Introduction To Auditing

IICA Forum on Financial Reporting & Disclosures
WHAT IS AN AUDIT?
1.
The term audit has been derived from the Latin word audire which means to
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hear. According to Auditing Standards and Guidelines, U.K., An audit is the

independent examination of an expression of opinion on, the financial statements of
an enterprise by an appointed auditor in pursuance of that appointment and in
compliance with any relevant statutory obligations.
2.
As per SA 200, Basic Principles Governing an Audit, issued by the Institute of

Chartered Accountants of India (ICAI), an audit is the independent examination of
financial information of any entity, whether profit oriented or not, and irrespective
of its size or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.
3.
Audit is designed to reduce the possibility of a material misstatement in the

financial statement of any entity not being detected. Financial audits exist to add
credibility to the implied assertion by an organization's management that its
financial statements fairly represent the organization's position and performance to
the company's stakeholders (interested parties). The principal stakeholders of a
company are typically its shareholders, but other parties such as tax authorities,
banks, regulators, suppliers, customers and employees may also have an interest in
ensuring that the financial statements are accurate.
4.
A recent trend in audits (spurred on by such accounting scandals as Enron,

Worldcom, Satyam etc.) has been an increased focus on internal control procedures,
which aim to ensure the completeness, accuracy and validity of items in the
accounts, and restricted access to financial systems. This emphasis on the internal
control environment is now a mandatory part of the audit of SEC-listed companies,
under the auditing standards of the Public Company Accounting Oversight Board
(PCAOB) set up by the Sarbanes-Oxley Act.
Interaction on Due Diligence by Auditors during Company Audit
History
1.
The earliest surviving mention of a public official charged with auditing

government expenditure is a reference to the Auditor of the Exchequer in England
in 1314. The Auditors of the Impress were established under Queen Elizabeth I in
1559 with formal responsibility for auditing Exchequer payments. This system
gradually lapsed and in 1780, Commissioners for Auditing the Public Accounts
were appointed by statute. From 1834, the Commissioners worked in tandem with
the Comptroller of the Exchequer, who was charged with controlling the issue of
funds to the government.
2.
As Chancellor of the Exchequer, William Ewart Gladstone initiated major reforms

of public finance and Parliamentary accountability. His 1866 Exchequer and Audit
Departments Act required all departments, for the first time, to produce annual
accounts, known as appropriation accounts. The Act also established the position of
Comptroller and Auditor General (C&AG) and an Exchequer and Audit
Department (E&AD) to provide supporting staff from within the civil service. The
C&AG was given two main functions to authorize the issue of public money to
government from the Bank of England, having satisfied himself that this was within
the limits Parliament had voted and to audit the accounts of all Government
departments and report to Parliament accordingly.
Rationale for an Audit

1.
The objective of an audit of financial statements is to enable the auditor to express

an opinion whether, apart from representing a true and fair view of an entitys
finances; the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
2.
The underlying objective is to add credibility and enhance the degree of confidence
of Users of managements financial statements. Access to capital markets, mergers,
acquisitions, and investments in an entity depend not only on the information that
management provides in financial statements, but also on the assurance that the
financial statements are free of material misstatements. This assurance is provided,
to a considerable extent, by an audit. While an audit does not guarantee financial
statements accuracy, it provides users with a reasonable assurance that an entitys
financial statements give a true and fair view in conformity with the applicable
financial reporting framework.
The need for an audit therefore originates from the following factors:
Requirement of Unbiased and relevant financial information to guide investment
decisions of stakeholders
Complexity of Financial information
Remoteness of the users from the financial information generating system and
processes
Financial and Economic consequences of using unreliable information
3.
As per SA 200A, Objective and Scope of the Audit of Financial Statements issued by
the ICAI, The objective of an audit of financial statements, is to enable an auditor to
express an opinion on such financial statements and help in determination of the
true and fair view of the financial position and operating results of an enterprise,
the user, should not assume that the auditors opinion is an assurance as to the
future viability of the enterprise or the efficiency or effectiveness with
which management has conducted the affairs of the enterprise.
From the foregoing, the objectives of an audit can be summarized as:U
Primary objectives of Audit (Auditors Report)
Truth and fairness of the financial position shown by the balance sheet.
Truth and fairness of the trading results or the results of operations shown by the
profit and loss account.
Adequacy of information required to be disclosed in the financial statements.

Compliance with statutory requirements.
Accuracy and reliability of books of account and underlying records from which
the financial s statements have been prepared.
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Secondary objectives of Audit (Auditors Report)
To detect errors and frauds, if any.

To prevent errors and frauds by the deterrent effect of audit.
4.
In the context of Indian Companies Act, 1956, as per Sec. 224 (1), Every company
shall, at each annual general meeting, appoint an auditor or auditors to hold office
from the conclusion of that meeting until the conclusion of the next annual general
meeting .
5.
Further, Sec. 233B of the Companies act, 1956 specifies that where in the opinion of
the Central Government it is necessary so to do in relation to any company required
under clause (d) of sub-section (1) of Section 209 to include in its books of account
the particulars referred to therein, the Central Government may, by order, direct
that an audit of cost accounts of company shall be conducted in such manner as
may be specified in the order by an auditor.
Scope of Audit
As per SA 200A, Objective and Scope of the Audit of Financial Statements issued by the
ICAI, the scope of an audit of financial statements will be determined by the
auditor having regard to :
The terms of the engagement;
The requirements of relevant legislation; and
The pronouncements of the Institute.
The audit should be organized to cover adequately all aspects of the enterprise
as far as they are relevant to the financial statements being audited.

The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by:
(a) Making a study and evaluation of accounting systems and internal
controls on which he wishes to rely and testing those internal controls to
determine the nature, extent and timing of other auditing procedures; and
(b) Carrying
out
such
other
tests,
enquiries
and
other
verification
procedures of accounting transactions and account balances as he

considers appropriate in the particular circumstances.
The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
(a) Comparing
the
financial
statements
with
the
underlying
accounting
records and other source data to see whether they properly summaries the
transactions and events recorded therein; and
(b) considering the judgments that management has made in preparing the
financial statements; accordingly, the auditor assesses the selection and
consistent application of accounting policies, the manner in which the
information has been classified, and the adequacy of disclosure.
The auditors work involves exercise of judgment, for example, in deciding the
extent of audit procedures and in assessing the reasonableness of the judgments
and estimates made by management in preparing the financial statements.
In forming his opinion on the financial statements, the auditor follows procedures
designed to satisfy himself that the financial statements reflect a true and fair view
of the financial position and operating results of the enterprise.
The auditor is primarily concerned with items which either individually or as a
group are material in relation to the affairs of an enterprise.

