Auditing

Unit-1 Notes

Introduction: Meaning

Auditing is a systematic examination of the books and records of a business or other organization to
ascertain or verify and report upon the facts regarding its financial operations and the results thereof.
Auditing is concerned with verifying accounting data by determining the accuracy and reliability of
accounting statements and reports.
The audit basically means an examination of financial reports or other reports by the independent
person or organization where the opinion is expressed based on the fact of their review.

Definition of Auditing:

According to Spicer and Peglar defined audit as:

“Audit is such an examination of the books, accounts and vouchers of a business, as shall enable the
auditor to satisfy himself whether or not the balance sheet is properly drawn up, so as to exhibit a true
and correct view of the state of the affairs of the business according to the best of his information and
explanations given to him and as shown by the books; and if not, in what respects it is untrue or
incorrect.”
According to The International auditing practices committee defined auditing as:
“The independent examination of financial information of any entity whether profit oriented or not
and irrespective of size/legal form, when such an examination is conducted with a view to express an
opinion thereon.”
According to The book “An Introduction to Indian Government Accounts and Audit” issued
by the Comptroller and Auditor General of India, defines audit as:
“An instrument of financial control. It acts as a safeguard on behalf of the proprietor (whether an
individual or group of persons) against extravagance, carelessness or fraud on the part of the
proprietor’s agents or servants in the realization and utilisation of the money or other assets and it
ensures on the proprietor’s behalf that the accounts maintained truly represent facts and that the
expenditure has been incurred with due regularity and propriety. The agency employed for this
purpose is called an auditor.”

Features of Auditing

1. Independent Examination: Audit is concerned with an independent examination. An

auditor must be independent in fact and appearance. He is independent if he is not an
employee.
2. Financial Information: Audit relates to financial information of a business concern the
books of accounts and financial information provide data about the business. The auditor
examines such information to test the validity of data.
3. Entity: Audit deals with an entity, enterprise, undertaking, concern, agency or company. All
aspects of entity relevant to financial statements are covered by the audit.
4. Business for Profit: Audit is for the business set up for profit in private sector. In real life
proprietorship, partnership and companies are working for profit. An audit is compulsory for
companies and it is optional for other businesses.
5. Non-Profit Business: Audit is conducted by non-profit associations. Many companies are
working, for the welfare of society. These companies promote art, religion, charity and other
useful objects.
6. Size of Business: Size of business may be small, medium or large. Proprietorship,
partnership, and co-operative society. Private limited company may be medium and a public
limited company is large in size. An audit is suitable for every size of business.
7. Legal Form: Audit can protect business assets and rights of owners. The legal form may
differ from business to business. But the audit is equally beneficial for all forms of business
concerns.
 8. Expressing Opinion: Audit is conducted for expressing an opinion on financial information.
The auditor can express an opinion whether financial statements give a true and fair view and
comply with relevant laws.

Objectives of Auditing
Primary and secondary objectives
The primary or main objective of audit is as follows:
1.To Examine the Accuracy of the Books of Accounts
An auditor has to examine the accuracy of the books of accounts, vouchers and other records
to certify that Profit and Loss Account discloses a true and fair view of profit or loss for the
financial period and the Balance Sheet on a given date is properly drawn up to exhibit a true
and fair view of the state of affairs of the business. Therefore, the auditor should undertake
the following steps:
Step-1 Verify the arithmetical accuracy of the books of accounts.
Step-2 Verify the existence and value of assets and liabilities of the companies.
Step-3 Verify whether all the statutory requirements on maintaining the book of accounts has
been complied with.
Meaning of Books of Accounts
Books of Accounts mean the financial records maintained by a business concern for a period
of one year. The period of one year can be either calendar year i.e., from 1st January to 31st
December or financial year i.e., from 1st April to 31st March. Usually, business concerns
adopt financial year for accounting all business transactions.
Books of accounts include the following: ledgers, subsidiary books, cash and other account
books either in the written form or through print outs or through electronic storage devices.
2. To Express Opinion on Financial Statements
After verifying the accuracy of the books of accounts, the auditor should express his expert
opinion on the truthfulness and fairness of the financial statements. Finally, the auditor should
certify that the Profit and Loss Account and Balance Sheet represent a true and fair view of
the state of affairs of the company for a particular period.

