Sikkim Manipal University Roll No:- 531010305

Q.1 Write the differences between Auditing and Accounting?

Ans:- Difference between accounting and auditing

Accounting is process of identifying, measuring, and communicating

economic information to various users.

Accounting is defined (by the American Institute of Certified Public

Accountants) (AICPA) as "the art of recording, classifying, and summarizing
in a significant manner and in terms of money, transactions and events
which are, in part at least, of financial character, and interpreting the results
thereof. Today, accounting is called "the language of business" because it is
the vehicle for reporting financial information about a business entity to
many different groups of people. Accounting that concentrates on reporting
to people inside the business entity is called management accounting and is
used to provide information to employees, managers, owner-
managers and auditors..

Accounting requires that an accountant must have accounting knowledge

while auditing work required that an auditor must have accounting as well as
auditing knowledge. Accounting is concerned with current data. It is
constructive in nature. Accounting is done on a day-to-day basis in business.
It is the recording of transactions, the accounting for depreciation, debt,
revenue, etc., that are all a part of reporting the company's financial
activities.

The main goal of accounting is to provide a company with clear,

comprehensive, and reliable information about its economic activities and
status of its assets and liabilities. This information is presented in the form
of accounting reports like the balance sheet, income statement, statement of
changes in equity (also called shareholders’ equity statement), and
statement of cash flows (also called cash flow statement). By means of
accounting reports it is possible to perform the following (list non-inclusive):

• Understand and re-allocate internal resources of the company to

ensure its financial stability
• Review profitability of the company’s economic activities
• Understand the company’s cash inflows and outflows
• Verify conformity of a company’s economic activities to government
regulations

Internal users of accounting reports are managers, owners, and employees.

External users of accounting reports are investors, creditors, and
government.

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Audit is independent appraisal performed by an independent expert of an

activity or event. There are operational, technical, ecological and other types
of audit. Most commonly, nevertheless, this term refers to audits of financial
statements.

Audit of financial statements is the process of examining the financial

statements and the underlying records of the company in order to render an
opinion as to whether the statements are fairly presented. Most commonly
financial audits are performed on a company’s request for the benefit of
financial information users (i.e. internal and external). Auditors analyze and
compare accounting reports and confirmation documents as well as verify
conformity of a company’s accounting with established standards and
regulations (e.g. US GAAP, IFRS). Therefore, the main goal of an audit is to
perform thorough evaluation of a company’s financial records and reports
and provide a company with improvement recommendations based on that
evaluation.

As we can see, accounting provides financial information to users of such

information, and auditing is a means to ensure such information is reliable
and comforts with established rules and regulations.

Q.2 Write the factors to be considered while drawing up the audit

programme an auditor should give attention?

Ans:- Audit planning requires a high degree of discipline on the part of the
auditor. In order to make the planning more meaningful, the auditor should
take into consideration the following matters in relation to the audit
engagement:

(a) Preliminary Work to be Done in Addition to the Real Audit

Work: This will include such matters as stocktaking, cash count,
debtors’ circularisation and review of previous year’s working papers.
This will remind the auditor of those matters brought forward from the
previous year and any other points to be resolved in the current year
or problems anticipated.

(b) Changes in Legislation or any Auditing Standards or

Guidelines: The promulgation of the Companies and Allied
Matters Act, brought with it a lot of changes in accounting and
auditing requirements of companies. Such legislations whether in
respect of all companies or particular industrial group, must be
reviewed ahead of the engagement in order to determine their effects on
the operations or reporting requirements of the enterprise.

(c) Analytical Review of Available Management Accounts and

Other Management Information that Relate to the Accounts : This

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will assist in establishing valuable ratios and indicators that will guide
the auditor. For instance, the computation of the gross profit percentage
compared with that of the previous year will provide a good indicator to
the auditor of the accuracy and reliability of sales and cost of sales.

(d) Changes in the Business or Management : The appointment

of a new Finance Controller and the establishment of a new business line or
the creation of a new branch are significant changes in the
circumstances of the company which will necessitate changes in the
existing audit plans.

