning Audit carried out in pursuance of Section Internal auditing is an independent,
139 of the Companies Act,2013 is known objective assurance and consulting
as statutory audit. activity designed to add value and
improve an organisations operations. It
helps an organization to accomplish its
objectives by bringing a systematic,
disciplined approach to evaluate and
improve the effectiveness of risk
management, control and governance
processes
Appointment The statutory auditor is appointed by Internal auditor is appointed by the
shareholders. management
Qualification A practicing chartered accountant or a firm There are no fixed qualification for the
of practicing chartered accountants can appointment of internal auditor.
only be appointed as a statutory auditor
Object The main object is to form an opinion on The main objective is to detect and
the financial statements of the company prevent the errors and frauds.
Scope The scope of statutory audit is fixed by The scope of internal audit is fixed by the
companies act, 2013 mutual consent of auditor and the
management of the company
Report The statutory auditor submits his report to The internal auditor submits his report to
the members of the company in the annual the management of the company
general meeting

ROLE OF INTERNAL AUDIT IN DIFFERENT AREAS

Page 38
cs urvashi uppal

1. Role of internal audit in Corporate Governance

(a)Corporate governance is a combination of processes and organizational structures implemented by
the Board of Directors to inform, direct, manage, and monitor the organization's resources, strategies
and policies towards the achievement of the organizations objectives.
(b)Internal auditing activity is accomplished primarily through
-participation in meetings and
-discussions with members of the Board of Directors.

(c)The internal auditor is often considered one of the "four pillars" of corporate governance, the other
pillars are the Board of Directors, management, and the external auditor.

(d)Internal auditor helps the Audit Committee and Board of Directors to perform its responsibilities
effectively by reporting critical internal control problems and providing suggestions and coordinating
with the external auditor and management to ensure that Committee receives effective information.

2. Role of internal audit in Internal Control

(a)Through evaluation and recommendations, of internal control system, internal auditor should
examine and contribute towards its effectiveness.

(b)It adds value to an organizations internal control system by bringing a systematic, disciplined
approach to the evaluation of risk management efforts which helps the internal auditor to focus towards
the improvement of internal control structure.

(c)The role of the internal auditor encompasses:

Evaluation of the efficiency and effectiveness of controls
Using control frameworks
Developing Control self-assessment

3. Role of Internal Audit in risk management

(a)Internal auditing require to monitor and evaluate the effectiveness of the organizations Risk
management processes which relates to how an organization identifies, analyzes, and responds to
risks that can impact its ability to achieve its objectives.

(b)Under the COSO Enterprise Risk Management (ERM) Framework, risks fall under strategic,
operational, financial reporting, and legal/regulatory categories. Management performs risk assessment
activities as part of the ordinary course of business. Examples include: strategic planning, marketing
planning, capital planning, budgeting, hedging, incentive payout structure, and credit/lending practices.

(c)Internal auditors may evaluate each of the activities, or the processes used by management to report
and monitor the risks identified.

I
PRACTICE QUESTIONS & ANSWERS

Q1.Define the term Internal Audit.

AnsInternal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organisations operations. It helps an organization to improve the effectiveness of
risk management, control and governance processes.

Page 39
cs urvashi uppal

Nature of Internal Audit

1.A Management tool: It is a management tool performed by employees of the organization or the
engaged professional firm to check the appropriateness of internal checks and control in the
organization. The reporting authority is generally board of directors and audit committee.
2.A Continuous exercise: it is a continuous and systematic process of examining and reporting
the operations and records of a concern
3.A Control system : It is a control system for examination and appraisal of other control
mechanisms.
4. A Risk Management Tool: The internal audit work helps in the creation of a risk management
process and ensures the evaluation of the process

Q2.What do you understand by Compliance Audit?

Ans
Compliance audit is a comprehensive review of an organizations adherence to regulatory guidelines. It
represents the strength and thoroughness of compliance preparations and ensures that the company is
following regulations and avoiding sanctions.

Objectives of Compliance Audit

The objective of compliance audit is to determine whether the company is following prescribed laws,
regulations, policies, or procedures. These audits can be performed for internal purposes or on demand
by outside groups, particularly government.

Q3.What process should be followed for doing compliance audit?

Ans
Doing a Compliance Audit, a stepwise approach is required:
1. The compliance auditor must have a clear knowledge of audits objective and scope.
2.The auditor must gain thorough understanding of applicable rules, guidelines and procedures to be
evaluated.
3. He should recognize if any, deviation has occurred.
4.The auditor prepare a detailed questionnaire about key compliance issues.
5. The auditor can sought the opinions of an expert.
6. Compliance audit reports must be made in the relevant format .
7. Compliance audit reports often indicate reasons for deviations from standards and recommend
actions that strengthen control procedures for assuring compliance.

Q4.Discuss about propriety audit.

Ans
The Propriety Audit means the verification of following main aspects to find out whether:

(i) Proper recording has been done in appropriate books of accounts.

(ii) The assets have not been misused and have been properly safeguarded.
(iii) The business funds have been utilized properly.
(iv) The concern is yielding the expected results.

The system of Propriety Audit is applied in respect to Government companies, Government Department
because public money and public interest are involved therein.

Q5.Internal Audit has become an important management tool Explain.

Page 40
cs urvashi uppal

Or
What is the scope of internal audit?
Ans
It is defined as the examination and evaluation of the adequacy and effectiveness of organizations
system of internal control and the quality of actual performance.
Internal audit involves five areas of operations
1. Reliability and Integrity of Financial and Operating information:
Internal auditors should review the reliability and integrity of financial and operating information
2. Economical and Efficient use of Resources:
Internal auditor should ensure the economic and efficient use of resources available.
3. Compliance with Laws, Policies, Plans, Procedures, Regulations:
Internal auditor should ensure the compliance of policies, plans, procedures, law and
regulations which have a significant impact on operations and should determine whether the
organization has complied it.
4. Accomplishment of Established Goals for Operations:
Internal auditor should ascertain whether actual results are consistent with the established
objectives and goals.
5. Safeguarding of Assets
Internal auditor should verify the existence of assets and should review means of safeguarding
assets.

Q6 Explain the role of internal audit in corporate governance.

Ans (a)Corporate governance is a combination of processes and organizational structures
implemented by the Board of Directors to inform, direct, manage, and monitor the organization's
resources, strategies and policies towards the achievement of the organizations objectives.
(b)Internal auditing activity is accomplished primarily through
-participation in meetings and
-discussions with members of the Board of Directors.

(c)The internal auditor is often considered one of the "four pillars" of corporate governance, the other
pillars are the Board of Directors, management, and the external auditor.

(d)Internal auditor helps the Audit Committee and Board of Directors to perform its responsibilities
effectively by reporting critical internal control problems and providing suggestions and coordinating
with the external auditor and management to ensure that Committee receives effective information.

Q 7. What is the process of Internal Audit?

Answer
Audit Planning Conducting Audits Improvement Actions
Feedback

1. The Scope and objectives for the audit is required to be established and then
communicated to the management.
2. Review of documents is done. Flow charts and narratives can be created for this.
3. Identify the key risks facing the business activities.
4. Identify the control procedures to control the above risks.
5. Report problems or any deviations identified.
6. Follow-up on reported findings at appropriate interval of time.