The Secondary Objectives of audit are:

(1) Detection and Prevention of Errors, and
(2) Detection and Prevention of Frauds.
1.Detection and Prevention of Errors
The Institute of Chartered Accountants of India defines an error as, “an unintentional mistake
in the books of accounts.” Errors are the carelessness on the part of the person preparing the
books of accounts or committing mistakes in the process of keeping accounting records.
Errors which take place in the books of accounts and the duty of an auditor to locate such
errors are discussed below:

1. Clerical Error
(A) Errors of Omission:
When a transaction is not recorded or partially recorded in the books of account is known as
Errors of Omission. Usually, it arises due to the mistake of clerks. Error of omission can
occur due to complete omission or partial omission.
(i) Error of Complete Omission: When a transaction is totally or completely omitted to be
recorded in the books it is called as “Error of Complete Omission”. It will not affect the
agreement of the Trial Balance and hence it is difficult to detect such errors.
Example – 1: Goods purchased on credit from Mr. X on 10.5.2016 for Rs. 20,500, not
recorded in Purchases Book.
Example – 2: Goods sold for cash to Ram for Rs. 10,000 on 1.7.2016, not recorded in Cash
Book.
(ii) Errors of Partial Omission: When a transaction is partly recorded, it is called as “Error
of Partial Omission”. Such kind of errors can be detected easily as it will affect the agreement
of the Trial Balance.
Example – 1: Credit purchase from Mr. C for Rs. 45,000 on 10.12.2016, is entered in the
Purchases Book but not posted in Mr. C’s account.
Example – 2: Cash book total of Rs. 1,10,100 in Page 5 is not carried.

(B) Errors of Commission:

Errors which are not supposed to be committed or done by carelessness is
called as Error of Commission. Such errors arise in the following ways
(1) Error of Recording,
(2) Error of Posting,
(3) Error of casting, or Error of Carry-forward.
(1) Error of Recording: The error arises when any transaction is incorrectly recorded in the
books of original entry. This error does not affect the Trial Balance.
Example – 1: Goods purchased from Shyam for Rs. 1000 wrongly recorded in Purchases Day
Book as Rs. 100.
Example – 2: Goods purchased from Ram for Rs. 1,000, instead of entering in Purchase Day
Book wrongly entered in Sales Day Book.

(2) Error of Posting: The error arises when a transaction is correctly journalized but
wrongly posted in ledger account.
Example – 1: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted to debit side
of Repairs account instead of debit side of Rent account.
Example – 2: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted to credit
side of Rent account instead of debit side of Rent account.
(3) Error of casting, or Error of Carry-forward: The error arises when a mistake is
committed in carrying forward a total of one page on the next page. This error affects the
Trial Balance.
Example – 1: Purchases Book is totalled as Rs. 10,000 instead of 1,000.
Example – 2: Total of Purchases Book is carried forward as Rs. 1,000 instead of Rs. 100.

2. Error of Duplication
Errors of duplication arise when an entry in a book of original entry has been made twice and
has also been posted twice. These errors do not affect the agreement of trial balance, hence it
can’t located easily.
Example: Amount paid to Anu, a creditor on 1.10.2016 for Rs. 75,000 wrongly accounted
twice to Anu’s account.

3. Error of Compensation (or) Compensating Errors

When one error on debit side is compensated by another entry on credit side to the same
extent is called as Compensating Error. They are also called as Off-setting Errors. These
errors do not affect the agreement of trial balance and hence it cannot be located.
Example: A’s account which was to be debited for Rs. 5,000 was credited as Rs. 5,000 and
similarly B’s account which was to be credited for Rs. 5,000 was debited for Rs. 5,000.

4. Error of Principle
An error of principle occurs when the generally accepted principles of accounting are not
followed while recording the transactions in the books of account. These errors may be due to
lack of knowledge on accounting principles and concepts. Errors of principle do not affect the
trial balance and hence it is very difficult for an auditor to locate such type of errors.
Example – 1: Repairs to Office Building for Rs. 32,000, instead of debiting to repairs account
is wrongly debited to building account.
Example – 2: Freight charges of Rs. 3,000 paid for a new machinery, instead of debiting to
Machinery account wrongly debited to Freight account.

