Nature, Objectives

and Scope of Audit

Auditing & Ethics ONE SHOT
Ankit Mundra Sir
 Topic: Introduction

→ Business Environment → Complex

→ Money Lender → Credit Worthiness

→ Share holders → Financial Position of Co. RELIANCE ?

CONFIDENCE?
→ Bank → Credit Worthy

→ Government → Taxes

→ Insurance Co. → Settle Claims

Financial Statements → True & Fair
 Topic: Origin of Auditing

Auditing → Ancient Times → Many Societies


Kautilya’s Arthshastra → 4th Century BC
Fixed Accounting Year
Process of Closure of A/c.s
Auditing
Focus Periodical Checking
Verification
Misstatement in F.S
Abuse of Power
 Topic: Origin of Auditing

Origin of the word ‘Audit’ → Latin → Audire → To HEAR

I Auditor General of Indian → 1860

Accounting Auditing

Presently → Constitutional Authority


C & AG
ICAI → Statutory Body → Act of Parliament
 Topic: Meaning & Nature of Auditing

Audit → INDEPENDENT Examination → Financial Information

 Profit Oriented
Any Entity
 Or Not
Irrespective of

Size Legal Form

When such on Examination is conducted

With a view to express An Opinion there on
 Topic: Meaning & Nature of Auditing

Auditor to Ensure:
(1) F.S.
Does not mislead
As per → Books of A/c. Classified
Amount → Properly Described As per AS
True + Fair Disclosed
 Topic: Meaning & Nature of Auditing

(2) Entries
Supported by → Suff. + Appro. A.E.
Not omitted

(3) Information
Clear
Unambiguous

Credibility
Auditing → Provides → Assurance → To user → F.S.
Relied Upon
 Topic: Interdisciplinary
Relationship with Diverse Subject
Sound knowledge of Accounting
Working Capital Management Funds
Flow, Ratio, Capital Budgeting Reviews the FS
Financial Management Accounting Good knowledge
of Business Law
EDP Auditing Law

Data Processing Auditing Production Cost System

Verification of Inventory
Economics
Statistics &
Mathematics
Behavioral Familiar with Economic
Science Environment of the client
Statistical Sampling
Knowledge of Human Behavior
 Topic: Objectives of Audit
As per SA 200 → "Overall OBJECTIVES of an Independent Auditor
AND conduct of an Audit in accordance with SA“

Objective of Audit


To obtain R.A. → That the F.S. as a whole To Report on F.S

→ are Free from M.M. +
→ Due to F/E Communicate as required by SA
Enabling the Auditor to Express an Option 
→ F.S. are Prepared In accordance with Auditor’s
 Findings
In accordance with App. F.R.F.
 Topic: Objectives of Audit

Absolute Assurance = Guarantee R.A.  Not Guarantee

= High Level of Assurance
 Topic: Scope of Audit -What is Included

➢ Scope = Range or Reach

➢ Purpose of Audit = Enhance the degree of Confidence of the intended user of FS.

Shareholders Employees Govt. Regulatory Bankers

➢ Scope of Audit Authorities
(1) Cover adequately all ASPECTS of an enterprise
Reliable Judgement
(2) Financial Information
Sufficient
Study + Assess Carryout
Underlying A/c
Other Source of Data
records
A/c. Sys. I.C. Test Enquiries Procedures
 Topic: Scope of Audit -What is Included

(3) Information → Relevant  Property Disclosed

Properly Summarized Consider Evaluate


Judgement Made by Mgt.
Transactions Events Selection Application
A/c.
Policies
 Topic: Scope of Audit -What is Included

(4) Expression of an opinion

➢ Historical Financial Info.
• Financial Terms
• Relation to particular entity
• Derived from A/c. Sys.
• About Economic

Event Conditions Circumstances

Past Pd.
 Topic: Scope of Audit -What is NOT Included
Auditor is NOT EXPECTED to:-
(1) Perform duties

which fall outside the domain of his competence
(2) Determine suitability + Life of civil structures (Bldg.)
(3) Authenticate Documentation → Not on Expert
(4) Audit  Not official investigation → Alleged wrongdoing
(5) Auditor  specific legal power
(6) Audit  Investigation

Obtain R.A. Critical Examination of A/c.
 With a special purpose
F.S. as a whole are free from MM → Due to F/E
(7) Responsibility → Preparation → FS
 Topic: Inherent Limitations of Audit

Auditor
➢ NOT EXPECTED to Reduce the Audit Risk to ZERO
➢ CANNOT obtain ABSOLUTE ASSURANCE

That the F.S. as a whole

are FREE from MM

Due to F/E
 Topic: Inherent Limitations of Audit

Factor
(1) Nature of Financial Reporting

Preparation of FS → Involves → Mgt. Judgement

 Topic: Inherent Limitations of Audit

(2) Nature of Audit Procedures

Practical + Legal Limitations

Sampling Approach Intentionally
Mg + May not provide
Unintentionally complete info
Sophisticated
→ Fraud may involve Scheme
 Carefully Organised
Fabricated Documents
→ Related party transactions
 Topic: Inherent Limitations of Audit

(3) Not in Nature of Investigation

Not official Investigation

(4) Timeliness of Financial Reporting & Decrease in Relevance of Info. Over Time

Balance b/w. Reliability of Info  cost of obtaining it

(5) Future Events

Entity’ ability to continue as Going Concern

 Topic: What is an Engagement?

