Unit – 5

• An unbiased examination and evaluation of the financial statements of an organization. • It can be done internally (by employees of the organization) or externally (by an outside firm).

External Audit
• A periodic examination of the books of account and records of an entity carried out by an independent third party (the auditor), to ensure that they have been properly maintained, are accurate and comply with established concepts, principles, accounting standards, legal requirements and give a true and fair view of the financial state of the entity. • Periodic or specific purpose (ad hoc) audit conducted by external (independent) qualified accountant(s).

and – the statements prepared from the accounts present fairly the organization's financial position. . – prepared in accordance with the provisions of GAAP. and the results of its financial operations. See also internal audit.Objectives – the accounting records are accurate and complete.

GENERAL METHODOLOGY OF AUDITING PROCESS • Objectives and Configuration of Work Auditing • Engagement letter of Auditing • Strategy of Work – – – – – – Objective and configuration Size and complexity of company The auditor experience Knowledge of the type of the business Quality of the organization Internal control of the organisation .

Independent expert in other matters Internal auditors Auditing risk methods The internal control • Analysis of the probabilistic series of different accounts of the financial statements . configuration and exact date of the beginning of the work • Global Plan of Auditing – – – – – Planning.GENERAL METHODOLOGY OF AUDITING PROCESS • Planificacion of Auditing – Scope.

GENERAL METHODOLOGY OF AUDITING PROCESS • • • • Auditing Program Review Techniques to Reach the Objectives Professional and Independent Opinion Audit Report of Financial Statement .

liabilities. other events.16] . • Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs (including Interpretations). [IAS 1. income and expenses set out in the Framework.Fair presentation • The financial statements must "present fairly" the financial position. • Fair presentation requires the faithful representation of the effects of transactions. and conditions in accordance with the definitions and recognition criteria for assets. financial performance and cash flows of an entity.

• In such a case. the entity is required to depart from the IFRS requirement.Fair presentation • Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. in extremely rare circumstances.16] • IAS 1 acknowledges that. management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. reasons. with detailed disclosure of the nature. [IAS 1. and impact of the departure. [IAS 1.19-20] .

Ernst & Young. it is a self examination. or to another party. • An internal audit is usually done by employees within a company. These companies will visit the client company for a designated period to review the books. etc. An external audit is done by auditors not under the influence of the company being audited. • An external audit is usually from an outside auditing company like Deloitte & Touche. or the IRS. • An internal audit is done by the company itself. a bank.Differences between Internal and External Audit • An internal audit is conducted by the organization itself or a firm hired by them. This is to maintain controls and prevent any mistakes. such as a business. • An external audit is done by an outside agency that reports to the firm's stockholders. .

g. related companies. internal combustion). activity or process inside or "within" an entity (e. creditors. . external symptoms. internal medicine. external hard drives). while an external report is prepared for shareholders.Differences between Internal and External Audit • An internal audit is an appraisal of activities within company areas.g. whereas an external audit looks at the financial statements as a whole • An internal report is normally given to managers. or government agencies. • Internal is a concern. External is applied to forces or influences outside the entity (e.

• Internal audit results are usually taken under consideration by management and improvements are made by the company in order to avoid an external audit finding which may result in the risk of citation or fine. • The external auditors findings are legal and binding and may lead to citations or fines or both. usually by employees who are subject matter experts. . state.Differences between Internal and External Audit • An Internal audit is performed by employees of your own company. or federal). • An external statutory audit would be performed by and auditor who is employed by the government (local.



controlling and recording evaluation of the internal control system evidence reporting and follow-up . ) planning.Essential features of an Effective Internal Audit Department • • • • • • • • Independence appropriate staffing and training relationships due care (The auditor can never give a total assurance that control weaknesses don’t exist but they must be able to demonstrate that due care is exercised and their working papers are consistent.

Financial Controls • It is the responsibility of the Board of the Association to ensure that good financial controls are in place. . • It is the responsibility of management to ensure that the controls are operating effectively.

What controls are necessary? • the nature and extent of risks they face. and • the cost of implementing a control compared to the benefit that would be obtained by implementing it. • the extent and type of risk which would be acceptable to bear. • the likelihood that the risks will occur. • the ability to reduce the incidence and impact of risks that do occur. .