Detection and Prevention of Frauds

Fraud is the intentional or willful misrepresentation of transactions in the books of accounts
by the dishonest employees to deceive somebody. Thus detection and prevention of fraud is
 of great importance and constituents an important duty of an auditor. Fraud can be classified
as:
1. Misappropriation of Cash
This is a very common method of misappropriation of cash by the dishonest employees by
giving false representation in the books of accounts intentionally. In order to detect and
prevent misappropriation, the auditor should verify the system of internal check in operation
and by making a detailed examination of records and documents. Cash may be
misappropriated in the following ways:
(1) By omitting to enter cash which has been received
Example: Cash received on account of cash sales for Rs. 35,000 is not accounted in the debit
side of the cash book.
(2) By accounting less amount on the receipt side of cash book than the actual amount
received.
Example: Cash received on account of cash sales for Rs. 35,000 is accounted in the debit side
of the cash book as Rs. 25,000. The difference of Rs. 10,000 may be defrauded by the cashier.
(3) By recording fictitious entries on the payment side of cash book.
Example: Cash book is credited for Rs. 44,000 as amount paid to Mr. X for goods purchased
on credit but actually no amount is paid. Hence, cashier misappropriates Rs. 44,000 of cash as
paid to Mr. X.

(4) By accounting more amount on payments side of cash book than the actual amount paid.
Example: Amount paid to Gopal for Rs. 5,000 is accounted on the credit side of cash book
as Rs. 15,000. The difference of Rs. 10,000 may be defrauded by the cashier.

2. Misappropriation of Goods
Fraud which takes places in respect of goods is Misappropriation of Goods. Such a type of
fraud is difficult to detect and usually takes place where the goods are less bulky and are of
high value.
Example – 1: Goods purchased amounting to Rs. 58,000 is wrongly accounted in Purchases
Book as Rs. 50,000. Hence, showing less amount of purchases than the actual and
misappropriating goods worth Rs. 8,000.

3. Manipulation of Accounts
There is a very common practice almost in every organization, some dishonest employees
have intention to commit this type of fraud. Manipulation of accounts is the procedure to alter
books of accounts in such a way that there will be an increase or decrease in the amount of
profit to achieve some personal objectives of the high officials. It is very difficult for the
auditors to identify such frauds which may be due to manipulation of accounts.

Other Objectives of Auditing

1. Accounts and statements verification: Evaluating the fairness & accuracy of books of
accounts is the primary objective of Auditing. It checks each & every financial transaction
thoroughly. It detects and prevents any frauds in the books of accounts. The auditor is
provided with free hands to audit the books of accounts & is independent of business.

2. Checking Accounting Policies: Every business or organisation needs to follow some

accounting policies. Books of accounts are prepared according to these accounting policies. If
a business has an effective accounting system, its efficiency can be increased. It is the duty of
the auditor to check the accounting policies of business & express his independent opinion.

3. Error and Fraud detection: Auditing helps in easy finding of errors & frauds from the books
of accounts. It is the duty of management to avoid & check errors & frauds. However,
sometimes it becomes difficult for management to find out the errors. It is through auditing
that helps managers to find out errors & frauds. After this manager take corrective steps
against these errors or frauds.
 4. Improves Quality of Business processes: Auditing helps management in finding out the
errors & frauds. Management can take corrective measures against these errors. Steps are
taken so that they are not repeated again. This way it improves the quality of business process
& improves its efficiency. Also, the employees of business work properly due to the threat of
auditing.

5. Assurance to investors: Auditing assures that each & every figure represented in the financial
statement is correct. It helps in evaluating every figure of business books of accounts.
Financial statements after being audited are considered trustworthy by investors. Investors are
fully assured by these financial statements.

6. Checking Assets and liabilities: Auditing thoroughly evaluates the financial statements of the
business. It helps in confirming the true value of assets & liabilities of the organisation. This
helps in determining true financial position of the business. After that accordingly, proper
plans can be made to achieve targets & goals.