(e) Changes in the Accounting System : The introduction of

computers such that when a company introduces significant changes in its
operating procedures will require a review and evaluation of the system
of internal control.

(f) Deadlines Established for the Submission of Audit Report :

Where a client has set deadlines for its statutory activities such as the
annual general meeting, it is important for the auditor to work in line
with such programmes.

(g) Use of Rotational Testing and Verification : In practice, the

auditor may not carry out a hundred percent testing or verification of the
client’s transactions or segments of the business. Where rotational testing
or verification is adopted, it will be necessary for the auditor to determine
ahead of the date of the engagement which aspects of the businessshould
be selected for testing or verification. An example of rotational testing could
be applied on the client’s branches to be visited.

Points for Consideration in Audit Planning Memorandum Audit planning

memorandum should cover the following standing matters which are
designed to achieve the desired audit objectives:

(a) Terms of Engagement : In the case of a new audit engagement,

a letter of engagement should be prepared as part of the overall plan of the
audit. Even in subsequent visits,the letter of engagement should be
reviewed in the light of current circumstances to ensure that all aspects
of the work undertaken for the client are covered in the letter especially
asthey relate to taxation, accountancy, staff development and executive
search.

(b) Audit Risk Areas : The auditor should critically review all the
areas of high risk in order to ensure that the planned procedures
adequately cover such areas and that competent staff have been
assigned to these areas. High risk areas may relate to the nature of the
items, such as cash for a retail establishment with numerous collection

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points and outdoor disbursement locations. Risk may also relate to a

high probability of error as in the case of stocks whose quantities
are subject to estimation and are susceptible to pilferage. The risk may
also relate to the structure of the organization especially in cases of joint
ownership of an organisation, where the owners are not equally
represented in the management. There is therefore the risk of withholding
key information from some of the directors.

(c) Assets and Liabilities : These will require detailed plans since
they are of continuing relevance to the financial statements of many years
and the relevant vouchers may not be readily accessible. The plans
relating to assets should clearly disclose their history such that current
movements may easily be ascertained and adequately verified. These will
apply mainly to plant and long term loans.

(d) Presence of Internal Auditor : Wherever an internal auditor

exists in an organisation, the auditor should develop suitable
plans to review the technical competence of the internal auditor, his
degree of independence and scope and quality of his work in order to
determine the extent of reliance to be placed on his work and to
identify the areas of work overlap.

(e) The Need for Specialists : The auditor should determine ahead
of his visit those aspects of the work that may require the services of
specialists. This may be internal or external specialists as relates to
stocks, specialist valuation for insurance or computer applications.

(f) Audit Approach : Based on the review of the system of internal

control, the auditor should be able to decide on the audit approach
to adopt. This will be based on the extent of reliance to be placed on
the system of internal control.

(g) Timetable : A critical aspect of the audit is the timetable. The

auditor should establish plans to ensure that for each year, the audit is
completed within any stated deadline for submission of the report.

(h) Staffing : The auditor should plan for adequate number of staff
with the required skill for the audit. The training of audit staff is a long term
process which will require that even from the initial appointment of the
auditor, he should take steps to train suitable staff in sufficient number
to handle the audit of the client.

(i) Fees : Based on plans already established in terms of time, staff

and materials, the auditor should plan for his fees to cover staff
salaries, overhead costs and leave a sufficient margin for the partners’

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share of profit and pension scheme. The planned fees must be discussed
with the client, if not already agreed.

Understanding the Client’s Business

The extent of the knowledge gained of the client’s industry and business
organisation greatly facilitates the performance of the engagement staff. It is
essential therefore that all staff engaged in the audit are encouraged to gain
an understanding of the client’s business operations. Such understanding, in
addition to enhancing the overall audit performance, also facilitates
communication with client’s staff and in assessing the reliability of
representations from management and making judgement regarding the
appropriateness of the accounting policies adopted and their disclosure.