Financial Control through • • • • • • • Budgetary Controls Bank and Cash Controls Expenditure and Purchasing Controls Investment Appraisal Payroll and Personnel Controls Controls over Assets Treasury Management .

Nature of Accounting Errors • The accounting errors based on their nature can be of the following types: – Clerical Errors – Errors Of Principe .

• These take place due to the carelessness of the clerk responsible for recording financial transactions. • These errors are committed in the process of recording financial transactions. • Clerical errors are also called technical errors.Clerical Errors • The errors which are committed by accounting clerks are called clerical errors. .

Clerical Errors • Errors Of Omission – Complete Omission – Partial Omission • Errors Of Commission • Compensating Errors • Errors Of Duplication .

For example.Errors Of Omission • The errors committed by not recording a transaction either in the book of original entry or in the ledger book are errors of omission. partial error of omission occurs if goods sold to Krishna for 4000 is recorded in sales book but failed to be posted in Krishna’s account. For example. goods sold to Krishna for 10. – Complete Omission: – Partial Omission: Complete omission takes place if a transaction is not recorded in the journal at all.000 were not recorded in the sales book at all. . Partial omission occurs if a financial transaction is recorded only partially.

Errors Of Commission • The errors which are committed while recording or posting a transaction are called errors of commission. or in the ledger. • For example. such error is called errors of commission.000 is entered as 1000 in the journal or in the ledger. . if purchase of goods for 10. Errors of commission may take place either in the journal or in the subsidiary books. posting on wrong side of accounts. wrong totaling or carrying forward. and wrong balancing. • Such errors include posting wrong amounts.

• For example. but wrongly posted to the customer's account as 500. as $ 4500 short on the debit side of the customer's account and on the credit side of the supplier's account. then the two error are called compensating errors. • If one error balances the effect of another error.Compensating Errors • Compensating errors refer to two or more errors which mutually compensate the effects of one another. wrongly posted to the supplier's account as 500. but by chance. goods purchased for 5000. • The errors in the personal account are compensated by each other. goods sold for 5000. . • Similarly.

• For example. but this transaction is wrongly entered twice or more in the sales book or wrongly posted twice or more in John's account then it is called the errors of duplication. . • Double posting of a transaction from journal or subsidiary books to ledger also create such errors. goods sold to John.Errors Of Duplication • Errors of duplication are those errors which arise because of double recording.

or wrong valuation of assets.Errors Of Principle • Errors of principle are those errors which occur by violating the principles of accounting. debiting the wage account instead of machinery account for the wage paid to the mechanics used for the installation of machine and debiting the customer's account instead of cash account for the cash sales made. • Errors of principle may also occur due to wrong valuation of assets by higher level staff. . • Errors of principle may occur due to wrong allocation between capital and revenue expenditure. • For example.

Frauds .

. lying.Fraud • It is intentional deception. fairness. justice. and equity to manipulate another person to give something of value. and cheating and the opposites of truth.

theft of money. payroll fraud. • Financial statement fraud – This type of fraud centers on the manipulation of financial statements in order to create financial opportunities for an individual or entity. bribes to influence decision-making. shell company schemes. or theft of services.Types of Frauds • Asset misappropriation – It includes things like check forgery. inventory theft. manipulation of contracts. or substitution of inferior goods. • Bribery and corruption – It includes schemes such as kickbacks. .

.Methods • Inventory and Other Assets Theft • Supplier Kickbacks – Corruption schemes misappropriations rather than asset • Financial Reporting Misrepresentation – a material misrepresentation resulting from an intentional failure to report financial information in accordance with generally accepted accounting principles.

Preventive Methods • Inventory and Other Assets Theft – – – – – – – – Proper Documentation Segregation of Duties Independent checks Physical safeguards • Supplier Kickbacks • Financial Reporting Misrepresentation Bribery Prevention Policy Reporting Gifts (employee) Discounts ((employee personal purchase) Business Meetings (Entertainment and services offered by a supplier or customer) .

throughout the organization . • Maintain accurate and complete internal accounting records • Promote strong values.Preventive Methods • Financial Reporting Misrepresentation • Establish effective board oversight of the “tone at the top” created by management. based on integrity.