Types of Audits:

1)On the basis of legislative control:

(a)Statutory Audit: Those audit which are mandatory is known as statutory audit. This is
done to determine whether an organization is providing an accurate financial position or not.
ex-Company/Financial institution/Joint stock company audit.
(b)Government audit: When government institutions are audited by a government auditor
then it is known as government audit.
ex-Audit of BTCL, BRTA
(c)Private audit: The audit which is done for specific purpose is known as private audit. This
type of audit can be done only for some specific section.
ex- audit of accounts receivable or inventory.

2)On the basis of relation between auditor and management:

(a)Internal audit: When an audit of an organization is done by an auditor of other branches
but of same organization is known as internal audit. Internal audit is done by the auditors who
are appointed by the management.
ex-when the AB bank of Cannaught Place branch, Delhi is being audited by the auditors of
AB bank Rohini branch, Delhi.
(b)External audit: The audit which is completed by an external auditor, who is appointed by
the board of directors/shareholders of an organization is known as external audit.
ex-Audit of AB bank by a renowned CPA firm.

i3)On the basis of periodicity:

(a)Continuous audit: The audit which is done continuously for the improvement and
verification of error of an organization is known as continuous audit.
-this type of audit is done monthly, quarterly.
(b)Interim audit: The audit which is completed during the middle of a fiscal year of an
organization is known as interim audit.
-a corporation might have an interim audit covering the first nine months of the fiscal year.
(c)Periodical audit: The audit which is done after a certain period of time is known as
periodical audit.
-this type of audit is completed at the end of a year, when the balance sheet, profit & loss
account is being prepared.
(d)Occasional audit: The audit which is done on the basis of necessity is known as
occasional audit.
4)On the basis of subject matter:
(a)Financial audit: This type of audit is completed by auditing the financial statement of a
business organization.
(b)Operational audit: The audit which is completed by auditing whether an organisations
day to day operational activities are recorded or not.
(c)Cost audit: This type of audit is completed by auditing the cost accounting section as total
manufacturing cost/costs of goods sold/manufactured of an organization.
(d)Management audit: This type of audit is done for justifying whether the management
policy of an organization is fair or not.

5)On the basis of manner of checking:

(a)Standard audit: The audit which is done by following standard rules and regulation of an
audit is known as standard audit.
(b)Balance audit: The audit in which all the balance sheet item as accounts
payable/receivable, cash, land etc. are audited is known as balance audit.
(c)Vouch & Post audit: The audit in which each transaction of a business organization is
being audited is known as vouch & post audit.

6)On the basis of coverage:

(a)Complete audit: The audit in which all the section as well as the financial information of
an organization is being audited is known as complete audit.
-this type of audit is done by checking up all the books of accounts of each section
(b)Partial audit: The audit in which a particular area/section of an organization is being
audited is known as partial audit.
- audit of a companies accounts section

Internal Audit
Internal audit checks how well a company maintains operational efficiency and manages accounting
processes while complying with its standard rules and regulations. Conducting audits from time to
time ensures the firms are strict enough in following the administrative fundamentals and sticking to a
maximum accuracy rate so far as financial reporting is concerned.
An internal auditor is appointed to check the overall performance of different companies with
respect to the administrative, executive, financial, and legal standards they follow. The audit
effectively identifies corporate frauds while assessing the internal controls to ensure a business'
efficiency.

Types of Internal Audit

1. Compliance Audits: An internal auditor checks whether the company complies with the
rules, regulations, and laws of the region, state, or country it operates. In case of non-
compliance, firms are subject to payment of fines and penalties or other punishments. As far
as the compliance audit is concerned, companies must stick to Foreign Corrupt Practices Act
(FCPA) or General Data Protection Regulation (GDPR).

2. IT Audits: The Information Technology audits include the assessment and evaluation of the
technological infrastructure. The auditor, in this case, checks if the hardware and software
equipment is processing requests and operating properly. This audit covers the cyber issues
 that might require immediate attention. In addition, the professional examines the general IT
controls, system operation, and backup-recovery processes.