The auditor may obtain knowledge of the client’s business by:

• Personal visits to the client’s premises and operating bases and

holding discussions with key officials of the company;
• Reading minutes of meetings and correspondence with the client;
• Reading internal audit report;
• Reading previous year’s audit files and permanent audit files;
• Reading other materials from within the firm, e.g. management
consultancy reports and feasibility reports; and
• Reading relevant materials relating to the business e.g. trade journals,
investment analysis and stockbroker’s report.

Other significant factors which should be considered by the auditor to

determine the audit strategy are as follows:

• The auditor’s responsibilities in accordance with the terms of the

engagement;
• The nature of the client’s business;
• The nature and significance of items in the year’s accounts; and
• The principal features of the client’s accounting system and the extent
and effectiveness of the related internal accounting controls, which
may be gained from a preliminary understanding of the system.

Consideration of the above factors should enable the auditor determine an

appropriate audit strategy which should be set out in writing, in an audit
strategy memorandum, which should be approved by the audit partner.

However, the auditor should recognise that this strategy may, if necessary as
a result of changing factors, be reviewed and revised as the audit
progresses. For existing clients, the auditor should have much of the
information he needs to determine his audit strategy in his audit files.

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Nevertheless, he should still discuss with the clients management whether

there have been any changes in the company’s circumstances that might
affect his audit approach.

The external auditor is appointed to carry out audit in accordance with

specific regulatory or statutory requirements, such as the Companies and
Allied Matters Act or in accordance with generally accepted auditing
standards within the country concerned. In these circumstances, the terms
and conditions will not call for any special consideration when determining
the audit strategy. The auditor should, however, consider whether additional
responsibilities arise from request by the client’s management or because
the client is required to conform to special regulatory or other requirements.

Q.3 Write the Guidelines for internal check for Big Departmental
stores?

Ans:- Guidelines for internal check for Big Departmental stores

1. Stocks to be stores in assigned areas.

2. Stocks are to be insured against fire, theft, flood , riot etc.

3. Record of such insurance policies to be reviewed.

4. Value of stock for insurance purpose should be decided by top

authority.

5. Perpetual stock records are to be kept.

6. Stock records are to be compared with accounting records

periodically.

7. Periodical verification of inventory and reporting is a must.

8. Stock levels are to be maintained.

9. ABC analysis of inventory is to be made.

10. Inventory verification should be in a prescribe mode and

time.

11. Verification should be done by independent person.

12. Variations should be properly explained.

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13. Stocks at other places like, with customers, consignees,

contractors, warehouses or third parties to be confirmed by such
parties.

14. Records to be maintained for scrap, by-products or

returnable containers.

15. Requisition notes from production departments must be

formal and duly authorized.

16. Valuation methods should be authorized and based on

accounting standards.

Q.4 Distinguish between internal control, internal check and

internal Audit?

Ans:- Distinguish between internal control, internal check and

internal Audit

Sometimes people get confused and interchange the terms-internal control,

internal check and internal audit. Hence it is necessary to know the
differences between these terms.

Internal control is all the procedures and policies set up by management to

achieve organizational goals. The process of internal control is designed to
provide reasonable assurance that an organization's assets are safeguarded,
that operations are managed effectively and efficiently, and that financial
reports are reliable. They vary according to organizational size, complexity,
and management structure.

Internal check is “check on day to day transactions which operate

continuously as a part of the routine system whereby the work of a person is
proved independently or is complementary to the work of another, the object
being the prevention or early detection of errors or frauds”

• Existence of checks on day-to-day transactions.

• Continuous operation of checking.
• Work of one person is checked by another person.

Thus basically internal check uses the features of “segregation of duties” of

internal control. Thus internal check is only a part of internal control.

Internal audit, as we have seen encompasses review and appraisal of

internal control itself and hence is much broader concept. Internal audit is a
kind of audit which is not a statutory audit. Internal audit is a tool of

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management and required for controlling the internal matter. Through the
Internal audit the financial transactions are regular and the mistakes are
detected. The Internal audit is done not only after completion of the year,
but it can be done during each financial year whenever required. In many
cares it becomes continuous or routine audit. In the care of statutory audit
only statutory matters or points are audited which in care of internal audit
almost all the financial transactions are audited.

