Shashikumar A

Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Unit-1 Introduction To Auditing 10Hr

Introduction – Meaning and Definition – Objectives– Types of Audits– Merits and Demerits
of Auditing – Relationship of audit with other disciplines. Preparations before
commencement of new audit - Working Papers -Audit Notebook, Audit Programme.
Qualities of an Auditor – Audit planning – Audit strategy ––Audit Engagement -Audit
Documentation - Audit Evidence – Written Representation.

Origin and Evolution of Auditing

• The term audit is derived from Latin word ‘Audire’, which means to hear. In early days
an auditors used to the accounts read over by an accountant in order to check them.

• Auditing is as old as accounting It was in use in all ancient countries such as Greece,
Egypt, Rome, UK. And India. The Vedas contain reference to account and auditing.

• The original objective of auditing was to detect & prevent errors & Frauds.

• Auditing evolved and grew rapidly after the industrial revolution in the 18th century.

• With the growth of the joint stock companies the ownership and management became
separate.

• The shareholders who were the owners needed a report from an independent expert on
the accounts of the company managed by the board of directors who were the
employees.

• The objective of audit shifted, and audit was expected to ascertain whether the accounts
were true and fair rather than detection of errors and frauds.

• In India the companies Act 1913 made audit of company accounts compulsory

• The Companies Act 1913 also prescribed for the first time the qualification of auditors

• The later developments in auditing pertain to use of computers in accounting and

auditing.

• In conclusion it can be said that auditing has come a long way from hearing of accounts
to taking the help of computer to examine computerized accounts.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Meaning of Auditing:
Auditing is the systematic examination and verification of an organization's financial records
and statements to ensure accuracy and compliance with established standards and regulations.
It provides an independent assessment of the financial health and integrity of the entity being
audited.

Definition of Auditing:
Auditing is a systematic examination and expression of opinion on, the financial statements of
an enterprise as presented by those entities
- The Institute of Chartered Accountants of India (ICAI)
“Auditing is an examination of accounting records undertaken with a view to establish whether
they correctly and completely reflect the transactions to which they relate.”
- Prof. L R Dicksee
Who is Auditor
An auditor is a person authorized to review and verify the accuracy of financial records and
ensure that companies comply with tax laws.

Difference between Accounting & Auditing

“Auditing begins, where Accountancy ends”.

Accounting Auditing
Aspect

Definition Recording, classifying, summarizing, and Independent examination of financial

interpreting financial transactions. statements and records.
Purpose To prepare financial statements and reports To verify the accuracy and fairness of the
that accurately reflect the financial position financial statements prepared by
and performance of the business. accountants.
Timing Ongoing process throughout the financial Typically conducted after the financial
year. year ends or periodically.
Responsibility Performed by the company’s accountants or Conducted by external or internal
financial department. auditors.
Scope Focuses on day-to-day financial Focuses on the verification, evaluation,
transactions and maintaining financial and assessment of financial statements
records. and internal controls.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Objectives of Auditing
Primary objective
As per Section 227/143 of the Companies Act, 1956/2013 the primary duty (objective) of the
auditor is as follows
1. Reporting on Financial Statements: The primary duty of the auditor is to report to
the company's owners (shareholders) on whether the Balance Sheet gives a true and fair
view of the company's financial position and whether the Profit and Loss Account
provides an accurate representation of the profit or loss for the financial year.

2. Verification of the Accounting System: The auditor is responsible for verifying the
effectiveness of the accounting system in correctly recording transactions. This
involves ensuring that the transactions are properly recorded and reflected in the
financial statements.

3. Compliance with Accounting Standards and Statutory Requirements: The auditor

must ensure that the financial statements are prepared in accordance with recognized
accounting policies and practices, as well as statutory requirements. The auditor should
also lecture on whether the financial statements comply with the applicable accounting
standards.
Secondary Objectives
1. Detection and prevention of errors: Errors are mistakes
committed unintentionally because of ignorance or carelessness.
Types of Errors

a) Errors of Omission: Errors of omission occur when a financial transaction is either

entirely or partially omitted from the financial records. This means that a transaction that
should have been recorded is not recorded at all or only partially recorded.

