2. Acknowledgement
This PROJECT REPORT would not have been possible
without the kind assistance and guidance of many persons who
indeed over very helpful, co-operative bind and hospitable during
the entire course of my report and express my heart felt
appreciation on for all these concerned.
SPECIAL THANKS TO:-
MR. ROHIT SHARMA
MR. SATISH KUMAR
MRS. SHRUTI SARIN
3. CONTENTS
Chapter 1—INTRODUCTION OF AUDITING
Meaning & Definition of auditing
Origin of auditing
Relation of Auditing with Accounting
Relation with Financial Statements
Aspects to be covered in Auditing
Basic Concepts Of Auditing
Concept of Materiality
Concept of True & Fair
Functions of Auditing
Objectives of Auditing
Principles governing an audit
Advantages & Limitations of auditing
Chapter 2—AUDITOR.
Meaning
Types of Auditor & Qualifications
Powers of Auditor
Duties Of Auditor
4.
5. CHAPTER 1
MEANING OF AUDITING
The word audit is derived from the Latin word audire which means to hear. It is an
important tool of management. It is concerned with making an analytical and critical
analysis of the books of accounts, checking and verification of evidence in support of
entries appearing in the books of accounts, and ascertaining the authenticity of the
financial statements. It is also concerned with the examination of accounting data to
determine the extent of an audit examination is too made on the basis of evidential
document such as invoice, money receipts and other records by the authorized
representative of the client. Auditor has used to send for the accountants and hear
whatever they had to say in connection with the accounts. The auditor has to look into
the facts behind figures and he must certify their accuracy. Auditing is to ascertain the
balance sheet and profit and loss account that they show a true and fair view of the
financial state of affairs of a concern. The Institute of Charted Accountants of India has
issued a number of statements of standard auditing practices and accounting standards
for guidance of Auditor of India.
6. DEFINITION OF AUDITING
According to DICKSEE, “An audit may be said to be such an examination of the books,
accounts and vouchers of a business, as will enable the auditor to satisfy himself that the
balance sheet is properly drawn up, so as to exhibit a true and fair value of the state of
the affairs of the business, whether the profit and loss account gives a true and fair value
of the profit and loss for the financial year. According to the best of his information and
explanations given to him and as shown by the books, and if not, in what respect he is
not satisfy.”
7. Origin of Auditing
Auditing has its origin in the necessity in the development of some system to
put a check on the persons whose duties were to record receipts and disbursements of
money on the behalf of owners. In the ancient days auditing was confined to public
accounts only. With the development of trade and commerce, the need for recording
transactions was felt by businessman. This had necessitated the development of some
system of check upon the persons who recorded such transactions on the behalf of
businessman.
The audit in its present shape is the result of large-scale production in
consequence of Industrial Revolution during the 18th Century. With the development of
banking facilities, communication and transport means, the concept of corporate
management has taken birth. It necessitated the investors to know whether their
investment is safe or not. Shareholders need an independent person having expert
knowledge of accounts to report on the working of the company and truthfulness of the
profit or loss and financial position disclosed by the management.
8. RELATION OF ACCOUNTING AND AUDITING
Both accounting and auditing are closely related with each other as auditing reviews the
financial statements which are nothing but a result of the overall accounting process. It
naturally calls on the part of the auditor to have a thorough and sound knowledge of
GAAP before he can review the financial statements.
In fact, auditing as a discipline is also closely related with various other disciplines as
there is lot of linkages in the work which is done by an auditor in his day-to-day activities.
To begin with, it may be noted that the discipline of auditing itself is a logical construct
and everything done in auditing must be bound by the rules of logic. The knowledge of
language is also considered essential in the field of auditing as the auditor shall be
required to communicate, both in writing as well as orally, in day-to-day work .For
example, if the business has really earned a profit but because of wrong accounting, the
annual accounts show a loss, the proprietor may take the decision to sell the business at
a loss. Thus from the point of view of the management itself, authenticity of financial
statements is essential. It is more essential for those who have invested their money in
the business but cannot take part in its management, for example, shareholders in a
company, such persons certainly need an assurance that the annual statements of
accounts sent to them are fully reliable. It is auditing which ensures that the accounting
statements are authentic. In today’s economic environment, information and
accountability have assumed a larger role than ever before. As a result, the independent
audit of an entity’s financial statements is a vital service to investors, creditors, and other
participants in economic exchange.
9. Aspects to be covered in Audit
The principal aspects to be covered in an audit concerning final statements of accounts
are as follows:-
An examination of the system of accounting and integral controls to ascertain whether
it is appropriate for the business and helps in properly recording all transactions.