Q.5 Write the essential requirement of Computer Assisted Auditing

Techniques (CAAT)?

Ans:- In auditing with the computer, auditors employ CAATs with other
auditing techniques to perform their work. As its name suggests, CAAT is a
tool to assist auditors in performing their work faster, better, and at lower
cost. As CAATs become more common, this technical skill is as important to
auditing profession as auditing knowledge, experience and professional
judgement.

The implementation of computerization greatly improved accounting

information processing speed and accuracy, can provide users with timely
and accurate accounting information, the accounting industry in the history
of an unprecedented leap forward. However, in this leap also audit work
great, and summarized in the following aspects:

An audit trail of changes in

Since the implementation of computerization of accounting, so that the audit

trail has greatly changed, the traditional manual accounting system audit
trail in the computerized system will be interrupted or even disappear. In the
manual system, from the original documents to the accounting vouchers,
from posting to the financial statements have been prepared, documented
every step, there are handling signature, audit trail is very clear. Auditor trial
lines, as needed Shun can search, reverse search, or random. However, in
computerized accounting system, the traditional is not the books, and most
of the transcripts disappeared, replaced by the existence of accounting
information disk and tape, which is based on the information on magnetic
media, machine-readable form, the naked eye does not recognize. In
addition, from the raw data into the machine, the output of the financial
statements, which focused on the middle of all the accounting treatment of
automatically by a computer program instructions according to preservation,
the traditional audit trail here interrupted, and disappeared. The traditional
guard of the computerized accounting entity is no longer fully applicable. In
order to effectively audit the computerization of the accounting entity, in the
computerized accounting system design and development of audit
requirements must pay attention to the new audit trail left behind. For

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example, to leave a detailed record of each business, rather than leaving

only the updated current balance. Some systems in the temporary files, after
a certain period of time should be deleted. If the audit need to check these
documents should be copied in order to search.

Second, changes in the accounting system of internal control

Modern international audit are based on system-based, that is the auditor of

the accounting system to review and evaluate internal controls, as a
development of the scope of the audit program and decide on the basis of
spot checks. Because of the computerized accounting system
implementation, manual control of the existing accounting system can not
meet the new features of data processing can not effectively reduce the
computerized accounting system-specific risk. For example, in computerized
accounting systems, accounting information processing and storage are
highly concentrated in the computer, make some of the manual accounting
system, separation of duties, each send control system failure. In order to
secure the system and the system processing and storage of accounting
information accurate and complete, we must consider the characteristics of
computerized systems, for its inherent risks, the establishment of new
internal controls. In addition to these internal controls related to electronic
data processing system for the implementation of process control and
artificial, the internal control procedures of computerized accounting
information system is an important feature. How to identify, review and
evaluation of these new content control, especially the process of internal
control is a computerized accounting for a further new audits. American
Institute of Certified Accountants Association, No. 3 of the Introduction to
Auditing Standards states: "If a customer in its accounting system, the use of
electronic data processing, whether it is a simple band is complex, the
auditor must fully understand the entire system, allowing to identify and
evaluation system of basic accounting controls features. including the more
complex electronic data processing applications, cases, the auditors in the
implementation of the necessary audit program that will be on the
application of specialized expertise in electronic data processing. "
Computerized accounting conditions, due to changes in internal controls, and
auditors must study computerized system of internal control, master of its
assessment methods. Of process control, the auditor should audit the use of
computer-assisted audit techniques. For Computerized Accounting
Information System of internal control weaknesses, auditors must be able to
assess its impact to the Pishendanwei suggestions for improvement.