Example:

• If a company receives cash from a customer but fails to record the receipt in the cash
book.
• forgetting to record an invoice received for services rendered.

b) Errors of Commission: Errors of commission occur when a financial transaction is

recorded, but it is recorded incorrectly. This includes mistakes in figures, mis posting, or
entering transactions into the wrong accounts.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Example:

• If a payment of RS 5,00,000 is mistakenly recorded as Rs 5000 this is an error of

commission.
• if a purchase is recorded in the sales account instead of the purchases account.

c) Compensating Errors: it’s an error when one error has been compensated by an
offsetting entry that's also in error.

Example: the wrong amount is recorded in inventory and is balanced out by the same
wrong amount being recorded in accounts payable to pay for that inventory.

d) Errors of Principle: Errors of principle occur when a transaction is recorded in violation

of accounting principles. This happens when an incorrect accounting treatment is applied
to a transaction, often involving the wrong classification of revenue, expense, asset, or
liability.

Example: If a company records the purchase of a fixed asset (like machinery) as an expense
in the Profit and Loss Account instead of capitalizing it as an asset on the Balance Sheet,
this is an error of principle.

e) Clerical Errors: Clerical errors involve simple mistakes made in the manual recording,
totalling, or processing of financial data. These can be arithmetic errors, errors in data entry,
or mistakes in copying figures from one place to another.

Example:
• If a company's bookkeeper accidentally adds $200 instead of $2,000 to the total of an
account, this is a clerical error.

• if the digits of a number are transposed, such as entering $2,341 instead of $2,431.

2. Detection and Prevention of Fraud: A fraud is an error committed intentionally to

deceive/to mislead/to conceal the truth or material facts. Frauds may be of three types.

a) Misappropriation of Cash: Misappropriation of cash occurs when an individual (often

an employee) illegally takes cash belonging to the company for personal use. This is a
common type of fraud that can significantly impact the financial health of a business.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Example: If a cashier at a retail store collects $1,000 in cash from sales but only records
$800 in the company’s accounting records and keeps the remaining $200 for
themselves, this is misappropriation of cash.

b) Misappropriation of Goods: Misappropriation of goods involves the theft or

unauthorized use of the company’s inventory or other assets. This type of fraud often
occurs in industries with significant inventory or tangible goods.

Example: In a manufacturing company, if an employee takes home company products

(like electronics or tools) without permission and without paying for them, this is
misappropriation of goods.

c) Manipulation of Accounts (“Window Dressing”): Manipulation of accounts involves

deliberately altering financial records to present a misleading picture of the company’s
financial position. This can be done to inflate profits, understate liabilities, or achieve
other deceptive financial objectives.

Example: If a company’s management intentionally inflates revenue figures by

recording fake sales or delaying the recognition of expenses to make the company
appear more profitable than it actually is, this is an example of account manipulation.

Types of Audits

On the basis of organizational structure of Business

1. Government Audit: A government audit is conducted on the accounts of government
agencies, departments, or public sector enterprises. It is typically carried out by
government-appointed auditors to ensure that public funds are being used properly and
in accordance with the law.

2. Private Audit: A private audit is conducted for privately-owned businesses, such as

private companies, partnerships, or sole proprietorships. The audit is usually done by a
private auditing firm to ensure that the business's financial statements are accurate and
comply with accounting standards.

3. Statutory Audit: A statutory audit refers to an audit conducted by an independent

auditor to ensure that a company's financial statements are accurate and comply with
relevant laws and regulations. It is a mandatory requirement for public companies,
banks, and other entities subject to specific regulations.

Below are the different laws that govern them

a) Companies Act 2013: Incorporation of Joint Stock Companies

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

b) Banking Companies Regulation Act 1949: Regulations of Banking Companies

c) Co-operative Societies Act 1959: Incorporation of Co-operative Societies
d) Religious and Other Endowment Acts: Incorporation of Public and charitable trust

On the basis of Practicability/Conduct of an audit work

1. Continuous/ Detailed Audit: A continuous or detailed audit is one where the auditor
examines the company’s financial transactions on a regular basis throughout the year.

The main objective of Continuous audit is to ensure that errors and frauds are detected
quickly and that the financial records are always up to date.

2. Periodical/ Final Audit: A periodical or final audit is conducted after the end of the
financial year. The auditor reviews the entire year’s financial transactions at once and
issues a final report on the company’s financial statements.

The main objective of Periodical audit is to provide a comprehensive review of the

company’s financial position at the end of the year.

3. Interim Audit: An interim audit is carried out during the financial year, often at
intervals like halfway through the year. It’s like a preliminary check before the final
audit.

