Audit (Paper 12B) Key points to remember 1.

Key points to remember

Chapter 1 - Auditing Concepts

Definition of  Systematic and independent examination of financial information,

Audit of any entity (whether profit making or not), with a view to express
an opinion [SA 200]

Purpose /  to express a true and fair view on the financial statements, after
objective of examining internal and external evidences – primary objective
Audit  to detect errors and frauds – secondary objective

Features of  involves evaluation & verification of the supporting documents

Audit such as vouchers, etc.
 involves review of systems of accounting & Internal Controls.
 The information audited may be financial or non-financial
 the auditor should be competent (possessing prescribed
qualification) and independent

Scope of Audit  Auditor is a watchdog and not a blood hound

 The scope of audit is to audit the financial statements and not
investigate in any matter

Who can be an  A person who professionally qualified

auditor ?  Should have a certificate of practice from the relevant authority
 Should possess knowledge of:
Or
 accounting and other relevant laws like the Companies Act,
Qualities of a 1956 in case of audit of Companies
good auditor  specific laws, if any governing the auditee eg. Banking
companies are governed by the Banking Regulation Act.
 Should be independent of the client
 Should possess integrity, honesty and objectivity
 Should possess good communication skills and drafting skills so
that the auditor’s report is free from any language / grammatical
error

Distinction
between Accounting Auditing

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 Audit (Paper 12B) Key points to remember 1.2

accounting and Record the events and Evaluate evidence to verify the
auditing transactions in the books of events and transactions
accounts recorded in the books

Prepare financial statements Determine fairness of

like Balance sheet, P&L statements in conformity with
account and the schedules accounting principles

Prepare the Audit report on

findings

Make financial statement Verify the assertions made by

assertions the management

Distribute the audited financial Deliver audit report to the

statements and audit report to company
shareholders

Distinction
between audit Audit Investigation
and
Examination of records to Examination of records to
investigation
ascertain whether the financial ascertain whether a specified
statements are true and fair fact is true or not

Wide in scope as it covers Narrow in scope as it focuses

checking almost all the aspects on some specific area only
of financials

Conducted in accordance with Extends to more than only

the generally accepted auditing auditing procedures. Like
principles forensic analysis

Gathers persuasive evidence Gathers conclusive evidence

Auditor has a positive mindset Investigator has a negative

mindset

It is a routine exercise It is a non-routine exercise.

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 Audit (Paper 12B) Key points to remember 1.3

Aspects to be  Accounting and internal control system

covered while  Books and records
Auditing  Statutory and regulatory compliances
 Reporting requirements

Principles  Integrity, objectivity and independence: Auditor should be

governing audit honest, straight forward, impartial and free from any influence
 Confidentiality: Auditor should not disclose the information of
the client to anyone
 Skills and competence: Auditor should be qualified, well trained
and experienced
 Work performed by others: Auditor is responsible for the work
performed by others like his subordinates, external experts etc.
 Documentation: Adequate working papers should be maintained
by the Auditors to demonstrate that audit has been performed as
per the established principles
 Planning: Auditor should obtain the adequate information about
the client (including knowledge about the accounting system and
internal controls), so that the Nature, Timing and Extent of the
audit procedures can be planned
 Audit evidence: Adequate evidence(s) must be collected
 Reporting: Audit report should be based on the evidences

Significance of The audited financial statements are relied upon by the following
auditing outsiders:

 Income tax authorities for ascertaining the taxable income

 GST authorities for ascertaining the tax due
 Financial institutions for granting / sanctioning loans
 Insurance companies for calculating the damage claims
 Bankruptcy and insolvency professionals to analyse the net worth
 Creditors for settling their dues

The audited financial statements are also referred by the Management for:

 for detection of errors and frauds

 keeping a moral check on the employees so that they don’t
embezzle funds

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 Audit (Paper 12B) Key points to remember 1.4

 improving efficiency and effectiveness in the overall functioning

of the organization
 comparing past results with the current period result and inter-firm
comparisons
 settling the accounts of the deceased partner, in case of a firm