Reviewing the systems and procedures to find out whether they are adequate and
comprehensive.
Check the arithmetical accuracy of books of accounts by the verification of postings,
balances etc.
Examine the documentary evidence to establish the accuracy, authenticity and validity
of transactions recorded.
Verifying that a proper distinction is made between capital and revenue items.
Verification of the title, existence and valuation of assets appearing in the balance
sheet.
Examination that the statutory requirements are complied with.
Verifications of the liabilities stated in the balance sheet.
Comparison of balance sheet and profit and loss account and other statements with
underlying records in order to see that they are in accordance there with.
Checking the results shown by the balance sheet and profit and loss account to see
whether the results shown are true and fair.
Reporting to the proper person as to what extent, accounts reveal a true and fair view
of the state of affairs and of the profit and loss account of the organization.
10. Functions of Auditing
Important functions of auditing can be summed up as follows:
Reviewing systems and procedures of business.
Examining documentary evidence to establish the accuracy of recorded transactions.
Reviewing the system of accounting and Internal Controls.
To verify the valuation and existence of assets.
To examine the mathematical accuracy of accounting statements.
To see whether the statutory requirements have been complied with.
Reporting as to what extent, accounts exhibit true and fairness.
To make recommendations for improvement in Internal Control and Accounting
System.
To verify the distinction between capital and revenue items.
11. Objectives of Auditing
(A) Verification of accounts and financial statement
The main objective of an audit is to verify and establish that at a given date balance
sheet presents true and fair view of financial position of the business and the profit and
loss account gives the true and fair value of the profit or loss for the accounting period.
The auditor must:-
Verify the accuracy of posting, balancing etc
Confirm the validity of transactions with supporting documents
Confirm existence of assets and liabilities
Assess the system of internal control
Ascertain whether distinction has been made between capital and revenue items
(B) Fraud
Fraud is the word used to mean intentional error. This is done deliberately which implies
that there is intent to deceive, to mislead. These are more serious than intentional errors.
A great variety of intentional errors may be found. Intentional errors are the most difficult
to detect and auditors generally devote greater attention to this type. Auditors while
studying the possibility and nature of fraud must keep this always in mind and should not
take any exception for those who held high offices. These things generally start in a non-
consequential way after a subordinate staff member first borrow small amounts from the
cash box to meet his temporary difficulty and gradually it becomes his habit to borrow in
such a manner. Fraud also takes place in forms other than cash defalcations.
12. Frauds may be divided into the following categories:-
Misappropriation of goods
In these types the businessman appropriates the goods to wrong accounts for
committing frauds and escaping from tax liabilities. Misappropriation of goods can be
detected by thorough checking of records and physical verification of stock as well as
purchase and sale.
Misappropriation of cash
This system can be done by theft of cash receipts, petty cash cheques, creditors,
purchases etc. The transaction relating to the receipt of cash are omitted from the
records or recorded with lesser amount in the cash book. Some of the examples are as
follows:-
Cash sale may not be recorded at all
Omitting credit not received from supplier and discount allowed to them
Manipulation of accounts
These frauds may be committed by manipulated wrong statement and accounts. These
are made only to give fraud to the higher authorities. This type of fraud is committees by
manager, director or board of directors.
(C) Detection and Prevention of Errors
Accounting is the device for collecting and presenting useful information in financial
terms about a business enterprise. It should as well be recognized that accounting data
may contain errors for a variety of reasons. Even today human element is the most
important element of recording and processing the accounting data. It is the
management that is responsible for prevention of errors and fraud.
13. Principles governing an Audit
Principle of Independence
The audit work should be independent from accountancy and the auditor should
examine the books of accounts indifferently and independently. He should be free from
any such interests which may affect his integrity and objectivity.
Principle of Objectivity
The audit work should be based on evidence and should be done impartially and in an
unbiased way.
Principle of Materiality
The principle of materiality is and has always been fundamental to the whole process of
counting. An auditor has also to be quiet concerned regarding the concept of materiality.
The auditor has to analyze and take decisions regarding various items whether they are
material or not during the course of audit. In case the auditor finds that an item is quiet
material in nature he would have to give careful consideration to its checking and would
care for more evidence in support.
Confidentiality
The auditor should maintain the confidentiality of the client’s information. It is well said
that an auditor keeps his ears and eyes open, but his mouth shut. He should disclose the
information only when:-
He has obtained permission of his client.
There is legal or professional duty to do so.