The main objective of Interim audit is to identify and correct any issues before the year-
end, and to provide early feedback on the company’s financial health.

4. Partial Audit: A partial audit focuses on only specific areas or accounts of the business
rather than the entire financial statements.

To review particular aspects of the business that may need special attention, such as
cash handling or inventory management.

Example: A company might request a partial audit to focus solely on its inventory
management, particularly if there were issues with stock levels in the past. The auditor
would then only examine inventory records and controls, rather than the whole financial
statement.

5. Cost Audit: A cost audit examines the company’s cost records to ensure that costs are
recorded accurately and that the company is managing its expenses efficiently.

To verify that the costs associated with production or services are correct and that
there’s no waste or inefficiency.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

6. Tax Audit: A tax audit is an examination of the company’s tax returns and records by
the tax authorities or an appointed auditor to ensure compliance with tax laws.
To verify that the taxes reported and paid by the company are accurate and that there
are no discrepancies.

7. Balance Sheet Audit: A balance sheet audit focuses specifically on the items reported
in the balance sheet, such as assets, liabilities, and equity, to ensure they are correctly
stated.

To confirm the accuracy of the company’s financial position as reported in the balance
sheet.

8. Management Audit: A management audit evaluates the efficiency and effectiveness

of the company’s management practices and organizational structure.

To assess how well management is achieving the company’s goals and using its
resources.

Merits of Auditing
Business Point of View
1. Detection of Errors & Fraud: Auditing helps in identifying mistakes or fraudulent
activities in financial records. This ensures that the company's financial statements are
accurate.
Example: Imagine a company's accountant accidentally records a $10,000 expense as
$1,000. An audit would catch this mistake, ensuring the company’s financial records
are correct.
2. Helps in Loan Formalities: Audited financial statements are often required by banks
before they approve a loan. It provides lenders with confidence that the company’s
finances are in good order.
Example: A small business looking to expand might need a loan. The bank will likely
ask for audited accounts to verify the company's profitability and ability to repay the
loan.
3. Builds Reputation: Regular audits show that a company is transparent and committed
to accurate reporting, which enhances its reputation among stakeholders.
Example: A business that consistently presents audited financials may gain trust from
investors and customers, leading to more business opportunities.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

4. Proper Valuation of Assets: Auditors ensure that a company’s assets are correctly
valued on the balance sheet, preventing overstatement or understatement.
Example: A company owns several machines. An audit helps ensure these are valued
accurately, reflecting their true worth rather than an inflated or deflated amount.
5. Government Acceptance as it Facilitates Taxation: Audited accounts are often
accepted by tax authorities, making the process of filing taxes smoother and more
credible.
Example: A company that has its financial statements audited is less likely to face
issues during tax assessments since the figures have already been verified by an
independent auditor.

Investor’s Point of View

1. Protects Interest: Audits give investors’ confidence that the company's financial
statements are accurate, safeguarding their investments.

Example: An investor reviewing the financial statements of a company before investing

will feel more secure if the statements are audited, as it reduces the risk of inaccuracies.

2. Moral Check: Regular audits act as a deterrent against unethical behaviour within a
company because employees know their actions could be scrutinized.

Example: Knowing that an audit is likely, a manager might avoid engaging in fraudulent
activities, like inflating sales figures, because they know it will be checked.

3. Proper Valuation of Investments: Audits help ensure that the value of investments, such
as stocks or bonds, is correctly reflected in the financial statements.

Example: An investor in a company receives audited reports showing that the company’s
stock value is based on genuine financial performance, helping them make informed
decisions.

4. Good Security: Auditing provides assurance that the company’s financial systems and
controls are secure, reducing the risk of financial losses.

Example: An investor is assured that the company has strong internal controls in place,
minimizing the risk of financial mismanagement.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

5. Updated Position of Accounts Available Then and There: Auditing ensures that financial
records are kept up to date, providing a clear picture of the company’s financial position at
any given time.

Example: Investors can rely on the latest audited reports to assess the current financial
health of a company before making investment decisions.

Other Advantages of Auditing

1. Evaluates Financial Status: Auditing provides a clear and accurate assessment of a
company’s overall financial condition.

Example: A company’s audited financial statements reveal its profitability, debt levels, and
cash flow, giving stakeholders a comprehensive view of its financial health.