3. Performance Audits: While conducting this type of audit, the auditor ensures that the
companies' standards and core competencies are efficiently met. The management sets these
standards, expecting employees and the overall workforce to strengthen their performance
while remaining compliant with the standards and regulations.

4. Operational Audits: The operational auditors are accountable for issues with the company’s
operational infrastructure. They check how efficiently a business works to achieve its set
output. Starting from quality control, accounting controls to human resources function, they
assess every aspect of the company. In addition, they also offer advice and guidelines to
improve the operational procedures to enhance the company’s efficiency and effectiveness.

5. Environmental Audits: Having an eco-friendly environment is a must for any company.

When an auditor is asked to conduct environmental audits, they see that the premises do not
violate any environmental laws or policies.

Functions of Internal Audit

These audits can be conducted daily, monthly, quarterly, or annually, given how frequently the
directors want the companies to be inspected and supervised. The main motives behind conducting the
audits internally are:
1. Through this audit, auditors monitor internal controls to ensure that the accounting
processes are effectively conducted and the accuracy is maintained in the released financial
reports.
2. The internal audit manager checks governance to ensure companies do not compromise
their ethical values. They see if the firms in question adopt fair practices for a growing
business.
Difference between Internal and External Audit:

Audit Programme

Meaning of Audit Programme:

An audit programme is a detailed, written statement designed by the auditor indicating the work to be
performed by the audit assistants, specifying the time limit for completion of work, instructions and
guidance to the audit staff. In short, it is a tool for planning, directing
and controlling the audit work.
An audit programme is a detailed plan of the auditing work to be performed. It specifies the
procedures to be followed in the conduct of audit more efficiently. The auditor outlines the whole
procedure of audit from beginning till the finalization of audit report.
Audit programme is generally contained in the audit notebook.
Definition:
Prof. Meigs defines an audit programme as, “an audit programme is a detailed plan of the auditing
work to be performed, specifying the procedures to be followed in verification of each item and the
financial statements and giving the estimated time required.”

Features of an Audit Programme:

The features of an audit programme include the following:

1. It is a set of procedures to be adopted to conduct the audit more efficiently.

2. It is a written scheme designed by the auditor.

3. It is a blue print of the audit work.

4. It facilitates delegation of work, based on the capabilities of audit staff.

5. It acts as evidence in future for the audit work being performed.

6.It specifies the work to be done by the audit staff, the manner and time limit for completion of the
work.

Contents of an Audit Programme:

The following are the details of an audit programme:

1. Name of the client.

2. Nature of operations and business of client.

3. Review of system of internal check.

4. Date of commencement of audit work.

5. Duration of audit work.

6. Accounting system followed in client organization.

7. Review the report of the previous auditor.

8. Review the remarks, instructions or objections raised in the previous audit report.

9. Examine the various ledger accounts and subsidiary books.

10. Examine the statutory books and registers, profit and loss account, and balance sheet.

Advantages of Audit Programme

The following are the advantages of an audit programme.
1. An audit programme helps to ensure that all the critical areas are covered during the audit
appropriately.
2. It helps to distribute work among the members of the audit team and assistants as per their
level of competence and experience.
3. An audit programme gives instructions to the audit team and decreases the scope for
misunderstanding.
4. It helps to fix the responsibility for the work done amongst the audit team as the work done
can be traced back to the individual in the auditing staff.
5. It helps to assess the progress of work by ascertaining the part of the audit work that has been
completed against how much is left in order to complete the audit successfully.
Disadvantages of Audit Programme
The following are the disadvantages of Audit Programmes.
1. Rigidity: An audit programme does not possess the advantage of being flexible as the same
programme cannot be used for different types of organisations. Every business or entity has
the separate and unique issues that they face. Therefore, a single or same audit programme
cannot be laid down for every type of business.
2. Decreases the Initiative of Efficient Staff: An audit programme does nothing to promote the
initiative of capable individuals. Assistants and team members would not be able to suggest
any improvement in the set plan.
3. Mechanical Audit Work: An audit programme is considered mechanical that it ignores
various other aspects such as internal control.
 4. Overlooking New Areas: As time passes, new problems or issues may arise during the audit,
and they may be overlooked in the Audit Programme

STEPS IN DEVELOPING OF AUDIT PROGRAMME:

The key steps involved in developing an audit programme are as follows:

1. Understanding the Entity and its Environment:

i. Obtain knowledge of the entity: This includes understanding the entity's industry,
operations, management, governance, and internal control systems.
ii. Identify key risks: Assess the risks of material misstatement in the financial statements or
subject matter being audited. This involves considering both internal and external factors that
could affect the entity.

