What is Audit?

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding

assertions about economic actions and events to ascertain the degree of correspondence between
those assertions and established criteria and communicating the results to interested users. It is a
service where the auditor’s objective is to provide a high level of assurance through the issue of a
positive expression of opinion that enhances the credibility of an assertion about an accountability
matter.

Audits are performed to ascertain the validity and reliability of information; also to provide an

assessment of a system's internal control. The goal of an audit is to express an opinion on the person /
organization / system (etc.) in question, under evaluation based on work done on a test basis.

IMPORTANCE:

Auditing is a vital part of accounting. Traditionally, audits were mainly associated with gaining
information about financial systems and the financial records of a company or a business (see financial
audit). However, recent auditing has begun to include non-financial subject areas, such as safety,
security, information systems performance, and environmental concerns. With nonprofit organizations
and government agencies, there has been an increasing need for performance audits, examining their
success in satisfying mission objectives. As a result, there are now audit professionals who specialize
in security audits, information systems audits, and environmental audits.

LIMITATIONS:

Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements
are free from material error. Hence, statistical sampling is often adopted in audits. In the case
of financial audits, a set of financial statements are said to be true and fair when they are free of
material misstatements - a concept influenced by both quantitative (numerical) and qualitative factors.

What are Auditing Standards?

The Institute of Chartered Accountants of India (ICAI) is a statutory professional

body established under the Chartered Accountants Act, 1949 passed by the Parliament to regulate the
profession of Chartered Accountancy in India. ICAI is the only licensing cum regulating body of
the audit and accountancy profession in India. It is responsible for issuing all applicable accounting,
auditing and assurance standards in India relating to presentation and publication of financial
statements. It works closely with the Government of India, Reserve Bank of India and the Securities and
Exchange Board of India in formulating and enforcing such standards.

Auditing Standards is a set of systematic guidelines used by auditors when conducting audits on
companies' finances, ensuring the accuracy, consistency and verifiability of auditors' actions and reports.
They are Standards issued by professional accounting organizations. These standards prescribe the basic
principles and essential procedures, together with the related guidance, which govern the professional
conduct of an auditor. They are the rules for performing an audit.isting international standards on
auditing (ISAs) issued by international auditing and assurance standards.

Thus these are the auditing standards issued by the Auditing Standards board. Now for the
purpose of brief explanation we take a few of the above mentioned standards and they are
explained briefly as follows:

AAS 4(THE AUDITOR’S RESPONSIBILITY TO CONSIDER FRAUD AND ERROR IN

AN AUDIT OF FINANCIAL STATEMENTS):

Introduction:

The purpose of this Standard on Auditing (SA) is to establish standards on the auditor's
responsibility to consider fraud and error in an audit of financial statements. While this SA
focuses on the auditor's responsibilities with respect to fraud and error, the primary responsibility
for the prevention and detection of fraud and error rests with both those charged with governance
and the management of an entity.
 In this Standard, the term 'financial information' encompasses 'financial statements'. In some
circumstances, specific legislations and regulations may require the auditor to undertake
procedures additional to those set out in this SA.

Fraud and Error and Their Characteristics :

Misstatements in the financial statements can arise from fraud or error. The term "error" refers to
an unintentional misstatement in the financial statements, including the omission of an amount or
a disclosure, such as:

 A mistake in gathering or processing data from which financial statements are prepared.
 An incorrect accounting estimate arising from oversight or misinterpretation of facts.
 A mistake in the application of accounting principles relating to measurement,
recognition, classification, presentation, or disclosure.

The term "fraud" refers to an intentional act by one or more individuals among management,
those charged with governance, employees, or third parties, involving the use of deception to
obtain an unjust or illegal advantage. Although fraud is a broad legal concept, the auditor is
concerned with fraudulent acts that cause a material misstatement in the financial statements.
Misstatement of the financial statements may not be the objective of some frauds. Auditors do
not make legal determinations of whether fraud has actually occurred. Fraud involving one or
more members of management or those charged with governance is referred to as "management
fraud"; fraud involving only employees of the entity is referred to as "employee fraud". In either
case, there may be collusion with third parties outside the entity.