Advantages of  protect interest of the stakeholders

audit  serves as a moral check on the employees from committing any
defalcation / embezzlement
 audited financials are considered more reliable by the government
agencies, like income tax / GST department
 facilitates detection of wastage and losses
 facilitates detection of errors and frauds
 audited financials are more reliable for valuation purposes in
corporate restructuring like amalgamation of companies
 Banking companies / financial institutions use the audited
financials to grant loan to the lenders
 Audited financials are helpful in settling the claims of the partners
in case of disputes

Limitations of Audit doesn’t guarantee absence of material misstatements because:

audit
 Test checking is done in audit
 Audit evidence are not conclusive but persuasive
 Inherent limitations are there in internal controls, like management
can override controls
 Absence of professional skepticism of auditor

Distinction
between private
Private Audit Statutory Audit
audit and
statutory audit Appointed by management Appointed as per the relevant
statute / law

Scope is decided by the Scope is decided by the

management relevant statute / law

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 Audit (Paper 12B) Key points to remember 1.5

Objective is to review the Objective is to ensure

internal controls and the truthfulness and fairness of
operations of the business financial statements

Proprietary approach Compliance approach

Voluntary in nature Mandatory in nature

Audit report is given to the Audit report is given to the

management shareholder / owner

Distinction
between
Statutory audit / Balance Government audit
statutory audit
sheet audit
and
government Applicable to all private Applicable to Government
audit companies, co-operative Companies, government
societies, proprietorship and departments and statutory
partnership firms corporations

Owners of the concern appoint Auditors are appointed by

the auditors, like shareholders Comptroller and Auditor
in case of Companies. General (‘CAG’) of India

Audit Report submitted to the Audit report submitted to

owners shareholders and CAG

Internal Audit  Audit of operations / functions of the entity

 Includes examination of matters related to finance as well as
policies and procedures of the Company
 Involves evaluation of internal controls and compliances

Distinguish Statutory Audit Internal Audit

between
Scope is determined by the The scope of work includes the
Statutory Audit
Companies Act adherence of management policies

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 Audit (Paper 12B) Key points to remember 1.6

and Internal and procedures and indentifies the

audit weakness in the internal control.

Statutory Auditor is appointed by Internal Auditor is appointed by

the shareholder in the general the Board.
meeting

Statutory Auditor can be removed Internal Auditor can be removed

by the shareholders. by the Board.

Remuneration is fixed by the Remuneration is fixed by the

shareholders Board

Report is submitted to the Report (alongwith suggestions for

appointing authority improvement) is submitted to the
Board

Forensic Audit  Involves investigation alongwith audit

 Investigation of whether fraud has taken place

Social Audit  Examination of whether an entity meets its social and ethical
objectives
 Review of the extent of community participation of the business
entity, towards environmental protection, customer satisfaction.

Environmental  Examination of how well an entity interacts with its environment.

Audit Like monitoring emission to air, water and land.
 Analysis of the legal constraints imposed on the entity


Propriety audit  An essential feature of government audit

 It not only examines the truthfulness and fairness of the financial
statements, but also ensures that the transactions have been carried
out prudently

Operational  Examination of all the operations and activities of the entity

Audit  Examination of control structure of the enterprise
 Evaluation of the whether operating standards are followed
 Evaluation of the whether the overall target capacity utilization is
met

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 Audit (Paper 12B) Key points to remember 1.7

Continuous  Audit conducted throughout the year at regular intervals

Audit  Testing of 100% transactions
 Errors and irregularities are detected much in advance
 Timely finalisation of accounts

Disadvantages:

 Inconvenient for the auditee

 Time taking
 Expensive
 Repetitive work

Information  Adherence to norms which ensure safeguarding of data

System Audit  Adherence of norms for maintenance of privacy of personal data
 Controlling the possibility of computer abuse / incorrect data

Final Audit  Annual audit conducted at the end of the year

Interim Audit  Audit conducted between two final audits, generally during the
mid-year like quarter / half-year

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