Page 41
cs urvashi uppal

Ch 4 - INTERNAL CONTROL
INTRODUCTION

Internal control is broadly defined as a process, designed to provide reasonable assurance regarding
the achievement of objectives in the following categories:

1. Effectiveness and efficiency of operations.

2. Reliability of financial reporting.
3. Compliance with applicable laws and regulations.

OBJECTIVES OF INTERNAL CONTROL

The objectives of internal control system in an organisation include:

1. Authorization - the objective is to ensure that all transactions are approved by responsible
personnel in accordance with their authority before the transaction is recorded.
2. Completeness - the objective is to ensure that no material information has been omitted from
the accounting records.
3. Accuracy - It is to ensure that all valid transactions are accurate, consistent and information is
recorded in a timely manner.
4. Validity - the objective is to ensure that all recorded transactions represent the events that
actually occurred, are lawful in nature, and have been executed effectively.
5. Physical Safeguards and Security - the objective is to ensure that access to physical assets
and information systems are controlled and properly restricted to authorized personnel.
6. Error Handling - the objective is to ensure that errors detected at any stage are corrected
immediately and are reported to the appropriate level of management.
7. Segregation of Duties - the objective is to ensure that duties are assigned to
individuals in a manner that ensures that there is no duplication of work.

Elements of internal control

Internal Control consists of five inter-related components. The components are

1. Control Environment: - It is the foundation for all other components of internal control, providing
discipline and structure.
2. Risk Assessment:- Risk assessment is the identification and analysis of risks involved
3. Control Activities:- It ensures that necessary actions are taken to address risks in order to achieve
the entity objectives.
4. Information and communication: - Material information must be identified,and communicated
timely which help the people to carry out their responsibilities.
5. Monitoring- Internal control systems need to be monitored to detect the deficiencies involved.

ADVANTAGES OF INTERNAL CONTROL

1. Increase in operational efficiency
Internal controls increases the efficiency of the operations by applying technological
advancements
2. Accurate Recording
Internal controls help to prevent errors and irregularities by recording each transaction involved.
3. Safeguarding Assets
It minimizes the risk of fraud and misappropriation of assets. It involves fraud monitoring and
prevention techniques.
4. Compliance

Page 42
cs urvashi uppal

It helps in compliance with prescribed policies and procedures. It assures that adequate
documentation is created and retained.
5. Protection of Employees
Internal controls protect employees:
a) by segregating duties and responsibilities
b) by providing checks and balances
6. Benefits of Internal Control to the Auditor
It promote a situation where the financial statements present a true and fair view which may
help the statutory auditor.
LIMITATIONS O

LIMITATIONS OF INTERNAL CONTROL

Some limitations are inherent in all internal control systems. These limitations include:

Judgment - If the judgements are given out of undue influence or pressure, then it can be biased and
unreliable which will hamper the effectiveness of controls

Breakdowns - Well designed internal controls can break down if employees misunderstand
instructions or simply make mistakes.

Management Override - High level personnel may be able to override prescribed policies or
procedures for personal gains or advantages.

Collusion Individuals can alter financial data or other management information in a manner that
cannot be identified by control systems.

INTERNAL CHECK
-Internal check is best regarded as indicating checks on the day-to-day transactions which operate
continuously as a part of the routine system.
- Internal check is a continuous process and is part of the day-to-day routine.
-Internal check is a part of internal control system.

Differentiate between Internal Control & Internal Audit

Points Internal Control Internal Audit

Meaning It is a system of control established Internal auditing is an independent,
by the management in order to carry objective assurance and consulting
on business in an orderly and activity designed to add value and
efficient manner, ensure adherence improve an organizations
to management policies, safeguard operations. It helps an organization
assets and completeness of records. accomplish its objective by bringing
a systematic, disciplined approach
to evaluate and improve the
effectiveness of risk management,
control and governance processes.
Way of checking In Internal Control system work is Under this, the work is checked
automatically checked. specially.
Thrust of It is a broad concept and it includes It is comparatively a narrow
System internal audit system concept.
Necessity It is necessary for every organization. It is to be implemented as per the

Page 43
cs urvashi uppal

suitability of the organization.

Primary Its primary objective is to prevent the Internal audit is primarily a
Objective occurrence of fraud. backward looking activity.

Differentiate between Internal Control & Internal Check.

Points Internal Control Internal check
Meaning It is a system of control established Internal check is checks on day to
by the management in order to carry day transactions which operate
on business in orderly and efficient continuously as a part of routine
manner, ensure adherence to systems whereby work of one
management policies, safeguard person is proved independently or
assets and completeness of records. is complementary to the work of
another.
Concepts It is a broader concept as compared It is one part of internal control
to internal check system. system.
Scope In internal control system, controls The essence of internal check is
other than internal check system are that the check should be automatic,
internal audit system and other non- continuous and objective.
financial control systems like quality
control, purchasing control,
marketing controls etc.

Differentiate between Internal check and Internal audit

Particulars Internal check Internal Audit

Way of checking In internal check system work is In internal audit system work is
automatically checked checked specially.

Cost involvement Cost of internal check is the part cost of internal audit is additional
of the system cost cost to the system.

Objective Objective of internal check objective of internal audit system

system is to prevent the errors is to detect the errors and
and frauds frauds.

Time of checking checking is done when the work work is checked after it is done.
is being done

TECHNIQUES OF INTERNAL CONTROL SYSTEM

There are two types of techniques used in internal control system : Preventive internal control
techniques and Detective internal control techniques.

(I) Preventive Controls techniques are designed to discourage errors or irregularities from occurring.
Examples of preventive controls techniques are:

Page 44
cs urvashi uppal

1. Segregation of Duties: Duties are segregated among different people to reduce the risk of error or
inappropriate action.

2. Approvals, Authorizations, and Verifications: Management authorizes employees to perform and

execute certain transactions within limited parameters. Also, management specifies those activities that
need supervisory approval before they are performed by employees.

3. Security of Assets (Preventive and Detective): Access to equipment, inventories, securities, cash
and other assets is restricted; assets are periodically counted and compared to amounts shown on
control records.

(II) Detective Controls techniques are designed to find errors or irregularities after they have occurred.
Examples of detective controls techniques are:

1. Reviews of Performance: Management compares actual performance to budgets, forecasts, prior

periods, or other benchmarks to measure the extent to which goals and objectives are being achieved
and any deviations,if occurred.

2. Reconciliations: An employee relates different sets of data to one another, identifies an differences,
and takes corrective action, when necessary.

3. Physical Inventories
4. Internal Audits

REVIEW OF INTERNAL CONTROL

Internal controls are an integral part of any organizations financial and business policies and
procedures. Therefore, its review is a very important task for an auditor. It is required to ensure that any
inefficiency or any ineffectiveness in system has been identified.

TOOLS FOR REVIEW OF INTERNAL CONTROL

An auditor can use the following tools to collect information required for the proper review and
evaluation of internal controls:-

(1) Narrative record : It is a complete description of the system as found in operation by the auditor.

(2) Check list : A check list is a series of instructions and/or answer. The complete check list is studied
by the principle/manager/senior to ascertain existence of internal control and evaluate its
implementation and efficiency.

(3) Questionnaire : It is a comprehensive series of questions related to internal control. This is the
most widely used from for collecting information about the existence, operation and efficiency of internal
control in an organization. The questionnaire form provides an orderly means of disclosing defects in
control system.

(4) Flow chart : Flow chart is a graphical presentation of each part of the companys system of internal
control. A flow chart is considered to be the most concise way of recording the auditors review of the
system. It minimizes the amount of narrative explanation.