2. Defining the Objectives and Scope of the Audit:

i. Clearly state the audit objectives: What are you trying to achieve with the audit?
For example, are you trying to determine if the financial statements are fairly
presented in accordance with generally accepted accounting principles 1 (GAAP)?
ii. Determine the scope of the audit: What areas or processes will be covered by the
audit? This will depend on the objectives of the audit and the risks identified.

3. Developing Audit Procedures:

i. Select appropriate audit procedures: Based on the identified risks and audit objectives, determine
the specific audit procedures that will be performed. These procedures may include:

a) Inspection of records or documents

b) Inspection of tangible assets
c) Observation of processes or procedures
d) Inquiry of management or other personnel
e) Confirmation with third parties
f) Analytical procedures
g) Recalculation of amounts

ii. Document the audit procedures: Clearly document each audit procedure, including the nature,
timing, and extent of the procedure.

4. Determining the Sample Size: Determine the appropriate sample size: For each audit
procedure, determine the appropriate sample size to provide sufficient and appropriate audit
evidence. This will depend on the risk of misstatement and the desired level of assurance.

5. Setting the Timing of the Audit: Establish a timeline for the audit: Determine when
each audit procedure will be performed. This will help ensure that the audit is completed in a
timely manner.

6. Preparing the Audit Program Document: Document the audit program: Compile all
of the above information into a formal audit program document. This document will serve as
a guide for the audit team.
7. Reviewing and Approving the Audit Program: Review the audit program: Before the
audit begins, the audit program should be reviewed and approved by a senior member of the
audit team. This will help ensure that the audit program is appropriate and complete.

8. Communicating the Audit Program: Communicate the audit program to the audit
team: All members of the audit team should be familiar with the audit program and their
responsibilities.

9. Updating the Audit Program: Update the audit program as needed: During the course
of the audit, it may be necessary to update the audit program to reflect changes in the entity
or its environment.

Audit Notebook

Audit Note Book is a register maintained by the audit staff to record important points
observed, errors, doubtful queries, explanations and clarifications to be received from the
clients. It contains definite information regarding the day-to-day work performed by the audit
clerks. It is also known as an Audit Working Papers and is a document used by auditors to
systematically and comprehensively record their work, findings, and conclusions during an
audit engagement.

Contents of Audit Note Book

The following matters should have been incorporated in an Audit Note Book.
1. A list of the account books normally used and maintained.
2. Names of the principal officers, their duties and responsibilities.
3. Nature of business carried on and important documents relating to the constitution of
business like
Memorandum of Association, Articles of Association, Partnership deed etc.,
4. Extracts of minutes and contracts affecting the accounts.
5. Extracts of correspondence with statutory authorities.
6. Copy of audit programme.
7. Accounting methods, internal control and internal check system in operation.
8. Routine queries like missing receipts and vouchers etc.
9. Details of errors and frauds discovered during the course of audit.
10. Points to be included in audit report.
11. Details of all important information to be used as reference for future audits.
12. Date of commencement and completion of audit.

Features of Audit Note Book

1.Comprehensive Record: It serves as a diary or register to record all critical aspects of the
audit process, including financial transactions, account reconciliations, discrepancies, and
irregularities. It captures the auditor's experiences, difficulties, and insights gained during
the audit.

2.Structured Organization: It should be organized systematically, with clear sections for

different aspects of the audit. Information should be recorded chronologically and
descriptively.