2. Listing of Shares/Payment of Dividend: Companies often require audited accounts to list

their shares on stock exchanges or decide on dividend payments to shareholders.

Example: A company looking to go public will need audited financials to list its shares,
ensuring potential investors that the company’s finances are legitimate.

3. Settlement of Claims and Settlement of Accounts: Audited accounts provide reliable

data, which can be crucial when settling disputes or claims, such as in cases of mergers or
acquisitions.

Example: During the acquisition of a company, audited financials ensure that both parties
agree on the value of assets and liabilities, facilitating smoother negotiations.

4. Facilitates Calculation of Purchase Consideration: In business transactions like mergers

or acquisitions, audited accounts help in determining the fair purchase price of a company.

Example: When one company buys another, the audited financial statements help in
deciding how much the buyer should pay for the acquisition based on the true value of the
company.

5. Evidence in Court as Audited Accounts are Treated as Authentic Records of

Transactions: In legal disputes, audited financial statements are considered credible
evidence because they are verified by an independent auditor.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Example: If a company is sued for financial misrepresentation, its audited accounts can be
used in court to prove the accuracy of its financial reporting.

Demerits of Auditing
1. High Cost: Auditing can be expensive, especially for small businesses, as it requires
hiring professional auditors.
Example: A small bakery may have to spend a significant portion of its budget on
auditing services, which could be a financial burden compared to larger companies.
2. Time-Consuming: Auditing can take a long time, which might delay important business
decisions until the audit is complete.
Example: A company wanting to launch a new product might have to wait until the audit
is finished before proceeding, potentially missing out on market opportunities.
3. Dependence on Auditor's Competence: The quality of the audit depends on the skill
and honesty of the auditor. If the auditor is not systematic, errors might go unnoticed.
Example: If an inexperienced auditor overlooks a critical mistake in the financial records,
the company could make decisions based on incorrect information.
4. Potential for Disruption: The auditing process can disrupt the daily operations of a
business, especially if employees need to spend time assisting the auditors.
Example: Employees in a retail store might have to pause their usual work to gather
documents and information for the auditors, affecting the store's efficiency.
5. False Sense of Security: Sometimes, businesses might rely too heavily on the audit
results, assuming that an audit guarantees everything is perfect, which isn’t always the
case.
Example: A company might ignore other signs of financial trouble because they assume
the audit would have caught any issues, leading to potential problems down the road.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Preparation before Commencement of Audit

1. Understand the Business Environment: Before starting an audit, it's crucial to understand
the business environment in which the organization operates. This includes knowing the
industry, market conditions, competitors, and the company’s internal processes and
systems.

Example: If you are auditing a retail company, you should be familiar with the retail
industry's trends, such as online shopping, customer preferences, and supply chain
challenges. You also need to understand the company’s internal systems like inventory
management and sales tracking.

2. Review Previous Audit Findings: Reviewing the findings from previous audits helps in
identifying recurring issues, areas of improvement, and the effectiveness of past
recommendations.

Example: If a previous audit revealed that a company had issues with inventory accuracy,
this area should be revisited to see if improvements have been made or if it remains a
concern.

3. Define Audit Objectives & Scope: Clearly defining the objectives and scope of the audit
ensures that the audit team focuses on the right areas. Objectives outline what the audit
aims to achieve, while the scope specifies the boundaries of the audit, including what will
and will not be examined.

Example: For a financial audit, the objective might be to verify the accuracy of the
financial statements, and the scope could include checking the revenue, expenses, and
compliance with accounting standards.

4. Engage with Key Stakeholders: Engaging with key stakeholders, such as management,
employees, and other relevant parties, is essential to gather insights, understand concerns,
and ensure that everyone is on the same page regarding the audit process.

Example: Before starting the audit, you might meet with the company’s CFO to discuss
the audit plan, understand any concerns, and ensure that the finance team is prepared to
provide the necessary documents.

5. Develop a Risk Assessment: A risk assessment helps identify and prioritize the areas
where the organization is most vulnerable. This allows the audit team to focus on high-risk
areas where issues are more likely to occur.

Example: In a manufacturing company, you might identify the risk of production delays
due to supply chain disruptions as a high-risk area, which would then receive extra attention
during the audit.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

6. Allocate Resources Effectively: Allocating resources effectively means assigning the right
people, time, and tools to the audit. This ensures that the audit is conducted efficiently and
within the set timeline.

