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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