Arrangement to do something
Auditor
→ Formal Agreement → b/w Under Which
Client

Auditor agrees to provide Auditing Service

Engagement Letter
 Topic: External Audit Engagement /
Reasonable Assurance Engagement
Purpose → Enhance the degree of confidence

of the intended user of F.S.
 Topic: Benefits of Audit /
Why is Audit needed?
(1) Audited A/c. → provide → High Quality Info.

Give confidence to user of FS

(2) Interest of shareholders → safeguarded
(3) Moral Check on employees
(4) Helpful for Govt. → determine Tax Liabilities
(5) Relied upon by Bankers / Lenders
(6) Detection of F/E
(7) Review

Existence Operation

I.C.
 Topic: Audit -Mandatory or Voluntary?

Mandatory → Companies
→ Entities

T/o > threshold limit as per Income Tax
→ Organization → Receiving Govt. Grants
 Topic: Who appoints an Auditor?

➢ Generally → Owners

➢ Constitutional/Govt. Authorities → As per Law/Regulation

➢ Companies (Non-Govt.) → Members (Shareholders) @ AGM

➢ Companies (Govt.) → C & AG

➢ Firms → Partners
 Topic: To Whom Report is
Submitted by an Auditor?

➢ Report → Written

➢ Submitted → To the person → Making Appointment

 Topic: Meaning of Assurance Engagement

Practitioners expresses a conclusion → About the outcome of


Designed to enhance the degree of confidence Evaluation
 OR
of the intended user Measurement
(Other than the Responsible Party) 
Of a subject
➢ Practitioner → Gives Opinion → About SPECIFIC INFO. matters
 
Due to which users make confident decisions Against Criteria

Knowing well → Chance of Incorrect info

DIMINISHED
 Topic: Elements of an Assurance Engagement

(1) Provides Assurance Broader than Auditor

Practitioner Audit → Historical

Assurance → Historical
or Present or Future
Responsible
Party
Person for whom an Relation
Assurance Report is prepared
Responsible for
Intended Preparation of Subject
User Matter
 Topic: Elements of an Assurance Engagement

(2) Appropriate Subject Matter

Info. To be examined by the practitioner

(3) Suitable criteria → Benchmarks → Used to evaluate the subject matter

Standards Guidance Laws Rules Regulations

(4) Suff. + Appro. Evidence→ Conclusion → Opinion

 
Qty. Quality
 Topic: Elements of an Assurance Engagement

(5) Written Assurance Report → in appropriate format


Outcome of an Assurance Engagement
 Topic: Audit vs. Review

Audit v/s. Review

→ R.A. Engagement → Limited Assurance Engagement

→ Higher assurance → Lower level of assurance

→ More Procedures → Fewer Procedures

→ Scope of Conclusion is higher → Limited Conclusion

Both are related to FS prepared on the basis of Historical Financial INFO.

 Topic: R.A. Engagement vs. L.A. Engagement

Basis R.A.E L.A.E.

Level Higher Lower
Audit Elaborate & Fewer Procedure as compared
Procedure Extensive with RA
Conclusion Reasonable Limited
Example Audit Engagement Review Engagement
 Topic: Audit & Review vs.
Prospective Financial Info
➢ Audit & Review → Historical Financial info.
Prospective Financial Info. → NOT Historical Financial Info.
Generally on I.C. of an entity
Based on Assumptions → About events

That may occur in the future
+
Possible Actions by an Entity
Forecast
In the form of
Projection
Topic: Audit & Review vs.
Prospective Financial Info
Obtains Suff. + Appro. A.E. → about Mgt.’s Assumptions

NOT Unreasonable
Financial Info. → Properly

Prepared Presented Disclosed

Moderate level of Assurance
Auditor → NOT in a position → to express an opinion

Results shown Will be achieved
Topic: Audit & Review vs.
Prospective Financial Info
Report :- Nothing has come to practitioner’s attention

To suggest that these assumptions

DO NOT PROVIDE A REASONABLE BASIS FOR THE PROJECTION
 Topic: Qualities of an Auditor

➢ Tact, Caution, Firmness, Good Temper, Integrity, Discretion, Industry

Judgement, Patience, Clear Headedness & Reliability
➢ Qualities of Good Businessman ⇋ Qualities of on Auditor
➢ Shine of culture for attaining great height
➢ Highest Degree of Integrity + Independence
➢ Basic Human Qualities
➢ Exhaustive Knowledge of Accounting is sine qua non
➢ Thoroughly known → A/c. Principles → Techniques
 Topic: Engagement and
Quality Control Standards
Engagement Standards → Issued under authority of → ICAI Council

SQC SA SRE SAE SRS

    
Quality Audit of Review of Assurance Procedures
control for Historical Historical Engagement
all services Financial Financial 
 Info. Info. Other than Info. Compilation Related
Only Firm Historical Services
Financial Info.
 Topic: Engagement and
Quality Control Standards
➢ Why are standards needed?

(1) Carrying Audit as per Global Practices & Benchmarks

(2) Improve → Quality of F.R

(3) Promote → Uniformity

Knowledge
(4) Equips → Professional
Skills
(5) Ensure → Audit Quality