Example: If the audit involves complex IT systems, you might allocate a specialized IT
auditor to handle that part, ensuring that the audit team has the expertise needed for that
area.

7. Plan for Unforeseen Challenges: Planning for unforeseen challenges involves

anticipating potential issues that could arise during the audit and developing contingency
plans to address them.

Example: If the audit is conducted in multiple locations, you might plan for possible travel
delays or access issues by building extra time into the audit schedule and having remote
access options available.

8. Ensure Compliance with Ethical Standards: Ensuring compliance with ethical standards
means that the audit is conducted with integrity, objectivity, and confidentiality. This is
essential for maintaining the credibility and reliability of the audit findings.

Example: If the audit team discovers a conflict of interest where an auditor has a personal
relationship with a client employee, they must disclose it and take steps to ensure that it
does not affect the audit’s objectivity.

Audit Procedure: An audit procedure involves a series of steps auditors take to examine and
verify a company's financial records and operations. It typically occurs in two main phases:
Audit Procedure involves two phases:
1. Audit planning is the initial phase of the audit procedure, where the groundwork is
laid for the entire audit process. This phase involves preparing for the audit by setting
objectives, identifying risks, gathering information about the organization, and creating
a detailed audit plan.
Key Activities in Audit Planning:
• Understanding the Business: Gathering information about the organization’s industry,
operations, and internal controls.
• Risk Assessment: Identifying areas where there might be a higher risk of errors or fraud.
• Defining Scope and Objectives: Clearly outlining what the audit will cover and what it
aims to achieve.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

• Resource Allocation: Assigning the right team members and tools to different parts of
the audit.
• Engagement with Stakeholders: Communicating with key personnel to discuss the audit
plan and expectations.

Real Audit Work: The real audit work is the execution phase where the audit plan is put into
action. This phase involves collecting evidence, analysing data, and conducting various audit
tests to ensure that the financial statements are accurate and reliable.
a) Vouching: Vouching is the process of checking and verifying the authenticity of the entries
recorded in the books of accounts. This involves tracing the entries back to the source
documents, such as invoices, receipts, and contracts.
Example: If the company has recorded a sale in its books, the auditor will check the
corresponding invoice and delivery receipt to ensure that the sale actually took place and is
recorded correctly.
b) Valuation and Verification of Assets: Valuation and verification involve checking that
the assets listed in the financial statements are correctly valued and actually exist. This
process ensures that the assets are not overstated or understated.
Example: If the company has listed a building as an asset, the auditor will verify the ownership
documents, check the current market value, and physically inspect the building to confirm that
it exists and is valued correctly.
c) Reporting: Reporting is the final step in the audit process, where the findings are compiled,
and an audit report is prepared. The report includes the auditor's opinion on whether the
financial statements present a true and fair view of the organization’s financial position.
Example: After completing the audit work, the auditor will issue an audit report, which may
include an unqualified opinion (if everything is in order), a qualified opinion (if there are some
issues), or an adverse opinion (if there are significant problems with the financial statements).

Audit Planning
"Audit planning" means developing a general strategy and a detailed approach for the
expected nature, timing and extent of the audit. The auditor plans to perform the audit in an
efficient and timely manner.
Planning is required to complete the audit effectively within the specified time. Audit planning
is a process of deciding in advance
- what is to be done.
- who is to do it

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

- how it is to be done.
- when it is to be done by the auditor in order to have efficient and effective completion of
work.

Benefits of Audit planning

1. It helps the auditor obtain sufficient appropriate evidence for the circumstances:
Proper planning allows the auditor to know exactly what kind of evidence they need to
gather. This helps ensure that the evidence is reliable and relevant to the audit.

Example: Imagine an auditor is reviewing a company’s sales records. By planning, they

know they need to collect invoices, receipts, and customer confirmations. This ensures they
have enough proof that sales are recorded correctly.

2. It helps to keep audit costs at a reasonable level: When an audit is well-planned, the
auditor can be efficient in their work, which helps reduce unnecessary expenses.

Example: If an auditor knows in advance which documents they need to review, they can
focus on those specific areas instead of spending extra time and money looking at irrelevant
records.

3. It helps to avoid misunderstandings with the client: Clear communication during

planning ensures that both the auditor and the client are on the same page about what the
audit will involve.