AUDIT TESTING

Page 45
cs urvashi uppal

-An audit test is a procedure performed by either an external or internal auditor in order to assess the
accuracy of financial statement.
-The two common categories of audit tests are substantive tests and tests of internal controls.
A substantive audit test is a direct test that validates a financial statement balance
Internal control tests are focused on key controls that are designed to prevent and detect
material misstatements.

SAMPLING IN AUDIT TESTING

Sampling is a process of selecting a subset of a population of items for the purpose of making
inferences to the whole population.

STATISTICAL SAMPLING IN AUDIT & ITS APPROACHES

Statistical sampling involves the random selection of a number of items for inspection and is endorsed
by the accountancy bodies. In statistical sampling, each item has a calculable chance of being
selected.
PPROACHES TO
Approaches to statistical sampling
Samples during an audit are normally selected through one of the probability sampling methods as
discussed below :

- Simple Random sampling

This method uses sampling without replacement in which each item has equal and likely chance of
being selected. once an item has been selected for testing it is removed from the population & is not
subject to re selection.

- Systematic (Interval) Sampling

This method provides for the selection of sample items in such a way that there is a uniform interval
between each sample item. Under this method, every Nth item is selected with a random start.

- Stratified (Cluster) sampling

This method provides for the selection of sample items by breaking the population down into separate
groups called stratas.
For example- Debtors may be divided into
- Balances in excess of Rs 25000
- Balances below Rs 25000
-
INTER-FIRM COMPARISON
1. Inter firm comparison is the technique of evaluating the performance efficiency, costs and profits
of firm in an industry.
2. An inter-firm comparison indicates the efficiency of production and selling, adequacy of profits,
weak spots in the organisation, etc.

Advantages of Inter- Firm comparison

1. Such a comparison gives an overall view of the industry as a whole to its members
2. It helps in knowing strengths or weaknesses of the firm.
3. It develops cost consciousness among members of the industry.
4. It helps Government in effecting price regulation.
5. It helps to improve the quality of products manufactured and to reduce the cost of production.

Page 46
cs urvashi uppal

Limitations of Inter- Firm comparison

1. Top management feels that secrecy will be lost.

2. Middle management is usually not convinced with the utility of such a comparison.
3. In the absence of a suitable Cost Accounting System, the figures supplied may not be reliable for the
purpose of comparison.

INTRA- FIRM COMPARISON

The term intra firm comparison means comparison of two or more departments or divisions belonging
to the same firm with the objective of making meaningful analysis for the purpose of increasing the
effectiveness or efficiency of the departments involved.

Advantages of Intra- Firm comparison

1. Such a comparison gives an overall view of the firm as a whole to the owner or stakeholders and
gives a comparative view of different product/different business of the firm.
2. It helps the particular department in knowing its strengths or weaknesses in relation to other
departments.
3. It develops cost consciousness among units of the firm.

Differentiate between inter firm comparison & intra firm comparison

Points Inter- firm comparison Intra- firm comparison

Meaning It is a technique of evaluating the It means comparison among different
performance, efficiency, costs and units/ products/ strategic business unit
profits of firms in an industry. It (SBU) of the same firm.
consists of voluntary exchange of
information concerning costs, prices,
profits, productivity and overall
efficiency among firms engaged in
similar type of operations for the
purpose of bringing improvement in
efficiency and indicating the
weaknesses.
Possibility It will be possible where uniform It is possible only when uniform
costing is in operation among the costing is being adopted by all units of
different firm of the industry. the firm or different branches of the
same company.
View it gives an overall view of the industry It gives an overall view of the firm as a
as a whole to its members the whole to the owners or stakeholders
present position of the industry, and gives a comparative view of
progress made during the past and different product/different business of
the future of the industry. the firm.
Secrecy Under this, top management feels There is no such fear in intra firm
that secrecy will be lost as comparison as all units belong to
information is being shared with same firm and are under the same
other firms in the industry management.
To whom in It helps government in effecting price It helps the management in identifying
benefits regulation and taxation policies. the units which have not been
performing as per the internal
benchmark or standard achieved by

Page 47
cs urvashi uppal

other units.

AUDIT IN DEPTH
-Audit in depth means checking a transaction extensively from origin to end.
- It is an audit technique which is used to evaluate the effectiveness of internal control system in an
organisation.
- It is used in investigation exercises where the objective is detailed examination of transactions or
records.
- In this technique all aspects relating to the transaction are checked
-It is also called vertical vouching as against horizontal vouching.

For example, a purchase of goods may commence when a pre-determined re-order level has been
reached. The ensuing stages may be summarized as given below:

1.Authorization of Purchase requisition: Check whether the requisitions are pre-printed, pre-
numbered and authorized by competent official.
2. Issue of Request for quotation: Check whether request for quotation have been issued or not
3. Issue of Purchase order: Check whether purchase order have been issued from the competent
authority.
4. Receipt of goods and entry of goods in store ledger: check whether the goods receipt is as per
specification given in the purchase order and have been properly recorded in store ledger or not.
5. Approval of payment of Supplier Invoice: Check whether the amount has been approved by the
competent authority.
6. Payment of supplier invoice: Check whether the supplier bill have been paid correctly.
7. Accounting of Transaction: Check whether correct expenses code have been debited while
preparing accounts while complying the applicable accounting standard .

PRACTICE QUESTIONS & ANSWERS

Q1. What do you mean by Internal Control.

Ans. Internal control is broadly defined as a process, designed to provide reasonable assurance
regarding the achievement of objectives in the following categories:

1. Effectiveness and efficiency of operations.

2. Reliability of financial reporting.
3. Compliance with applicable laws and regulations.

Nature of Internal Control

- Detective controls: they are designed to detect errors or irregularities that may have occurred
- Corrective controls: They are designed to correct errors or irregularities that have been
detected.
- Preventive Controls: They are designed to keep errors or irregularities from occuing in the first
place.

Q2. What are the techniques of Internal Control System.

Page 48
cs urvashi uppal

Ans. There are two types of techniques used in internal control system Preventive internal control
techniques and Detective internal control techniques controls. Both types of internal control
techniques are essential to an effective internal control system.
(I) Preventive Controls techniques are designed to discourage errors or irregularities from occurring.
Examples of preventive controls techniques are:

1. Segregation of Duties: Duties are segregated among different people to reduce the risk of error or
inappropriate action.

2. Approvals, Authorizations, and Verifications: Management authorizes employees to perform and

execute certain transactions within limited parameters. Also, management specifies those activities that
need supervisory approval before they are performed by employees.

3. Security of Assets (Preventive and Detective): Access to equipment, inventories, securities, cash
and other assets is restricted; assets are periodically counted and compared to amounts shown on
control records.

(II) Detective Controls techniques are designed to find errors or irregularities after they have occurred.
Examples of detective controls techniques are:

1. Reviews of Performance: Management compares actual performance to budgets, forecasts, prior

periods, or other benchmarks to measure the extent to which goals and objectives are being achieved
and any deviations,if occurred.

2. Reconciliations: An employee relates different sets of data to one another, identifies an differences,
and takes corrective action, when necessary.

3. Physical Inventories
4. Internal Audits

Q3. Maintenance of Internal control system is a responsibility of Auditor. Comment.

Ans. It is the responsibility of the management for the maintenance of internal control system rather
than of the auditor. Because, internal control is the process designed, implemented and maintained by
those charged with governance, management to provide reasonable assurance about the achievement
of the entitys objectives.

Q4. When auditor uses more professional judgment, the degree of inherent risk is lower.
Comment.