Two types of intentional misstatements are relevant to the auditor's consideration of

fraud-misstatements resulting from fraudulent financial reporting and misstatements resulting
from misappropriation of assets.

Fraudulent financial reporting involves intentional misstatements or omissions of

amounts or disclosures in financial statements to deceive financial statement users. Fraudulent
financial reporting may involve:
  Deception such as manipulation, falsification, or alteration of accounting records or
supporting documents from which the financial statements are prepared.
 Misrepresentation in, or intentional omission from, the financial statements of events,
transactions or other significant information.
 Intentional misapplication of accounting principles relating to measurement, recognition,
classification, presentation, or disclosure.
 Misappropriation of assets involves the theft of an entity's assets. Misappropriation of
assets can be accomplished in a variety of ways (including embezzling receipts, stealing
physical or intangible assets, or causing an entity to pay for goods and services not
received); it is often accompanied by false or misleading records or documents in order
to conceal the fact that the assets are missing.
 Fraud involves motivation to commit fraud and a perceived opportunity to do so.
individuals might be motivated to misappropriate assets, for example, because the
individuals are living beyond their means. Fraudulent financial reporting may be
committed because management is under pressure, from sources outside or inside the
entity, to achieve an expected (and perhaps unrealistic) earnings target particularly when
the consequences to management of failing to meet financial goals can be significanthas
knowledge of specific weaknesses in the internal control system.

The distinguishing factor between fraud and error is whether the underlying action that results in
the misstatement in the financial statements is intentional or unintentional. Unlike error, fraud is
intentional and usually involves deliberate concealment of the facts. While the auditor may be
able to identify potential opportunities for fraud to be perpetrated, it is difficult, if not impossible,
for the auditor to determine intent, particularly in matters involving management judgment, such
as accounting estimates and the appropriate application of accounting principles.

Responsibilities of the Auditor:

auditor to express an opinion such financial statements. An audit conducted in accordance with
the auditing standards generally accepted in India is designed to provide reasonable assurance
that the financial statements taken as a whole are free from material misstatement, whether
caused by fraud or error. The fact that an audit is carried out may act as a deterrent, but the
auditor is not and cannot be held responsible for the prevention of fraud and error.

AAS 8(AUDIT PLANNING):

"The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on a knowledge of the client's business.

Plans should be made to cover, among other things :

 Acquiring knowledge of the client's accounting systems, policies and internal control
procedures;
 Establishing the expected degree of reliance to be placed on internal control
 Determining and programming the nature, timing, and extent of the audit procedures to
be performed
 Coordinating the work to be performed.

Plans should be further developed and revised as necessary during the course of the audit."
Planning should be continuous throughout the engagement and involves:

 Developing an overall plan for the expected scope and conduct of the audit; and
 Developing an audit programme showing the nature, timing and extent of audit
procedures.

Changes in conditions or unexpected results of audit procedures may cause revisions of the
overall plan and of the audit programme. The reasons for significant changes may be
documented.

Adequate audit planning helps to:

 Ensure that appropriate attention is devoted to important areas of the audit

 Ensure that potential problems are promptly identified
 Ensure that the work is completed expeditiously
 Utilize the assistants properly; and
 Co-ordinate the work done by other auditors and experts.

Effective Date: This Statement on Standard Auditing Practices becomes operative in respect of
all audits relating to accounting periods beginning on or after 1.4.1989.

AAS 13(AUDIT MATERIALITY):

The purpose of this Standard is to establish standards on the concept of materiality and its
relationship with audit risk. The auditor should consider materiality and its relationship with
audit risk when conducting an audit.
 Information is material if its misstatement (i.e., omission or erroneous statement) could
influence the economic decisions of users taken on the basis of the financial information.
Materiality depends on the size and nature of the item, judged in the particular circumstances of
its misstatement. Thus, materiality provides a threshold or cut-off point rather than being a
primary qualitative characteristic which the information must have if it is to be useful.