The auditor is not expected to perform duties which fall outside the scope of his
competence. For example, the professional skill required of an auditor does not
include that of a technical expert for determining physical condition of certain
assets.
Constraints on the scope of the audit of financial statements that impair the
auditors ability to express an unqualified opinion on such financial statements
should be set out in his report, and a qualified opinion or disclaimer of
opinion should be expressed, as appropriate.
Basic Principles Governing an Audit

SA 200, Basic Principles Governing an Audit, issued by the ICAI, describes the basic
principles which govern the auditors professional responsibilities and which should
be complied with whenever an audit is carried out. These are:1.
Integrity, Objectivity and Independence
The auditor should be straightforward, honest and sincere in his approach to his
professional work. He must be fair and must not allow prejudice or bias to override
his objectivity. He should maintain an impartial attitude and both be and appear to
be free of any interest which might be regarded, whatever its actual effect, as
being incompatible with integrity and objectivity.
2.
Confidentiality
The auditor should respect the confidentiality of information acquired in the course
of his work and should not disclose any such information to a third party without
specific authority or unless there is a legal or professional duty to disclose.
3.
Skills and Competence
The audit should be performed and the report should be prepared with due
professional care by persons who have adequate training, experience and competence
in auditing.
The auditor requires specialized skills and competence which are acquired through a
combination of general education, technical knowledge obtained
through
study
and
formal courses concluded by a qualifying examination recognized for this purpose

and practical experience under proper supervision. In addition, the auditor requires a
continuing awareness of developments including pronouncements of ICAI on accounting
and auditing matters, and relevant regulations and statutory requirements.
4.
Work Performed by Others
When the auditor delegates work to assistants or uses work performed by other auditors and
experts, he will continue to be responsible for forming and expressing his opinion on the
financial information. However, he will be entitled to rely on work performed by others,
provided he exercises adequate skill and care and is not aware of any reason to believe
that he should not have so relied. In the case of any
independent statutory
appointment to perform the work on which the auditor has to rely in forming his
opinion,
such
as
in
the case of the work of branch auditors appointed under the
Companies Act, 1956, the auditors report should expressly state the fact of such reliance.
The
auditor
should
carefully
direct,
supervise
and
review
work delegated to
assistants. The auditor should obtain reasonable assurance that work performed by other
auditors or experts is adequate for his purpose.
5.
Documentation
The auditor should document matters which are important in providing evidence that
the audit was carried out in accordance with the basic principles.
6.
Planning
The auditor should plan his work to enable him to conduct an effective audit
efficient
and
timely
manner.
Plans
should
be
based
in
an
on knowledge of the clients
business.
Plans should be made to cover, among other things:
(a)
Acquiring knowledge of the clients accounting system, policies and internal

control procedures;
(b)
Establishing the expected degree of reliance to be placed on internal

control;
(c)
Determining and programming the nature, timing, and extent of the audit
procedures to be performed; and
(d)
Coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of the audit.
7.
Audit Evidence
The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive procedures to enable him to draw reasonable conclusions there
from on which to base his opinion on the financial information.
Compliance procedures are tests designed to obtain reasonable assurance that those
internal controls on which audit reliance is to be placed are in effect.
Substantive procedures are designed to obtain evidence as to the completeness, accuracy and
validity of the data produced by the accounting system. They are of two types:
(i) Tests of details of transactions and balances;
(ii) Analysis of significant ratios and trends including the resulting enquiry of
unusual fluctuations and items.
8.
Accounting System and Internal Control
Management
is
responsible
for
maintaining
an
adequate
accounting system
incorporating various internal controls to the extent appropriate to the size and nature of
the business. The auditor should reasonably assure himself that the accounting system
is adequate and that all the accounting information which should be recorded has in
fact been recorded. Internal controls normally contribute to such assurance.
The auditor should gain an understanding of the accounting system and related internal
controls and should study and evaluate the operation of those internal controls upon
which he wishes to rely in determining the nature, timing and extent of other audit
procedures.
Where the auditor
concludes
that he
can
rely
on
certain
internal controls, his
substantive procedures would normally be less extensive than would otherwise be

required and may also differ as to their nature and timing.
9.
Audit Conclusions and Reporting
The auditor should review and assess the conclusions drawn from the audit evidence
obtained and from his knowledge of business of the entity as the basis for the expression of
his opinion on the financial information. This review and assessment involves forming an
overall conclusion as to whether:
(a) The financial information has been prepared using acceptable accounting
policies, which have been consistently applied;
(b) The
financial
information
complies
with
relevant
regulations
and
statutory requirements;
(c) there is adequate disclosure of all material matters relevant to the proper
presentation of the financial information, subject to statutory requirements,
where applicable.
The audit report should contain a clear written expression of opinion on the financial
information and if the form or content of the report is laid down in or prescribed under any
agreement or statute or regulation, the audit report
should comply
with
such
requirements. An unqualified opinion indicates the auditors satisfaction in all material

respects with the matters dealt with in above paragraph or as may be laid down or
prescribed under the relevant agreement or statute or regulation, as the case may be.
When a qualified opinion, adverse opinion or a disclaimer of opinion is to be given or
reservation of opinion on any matter is to be made, the audit report should state the reasons
therefore.
Observance of Standards
In India, a Chartered Accountant, while carrying out an audit of financial statements is
governed by the Engagement and Quality Control Standards [earlier known as the Auditing
and Assurance Standards (AASs)], issued by the Institute of Chartered Accountants of India.
The Engagement Standards comprise of the following four categories Standards:
Standards on Auditing (SAs), to be applied in the audit of historical financial

information.
Standards on Review Engagements (SREs), to be applied in the review of

historical financial information.
Standards on Assurance Engagements (SAEs), to be applied in assurance

engagements, dealing with subject matters other than historical financial
information.
Standards on Related Services (SRSs), to be applied to engagements involving

application of agreed-upon procedures to information, compilation engagements,
and other related services engagements, as may be specified by the ICAI.
Standards on Quality control (SQCs), issued by the ICAI, are to be applied for all services
covered by the Engagement Standards as described in the above paragraph. These Standards
codify the best practices in the respective area of auditing.
It is the duty of the members of the ICAI to ensure that these Standards are complied with in
an audit of financial statements covered by their audit report. If for any reason, the member
has not been able to perform an audit in accordance with the Standard; his report should
draw attention to material departures there from. Till date, the ICAI has issued 37
Engagement standards.
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Powers and Duties of Auditors