Ans. The auditor uses his professional judgment to assess inherent risk by evaluating different factor
relating to the organization. on this basis, he tries to ensure lower level of inherent risk. Thus, it is
correct to say that when auditor uses more professional judgment, the degree of inherent risk is lower.

Q5. In a medium size trading organisation, the accountant was given additional responsibility of
making recoveries from receivables. On one occasion, an insurance claim of Rs.75,000 was
received. He credited the same to the account of a debtor and misappropriated the cash which
he had recovered from the said receivable. Pinpoint the weaknesses in the internal control
which led to this situation.

Page 49
cs urvashi uppal

Ans. Following points can be mentioned in support of weakness of internal control which lead to
misappropriation of cash:

- Casting of additional responsibility of making recoveries from receivables without assigning

accountability.
- Non- monitoring the work of accountant
- Too much trust on accountant
- Weak internal audit system for which accountant has no fear
- Non- reconciliation of receivables with cash balance
- Non maintenance of receipts vouchers.

Q5.What are the limitations of Internal Control

Ans. No matter how well the internal controls are designed, they can only provide a reasonable
assurance that objectives will be achieved. Some limitations are inherent in all internal control systems.
These limitations include:
Judgment - If the judgements are given out of undue influence or pressure, then it can be biased and
unreliable which will hamper the effectiveness of controls

Breakdowns - Well designed internal controls can break down if employees misunderstand
instructions or simply make mistakes.

Management Override - High level personnel may be able to override prescribed policies or
procedures for personal gains or advantages.

Collusion Individuals can alter financial data or other management information in a manner that
cannot be identified by control systems.

Q6. Explain ratio/trend analysis as a tool of inter- firm and intra-firm comparison.

Ans. Ratio analysis is a process of determining and interpreting relationships between the items of
financial statements to provide a meaningful understanding of the performance and financial position of
an enterprise. Ratio analysis is an accounting tool to present accounting variables in a simple, concise,
intelligible and understandable form.

A firm would like to compare its performance with that of other firms and of industry in general. The
comparison is called inter-firm comparison. If the performance of different units belonging to the same
firm is to be compared, it is called intra-firm comparison. Such comparison is almost impossible without
accounting ratios. Even the progress of a firm from year to year cannot be measured without the help of
financial ratios. The accounting language simplified through ratios is the best tool to compare the firms
and divisions of the firm.

Q7. Director (finance) of KK Ltd informed their newly appointed statutory auditor that they have
sound internal control system implemented by a renowned professional firm and he is satisfied
with its effectiveness and functioning. Therefore, the statutory auditor should concentrate on
verifying only the routine books and financial statements. As an auditor, how would you react to
this situation.
Ans. The objective of an audit of financial statement is to enable an auditor to determine the true and
fair view of the financial position and operating results and to express an opinion thereon.

Page 50
cs urvashi uppal

The scope of audit will be determined having regard to the terms of engagement,requirement of
relevant statute and pronouncement of the Institute. The terms of engagement, however cannot restrict
the scope of an audit in relation to matters that are prescribed by the legislation or by the
pronouncement of the Institute.

The report of the auditor is based on his examination of financial statements and the underlying
documents and evidences. It is for the auditor to decide, based on his evaluation of the internal control
as to its existence and effectiveness. The nature, timing and extent of audit procedures are based on
such evaluation.

In the instant case, management has no right to guide and place any restriction on the work of the
auditor as it would amount to restriction on the scope of the audit. The auditor should ask the
management not to impose such restriction on his scope of the audit, that impairs his ability to examine
and express an opinion and if the management doesnot agrees, he should issue a qualified opinion or
disclaimer, as appropriate.

Considering the above points, it can be said that contention of finance director that statutory auditor
should concentrate on verifying only the routine books and financial statements is incorrect and not
acceptable.

Q8. What is Audit in depth.

Ans. -Audit in depth means checking a transaction extensively from origin to end.
- It is an audit technique which is used to evaluate the effectiveness of internal control system in an
organisation.
- It is used in investigation exercises where the objective is detailed examination of transactions or
records.
- In this technique all aspects relating to the transaction are checked
-It is also called vertical vouching as against horizontal vouching.

For example, a purchase of goods may commence when a pre-determined re-order level has been
reached. The ensuing stages may be summarized as given below:

1.Authorization of Purchase requisition: Check whether the requisitions are pre-printed, pre-
numbered and authorized by competent official.
2. Issue of Request for quotation: Check whether request for quotation have been issued or not
3. Issue of Purchase order: Check whether purchase order have been issued from the competent
authority.
4. Receipt of goods and entry of goods in store ledger: check whether the goods receipt is as per
specification given in the purchase order and have been properly recorded in store ledger or not.
5. Approval of payment of Supplier Invoice: Check whether the amount has been approved by the
competent authority.
6. Payment of supplier invoice: Check whether the supplier bill have been paid correctly.
7. Accounting of Transaction: Check whether correct expenses code have been debited while
preparing accounts while complying the applicable accounting standard .

Page 51
 cs urvashi uppal

Ch 5 - Review of Internal Control

Question 1
What is Internal Control Review (ICR) and how different it is to Internal Audit?
Answer
Internal Control Review is an overall assessment of the internal control system and its adequacy of each
business area in an organization to address the relevant risks. Through control review, an organization's
resources are directed, monitored, and measured in an effective manner. It plays an important role in
protecting the organization's tangible and intangible resources.

Whereas, Internal audit as defined by the Institute of Internal Auditors is "an activity that provides
independent, objective assurance and consulting activity designed to add value and improve an
organizations operations. It helps an organization to fulfil its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control, and governance
processes".

Question 2
Explain the term segregation of duties in context of purchase control review.
Answer
To ensure proper separation of duties, assign related buying functions to different people.

It is always preferable to have different people who

I. Approve purchases
II. Receive ordered materials
III. Approve invoices for payment
IV. Review and reconcile financial records
V. Perform inventory counts

If segregation of duties does not exist in purchases operations, this may result into unauthorized or
unnecessary purchases, improper charges to department budgets, purchase of goods at excessive costs,
use of goods for personal purposes.

Question 3
What are the objectives of review of management information system of an organisation?
Answer
The following are the objectives of review of management information system of an organisation:
1. To determine whether review procedures are necessary to achieve stated objectives.
2. To determine whether MIS policies or practices, processes, objectives, and internal controls are adequate.
3. To evaluate whether MIS applications provide users with timely, accurate, consistent, complete, and
relevant information.
4. To assess the types and level of risk associated with MIS and the quality of controls over those risks.
5. To determine whether MIS applications and enhancements to existing systems adequately support
corporate goals.
6. To determine whether MIS is being developed in compliance with an approved corporate MIS policy or
practice statement.
7. To determine whether management is committed to providing the resources needed to develop the
required MIS.
8. To determine if officers are operating according to established guidelines.
9. To evaluate the scope and adequacy of audit activities.

Page 52
 cs urvashi uppal

10. To initiate corrective action when policies or practices, processes, objectives, or internal controls are
deficient.
11. To determine if any additional work is needed to fulfill the examination strategy of the institution.

Question 4
Explain the internal control review points for reviewing the marketing function of an organisation?
Answer
The following are the review points for reviewing the marketing function of an organisation:

1.Are standard price lists maintained?