Example: Before starting the audit, the auditor discusses the audit plan with the client,
explaining which areas will be reviewed and why. This avoids surprises later on, like the
client asking, "Why are you checking this? I didn’t know it was part of the audit!"

4. It helps to ensure that potential problems are promptly identified: Planning allows the
auditor to spot areas where there might be issues early on, so they can address them before
they become bigger problems.

Example: During the planning stage, the auditor might notice that the company has
recently changed its accounting software. They can then focus on checking if the transition
was handled correctly to avoid any errors in the financial records.

5. It helps to know the scope of the audit program by an auditor: Planning helps the
auditor clearly define what areas and activities will be included in the audit.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Example: If a company operates in multiple locations, the auditor decides during planning
whether to audit all locations or just a few. This helps them understand the full scope of their
work.
6. It helps to carry out the audit work smoothly and in a well-defined manner: A well-
planned audit follows a clear structure, which makes the entire process more organized and
efficient.

Example: With a detailed plan, the auditor knows which tasks to complete first, like
verifying cash balances before moving on to inventory checks. This ensures the audit
progresses logically without confusion.

Process of Audit Planning: According to the international standard of auditing (ISA), an audit
plan should be based on an overall audit strategy. Process includes the following procedures.

1. Understand the client’s operations: This including how they get funding, legal rules
they follow, and any risks they face.

2. Development of audit strategies or overall plan (who, when and how): Plan who
will do the audit, when it will happen, and how it will be done.

Example: deciding which team members will audit specific areas and setting timelines.

3. Preparation of audit programmer: Create a detailed checklist of tasks for the audit,
ensuring all important areas are covered.

Example: listing steps to verify all major financial transactions of the company.

Audit Strategy
An audit strategy is a plan that guides how an audit will be done, including when it will happen,
what areas it will cover, and how resources will be managed. It helps auditors respond to risks
effectively and ensures the audit is completed efficiently.

Contents of audit Strategy

• Significant Risks: This section highlights the biggest risks in the audit, like fraud or errors,
and explains how auditors will address them.
Example, if there's a risk of incorrect revenue reporting, auditors will closely check all
sales records.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

2. Materiality: This sets the thresholds for what amounts are big enough to affect
decisions, like only focusing on errors above $10,000.
Example, if a $500 mistake is found, it might be ignored if it’s too small to matter.

3. Deliverable and Timetable: This outlines when the audit work will be done and what
documents will be provided.
Example: the final audit report might be scheduled for delivery by the end of October.

4. Independence: This shows how auditors stay neutral and unbiased during the audit.

Example: auditors avoid any business ties with the company they are auditing to keep
their judgment clear.

5. Audit Approach and Scope: This details the methods and rules auditors follow and
whose work they trust.

Example, auditors might rely on the internal auditor's reports if they are proven reliable.

6. Audit Engagement Team: This names the key people leading the audit, like the audit
manager and team leader.

Example, the team leader ensures the audit follows the plan and is completed on time.

7. Overview: This summarizes the auditors’ main duties, like giving an opinion on the
company’s financial statements.

Example, auditors may state if the company’s records fairly reflect its financial
position.

Importance of audit strategy

• This method sets an audit engagement's scope.
• It establishes the requirements concerning documentation for the audit methodology.
• Sets the correct audit approach.
• it establishes the audit's timeframe.
• This allows auditors to arrange and manage the audit correctly and efficiently.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Audit Strategy vs Audit plan

Aspect Audit Plan
Audit Strategy
Scope Provides a broad overview of the audit Details the specific procedures and
approach. tasks to be performed.
Timeframe Developed at the beginning of the audit process.
Developed after the strategy and
updated as the audit progresses.
Focus Focuses on step-by-step actions and
Focuses on overall goals, objectives, and
methods to achieve the strategy.
direction.

Audit Engagement
An audit engagement is a formal arrangement between an auditor and a client to perform an
audit. It involves agreeing on the scope, objectives, and terms of the audit work. The
engagement ensures that the auditor evaluates the client's financial statements or operations
according to agreed standards. It establishes the responsibilities of both parties and outlines
how the audit findings will be reported.

• Planning: Develop a detailed audit plan outlining the scope, objectives, and methodology.
This step ensures that the audit is organized and aligned with the client's needs and
regulatory requirements.

• Risk Assessment: Identify and evaluate potential risks that could affect the financial
statements or audit process. This helps focus the audit efforts on areas with higher risk and
ensures effective use of resources.