Section 227 of the Companies Act, 1956 provides the powers and duties of an auditor:-
I.
Every auditor of a company shall have a right of access at all times to the books
and accounts and vouchers of the company, whether kept at the head office of
the company or elsewhere.
II.
The auditor shall make a report to the members of the company on the accounts
examined by him and the report shall state whether, in his opinion and to the
best of his information and according to the explanations given to him, the said
accounts give the information required by the Act in the manner so required and
give a true and fair view
In the case of the balance sheet, of the state of the companys affairs as at the
end of its financial year; and
In the case of the profit and loss account, of the profit or loss for its financial
year.
The auditors report shall also state
Whether he has obtained all the information and explanations which to the
best of his knowledge and belief were necessary for the purposes of his audit;
Whether, in his opinion, proper books of account as required by law have

been kept by the company;
Whether the report on the accounts of any branch office audited under
section 228 by a person other than the companys auditor has been
forwarded to him and how he has dealt with the same in preparing the
auditors report;
Whether the companys balance sheet and profit and loss account dealt with
by the report are in agreement with the books of account and returns;
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Whether, in his opinion, the profit and loss account and balance sheet
comply with the accounting standards referred to in sub-section (3C) of
section 211;
The observations or comments of the auditors which have any adverse effect
on the functioning of the company;
Whether any director is disqualified from being appointed as director under

clause (g) of sub-section (1) of section 274;
Whether the cess payable under section 441A has been paid and if not, the
details of amount of cess not so paid.
Where any of the matters referred to is answered in the negative or with a

qualification, the auditors report shall state the reason for the answer.
The Central government may, by general or special order, direct that, in the
case of such class or description of companies as may be specified in the
order, the auditors report shall also include a statement on such matters as
may be specified therein.
Duties of an auditor can be summarized as:Duties under the Companies Act and Common Law
Statutory duties of Auditor (Section 227)
Duty to report as to disqualification of Director
Duty in case of private companies
Duty to attend audit committee meetings
Duty to consider Laws and Regulations of Financial Statements
Duty as regards initial engagements-Opening balances
Duty to submit Report

o Qualified opinion
o Unqualified opinion (clear opinion)
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Duty to preserve Audit working papers
Auditors duty as to loan given by company in contravention of section 295
Duty of verification of political contributions
Duty to report frauds by Client Companys employee
Duty as to substantial accuracy
Duty of care to warn directors in certain cases
Duty as regards transactions prior to period under audit
Duty of auditor in case of Conversion of a deemed public company to a

Private Limited Company
Duty to report material violation of law and accounting practices
Duties to Third Parties
Duty to shareholder for purpose of Compulsory Sale
Other Obligations of the Auditors

o Disclosure of unlawful acts of clients
o Disclosure of confidential information
o Reliance by auditors on others
o Joints audits
o Obligations to report breach of law
Penalty for Non-compliance by Auditor

Under Companies Act, 1956
Sec. 233 specifies punishment for willful default of the provisions of Sec. 227 & 229 as
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fine which may extend to ten thousand rupees.

Under Chartered Accountants Act, 1949
Sec. 21B specifies that Disciplinary Committee of the ICAI may, if the member is guilty
of professional or other misconduct as mentioned in Second Schedule or both the First
Schedule and Second Schedule, take any one or more of the following actions:-
13
Reprimand the member;
Remove the name of the member from the Register permanently or for such
period as it may thinks fit;
Impose such fine which may extend to rupees five lakhs.
Duties and Liabilities of Auditors Some Rulings by the Courts

The following rulings by the Courts are stated in regard to the duties and liabilities of
auditors:
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Business Decisions are not the concern of the auditor
In re the London and General Bank Ltd. (1895) 2 Ch 673 (CA): It was held that
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imprudence or otherwise of the business is not the concern of the auditor. He is

neither required to not even suppose to advise the company on matters over which
are its internal affairs. The principle of internal autonomy demands that the auditor
does not meddle in what is purely the private domain of the company.
The
shareholders acting through the directors are the best judges of the internal
functioning of the company.
Auditors enjoy a fiduciary relationship with the shareholders
Institute of Chartered Accountants of India v. P.K. Mukherjee, AIR 1968 SC 1104:
It was held that shareholder protection is the prime consideration of auditors. The
auditors and the shareholders enjoy a fiduciary relationship (a relationship of trust)
and informing the shareholders about the correct financial position of the company
is a statutory duty of the auditors. Shareholders can only be protected by informing
them about any suspicious items in the financial statements and for this it is
e4ssential that the auditors remain ever vigilant.
14
Auditor is a watchdog of the shareholder
ICAI V.R. Ayyavoo (2005) 123 Comp Cas 345 (Mad HC DB ): it was held that the
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auditor is a watchdog of the shareholders and plays a pivotal role in monitoring

finances of and ensuring financial discipline in business, more particularly of
companies under the Companies Act. They are the trustees of society and a breach
of the societal trust important and crucial to maintain the sanctity of fiduciary
relationships. An auditor has commitment of the company to be honest, responsible
and accountable and he must be ever diligent in his functioning. An auditor is a
statutorily appointed person, vested with the responsibilities that demand a great
sense of commitment which ought to inspire confidence in his functioning to the
investing public at large. He is not a art of the management, but an independent
watchdog.
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CORPORATE ACCOUNTING FRAUD

Introduction
Misstatements in the financial statements can arise from either fraud or error. The
distinguishing factor between fraud and error is whether the underlying action that
results in the misstatement of the financial statements is intentional or unintentional.
Accounting fraud, or corporate accounting fraud are business scandals which arise with
the disclosure of misdeeds by trusted executives of large public corporations. Such
misdeeds typically involve complex methods for misusing or misdirecting funds,
overstating revenues, understating expenses, overstating the value of corporate assets
or underreporting the existence of liabilities, sometimes with the cooperation of officials
in other corporations or affiliates.
The phenomenon of corporate fraudulent financial reporting has battered investors
confidence in financial reporting, the accounting profession and global financial
markets. It has not only caused severe damage to corporations and banks but also
harmed small investors who have lost considerable amounts of money. And, with the
increasing complexity of financial structures and the intensity of business competition,
fraud has become more tempting to commit and harder to detect. Fraud thus continues
to be a prominent issue and has become increasingly important in the eyes of the
regulators.
Fraudulent financial reporting may be accomplished by the following:
Manipulation, falsification (including forgery), or alteration of accounting

records
or
supporting
documentation
from
which
the
financial
intentional
omission
from,
the
financial
statements are prepared.
Misrepresentation
in
or
statements of events, transactions or other significant information.
Intentional misapplication of accounting principles relating to amounts,

classification, manner of presentation, or disclosure.
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Auditors Responsibilities relating to Fraud in an Audit of Financial Statements