2. Does the system of provides rebates and discount?
3. Are special sanctions required in case of sales to those companies/ other enterprises in which the
managerial personnel or senior employees are interested?
4. Is there a well defined policy for making sales to employees at concessional prices?
5. Is there a timely preparation of a written sale order on receipt of an order from a customer?
6. Are sale orders pre numbered?
7. Is there a proper authorization of credit, price, quantity and other important terms of the sale order?
8. Is credit limit of the customer concerned checked before sanctioning the credit on the sale order?
9. Is a copy of each sale order sent to the dispatch department and the accounts department.
10. Are dispatch documents pre numbered and missing document numbered duly enquired into?
11. Is there a system of checking each consignment of good before leaving the premises?
12. Is a copy of goods outward challan /gate pass sent to the customer and to the accounts department?
13. Is an acknowledgement of receipt of goods obtained from the customer or from his agent?

Question 5
What are the points to be considered while reviewing the quality management system of a manufacturing
organisation?
Answer
The following points are to be considered while reviewing the quality management system of a manufacturing
organisation:

1. Whether formal documented instructions / procedures are available for quality tests
2. Whether sufficient quantities of each production run are tested to check the quality
3. Whether Quality assurance procedures are integrated into the production process.
4. Whether defect rates, customer returns and complaints due to poor quality are monitored.
5. Whether measuring equipment and devices are checked on a periodic basis i.e. quarterly, half yearly.

Question 6
What are the points to be considered while carrying out the internal control review of recruitment function?
Answer
Organizations recruitment and selection process shapes part of companys reputation. Reviewing human
resources employment function involves a review of the way applicants are received. A review should reveal
how knowledgeable the engaged employment specialists are concerning organizational structure, positions
within each department, and fair employment practices in recruiting and hiring candidates.

Question 7
Explain the main points to be considered in reviewing the decision making process of management.
Answer

Page 53
 cs urvashi uppal

Decision-making is a primary function of management. A decision may be defined as a course of action

which is consciously chosen from among a set of alternatives to achieve a desired result. Decision-making
is an indispensable component of the management process itself.

1. Define the problem.

2. Identify limiting factors.
3. Develop potential alternatives.
4. Analyze the alternatives.
5. Select the best alternative.
6. Implement the decision.
7. Establish a control and evaluation system.

Question 8
What are the internal control aspects in relation to Bank Reconciliation Statement?
Answer
The following are the internal control aspects in relation to Bank Reconciliation Statement :
1. Receipt of Bank Statement : Decision regarding handling over/receipt of bank Statements.
2. Frequency of Reconciliation : How frequently reconciliation should be performed.
3. Authorisation : The person responsible for carrying out the bank reconciliation should not be concerned
with handling cash and cheques received or with arrangements for disbursements.
4 Attention points : Special attention to be given for long standing unpresented cheques, stop payment
notices, examination of the sequence of cheque numbers and compilation of cheque details with details
recorded in the cash book.

Question 9
Explain the points to be considered while carrying out the internal control review of an organisation over the
selection of transporter.
Answer
The following points are to be considered while carrying out the internal control review of an organisation
over the selection of transporter:
1. Check the system of sending enquiry and receiving quotations.
2. Check the control over sending enquiry and receiving, how record keeping, etc.
3. Check whether basis of taking decision is recorded properly or not.
4. Check whether date of approval, name of approving authority is mentioned on the approval document or
not.
5. Check whether the contract is entered into with the selected transporter. Check the terms and conditions
of transporter agreement.

Question 10
Prepare a small questionnaire enlisting the important things to be reviewed in case of hiring by the HR
department of an organisation.
Answer
The following important things to be reviewed in case of hiring by the HR department of an Organization
Question Yes No N/A Comments
1. Do job descriptions exist?
2. Are job descriptions up to date?
3. Are forms and acceptable documentation
reviewed annually?
4. Are job openings offered to current employees?
5. Are applicant references checked?

Page 54
 cs urvashi uppal

6. Are turnover rates monitored?

7. Are selection processes used with reference to the
Uniform Guidelines?
8. Are all applicants required to fill out and sign an
application form?
9. Are applicants asked to voluntarily identify their affirmative
action information?
10. If applicable, do application forms identify that the
employment relationship at the organization at-will?
11. Do employment applications refrain from
requesting protected information?
12. Are independent contractors accurately
identified?
13. If the organization has a qualifying federal
contract, is there an affirmative action plan?
14. Is medical information kept separately from personnel
files?

Question 11
What is management information system (MIS)? List down the points to be considered while evaluating the
MIS.
Answer
MIS is an information system which provides information to the management so that management may take
timely decisions. MIS is concerned with processing data into information which is then communicated to the
various departments in an organisation for appropriate decision making.

Points to be considered while evaluating MIS are:

1. Has management developed and maintained a current MIS policy or practice?
2. Is the policy or practice reviewed and updated regularly?
3. Is the information provided to appropriate employees?
4. Is the user manual for MIS system (s) meaningful, easy to understand and current?
5. Does the organisation use a consistent and standardized approach for developing MIS projects?
6 Are the employees sufficiently trained for new systems and subsequent enhancements.

Question 12.
In the course of audit of Growth Ltd you want to review the internal control in the area of sales return.
Mention the aspects which are to be specifically looked into to ascertain its soudness.
Answer
Review of Sales Return
1. Is the system relating to sale returns prescribe limits at various levels to accept return of goods?
2. Are sale return analyzed with reference to the reason & necessary actions taken ?
3. Are the returned goods inspected before acceptance?
4. Is an inward return note prepared against each sale return, indicating the quantity and specifications of the
goods received back?
5. Are appropriate entries made in the books of account promptly?
6. Check whether the excise paid is reversed for the returned goods or not.

Question 13
As internal auditor of the company, how will you review the internal control of the following:

Page 55
 cs urvashi uppal

(i) Debit/Credit notes

(ii) Sales Commission
(iii) Export Sales
Answer
Review of Debit/Credit notes
1. Check whether the corresponding impact of credit note/debit note on Sales Tax, Excise etc. have been
considered or not
2. Check whether credit note/debit note are issued in accordance with the Sales Policy and term of the Sales
Order.
3. Check whether credit note/debit note properly authorized.
Review of Sales Commission
1. Check all the sales commission are given as per contracts made with the party
2. Make the reconciliation of sales with sales commission.

Review of Export Sales

1. Reasons wise analysis of the overdue bills.
2. Loss of overdue interest due to delay in realization of the export bills.
3. Norms of Export trade, imports, process of order booking to production planning, realization, settlement
benefits, claims, etc.

Question 14.
What are the objectives of the review of selling and distribution function.
Answer
Selling and distribution function are one of the most important function for an organisation. The survival of an
organisation largely depends on the effectiveness of selling and distribution function.

Review of sales and distribution function is very important from internal control point of view and it requires a
detailed understanding of company business.

Objectives of review of sales and distribution policies and programs

1. To determine whether sales and distribution policies and programs are adequately documented
2. To determine whether sales and distribution policies and programs are approved by the appropriate
authority.
3. To check whether the distribution program is able to serve customers of all regions.
6. Whether controls are in place in the process to ensure accountability
7. Whether segregation of duties exists between the various types of transaction processing (e.g., Discount
approval, selection of mode of transportation. Accounts receivable etc).

Question 15.
How you will review the internal control of process of taking insurance during transit.
Answer.
1. Check whether the process of taking insurance for transit vehicle exists or not.
2. Check the coverage of insurance policy i.e. it covers full inventory value or just material price.
3. Check who takes the insurance transporter or the client
4. Check whether proper insurance value is declared for insurance coverage.
5. Check whether the insurance policy is made available to all concerned.
6. Check whether any cost benefit analysis has been done for the insurance premium paid and claim
launched.