14. Work performed by others
The auditor can delegate work to assistants or can use work performed by others,
auditors or experts. But he will continue to be responsible for expressing an opinion of
financial statements. The auditor should obtain reasonable assurance that work
performed by other auditors or experts is adequate for his purpose. ICAI has issued
AAS-7, AAS-9, AAS-10, AAS-12 and AAS-17 in regard to this issue.
Documentation
Documentation is an important aspect of any audit. An auditor should maintain sufficient
working papers for each audit assignment. Such documentation is very important in
providing evidence that the audit was carried out in accordance with the basic principles.
Planning
The Auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner. Plans should be based on knowledge of business client.
Plans should be revised as necessary during the course of audit. AAS-8 issued by ICAI
deals with aspects of planning.
Audit Evidence
The information which may be oral or written, obtained for the purpose of the audit is
known as audit evidence. Auditor should obtain sufficient and appropriate evidence to
enable him to draw conclusions so as to make an opinion on financial statements. Audit
evidence can be obtained with the help of following:-
Compliance Procedures
Substantial Procedures
Tests of Details
Analytical Procedures
15. Accounting System and Internal Control
Management is responsible for maintaining an auditable adequate accounting system
incorporating various internal controls to the extent appropriate to the size and nature of
the business. The internal controls contribute to audit assurance that the accounting
system is adequate and that all the accounting information has been duly recorded.
AAS-6 has established standards for obtaining an understanding of accounting and
internal control system.
Audit Conclusion and Reporting
Auditor should review and assess the conclusions drawn from the audit evidence
obtained. He should assess whether the financial information complies with recognized
accounting principles. He should also assess the disclosure requirements. The audit
report should contain a clear and written expression of opinion on financial information.
AAS-28 describes the elements and types of audit report.
16. ADVANTAGES AND LIMITATIONS OF AUDITING:-
ADVANTAGES :-
The fact that audit is compulsory by law, in certain cases by itself should show that there
must be some positive utility in it. The chief utility of audit lies in reliable financial
statements on the basis of which the state of affairs may be easy to understand. Apart
from this obvious utility, there are other advantages of audit. Some or all of these are of
considerable value even to those enterprises and organizations where audit is not
compulsory, these Advantages are given below:-
(a) It safeguards the financial interest of persons who are not associated with the
management of the entity, whether they are partners or shareholders.
(b) It acts as a moral check on the employees from committing defalcations or
embezzlement.
(c) Audited statements of account are helpful in settling liability for taxes, negotiating
loans and for determining the purchase consideration for a business.
(d) These are also useful for settling trade disputes for higher wages or bonus as well as
claims in respect of damage suffered by property, by fire or some other calamity.
(e) An audit can also help in the detection of wastages and losses to show the different
ways by which these might be checked, especially those that occur due to the absence
or inadequacy of internal checks or internal control measures.
(g) Audit ascertains whether the necessary books of account and allied records have
been properly kept and helps the client in making good deficiencies or inadequacies in
this respect
(h) As an appraisal function, audit reviews the existence and operations of various
controls in the organizations and reports weaknesses, inadequacies, etc., in them.
17. LIMITATIONS OF AUDIT
At this stage, it must be clear that the objective of an audit of financial statements is
to enable an auditor to express an opinion on such financial statements.
In fact, it is the auditor’s opinion which helps determination of the true and fair view of the
financial position and operating results of an enterprise. It is very significant to note that
the AAS-2 makes it a subtle point that such an opinion expressed by the auditor is
neither an assurance as to the future viability of the enterprise nor the efficiency or
effectiveness with which management has conducted affairs of the enterprise. Further,
the process of auditing is such that it suffers from certain inherent limitations, i.e., the
limitation which cannot be overcome irrespective of the nature and extent of audit
procedures. It is very important to understand these inherent limitations of an audit since
understanding of the same would only provide clarity as to the overall objectives of an
audit. The inherent limitations are :-
(i) First of all, auditor’s work involves exercise of judgment, for example, in deciding the
extent of audit procedures and in assessing the reasonableness of the judgment and
estimates made by the management in preparing the financial statements. Further much
of the evidence available to the auditor can enable him to draw only reasonable
conclusions there from. The audit evidence obtained by an auditor is generally
persuasive in nature rather than conclusive in nature. Because of these factors, the
auditor can only express an opinion. Therefore, absolute certainty in auditing is rarely
attainable. There is also likelihood that some material misstatements of the financial
information resulting from fraud or error, if either exists, may not be detected
18.