I.
The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management. It is
important that management, with the oversight of those charged with
governance, place a strong emphasis on fraud prevention, which may reduce
opportunities for fraud to take place, and fraud deterrence, which could
persuade individuals not to commit fraud because of the likelihood of detection
and punishment.
II.
The auditor may, at times, be required to by a legislation or a regulation to

make a specific assertion in respect of frauds on/by the entity in his report. For
example, Clause (xxi) of Paragraph 4 of the Companies (Auditors Report)
Order, 2003 requires the auditor to specifically report whether any fraud on
or by the entity has been noticed or reported during the year; if yes, the nature
and amount involved is to be indicated. Similarly, in case of audit of banks,
the
auditors,
in
BC/23.08.001/2001-02,
terms
is
of
required
the
to
circular
no. DBS.FGV.(F).No.
report to the Reserve Bank of India
anything susceptible to fraud or fraudulent activity or act of excess power or any

foul play in any transaction.
Consequently, in such cases, the auditors
responsibilities may not be limited to consideration of risks of material

misstatement of the financial statements, but may also include a broader
responsibility to consider risks of fraud.
III.
As per SA 240, The Auditors Responsibilities relating to Fraud in an Audit of

Financial Statements issued by the ICAI, an auditor conducting an audit in
accordance with SAs is responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error.
17
IV.
When obtaining reasonable assurance, the auditor is responsible for maintaining

an attitude of professional skepticism throughout the audit, considering the
potential for management override of controls and recognizing the fact
that audit procedures that are effective for detecting error may not be effective
in detecting fraud.
Requirements of an auditor would include:
Maintenance of an attitude of professional skepticism throughout the audit
Discussion among the Engagement Team
Risk assessment procedures and related activities to be performed by the

auditor to obtain information for use in identifying the risks of material
misstatement due to fraud
o
Management and Others within the Entity
Those Charged with Governance
Unusual or Unexpected Relationships Identified
Evaluation of Fraud Risk Factors
Other Information
Identification and assessment of the risks of material misstatement due to fraud
Responses to the Assessed Risks of Material Misstatement Due to Fraud

o
Overall Responses
Audit
Procedures
Responsive
to
Assessed
Risks
of
Material
Misstatement Due to Fraud at the Assertion Level

o
Audit Procedures Responsive to Risks Related to Management

Override of Controls
Evaluation of audit evidence
Auditor unable to continue the engagement

o
Determine the professional and legal responsibilities applicable in the

circumstances
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Consider whether it is appropriate to withdraw from the engagement,

where withdrawal from the engagement is legally permitted
If the auditor withdraws, discuss with the appropriate level of

management and those charged
with
governance and determine
whether there is a professional or legal requirement to report to the

person or persons who made the appointment
Management Representations
Communications to Management and with those charged with Governance
Communications to Regulatory and Enforcement Authorities
Documentation
Notable Accounting Scandals

0B
5B
Company
Enron
10B
Parmalat
1B
6B
Year
2001
11B
2003
2B
7B
Audit Firm
Arthur Andersen
12B
Deloitte & Touche
3B
8B
Country
US
13B
Italy
Notes
Jeffrey Skilling, Kenneth
Lay, Andrew Fastow
Falsified
accounting
documents, Calisto Tanzi
4B
9B
14B
Case Study: Enron

Background
The seventh largest company in America, Enron was formed in 1985, when InterNorth
acquired Houston Natural Gas. The company branched into many non-energy-related
fields over the next several years, including such areas as Internet bandwidth, risk
management, and weather derivatives (a type of weather insurance for seasonal
businesses). Although their core business remained in the transmission and distribution
of power, their phenomenal growth was occurring through their other interests.
Fortune Magazine selected Enron as "America's most innovative company" for six
straight years from 1996 to 2001. Then came the investigations into their complex
network of off-shore partnerships and accounting practices.
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How the Fraud Happened

The Enron fraud case is extremely complex. Some say Enron's demise is rooted in the
fact that in 1992, Jeff Skilling, then president of Enron's trading operations, convinced
federal regulators to permit Enron to use an accounting method known as "mark to
market." This was a technique that was previously only used by brokerage and trading
companies. With mark to market accounting, the price or value of a security is recorded
on a daily basis to calculate profits and losses. Using this method allowed Enron to
count projected earnings from long-term energy contracts as current income. This was
money that might not be collected for many years. It is thought that this technique was
used to inflate revenue numbers by manipulating projections for future revenue.
Use of this technique (as well as some of Enron's other questionable practices) made it
difficult to see how Enron was really making money. The numbers were on the books
so the stock prices remained high, but Enron wasn't paying high taxes. Robert
Hermann, the company's general tax counsel at the time, was told by Skilling that their
accounting method allowed Enron to make money and grow without bringing in a lot
of taxable cash.
Enron had been buying any new venture that looked promising as a new profit centre.
Their acquisitions were growing exponentially. Enron had also been forming off
balance sheet entities (LJM, LJM2, and others) to move debt off of the balance sheet and
transfer risk for their other business ventures. These SPEs were also established to keep
Enron's credit rating high, which was very important in their fields of business. Because
the executives believed Enron's long-term stock values would remain high, they looked
for ways to use the company's stock to hedge its investments in these other entities.
They did this through a complex arrangement of special purpose entities they called the
Raptors. The Raptors were established to cover their losses if the stocks in their start-up
businesses fell.
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When the telecom industry suffered its first downturn, Enron suffered as well. Business
analysts began trying to unravel the source of Enron's money. The Raptors would
collapse if Enron stock fell below a certain point, because they were ultimately backed
only by Enron stock. Accounting rules required an independent investor in order for a
hedge to work, but Enron used one of their SPEs.
The deals were so complex that no one could really determine what was legal and what
wasn't. Eventually, the house of cards began falling. When Enron's stock began to
decline, the Raptors began to decline as well. On August 14, 2001, Enron's CEO, Jeff
Skilling, resigned due to "family issues." This shocked both the industry and Enron
employees. Enron chairman Ken Lay stepped in as CEO.
Enron: Discovering Fraud
On August 15, Sherron Watkins, an Enron VP, wrote an anonymous letter to Ken Lay
that suggested Skilling had left because of accounting improprieties and other illegal
actions. She questioned Enron's accounting methods and specifically cited the Raptor
transactions.
Later that same month, Chung Wu, a UBS PaineWebber broker in Houston, sent an email to 73 investment clients saying Enron was in trouble and advising them to consider
selling their shares.
Sherron Watkins then met with Ken Lay in person, adding more details to her charges.
She noted that the SPEs had been controlled by Enron's CFO, Fastow, and that he and
other Enron employees had made their money and left only Enron at risk for the
support of the Raptors. (The Raptor deals were written such that Enron was required to
support them with its own stock.) When Enron's stock fell below a certain point, the
Raptors' losses would begin to appear on Enron's financial statements. On October 16,
Enron announced a third quarter loss of $618 million. During 2001, Enron's stock fell
from $86 to 30 cents. On October 22, the SEC began an investigation into Enron's
accounting procedures and partnerships. In November, Enron officials admitted to
21
overstating company earnings by $57 million since 1997. Enron, or "the crooked E," filed
for bankruptcy in December of 2001.
Case Study: Parmalat