3.Detailed Documentation: It includes detailed information about the audit, such as:

i. Types of accounts examined

ii. Accounting methods used
iii. Internal control systems
iv. Errors and frauds discovered
v. Queries and clarifications
vi. Relevant information from previous auditors
 vii. Dates of audit activities

4.Evidence of Work Performed: It serves as tangible proof that the audit work has been
carried out diligently. It can be used to support the auditor's findings and conclusions in the
audit report.

5.Reference for Future Audits: It provides valuable insights and lessons learned from past
audits, which can be used to improve future audits. It helps maintain consistency and
efficiency in audit procedures over time.

6.Support for Staff Performance Evaluation: It can be used to evaluate the performance of
auditing staff members. It helps identify areas where staff may need additional training or
supervision.

6.Legal Protection: In some jurisdictions, the audit notebook can serve as evidence in legal
proceedings if the auditor is accused of negligence or misconduct.

7. Confidentiality: The information in the audit notebook is confidential and should be

protected from unauthorized access.

8. Physical or Digital Format: Audit notebooks can be maintained in physical format

(bound notebooks) or digital format (software or online tools).

Advantages of Audit Note Book

1. Facilitates Audit Work: It facilitates the work of an auditor as all important details about
the audit are recorded in the note book which the audit clerk cannot remember everything at
all the time. It helps in remembering and recalling the important matters relating to the audit
work.
2. Preparation of Audit Report: Audit note book helps in providing required data for
preparing the audit report. An auditor examines the audit note book before preparing and
finalizing the audit report.
3. Serves as Documentary Evidence: Audit note book serves as a documentary evidence in
the court of law when a suit is filed against the auditor for his negligence.
4. Serves as a Guide: When a audit assistant is changed before the completion of audit
work, audit note book serves as a guide in completion of balance work. It also acts as a guide
for carrying on subsequent audits.
5. Evaluating Work of Audit Staff: It helps to assess the work performed by the audit staff
and helps in evaluating their level of efficiency.
6. Fixation of Responsibility: Audit note book helps in fixing responsibility on concerned
clerk who is responsible for any undetected errors and frauds in the course of audit.
7. No Dislocation of Audit Work: An audit note book contains all important details about
audit hence any change in the audit staff will not disturb or dislocate the audit work.

Disadvantages of Audit Note Book

1. Fault-finding Attitude: It leads to development of a fault-finding attitude in the minds of
the staff.
2. Misunderstanding: Very often maintenance of audit note book creates misunderstanding
between the client’s staff and the audit staff.

3. Improper Preparation: Since it serves as evidence in the court of law, it needs to be

prepared with great caution. When the note book is prepared without due care it cannot be
used as evidence against the auditor for negligence.
4. Adverse Effects on Subsequent Audits: Since audit note book is used in performing
subsequent audits, any mistakes in the note book may have adverse impacts on the next audit.

Routine Checking

Meaning of Routine Checking:

The term "routine" emphasizes the consistent and repetitive nature of this process. It's not a one-time
event but an ongoing activity, often performed daily or weekly. This continuous monitoring helps
catch errors early on and prevents them from snowballing into larger problems.

Routine checking in auditing refers to the regular and systematic examination of a company's
accounting records. It involves verifying the accuracy of financial transactions and ensuring
they comply with established procedures and regulations. Therefore, the daily checking of
these books of accounts under audit is called Routine Checking.

Factors involved in Routine Checking:

1. Vouching: This is a key part of routine checking. Auditors examine supporting
documents (vouchers) like invoices, receipts, and contracts to verify that recorded
transactions actually occurred and were properly authorized.
2. Posting Verification: Auditors ensure that transactions are correctly transferred
(posted) from journals to the appropriate ledger accounts. This helps maintain the
accuracy of account balances.
3. Casting and Balancing: Auditors check the mathematical accuracy of calculations in
journals and ledgers. They verify totals, balances, and carry-forwards to ensure
everything adds up correctly.
4. Reconciliations: Auditors compare related records (e.g., bank statements with the
company's cash book) to identify any discrepancies or inconsistencies.

Objectives of routine checking:

1. Detect errors and frauds: Identify any unintentional errors or intentional fraudulent
activities in the accounting records.
2. Ensure accuracy: Verify the accuracy and reliability of financial information.
3. Maintain compliance: Ensure adherence to accounting standards, policies, and
regulations.
4. Improve internal controls: Identify weaknesses in internal control systems and
recommend improvements.