19. MEANING OF AUDITOR ;-
The person conducting audit is known as the Auditor;
he makes a report to the person appointing him after due examination of the accounting
records and the accounting statement in the form of an opinion on the financial
statements. The opinion that he is called upon to express is whether the financial
statement reflect a true and fair view. Auditing, especially of companies and for public
purposes has become the preserve of persons having recognized professional training
and qualification. In India, under the authority of the Companies Act, 1956, only
Chartered Accountants are professionally qualified for the audit of the accounts of
companies... Chartered Accountants are in a position to undertake auditing of almost
any accounting aspect, unlike cost accountants whose sphere has been restricted to
audit of the cost accounting records and statements. It is C.A. or a firm whose all
partners are Chartered Accountants who act as auditors in India.
TYPES OF AUDITORS:-
Functional Classification of Auditors : Internal vs. External Auditors
External auditors are the persons who practice the profession of accountancy having
qualified in the professional examination and are external vis-à-vis the organizational
which they audit the accounts. The Internal auditors, on the other hand, may also be
professionally qualified and are internal vis-à-vis the organization in which they are
appointed to perform specific work.
20. Powers of Auditors
The rights of the company auditor can not be limited or abridged in any way. Any
resolution limiting the powers of the auditor or any such provision in articles of
association will be void. Following are powers/rights of auditors:-
Access to books and vouchers
Every auditor of company shall have a right to access at all times to the books and
accounts and vouchers, whether kept at head office of company or elsewhere. Auditor is
not required to wait for the closing of accounts for conducting the audit. The words all
times means only the normal business hours. All types of documents, agreements,
correspondences, financial books, statistical books, memorandum books, etc are
covered.
Right to obtain information and explanations
Auditor may require the officers of the company to provide such information as he may
think necessary for the permanence of his duties. It will be obligatory for the officers of
the company to furnish without delay the relevant information to the auditors.
Right to visit branch offices and access to branch accounts
Where accounts of any branch office are audited by another person, the company
auditor:-
Shall be entitled to visit the branch office, if he deems it necessary to do so for the
performance of his duties as auditor
Shall have a right to access at all times to books and accounts and vouchers of the
company maintained at the branch office.
21. Right to attend General Meeting
All the notices and other communications relating to any general meeting also be
forwarded to the auditors of a company along with shareholders/members. Auditors shall
be entitled to attend any general meeting and to be heard at any general meeting which
he attends on any part of the business which concerns him as auditor.
Auditor’s lien
Auditor’s lien on his client’s books and records is unconditional. Auditor can exercise lien
on books and documents subject to following conditions:-
Documents retained must belong to client
Such documents must be in possession of auditor on client’s authority
On such documents, some work must have been done
The fees for work performed must be outstanding.
Right to receive remuneration
Remuneration of the auditor of a company may be fixed by the authority which appoints
him. Therefore, Board of Directors will fix remuneration in case of first auditors or
auditors appointed to fill up casual vacancy. If he is appointed at the annual general
meeting his remuneration will be fixed by the company at the general meeting.
A separate disclosure of all the amounts paid to the auditor in whatever capacity and
whether as fees or expenses, is required to be made in profit and loss account, classified
as follows:-
(a) As auditor
(b) As advisor or in any other capacity in respect of:
22. Duties of Auditor
The statutory duties of an auditor cannot be limited in any way either by Articles of
Association or Directors or by members. However, a company may extend them. The
following are the duties that the auditor has to perform:-
Auditor has to state whether in his opinion and to the best of his information and
according to the explanations given to him, the accounts, give a fair and true view in the
case of the balance sheet, of the state of the company’s affairs as at the end of its
financial year and in the case of the profits and loss account, of the profits and losses for
its financial year. Following guidelines may be laid down in this regard:
Balance sheet and profit and loss account should be as per requirements of The
Companies Act, 1956
There should be no window dressing
All material facts should be properly disclosed
All usual, exceptional or non recurring items should be disclosed separately
The financial statements should convey the required information clearly
Auditor has to state whether he has obtained all the information and explanations
which to the best of his knowledge and belief were necessary for the purpose of his
audit.
He is required to state whether in his opinion, proper books of accounts as required by
law have been kept by the company, so far as appears from his examination of these
books, and proper returns adequate for the purpose of his audit have been received
from branches not visited by him.
23. Whether in his opinion the balance sheet and profit and loss account comply with the
accounting standards referred in Section 211 of The Companies Act, 1956.
Auditor is required to state whether any director is disqualified from being appointed as
director under Section 274
He will state whether the cess payable under Section 441A of the act has been paid by
the company and if the same remains to be paid, details thereof.
Whether the company’s balance sheet and profit and loss account dealt with by the
reports are in agreement with the books of accounts and returns.
He will state whether the report on the account of any branch office audited under
Section 228 by a person other than the company auditor has been forwarded to him and
how he was dealt with the same in preparing auditors report.