Abstract
The case deals with the financial scandal at Parmalat, one of the biggest companies in
Italy. Parmalat was among the largest food-based companies in the world, and had a
presence in a variety of product categories. Towards the end of 2003, it was revealed
that the company had been resorting to fraudulent accounting practices from the late1980s and had been in the habit of transferring large amounts of money from the
Parmalat group to several other overseas subsidiaries or companies owned by the Tanzi
family. The scandal came to light only in December 2003, when Parmalat was not in a
position to honor a bond payment that had become due, but analysts had been doubtful
about the company's accounting practices since 2002.
The Parmalat case was one of the biggest scandals to hit Europe and many analysts took
to calling Parmalat 'Europe's Enron'.
Background
The roots of Parmalat can be traced back to 1961, when Tanzi inherited a family food
processing business that was started by his grandfather. In 1963, the name Parmalat was
given to the company. (Parmalat meant 'milk from Parma', and latte was Italian for
milk). Parmalat produced the first branded milk in Italy.
A Year That Went Wrong
Parmalat's troubles began early in 2003, leading eventually to the collapse of the
company by the end of the year.
In January 2003, soon after the company declared its results for 2002, reports began
circulating among bankers and investment firms about the company's balance sheet and
its high levels of debt, in spite of having considerable assets and high cash reserves.
22
This resulted in Consob, the Italian stock market regulatory authority, asking Parmalat
to explain the rationale behind raising high levels of debt, given high cash reserves.
Early in the year, the company was also forced to withdraw a bond issue valued at $360
million, after the company's share price fell by nine percent. Fausto Tonna (Tonna),
Parmalat's long-standing CFO and aide of Tanzi, resigned in April 2003.
In January 2003, soon after the company declared its results for 2002, reports began
circulating among bankers and investment firms about the company's balance sheet and
its high levels of debt, in spite of having considerable assets and high cash reserves.
This resulted in Consob, the Italian stock market regulatory authority, asking Parmalat
to explain the rationale behind raising high levels of debt, given high cash reserves.
Early in the year, the company was also forced to withdraw a bond issue valued at $360
million, after the company's share price fell by nine percent. Fausto Tonna (Tonna),
Parmalat's long-standing CFO and aide of Tanzi, resigned in April 2003.
How it All Happened
A notable point in the Parmalat case was that, unlike other accounting scandals, no
money had actually disappeared from the company. However, a number of nonexistent assets had been created to show money where it did not exist.
Analysts said that this was rather different from other cases of fraudulent accounting,
where money was diverted from the company to enrich a few of the top people. In
Parmalat's case, the money was either diverted to other companies (within the group or
belonging to the Tanzi family) to keep them afloat or did not exist in the first place.
Investigations revealed that the fraud had first begun in the late-1980s. The company
had expanded very rapidly into international markets in the 1980s. However, not all the
international operations were successful.
23
The Italian Angle

Analysts said that the important reason why Parmalat was able to carry on with its
fraud for so many years was because of the peculiar features of the Italian business
environment.
In Italy, most of the large businesses, although they were public companies, were
essentially controlled by families.
This ensured that all the important matters were kept within the family and not
revealed to the public. This gave more scope for frauds of the nature of Parmalat. For
instance, it was very difficult for investigators in the Parmalat case to separate the funds
that went from Parmalat to the company's subsidiaries and those that went to Tanzi's
family businesses. Analysts said the Italian idea of corporate governance was very
different from that of the rest of the world, and that most of the business transactions
were shrouded in secrecy.
Some Significant Developments around the World

United States SOX and PCAOB
The Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting
Reform and Investor Protection Act of 2002 and commonly called Sarbanes-Oxley,
Sarbox or SOX, is a United States federal law enacted on July 30, 2002, as a reaction to a
number of major corporate and accounting scandals including those affecting Enron
and WorldCom. These scandals, which cost investors billions of dollars when the share
prices of affected companies collapsed, shook public confidence in the nation's
securities markets.
The legislation set new or enhanced standards for all U.S. public company boards,
management and public accounting firms ranging from additional corporate board
responsibilities to criminal penalties, and requires the Securities and Exchange
Commission (SEC) to implement rulings on requirements to comply with the new law.
24
Debate continues over the perceived benefits and costs of SOX. Supporters contend the
legislation was necessary and has played a useful role in restoring public confidence in
the nation's capital markets by, among other things, strengthening corporate accounting
controls. Opponents of the bill claim it has reduced America's international competitive
edge against foreign financial service providers, saying SOX has introduced an overly
complex regulatory environment into U.S. financial markets.
The Act creates a new, quasi-public agency, the Public Company Accounting Oversight
Board, or PCAOB, charged with overseeing, regulating, inspecting and disciplining
accounting firms in their roles as auditors of public companies. The Act also covers
issues such as auditor independence, corporate governance, internal control assessment,
and enhanced financial disclosure.
The Public Company Accounting Oversight Board (or PCAOB) is a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act, a 2002 United States federal law,
to oversee the auditors of public companies. Its stated purpose is to 'protect the interests
of investors and further the public interest in the preparation of informative, fair, and
independent audit reports'. Although a private entity, the PCAOB has many
government-like regulatory functions, making it in some ways similar to the private Self
Regulatory Organizations (SROs) that regulate stock markets and other aspects of the
financial markets in the United States.
UK Role of FRC
The Financial Reporting Council (FRC) is the UK's independent regulator responsible
for promoting confidence in corporate reporting and governance. The FRC is
responsible for promoting high standards of corporate governance. It aims to do so by:
Maintaining an effective Combined Code on Corporate Governance and