The objective of an audit of financial information prepared within a framework of

recognized accounting policies and practices and relevant statutory requirements, if any, is to
enable the auditor to express an opinion on such financial information. The assessment of what is
material is a matter of professional judgment. The concept of materiality recognizes that some
matters, either individually or in the aggregate, are relatively important for true and fair
presentation of financial information in conformity with recognized accounting policies and
practices. The auditor considers materiality at both the overall financial information level and in
relation to individual account balances and classes of transactions. Materiality may also be
influenced by other considerations, such as the legal and regulatory requirements, non-
compliance with which may have a significant bearing on the financial information, and
considerations relating to individual account balances and relationships. This process may result
in different levels of materiality depending on the matter being audited.

Materiality should be considered by the auditor when :

 Determining the nature, timing and extent of audit procedures

 Evaluating the effect of misstatements.

Effective Date:

This Auditing and Assurance Standard becomes operative for all audits relating to
accounting periods beginning on or after April 1, 1996.

AAS 17(QUALITY CONTROL FOR AUDITS):

The purpose of this standard is to establish standards on the quality control:

 Policies and procedures of an audit firm regarding audit work generally

 Procedures regarding the work delegated to assistants on an individual audit.

Quality control policies and procedures should be implemented at both the level of the audit
firm and on individual audits. The audit firm should implement quality control policies and
procedures designed to ensure that all audits are conducted in accordance with Statements on
Standard Auditing Practices (SAPs).
There should be compliance with Statements on Standard Auditing Practices is essential
whenever an audit is carried out and requires the application of auditing procedures and reporting
practices appropriate to the particular circumstances. An audit firm needs to implement
appropriate quality control policies and procedures to ensure that all audits are carried out in
accordance with Statements on Standard Auditing Practices.

6. The objectives of the quality control policies to be adopted by an audit firm will ordinarily
incorporate the following:

a) Professional Requirements: Personnel in the firm are to adhere to the principles of

Independence, Integrity, Objectivity, Confidentiality and Professional Behavior.

(b) Skills and Competence: The firm is to be staffed by personnel who have attained and
maintain the Technical Standards and Professional Competence required to enable them
to fulfill their responsibilities with Due Care.

(c) Assignment: Audit work is to be assigned to personnel who have the degree of
technical training and proficiency required in the circumstances.

(d) Delegation: There is to be sufficient direction, supervision and review of work at all
levels to provide reasonable assurance that the work performed meets appropriate
standards of quality.

(e) Consultation: Whenever necessary, consultation within or outside the firm is to occur
with those who have appropriate expertise.

(F) Monitoring: The continued adequacy and operational effectiveness of quality control
policies and procedures is to be monitored.

The firm's general quality control policies and procedures should be communicated to its
personnel in a manner that provides reasonable assurance that the policies and procedures are
understood and implemented.

Effective Date:

This Statement on Standard Auditing Practices becomes operative for all audits relating to
accounting periods beginning on or after April 1, 1999.

AAS 12(RESPONSBILITY OF JOINT AUDITORS):

The practice of appointing more than one auditor to conduct the audit of large
entities is in vogue these days. Such auditors, known as joint auditors, conduct the audit
jointly and report on the financial statements of the entity. This statement deals with the
professional responsibilities which the auditors undertake in accepting such appointments as
joint auditors.
Division of Work

Where joint auditors are appointed, they should, by mutual discussion,

divide the audit work among themselves. The division of work would usually be in terms of
audit of identifiable units or specified areas. In some cases, due to the nature of the business
of the entity under audit, such a division of work may not be possible. In such situations, 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 and which deserve
their attention, 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.

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 a separate report on the work performed by him. On the other hand, all the joint
auditors are jointly and severally responsible –

 In respect of the audit work which is not divided among the joint auditors and is
carried out by all of them
 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.
 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
 For examining that the financial statements of the entity comply with the disclosure
requirements of the relevant statute
 For ensuring that the audit report complies with the requirements of the relevant
statute.

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 views 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 a disagreement.

Effective Date: This Statement on Standard Auditing Practices becomes operative in respect
of all audits relating to accounting periods beginning on or after April 1, 1996.

Conclusion:

Thus by the above explanations a person could get a picture of how the standards work
in today’s organizations and their impact in the accounting and auditing practices followed
by auditors. They impose responsibilities to the auditors as well as the firm to follow some
general norms so that unity among the auditing practices can be ensured. Thus a few specific
standards have been explained above for clear understanding of those auditing standards.