Third, changes in the contents of the audit

Computerization of accounting under the conditions of the trial so that the

monitoring functions, though not changed, but the audit of the substance

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was changed. In the computerized accounting information systems,

accounting matters automatically by a computer according to the procedures
for processing, if the system an application error or unlawfully altered, then
the computer will only process given the same wrong way to deal with all of
the relevant accounting matters, the system can be without our noticing
them embedded in illegal and corrupt process, criminals can use these
procedures for a large number of corrupt misappropriation of property. Does
the system deal with compliance, legal, safe and reliable, with the computer
system processing and control functions are directly related. The
characteristics of computerized accounting information system and its
inherent risks, the decision to increase the content of the audit of the
computer system processing and control functions under review. Under the
condition of computerized accounting, the audit staff to spend more time
and effort to understand and review the functions of a computer system to
confirm the legitimacy of its processing, accuracy and completeness to
ensure the system safe and reliable.

When a system has been completed and put into use, and then to improve it,
than in the system design, development stage is much more difficult, costs
much more expensive. Therefore, in addition to right to vote after use
computerized accounting information systems post-audit services, but also
to promote the system's design, development stage, the audit should be
carried out in advance, and things involved in the audit. They are in the
system design and development at all stages of review and assessment
should pay attention to the following questions: First, the system is
functioning properly, complete, users can meet the accounting and
management requirements; second is the system of data flow approach is in
line with the accounting system, regulations, decrees and financial discipline
requirements; third is whether the system is set up properly process control,
to prevent or timely detection of unintentional errors or intentional fraud; 4
whether to keep the system a full audit trail, can successfully develop for the
future the audit to provide the necessary conditions; 5 is the system's
security measures and management system is sound, whether the system
safe and reliable operation of the future system of development control.
Audit staff also participated in the system debugging, testing and
acceptance, as timely as possible to find that the system matters, and
suggest improvements.

Fourth, changes in audit techniques

In the manual processing conditions, the audit can be carried out according
to specific circumstances shun investigation, reverse search, or random.
Review commonly used to review, check, compare, investigate and prove
such. All the reviews are done by hand. Computerized accounting conditions,
determine the characteristics of the accounting audit and technical change.
Although a variety of manual review of technology is still very important, but

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machine-assisted auditing techniques is essential to the audit.

Computerized information processing and information storage of the

electromagnetic, if not all of the accounts table printout paper documents,
magnetic media on the accounting information is the naked eye can not
recognize, the audit staff can only use computers to review it. Even though,
the entire account must be in hard copy form, using the computer more
quickly than the hand can be more effective to complete review, verification,
analysis, comparison of the review. For example, the computer can help
auditors to review the accounts file, find the accounting records to meet the
specified conditions; can be a large number of accounting matters of
statistical sampling in order to extract samples of the auditors of the lack of
further review; also be recorded in accordance with accounting information
system to calculate various financial ratios, rates of change and conducting a
variety of analysis and comparison and so on.

Computerization of accounting under the conditions of both the computer

system processing and control functions to review, but also using computer-
assisted audit techniques. Review of the computer system functions, you
must run the computer, let the computer perform various operations and
processing, that is, the use of computers to carry out the audit. This review is
not to leave the computer only by manual methods to complete.

Another computer-assisted audit techniques, in computerized accounting

information system design and development process, can be audited in
advance of the embedded computer systems audit procedures. These
programs can perform the audit oversight, to establish an audit trail
documents, records the transactions meet the specified conditions and the
operation processing of relevant information for future audit staff actively
tracing. These programs can also perform some special audit function.

Fifth, higher demand for auditors

Computerization of accounting under the condition of content control as an

audit trail, content, and auditing techniques change, the decision on the
audit staff requirements high. The auditors do not understand computers
because of changes in the audit trail can not be active audit; do not know the
characteristics of computerized accounting systems and risk can not be
identified and the trial of its internal controls; do not know how so that the
computer can not review or use of computer the computer audit. Therefore,
it requested the auditors not only have the accounting, auditing, and
practical knowledge, but also access to computers and computerized
accounting knowledge and skills.

Seen from the above, the accounting computerization to the audit made a
number of new, new requirements. The traditional manual audit can not
meet the requirements of computerization. , And to carry out computer

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audit, the audit department and audit staff of new subjects and new tasks.