promoting its widespread application
Ensuring that related guidance, such as that on internal control, is current and
relevant
25
Influencing EU and global corporate governance development
Helping to promote boardroom professionalism and diversity; and
Encouraging constructive interaction between company boards and institutional

shareholder.
India Role of Audit Committee and Quality Review Board

In India, the experience has been somewhat different. The Companies (Amendment)
Act (2000), among other things, provides for the formation and functioning of audit
committees (section 292A). Similar requirements for audit committees are prescribed
under clause 49 of the Listing Agreement issued by SEBI. Sec. 292A of the Companies
Act provides that every public company having a paid-up capital of not less than five
crores of rupees shall constitute a Committee of the Board known as Audit
Committee which shall consist of not less than three directors and such number of
other directors as the Board may determine of which two-thirds of total number of
members shall be directors, other than managing or whole-time directors. It, inter alia,
further specifies:o
Auditors, internal auditors to participate in meetings of the Audit Committee

but shall not have right to vote
Audit Committee to have periodic discussions with the auditors about the
internal control systems, scope of audit including observations of auditors
Audit Committee to have authority to investigate into matters
Recommendations of the Audit Committee relating to financial management to

be binding on the Board except for reasons recorded and communicated to
shareholders.
26
Quality Review Board

Establishment of the Board
The Quality Review Board has been set-up, under Section 28A of the Chartered
Accountant Act, 1949 consequent to the Chartered Accountants (Amendment) Act,
2006. The Chartered Accountants (Amendment) Act, 2006 inserted Chapter-VIIA titled
Quality Review Board, comprising of Sections 28A to 28D. Sub-section (1) of Section
28A of the Act provides that the Central Government shall, by notification, constitute a
Quality Review Board consisting of a Chairperson and ten other members.
Consequently, the Central Government by notification dated June 28, 2007 constituted
the Quality Review Board.
Five members of the Board shall be nominated by the Council of the Institute of
Chartered Accountants of India and other five members shall be nominated by the
Central Government.
Functions of the Board
Section 28B of the Act specifies that the Board shall perform the following functions:
(a)
Make recommendations to the Council with regard to the quality of services

provided by the members of the Institute;
(b)
Review the quality of services provided by the members of the Institute including
audit services; and
(c)
Guide the members of the Institute to improve the quality of services and
adherence to the various statutory and other regulatory requirements.
27
INTERNAL AUDIT
In the initial stages, internal audit began as an extended arm of an external/statutory
audit of financial statements. As the global economy surged forward full steam, the
need for having a full-fledged, strategically directed internal audit emerged as an
inevitable service that could assist management in decision making, moving away from
being merely a police on financial transactions. In the modern business environment,
internal audit function has become a major support function for management, Audit
Committee, Board of Directors, External Auditors and key stakeholders. Internal audit
can be defined as an independent management function, which involves continuous
and critical appraisal of the functioning of an entity with a view to suggest
improvements thereto and add value and strengthen the overall governance
mechanism of the entity including the entitys strategic risk management and internal
control system.
The above definition highlights following facets of the internal audit:
Internal auditor should be independent of the activities they audit.
Internal audit is a management function, thus, it has the high-level objective of

serving managements needs through constructive recommendations in areas such
as, internal control, risk, utilization of resources, compliance with laws,
management information systems, etc.
Internal audits role should be a dynamic one, continually changing to meet the
needs of the organization.
There is often a need to change audit plans as
circumstances warrant.
An effective internal audit function plays key role in assisting the board to
discharge its governance responsibilities.
Internal auditor plays an important role in providing assurance to management on

the effectiveness of risk management.
28
Internal audit function constitutes a separate component of internal control with

the objective of determining whether other internal controls are well designed and
properly operated.
Internal Audit - Indian Scenario

Clause 49 of Listing Agreement
The Securities and Exchange Board of India (SEBI) has introduced certain mandatory as
well as certain recommendatory corporate governance provisions in clause 49 of the
Listing Agreement applicable to listed entities. Some of the important requirements of
Clause 49 pertaining to internal audit are as follows:
The Audit committee is required to review:
The adequacy of the internal audit function, if any, including the structure of
internal audit department, staffing and seniority of the official heading the
department, Reporting structure coverage and frequency of internal audit,
including appointment, removal and terms of remuneration of the chief internal
auditor.
Internal audit reports relating to internal control weaknesses
The finding of any internal investigation by the internal auditors into matters where
there is a suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the Board.
Section 292A of the Companies Act, 1956
In addition, Section 292A of the companies act, 1956, requires public companies having
paid up capital not less than Rs. 5 crores to constitute a committee of the Board, i.e., the
Audit committee. In terms of sub section 5 of the said Section, the internal auditor is
required to attend and participates at the meeting of such Audit Committees.
29
Companies (Auditors Report) Order, 2003

The Central Government, in terms of the power vested under section 227A) of the
Companies Act, 1956 had notified the companies (Auditors Report) Order, 2003.
Clause (vii) of the said 2003 order requires the auditor to report as follows:
whether in case of listed companies and/or other companies having paid-up capital
and reserves exceeding Rs. 50 lakhs as at the commencement of the financial year
concerned, or having an average annual turnover exceeding five crore rupees for a
period of three consecutive financial years immediately preceding the financial year
concerned, whether the company has an internal audit system commensurate with its
size and nature of its business.
30
CREATIVE ACCOUNTING
Introduction
1.
Creative Accounting is a process in which a company firstly estimates its
target financial position, and then works backwards in order to achieve these desired
figures. This process, also referred to as cooking the books is sometimes used as a
means of manipulating the true incomes and losses of Companies.
2.
The term as generally understood refers to systematic misrepresentation of the
true income and assets of corporations or other organizations. "Creative accounting" is