• Testing: Conduct tests to gather evidence on the accuracy and reliability of financial
information. This includes checking transactions, balances, and compliance with
accounting standards.

• Evaluation of Internal Control: Assess the effectiveness of the client's internal controls
to prevent and detect errors or fraud. Strong controls reduce the risk of misstatements and
enhance the reliability of financial reporting.

• Communication: Maintain clear and ongoing communication with the client and audit
team throughout the engagement. This ensures that issues are addressed promptly, and all
parties are informed about the audit progress.
• Reporting: Prepare and present an audit report summarizing findings, conclusions, and
recommendations. This report provides stakeholders with an independent assessment of the
financial statements and internal controls.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Types of Audit Engagement

• Financial Statement Audit: Examines the accuracy and fairness of a company’s financial
statements to ensure they reflect true financial performance and position. This audit is
typically conducted by external auditors.

• Compliance Audit: Assesses whether an organization is following laws, regulations, and

internal policies. This ensures adherence to external requirements and internal controls.

• Operational Audit: Evaluates the efficiency and effectiveness of an organization’s

operations and processes. The focus is on improving operational performance and resource
utilization.

• Information System Audit: Analyses the controls, security, and reliability of an

organization's IT systems. It ensures that information systems are secure, reliable, and
aligned with business objectives.

• Internal Audit: Conducted by an organization’s own audit team to assess internal controls,
risk management, and governance processes. It aims to improve internal operations and
ensure compliance with policies.
Audit Documentation
Audit documentation refers to the records and working papers that auditors create during an
audit. These documents provide evidence of the audit work performed, support the auditor's
conclusions, and ensure that the audit complies with professional standards. They also serve as
a reference for future audits and help maintain transparency and accountability.
Audit Evidence
Audit evidence refers to the information auditors collect to support their conclusions about the
accuracy and completeness of an organization's financial statements. It includes documents,
records, observations, and confirmations that help verify the truthfulness of reported figures.
The quality and sufficiency of audit evidence are crucial for forming a reliable audit opinion.
Relevance and Reliability
Relevance in Audit Evidence: Relevance means that the evidence directly relates to the
specific audit objective or question being addressed.
Example, if an auditor is verifying the value of inventory, the evidence should directly show
how much the inventory is worth.
Reliability in Audit Evidence: Reliability refers to the trustworthiness of the evidence.
Reliable evidence is accurate, credible, and can be depended on to form a conclusion.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Example: a signed contract from a supplier is more reliable than an informal email
confirmation.
Written Representation in Audit
• A Written Representation in an audit is a formal statement provided by the management
of a company to the auditors.
• In this statement, management confirms that they have provided all the necessary
information and that the financial statements are accurate and complete to the best of
their knowledge.
• It serves as a form of assurance to the auditors that the information they are auditing is
trustworthy.
Audit Notebook
An Audit Notebook is a detailed record maintained by an auditor during the audit process. It
includes notes on important observations, issues, and questions that arise while examining the
company’s financial records and operations. The notebook serves as a reference for the auditor
to ensure all aspects of the audit are thoroughly reviewed and documented.
Audit Notebooks includes 2 types of information those are as follows
General Information to be Recorded in the Audit Notebook
1. Business Nature and Key Documents: Understand the type of business and review key
documents like
• Memorandum of Association and Articles of Association for companies,
• Partnership Deed for partnership firms, along with other legal documents.
2. Client and Audit Year: Note the client’s name and the specific year for which the audit
is being conducted.
Example
Client Name: Tata Consultancy Services
Audit Year: 2023-2024
3. Books of Accounts: List all the accounting books used by the business, like ledgers,
journals, and cash books.
4. Key Officers: Identify the main officers in the business, along with their roles and
responsibilities.
5. Accounting and Financial Systems: Understand the accounting system, financial
procedures, and internal checks that the business follows.
6. Accounting and Financial Policies: Gather details about the accounting and financial
policies the business uses, such as how they value assets or recognize revenue.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Example: Asset Valuation methods: the cost approach, the market approach, and the
income approach etc.
7. Audit Program: Keep a copy of the audit plan that outlines the steps and procedures for
the audit.
Special Matters to be Recorded in the Audit Notebook
1. Unresolved Queries: Record any routine questions that haven’t been answered, like
missing receipts or vouchers.
2. Errors Found: Note any mistakes or errors discovered during the audit.
3. Important Issues: Highlight issues that need the auditor’s attention, such as the
company not following legal requirements or the rules in its key documents.
4. Key Extracts: Include important excerpts from meeting minutes, contracts, or
communications with government agencies, banks, customers, and suppliers.
5. Audit Report Points: List the issues that should be included in the final audit report.
6. Further Clarifications Needed: Note any areas that need more explanation, like
changes in how inventory is valued or how depreciation is calculated.
7. Audit Dates: Record when the audit started and when it was completed.
8. Future Reference: Document important matters that might be useful for future audits.
9. Final Accounts Considerations: Highlight special points that need to be considered
when preparing the final accounts.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Audit Working Papers