Page 56
 cs urvashi uppal

Question 16
Write a short note on review of working environment, safety and security.
Answer

1. Whether separate areas are identified for inventory storage and handling,vaults, toxic materials
2. Whether entry and exit points for sensitive areas have appropriate security controls such as security
personnel, gate passes, cameras and lighting, perimeter fencing.
3. Whether smoke detection and fire-fighting equipment are functional and provide adequate protection.
4. Whether the workers use self protective devices at the work place.
5. Whether equipment and evacuation procedures are tested on a regular basis .
6. Whether security incidents i.e. accidents/theft etc are formally reported and tracked.

Question 17.
What are the objectives of review of Manufacturing Operations.
Answer
1. Whether the organization have any manufacturing process management system.
2. Whether the policies and procedures for production are well defined & well documented.
3. Whether the organisation have a quality management system in place.
4. Whether the organization is following six sigma.
5. Whether the organisation have a written maintenance policy.
6. Whether security policies are documented or not

Page 57
cs urvashi uppal

Ch 6 -Audit Engagement and Documentation

AUDIT PLAN

An audit plan lays out the strategies to be followed to conduct an audit. It includes the nature, timing
and extent of audit procedures to be followed. It is a step-by-step approach that enables auditors to
focus on important areas under review.
For high standard of performance, it is important that the auditor should prepare adequately for his
work.
Planning ahead for an audit work will help the auditor to ensure that:
- The audit objective is established and achieved;
- The audit is properly controlled and directed
-The work is completed economically

Audit plan relates to preparations made by the auditor for one specific audit engagement of
one client for one year.

Points for consideration in Audit Planning

The auditor should take into consideration the following matters in relation to the audit engagement:

(a) Preliminary Work to be done in addition to the real audit work

This includes the review of previous years working papers which will help the auditor in the matters
brought forward from the previous year

(b) Changes in legislation, accounting or any auditing standards or guidelines

The auditor should update himself with all the changes that took place during the year in applicable
legislation, accounting and auditing standard.

(c) Analytical review of available management accounts and other management information that
relate to the accounts
This will help in establishing valuable ratios that will guide the auditor. For eg, the calculation of the
gross profit percentage compared with that of the previous year will help the auditor to assess sales
and cost of sales.

(d) Changes in the business or management

The establishment of a new business line or the creation of a new branch are significant changes in the
working of the company which will require necessary changes in the existing audit plans.

(e) Changes in the accounting system

The change in accounting system will require a review of internal control system.

(f) Deadlines established for the submission of audit report

Where a client has set deadlines for its statutory activities such as the annual general meeting, it is
important for the auditor to work with in the time for such programmes.

(g) Use of Rotational Testing and Verification

Page 58
cs urvashi uppal

The auditor may not carry out a hundred percent testing or verification of the clients transactions or
segments of the business. Where rotational testing or verification is adopted, it will be necessary for the
auditor to determine which aspect of the business should be selected for testing.

AUDIT PROGRAMME
An audit programme is a set of instructions which are to be followed for proper execution of audit. After
the development of audit plan a detailed written audit programme containing the various steps and
procedures is required. The audit programme contains the measures that are used to determine what,
and how much evidence must be collected and evaluated.
It is documented in the audit working papers, which are the official records that contains the planning
and execution of the audit agreement.

Sample audit programme for auditing the receipt of fees from the students of a government
college
1.Check names entered in the Students Fee Register for each term, with the respective class registers
2.Check fees received by comparing counterfoils of receipts granted with entries in the cash book
3.Ascertain that fees paid in advance have been carried forward and the arrears that are irrecoverable
have been written off.
4.check free studentship and concessions granted
5.Confirm that fines for late payment or absence, etc., have been collected.
6.To check Bank Reconciliation statement with receipts.
7.Check the reminder system SMS alert, e-mails, call log book, to proper collection of fee.
8.Check the authentication of system and software used by the concern in this regard.

VOUCHING
Vouching means examining the entries with the documents. It is an act of examining documentary
evidence in order to ascertain the accuracy and authenticity of entries in the books of accounts.
It is the acid test of audit. It tests the truth of the transaction recorded in the books of accounts. The
auditor should be satisfied that books are properly maintained and supported by all the evidence and
are correctly recorded.

The importance of vouching in auditing:

Enables to know transactions
Facilitates proper allocation of capital & revenue, expenditure
Detects frauds and errors
Decides authenticity of transactions
Ensures proper accounting
Ensures proper disclosure

Objectives of Vouching
1) To ensure that all the transactions are properly recorded in the books of accounts
2) To see the proper evidence supports all the entries of the transactions
3) To make sure that fraudulent transactions are not recorded in the books of accounts
4) To see that all transactions relating to business are recorded in the books of accounts
5) To see that all transactions are properly authenticated by a responsible person.

VOUCHER

Page 59
cs urvashi uppal

Any documentary evidence supporting the entries in the records is termed as a voucher. Any
document, which supports the entries in the books of accounts and establishes the arithmetical
accuracy, is called a voucher.
For eg- a bill, an invoice, salaries & wages sheets, bank pass book, memorandum & articles of
association, trust deed, prospectus, minute book etc.

VERIFICATION
Verification is a process by which an auditor satisfies himself about the accuracy of the assets and
liabilities appearing in the Balance Sheet by inspection of the documentary evidence available.
Verification means confirmation of the assets and liabilities appearing in the Balance Sheet.

Thus, verification includes verifying:-

1. The existence of the assets
2. Legal ownership and possession of the assets
3. Ascertaining that the asset is free from any charge, and
4. Correct valuation

POINTS TO BE CONSIDERED IN VERIFICATION

While conducting verification following points should be considered by the auditor:-

1. Existence: The auditor should confirm that all the assets of the company physically exist on the date
of balance sheet.

2. Possession: The auditor has to verify that the assets are in the possession of the company on the
date of balance sheet.

3. Ownership: The auditor should confirm that the asset is legally owned by the company.

4. Charge or lien: The auditor has to verify whether the asset is subject to any charge or lien.

5. Record: The auditor should confirm that all the assets and liabilities are recorded in the books of
account.

6. Audit report: Under CARO the auditor has to report whether the management has conducted
physical verification of fixed assets and stock and the difference, if any, between the physical inventory
and the inventory as per the book.

7. Event after balance sheet date: The auditor should find out whether any event after the date of
balance sheet has affected any items of assets and liabilities.

SCOPE OF VERIFICATION

Verification includes information on the following:-

1. That the assets were in existence on the date of the balance sheet.
2. That the assets had been acquired for the purpose of business only.
3. That the assets had been acquired under a proper authority.
4. That the right of ownership of the assets vested in the organization.
5. That the assets were free from any charge.
6. That the assets were properly valued and disclosed in the balance sheet.

Page 60
cs urvashi uppal

OBJECTS OF VERIFICATION

Following are the objects of verification of assets and liabilities.

1. To show correct valuation of assets and liabilities.
2. To know whether the balance sheet exhibits a true and fair view of the state of affairs of the
business.
3. To find out the ownership and title of the assets.
4. To find out whether assets were in existence.
5. To detect frauds and errors, if any.
6. To ensure that the assets have been recorded properly

ADVANTAGES OF VERIFICATION

Advantages of verification are as under:-

1. It avoids manipulation of accounts.
2. It guards against improper use of assets.
3. It ensures proper recording and valuation of assets.
4. It exhibits true and fair view of the state of affairs of the company.