Q.6 Write the Audit programme in an EDP environment?

Ans:- EDP-AUDITING

To give you a view about what Electronic Data Process (EDP) auditing is we
give you first a definition about EDP auditing:

“It is the independent and impartial appraisal of the reliability,

security, effectiveness and efficiency of automated computer
systems, the organization of the automation department and the
technical/organizational infrastructure of the automated fact
processing.”

When we look at the six EDP auditing independent and impartial appraisals
we see that these are the main factors for business processes for an EDP
auditor. These are the key factors where an EDP auditor is checking a system
described in the literature. At the Symposium were we presented our
research a lecturer from Ernst & Young, an EDP auditor, had given his lecture
about EDP auditing & Innovation. He told us that before he become an EDP
auditor he had learned about these six key factors were the basic of EDP
auditing was relied on but in the reality it is more than these factors.

The first appraisal, Reliability, gives an EDP auditor the view about in
which the business processes are reliable for the automated system.
Nowadays the automated systems have more transactions and more
processes than before. This gives an EDP auditor more processes to examine
at the Reliability of the system.

The second appraisal, Security, gives an EDP auditor the view about in
which way the security
has been established. His methodology focuses on the analysis of the
structure and performance of control processes. Representative transactions
are examined by the auditor to assure that these processes are functioning
consistently and correctly. An EDP auditor has also different kind of checking
tools to checks leaks in the automated system. The goal of the EDP auditor is
not to check fraud because the perpetration of a fraud typically manipulates
the purpose and content of specific transactions, rather than the process
itself. For an EDP auditor this kind of fraud is not to see, because the
manipulated transaction is fully blend into normal (legitimate) transaction
flow and through the administrative process is being compromised .

The third appraisal, Effectiveness, is about in which way an automated

system is effective. How is the processes of the system effective regulated.
In this way an EDP auditor views the system and gives recommendation in

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which way the system is effective. To do that an EDP auditor van use scripts
or doing it by hand. Nowadays with the rise of the emerging information
technologies the use of audit computer-assisted techniques are more
effectively used because of the new generation system are using more data
mining, object-oriented architecture and intelligent agents processes in the
automated system.

The fourth appraisal, Efficiency, is about in which way the processes are
optimally regulated. In the efficiency method the EDP auditor looks if
resources are optimally used in the automated
system. Here the EDP-auditor can recommend whether the resources must
be downgraded or be extended to give a better business performance.
Nowadays EDP auditors have many specific tools to use like Cobit, but the
use of these IT tools is less. Auditors are doing mostly their recommendation
by hand and with their use of knowledge.

The fifth appraisal, the organization of the automation department, is the

fact in which way for
example the segregation of duties is regulated for the employee to check or
to place orders for in the system. The EDP auditor looks on this fact how does
and how many employees are used for the resources of any business
process in the system. He is using his experience and his knowledge to
recommend if there are more employees necessary or that it is better to re-
engineer your system.

The technical/organizational infrastructure of the automated fact processing

is about in which way the automated processes are regulated at the
company and how this is reliable for the goals of the company. The EDP
auditor reviews this and recommends the business processes to be optimal
and that the technical infrastructure is regulated in the way that gives the
company an efficient and effective way of business performance.

Work field EDP-auditor

EDP auditor as his main function is to assure that management exercises

effective control over the way in which the organizations assets are used and
that these factors for business processes is related so that use are current
and accurate. Its work is focused on the reasonableness and consistency of
the processing methods used and the accuracy, completeness and currency
of the data itself, this is called the fairness issue .

Also where it is focuses on is the custody and use of organization assets in

general. In these both instances significant attention is paid by the EDP
auditor to the means used to detect and correct errors.

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If we look at the business processes at the work field for an EDP auditor we
see that much of these factors can be automated to give a better and
accurate decision support for an EDP auditor. Since the more using of
complex systems and systems that are hand shaped for a company an EDP
auditor needs more IT tools to give a better recommendation and spit
through the resources for its decision support.

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