Limitations of routine checking:

 1. Time-consuming: It can be a lengthy and time-consuming process, especially for
large organizations with numerous transactions.
2. May not detect complex errors: It may not be effective in detecting complex or
cleverly concealed errors and frauds.
3. Can be monotonous: The repetitive nature of routine checking can lead to boredom
and reduced attention to detail.
4. May not be cost-effective: The cost of performing routine checking may outweigh
the benefits in some cases.

Test Checking

Meaning of Test Checking:

Test checking, also known as sampling, involves selecting a subset (a sample) of transactions
or items from a larger population and examining them. The goal is to draw conclusions about
the entire population based on the findings from the sample. Auditors use test checking to
assess the accuracy, completeness, and validity of financial information.

Test checking is a process of selecting and checking of a few transactions from a large
volume of transactions. If the entries checked are found to be correct then the auditor assumes
that the remaining entries are also correct. The technique is based on the theory of sampling
which is commonly used as a statistical method. Checking each and every transaction that
occurs during the year is both redundant and uneconomical for the auditor.

Test checking is a fundamental auditing technique that allows auditors to gain reasonable
assurance about the financial records of an organization without having to examine every
single transaction. It's a practical approach, especially for large entities with vast amounts of
data.

Importance of Test Checking

1. Efficiency: Examining every single transaction is often impractical, time-consuming,

and expensive. Test checking allows auditors to complete their work more efficiently.
2. Cost-effectiveness: It reduces the cost of the audit by limiting the number of
transactions that need to be examined.
3. Focus on Key Areas: Test checking allows auditors to concentrate their efforts on
areas that are considered more high-risk or where errors are more likely to occur.
They can then perform more extensive testing in those specific areas if necessary.

Features of Test Checking:

1. Population: The entire set of transactions or items that the auditor wants to draw
conclusions about. For example, all sales invoices for the year.
2. Sample: A subset of the population that is selected for examination.
3. Sampling Unit: The individual item within the population that is being sampled. For
example, a single sales invoice.
 4. Representative Sample: A sample that accurately reflects the characteristics of the
population. This is crucial for drawing valid conclusions.
5. Sampling Risk: The risk that the sample selected is not representative of the
population, and therefore the auditor's conclusions may be incorrect.

How is a Sample Selected?

Several sampling methods can be used, including:

1. Random Sampling: Every item in the population has an equal chance of being
selected.
2. Stratified Sampling: The population is divided into subgroups (strata) based on
shared characteristics (e.g., transaction value), and a random sample is selected from
each stratum. This is useful when the population is diverse.
3. Systematic Sampling: Every nth item in the population is selected (e.g., every 10th
invoice).
4. Haphazard Sampling: The auditor selects items without any conscious bias, but it's
not truly random. This method is generally less reliable.
5. Judgmental Sampling: The auditor uses their professional judgment to select items
that they believe are most likely to contain errors.

Steps in Test Checking:

1. Define the Objectives: Clearly state what the auditor wants to achieve with the test.
2. Define the Population: Identify the complete set of data from which the sample will
be drawn.
3. Determine the Sample Size: The sample size should be large enough to provide
sufficient assurance about the population. Several factors influence sample size,
including the desired level of confidence and the tolerable error rate.
4. Select the Sampling Method: Choose the appropriate sampling method based on the
nature of the population and the audit objectives.
5. Select the Sample: Use the chosen sampling method to select the specific items to be
examined.
6. Examine the Sample: Perform the necessary audit procedures on the selected items.
7. Evaluate the Results: Analyze the findings from the sample and draw conclusions
about the population.
8. Document the Results: Maintain proper documentation of the sampling process,
including the sampling method, sample size, and findings.

Limitations of Test Checking:

1. Sampling Risk: There's always a chance that the sample may not perfectly represent
the population, leading to incorrect conclusions.
2. Non-Sampling Risk: This risk arises from factors other than sampling, such as
human error or misunderstanding of audit procedures.