at the root of a number of accounting scandals. The idea of Creative Accounting,
cosmetic accounting or profiteering is not a new concept to the Accounting world.
Manipulation of accounts done in one year often requires the same kind of tailoring to
be made the next year too and thus the process is constant. The practice often throws
financial reporting out of control eventually results in frauds of very large magnitude.
What is Creative Accounting?
Creative accounting, also called aggressive accounting or innovative accounting, is
the manipulation of financial numbers, usually within the letter of the law and
accounting standards, but very much against their spirit and certainly not providing
the "true and fair" view of a company that accounts are supposed to. A typical aim
of creative accounting could be to inflate profit figures. Some companies may also
reduce reported profits in good years to smooth results. Assets and liabilities may
also be manipulated, either to remain within limits such as debt covenants, or to
hide problems.
A different definition from the perspective of an accountant would be The
accounting process consists of dealing with many matters of judgement and of
resolving conflicts between competing approaches to the presentation of the results
31
of financial events and transactions... this flexibility provides opportunities for

manipulation, deceit and misrepresentation. These activities - practised by the less
scrupulous elements of the accounting profession - have come to be known as
creative accounting
Why Creative Accounting?
1.
A quarterly or an annual review provides information on the financial position
of a company. It is a snapshot of the company situation, as well as a history of change.

However, the message the review gives is often taken to be about the future position of
the company. In particular, investors and the capital market tend to base their decisions
on results to date and the prognosis for the future. The shareholder and market reaction
is related more and more to managers' actions and directors are increasingly judged on
profit, growth and EPS and have large bonuses at stake. So companies (and directors)
are tempted to use the financial reports to present the message they want investors to
see, and may resort to creative accounting.
Situations where Creative Accounting may be resorted to
Acquisitions, to hide poor results or boost EPS;
Off-balance sheet financing;
Valuations particularly of intangible assets such as Goodwill and brand

names;
Capitalising R&D or Revenue Expenses;
Depreciation;
Revenue recognition;
Asset sales;
Failure to write down inventories that have declined in value;
Reflecting higher margins.
32
Types of Creative Accounting

The incidents of creative accounts are fairly common. These Accounting methods
can broadly be categorized in the following four ways:
Sometimes the accounting rules may allow a company to choose between

different accounting methods. In many countries, for example, a company
is allowed to choose between a policy of writing off development
expenditure as it occurs and amortising it over the life of the related
project. A company can therefore choose the accounting policy that gives
their preferred image.
Certain entries in the accounts involve an unavoidable degree of

estimation, judgement, and prediction. In some cases, such as the
estimation of an asset's useful life made in order to calculate depreciation,
these estimates are normally made inside the business and the creative
accountant has the opportunity to err on the side of caution or optimism
in making the estimate
Artificial transactions can be entered into both to manipulate balance

sheet amounts and to move profits between accounting periods. This is
achieved by entering into two or more related transactions with an
obliging third party.
Genuine transactions can also be timed so as to give the desired

impression in the accounts. As an example, suppose a business has an
investment of Rs. 100 Crore at historic cost which can easily be sold for Rs.
500 Crore, being the current value. The managers of the business are free
to choose in which year they sell the investment and so increase the profit
in the accounts.
33
Engaging in creative accounting is a possible first step towards pushing at the

boundaries of the law. The danger is that respectable executives lose sight of
where the boundaries are, and end up committing fraud.
2.
Accounting fraud, or corporate accounting fraud are business scandals which
arise with the disclosure of misdeeds by trusted executives of large public corporations.
Such misdeeds typically involve complex methods for misusing or misdirecting funds,
overstating revenues, understating expenses, overstating the value of corporate assets
or underreporting the existence of liabilities, sometimes with the cooperation of officials
in other corporations or affiliates.
3.
The phenomenon of corporate fraudulent financial reporting has battered
investors confidence in financial reporting, the accounting profession and global

financial markets. It has not only caused severe damage to corporations and banks but
also harmed small investors who have lost considerable amounts of money. And, with
the increasing complexity of financial structures and the intensity of business
competition, fraud has become more tempting to commit and harder to detect. Fraud
thus continues to be a prominent issue and has become increasingly important in the
eyes of the regulators.
4.
The biggest reported fraud of Corporate India i.e. Satyam Fraud is an example of
how creative accounting could be used for corporate fraud. A copy of the confession
letter of by Shri Ramlinga Raju, the ex-Chairman of Satyam, addressed to the members
of the Board of Directors of Satyam is annexed. Shri Raju confessed among other things
that the company had been fudging figures to show better results. Some other instances
of creative accounting used to perpetrate Corporate Fraud noticed during investigation
are given below:
Changes in Depreciation Policy: Changes in the depreciation policy on

the software programmes by a media company to report higher profits,
34
create reserves and use the same reserves for payment of bonus was
noticed. After the payment of bonus, the policy was reversed and
production costs charged to P&L account.
Revenue Recognition: In one company, non-existent revenue was being

recognized based on the fake Invoices raised by the company to report
higher profits.
Capitalising R&D or Revenue Expenses: In one case investigated,

revenue expenditure was treated as R&D expenditure and capitalized to
report better profit. After objective of reporting a rosy picture was
achieved, the amount was reversed and charged to Profit & Loss account.
Valuation: In one case, the company whose shares were to be acquired

was valued using the method (Discounting the Future Cash Flows) most
suited to the acquirer. This investment was written off after a couple of
years while the company from whom shares were acquired made huge
profits.
How to Tackle the Issue

The statutory auditors have an important role to play in checking and restraining
creative accounting. The auditors are appointed by the actual owners the
shareholders, and should ensure they protect the interests of all stakeholders.
The audit due diligence hence assumes great significance. The laid down
standards and other guidelines have to be followed not just in letter but in spirit
also. The role of auditors and their liability would need to be enhanced to check
the propriety of financial transactions of a company.
35
Challenge before the Investigator
Access to Audit Documents: The investigator has to receive and examine

audit documents for the relevant period from the statutory auditors of the
company. In many cases, the auditors do not keep the documents or do
not keep the required documents like groupings to the balance sheet,
profit and loss account etc. This problem is compounded when the
company is not available to provide the documents.
Independence of Auditors: The Statutory Auditors are appointed by the

shareholders in the AGM and are required to discharge their function
independently. How diligently the audit has been performed by the
auditors and whether they had sought independent confirmations,
wherever required, or went with the management certificates and whether
they had complete access to the data and records is an important issue.
Interpreting the changes to accounting policies : The investigator needs