Audit Working Papers are the documents auditors prepare and collect during an audit to record
their findings, evidence, and procedures. These papers support the auditor's conclusions and
provide a basis for the audit report. They ensure transparency, accuracy, and compliance with
auditing standards.
Purpose of Audit Working Paper
• Record of Work Done: They keep a clear record of all the work done during the audit,
showing what was checked and how it was checked.

• Support for Conclusions: They provide evidence to back up the auditor's conclusions,
ensuring that decisions are based on solid facts.

• Communication Tool: They help communicate findings to other team members and
supervisors, making sure everyone understands what was found.

• Future Reference: They serve as a reference for future audits, helping to compare past
and present situations.

• Proof of Compliance: They show that the audit was done according to the required
standards and procedures, proving that the audit was conducted properly.
Audit files
Audit files are like organized folders or digital documents where auditors keep all the important
papers and notes related to an audit. These files help the auditor track what they’ve checked,
what they’ve found, and how they’ve reached their conclusions.
Current Audit File:
1. Copy of accounts or statements under review.
2. Audit program and details of audit tests performed.
3. Minutes of meetings with directors, shareholders, or trustees.
4. Queries raised during the audit and official responses.
5. Letters confirming accounts, stock valuation, and provisions.
6. List of missing vouchers.
7. Bank reconciliation statements.
8. Computation of tax, bonus, and gratuity.

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Permanent Files:
1. Certified copy of the company's Memorandum and Articles of Association, or
partnership trust deed.
2. Copy of relevant statutory or legal regulations.
3. Brief note on the business nature and office/factory locations.
4. Copy of client's instructions for non-statutory audits.
5. List of important books of accounts and registers maintained by the client.
6. List of company directors and their other affiliations.
7. List of officials, their roles, and organizational chart.
8. Details of holding and subsidiary companies.
9. Description of internal control and audit systems.
10. Statements on stock valuation, work in progress, and depreciation.
The files must be preserved and should be kept up-to-date periodically.
Difference between Audit Files, Audit Notebook, Audit Working Papers
Aspect Audit Files Audit Working Papers
Audit Notebook
Purpose Record of work done in Detailed notes and Detailed documentation
each audit observations by the auditor supporting audit
conclusions
Type Permanent and current files Informal and personal, often Structured, detailed
with structured documents. handwritten or typed notes. documentation used to
substantiate audit
findings
Content Documents related to the Notes on audit procedures, Evidence, calculations,
specific audit year observations, and queries and analyses used in audit
Scope Includes finalized reports, Includes auditor’s personal Includes detailed records
minutes, and notes and ongoing of evidence and analysis
correspondence observations
Retention Kept up-to-date and Typically kept as long as Kept as part of the audit
preserved for future necessary for the audit file for reference
reference
Usage For record-keeping and For auditor’s personal use and To support audit opinions
review by other auditors reference and conclusions
Examples Accounts, audit program, Notes on client discussions, Copies of invoices, bank
minutes of meetings preliminary findings statements, tax
computations

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Shashikumar A
Assistant Professor
Department of Commerce & Management
Surana College, Peenya

Other Aspects of Audit

Audit Tick: An audit tick is a mark or symbol used by auditors to indicate that they have
reviewed and verified a specific entry or document. It helps keep track of what has been
checked during the audit.
Routine Checking: Routine checking involves reviewing common or regular transactions and
processes to ensure they are correct and follow standard procedures. It focuses on the usual
day-to-day activities of the business.
Test Checking: Test checking means examining a sample of transactions or records rather than
reviewing everything. This approach helps auditors assess the accuracy and reliability of the
financial information without inspecting every single item.

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