TECHNIQUES OF VERIFICATION:

1. Inspection: It means physical inspection of the assets i.e. physical inventory, inspection of shares
certificates, documents etc.

2. Observation: The auditor may observe or witness the inspection of assets done by others.

3. Confirmation: It means obtaining written evidence from outside parties regarding existence of
assets.

VERIFICATION OF ASSETS
verification means the physical examination of certain class of assets and confirmation regarding
certain transactions.
Verification through physical examination and confirmation proves whether a particular asset actually
exists without having any charge on the date of the Balance Sheet.

Verification of assets involves the following steps:

1. Examination of the ownership and title deeds of assets;
2. Physical inspection of the tangible assets; and
3. Confirmations regarding the charge on assets;
4. Ensuring that the assets are disclosed, classified and presented in accordance with recognized
accounting policies and legal requirements.

DISTINCTION BETWEEN VOUCHING AND VERIFICATION

Verification is made on the basis of vouching. So, verification is a part of vouching. Even though they
have some differences which are as follows:
Particulars Vouching Verification
Meaning Verification is the act of checking vouching is the act of checking the records
title, possession and valuation of with the help of evidential documents.

Page 61
cs urvashi uppal

assets

Nature Verification is specially related to the vouching is related to all the accounting
assets and liabilities documents
Person Generally, assistant staff or auditor auditor himself performs the work of
performs the work of vouching verification
Time Vouching is made at the beginning of verification is made at the end of auditing or
auditing at the time of checking balance sheet.

DOCUMENTATION
Documentation refers to the working papers prepared or obtained by the auditor and
retained by him, in connection with the performance of the audit.
-The form and content of audit documentation should be designed to meet the circumstances of the
particular audit.
-The information contained in audit documentation constitutes the principal record of the work that the
auditors have performed in accordance with standards.

The factors that determine the form and content of documentation for a particular engagement are:
(a) The nature of the engagement.
(b) The nature of the business activity of the client.
(c) The status of the client.
(d) Reporting format.
(e) Relevant legislations applicable to the client.
(f) Records maintained by the client.
(h) Quality of audit assistants engaged

PERMANENT & CURRENT AUDIT FILES

Permanent audit file
The data in these files are the information, which is of continuous interest and relevant to succeeding
audits. It includes
- Copy of initial appointment letter if the engagement is of recurring nature.
- NOC from previous auditor
- Details of Bankers, Registrars, Lawyers etc.
- Details of sister concerns

Current audit file

It contains information relating to the audit of current period. It includes
- Letters of representation
- Analysis of transactions
- Audit report

WORKING PAPERS

Working papers are the property of the auditor. The auditor may, at his discretion, make portions of or
extracts from his working papers available to his client.
General guidelines for the preparation of working papers are :

Page 62
cs urvashi uppal

1. Clarity and Understanding Working papers should be clear and understandable. The working
papers should be able to provie the information related to the purpose, the nature and scope of the
work done.

2. Completeness and Accuracy Working papers should be complete, accurate, and support
observations, testing, conclusions, and recommendations.

3. Pertinence Information available in working papers should reflect the important matters which are
necessary to support the working of the auditor

4. Logical Arrangement Working papers should be arranged in a logical order.

5. Legibility and Neatness Working papers should be legible and as neatly prepared. Crowding and
writing between lines should be avoided.

6. Safety Keep the working papers safe and retrievable.

7. Initial and Date Put initials and date on every working paper
8. Summary of conclusions Summarize the results of work performed.

The need for working papers are :

(1) They aid in the planning and performance of the audit.
(2) They provide evidence of the audit work performed to support the auditors opinion
(3) They can be useful for future audits of the entity.
(4) It helps in enhancing the quality of an audit.
(5) They help in the supervision and review of the audit work

RETENTION OF WORKING PAPERS

Period of retention
The auditor should retain the working papers for a period of time sufficient to meet the needs of his
practice and satisfy the legal or professional requirements.

Ownership & Custody

Working papers are the property of the auditor. The auditor, may, at his discretion, make portions of or
extracts from his working papers available to his client. The auditor should adopt reasonable
procedures for custody and confidentiality of his working papers.

SAMPLING
Audit sampling is testing of less than 100% of the items with in the population to obtain and evaluate
evidence about some characteristic of that population, in order to form a conclusion concerning the
population.

Approaches used in Statistical Sampling

Statistical sampling involves the random selection of a number of items for inspection and is endorsed
by the accountancy bodies. In statistical sampling, each item has a calculable chance of being
selected.
PPROACHES TO

- Simple Random sampling

Page 63
cs urvashi uppal

This method uses sampling without replacement in once an item has been selected for testing it is
removed from the population & is not subject to re selection.

- Systematic (Interval) Sampling

This method provides for the selection of sample items in such a way that there is a uniform interval
between each sample item. Under this method, every Nth item is selected with a random start.

- Stratified (Cluster) sampling

This method provides for the selection of sample items by breaking the population down into separate
groups called stratas.
For example- Debtors may be divided into
- Balances in excess of Rs 25000
- Balances below Rs 25000

Factors determining Sample Size

1) While determining the sample size, the auditor should consider sampling risk, the tolerable
error, the expected error.
2) Sampling risk arises if the auditor conclusion, based on sample, may be different from the
conclusion that would be reached if the entire population were subjected to the same audit
procedure.
3) The auditor is faced with sampling risk in both test of control and substantive procedure as
follow:
(a) Tests of control:
(i) Risk of under reliance
(ii) Risk of over reliance

(b) Substantive procedures

(i) Risk of incorrect rejection
(ii) Risk of incorrect acceptance

4) (a) The risk of under reliance and the risk of incorrect rejection affect audit efficiency.
(b)Whereas, the risk of over reliance and the risk of incorrect acceptance affect audit
effectiveness.
5) Sampling size is affected by the level of sampling risk the auditor is willing to accept from the
result of the sample.

TOLERABLE ERROR
-Tolerable error is the maximum error in the population that the auditor would be willing to
accept.
-Tolerable error is considered during the planning stage and, for substantive procedures, is
related to the auditors judgement about materiality.
-The smaller the tolerable error, the greater the sample size will need to be.
- In substantive procedures, the tolerable error is the maximum monetary error in an account balance or
class of transactions, so that the auditor is able to conclude, with reasonable
assurance, that the financial statements are not materially misstated.

EXPECTED ERROR
If the auditor expects error to be present in the population, such that, actual error in the population is
not greater than the planned tolerable error.

Page 64
cs urvashi uppal

In determining the expected error in the population, the auditor would consider such matters as error
levels identified in previous audits, changes in the entitys procedures, and evidences available from
other procedures.

TEST CHECKING & ITS TECHNIQUES

Test checking is an accepted auditing procedure wherein only a part of its transactions is
checked to form an opinion instead of checking the transactions.

Carrying out detailed check of each and every transaction of a large business shall be time consuming
for the auditor. In auditing the accounts of a business, every single copy is not usually checked by the
auditor; what is usually done in practice is that a representative number of entries of each class are
selected and checked and if they are found correct, the remaining entries are taken to be correct. This
is known as Test Checking

Precautions to be taken while adopting test checking

1. Entries selected for test checking must be representative of all transactions.
2. The selection of the items should be at random.
3. It cannot be adopted in case of vouching the cash book.
4. Clients staff should not come to know of the entries selected for test checking.
5. Period selected for test checking should differ from book to book and year to year.
6. A number of entries of the first and last month of the year must be checked thoroughly.

The advantages of test checking include:

1. Expertise : Application of test check principles involves the application of mind and intelligent
judgement. It enables the auditors to use his expertise effectively.

2. Exception Principle : Test checking adopts the principle of exception in control. If certain aspects of
internal control do not create suspicion, there is no need to verify all these transactions exhaustively.

3. Scientific assessment of risk : The auditor assesses the risk of material misstatements
in the Financial Statements in a scientific manner by drawing suitable samples and studying the same
in detail.

4. Saving in time : As fewer transactions are verified, time is saved to a great extent.

5. Reduction in Work : Volume of work is reduced by test checking methods.

The disadvantages of test checking include:

1. The auditor is always under fear whether he has misses out certain important items or that
errors have remained undetected while test checking.
2. If the clients staff is aware that the auditor adopts test checking, the staff may become careless.

AUDITORS LIABILITY
If any errors are found in the accounts the auditor cannot take the shield against the fact that he
conducted test check. The auditor should very carefully select the items for test check and ensure on
the whole that the accounts show a true and fair view.

PRACTICE QUESTIONS AND ANSWERS

Page 65
cs urvashi uppal

Q1.What is the meaning of audit plan? State the reasons why audit plan is prepared?
Ans
- An audit plan is a step-by-step, methodical approach that enables auditors to focus on
important areas under review.
-For high standard of performance, it is important that the auditor should prepare adequately for his
work.
Planning ahead for an audit work will help the auditor to ensure that:
- The audit objective is established and achieved;
- The audit is properly controlled and adequately directed at all stages;
-The work is completed economically

Audit plan relates to preparations made by the auditor for one specific audit engagement of
one client for one year.

Q2.The scope of verification is much wider than that of vouching.

Ans
The statement is true. Vouching enables the auditor to know whether the transactions are
1.Genuine and valid to enable the auditor to report on the financial statements with reference to
relevant documentary evidence.

2.Vouching is the substantive testing/examination of transaction at their point of origin.

3.On other hand, verification process encompasses the inquiry into the ownership/ title, existence,
valuation, completeness and presentation of assets and liabilities in the balance sheet.

4.Verification usually deals with the final balance in the Final Accounts ie the balance
sheet and profit and loss account.

Q3.Define documentation and explain the form and contents of documentation.

Ans
Documentation refers to the working papers prepared or obtained by the auditor and
retained by him, in connection with the performance of the audit.
-The form and content of audit documentation should be designed to meet the circumstances of the
particular audit.
-The information contained in audit documentation constitutes the principal record of the work that the
auditors have performed in accordance with standards

Generally the factors that determine the form and content of documentation for a
particular engagement are:
(a) The nature of the engagement.
(b) The nature of the business activity of the client.
(c) The status of the client.
(d) Reporting format.
(e) Relevant legislations applicable to the client.
(f) Records maintained by the client.
(g) Internal controls in operation.
(h) Quality of audit assistants engaged in the particular assignment and the need to
direct and supervise their work.

Q4. What is test checking in audit? What are the advantages of test checking?

Page 66
cs urvashi uppal

Ans
Test checking is an accepted auditing procedure wherein only a part of its transactions is checked to
form an opinion instead of checking the transactions. The advantages of test
checking include:
1. Audit objective : The auditor is required to form an opinion on the financial statements.Hence,
proper and careful test checking serves the audit objective in obtaining reasonable audit assurance.

2. Expertise : Application of test check principles involves the application of mind and intelligent
judgement. It enables the auditors to use his expertise effectively.

3. Exception Principle : Test checking adopts the principle of exception in control. If certain aspects of
internal control do not create suspicion, there is no need to verify all these transactions exhaustively.

4. Scientific assessment of risk : The auditor assesses the risk of material misstatements
in the Financial Statements in a scientific manner by drawing suitable samples and studying the same
in detail.

5. Saving in time : As fewer transactions are verified, time is saved to a great extent.

6. Reduction in Work : Volume of work is reduced by test checking methods.

Q5.What is tolerable terror?

Ans
-Tolerable error is the maximum error in the population that the auditor would be willing to
accept.
-Tolerable error is considered during the planning stage and, for substantive procedures, is
related to the auditors judgement about materiality.
-The smaller the tolerable error, the greater the sample size will need to be.
- In substantive procedures, the tolerable error is the maximum monetary error in an account balance or
class of transactions, so that the auditor is able to conclude, with reasonable
assurance, that the financial statements are not materially misstated.

Q6.What is the guideline for preparation of good working papers?

Ans
Working papers are the property of the auditor. The The auditor may, at his discretion, make
portions of or extracts from his working papers available to his client.
General guidelines for the preparation of working papers are :
1. Clarity and Understanding Working papers should be clear and understandable. The working
papers should be able to provie the information related to the purpose, the nature and scope of the
work done.

2. Completeness and Accuracy Working papers should be complete, accurate, and support
observations, testing, conclusions, and recommendations.

3. Pertinence Information available in working papers should reflect the important matters which are
necessary to support the working of the auditor

4. Logical Arrangement Working papers should be arranged in a logical order.

Page 67
cs urvashi uppal

5. Legibility and Neatness Working papers should be legible and as neatly prepared. Crowding and
writing between lines should be avoided.

6. Safety Keep the working papers safe and retrievable.

7. Initial and Date Put initials and date on every working paper

Q7.Audit Working Papers are of great need to auditors in discharge of their duties. In what whey is it
helpful to them. Discuss
Ans
Audit working papers are the documents which record all audit evidence obtained during financial
statement auditing, internal management auditing, information system auditing and investigation. They
are used to support the audit work done in order to provide assurance that the audit was performed in
accordance with the relevant auditing standards.

The need for working papers are :

(1) They aid in the planning and performance of the audit.
(2) They provide evidence of the audit work performed to support the auditors opinion
(3) The working papers should evidence compliance with technical standards.
(4) They retain a record of matters of continuing significance to future audits of the
entity.
(5) They document clearly and logically the schedule, result of test etc
(6) The process of preparing sufficient audit documentation contributes to the quality of an audit.
(7) They fulfil the need to document oral discussions of significant matters and communicate to those
charged with governance, as discussed in AAS 27, Communication of Audit Matters with those
Charged with Governance
(8) They aid in the supervision and review of the audit work and to review the quality of work performed,
in accordance with AAS 17 Quality Control for Audit Work;

Q8.Differentiate between Audit Plan & Audit Programme.

Ans
Points Audit Plan Audit Programme
Meaning An audit plan lays out the An audit programme is a set of instructions
strategies to be followed to which are to be followed for proper
conduct an audit. It includes the execution of audit.
nature, timing and extent of audit
procedures/ to be performed.
Scope It lays down the audit strategies to It is an outline of how the audit is to be
be followed for conducting an done, who is to do what work and within
auditsuch as identifying the areas what time.
where special audit consideration
and skills may be necessary,
obtain the knowledge of business
etc.
Coverage Plans should be made to cover, It lays down the following audit procedures
among other things: to be followed:
- Acquiring knowledge of - Evaluation of internal control
accounting systems, - Ascertain arithmetical accuracy of
policies and internal books of accounts
control procedures - Vouching of transactions

Page 68
cs urvashi uppal

- Establishing the expected - Verification and valuation of assets

degree of reliance to be and liabilities
placed on the internal - Ledger scrutiny
control - Checking of overall disclosure and
- Determining the nature, presentation of all items in the final
timing and extent of the accounts
audit procedures to be - Preparation and submission of
followed audit report.
- Coordinating the work to
be done

Page 69