to interpret the changes brought out in various policies being followed for
preparation of Annual statements permitted by law. This is a challenging
job, since the people behind such creative accounting normally make all
efforts to project the same as in the interests of company and hence
correct.
Disciplining the Erring Auditors: The statutory auditors who have failed
in their duties or have ignored the warning signals need to be brought to
book. The current punishment prescribed u/s 227/233 is not sufficient as
deterrence. The complaints filed in the ICAI take an unusually long time
to be decided and defeat the purpose of deterrence.
36
Conclusions
1.
Where the accounting is open and documented it is there to handle special
situations. Where it is hidden or disguised, it is a case of a company hiding its true

position. And given the annual financial statements that the shareholders receive,
hiding the true position of a company is simply misleading the owners of the company
and should be regarded as fraud.
2.
At the same time, there is a strong case for strengthening the requirements for
exercise of due diligence by auditors in carrying out audit of the financial affairs of the
company, with negligence or willful default being suitably punished in a deterrent
manner. The public interest aspect of the auditors role is undeniable.
3.
The swelling incidents of accounting frauds have brought out the need for
investigative accounting. While the accounting scandals have created a crisis of

confidence, on the one hand, they have heralded a boom of forensic business, on the
other. Now, technology can be used and due diligence exercises can be undertaken to
uncover accounting frauds. Over the past few years, prevention of financial statement
frauds has risen to the top of the corporate agenda.
4.
The development of a broad ranging fraud risk management program is also an
important step in managing this challenge. Organizations undertaking the effort should
begin by assessing how well they are managing fraud risk. Identifying known risks and
existing controls is an important first step. Then the organization can determine its ideal
future state, perform an analysis, and prioritize activities that will help enable the
development of a company-specific antifraud program. Such a program will not only
help enable appropriate compliance with regulatory mandates but also help the
organization align its corporate values and performance as well as protect its many
assets, including its reputation.
37
SUMMING-UP
Failures of businesses in which deficiencies of financial reporting and corporate
disclosure have figured prominently are not new phenomena. However, high-profile
cases of the recent past, such as Enron, WorldCom, Satyam together with a host of
smaller-scale examples worldwide, have drawn far greater attention to this area. At the
same time, there has been evidence of an increased frequency of restated financial
statements. All of this has had a negative and cumulative impact on the way informed
opinion views financial reporting.
These concerns have reduced the credibility of all those involved in the process of
providing financial and other information, and increased the difficulty of restoring
credibility. This loss of credibility has been widespread across capital markets. The
increasingly global nature of the markets, and of businesses, has resulted in concerns
crossing national boundaries.
Almost all the high profile failures are the result of the combined effect of failures in
business, failures in governance and failures in reporting.
The business issue that
should be communicated to users of the financial statements is not properly disclosed,

governance structures fail to prevent or detect this, and a reporting failure results. As
an entity moves closer to business failure, the incentive to distort reporting increases
and, therefore, the chance of reporting failure increases.
The collapse of Enron and the related auditor issues are seen by many as the event that
initiated the changed perception of the reliability of financial reporting. It might be
better to consider Enron as the event that confirmed a trend and, by its sheer size,
awoke many issues that had been significant for some time. Enron gave the issues
greater visibility.
The auditors role is to give an independent opinion on the companys financial
statements, assessing whether there is material misstatement in them or failure to
conform to relevant accounting standards.
In carrying out this responsibility, the
38
auditor needs to follow appropriate auditing standards with competence and integrity
and to give the independent opinion that is appropriate to the result of his work.
Because it is objective and independent, the auditors opinion should add credibility to
the reported information, thereby facilitating its use by shareholders and others.
Effective standards make the language of reporting comprehensible and responsive to
users needs, make comparisons possible, and restrict the actions of those who wish to
mislead or disguise. An effective regulatory regime makes it more difficult to ignore
the standards and easier to bring culprits to justice, resulting in increased trust among
investors. The audit expectation gap has been recognized for many years, but the
professions attempts to eliminate it by informing stakeholders as to what it is realistic
to expect, and by raising auditor performance by improved practices, higher standards
and strengthened regulation, do not appear to have reduced the gap significantly.
Although it may not be possible to eliminate such differences, but it should be possible
to narrow the range and to provide information which will allow users to understand
the more significant estimates and judgments which have been made.
39

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IICA Forum on Financial Reporting & Disclosures

hear. According to Auditing Standards and Guidelines, U.K., An audit is the

As per SA 200, Basic Principles Governing an Audit, issued by the Institute of

Audit is designed to reduce the possibility of a material misstatement in the

A recent trend in audits (spurred on by such accounting scandals as Enron,

Interaction on Due Diligence by Auditors during Company Audit

IICA Forum on Financial Reporting & Disclosures

The earliest surviving mention of a public official charged with auditing

As Chancellor of the Exchequer, William Ewart Gladstone initiated major reforms

Rationale for an Audit

The objective of an audit of financial statements is to enable the auditor to express

IICA Forum on Financial Reporting & Disclosures

From the foregoing, the objectives of an audit can be summarized as:U

Primary objectives of Audit (Auditors Report)

IICA Forum on Financial Reporting & Disclosures

Adequacy of information required to be disclosed in the financial statements.

Secondary objectives of Audit (Auditors Report)

To detect errors and frauds, if any.

IICA Forum on Financial Reporting & Disclosures

as far as they are relevant to the financial statements being audited.

procedures of accounting transactions and account balances as he

IICA Forum on Financial Reporting & Disclosures

group are material in relation to the affairs of an enterprise.

Basic Principles Governing an Audit

Integrity, Objectivity and Independence

Skills and Competence

IICA Forum on Financial Reporting & Disclosures

formal courses concluded by a qualifying examination recognized for this purpose

Work Performed by Others

the case of the work of branch auditors appointed under the

on knowledge of the clients

IICA Forum on Financial Reporting & Disclosures

Acquiring knowledge of the clients accounting system, policies and internal

Establishing the expected degree of reliance to be placed on internal

Coordinating the work to be performed.

Accounting System and Internal Control

IICA Forum on Financial Reporting & Disclosures

internal controls, his

substantive procedures would normally be less extensive than would otherwise be

Audit Conclusions and Reporting

requirements. An unqualified opinion indicates the auditors satisfaction in all material

Interaction on Due Diligence by Auditors during Company Audit

IICA Forum on Financial Reporting & Disclosures

Standards on Auditing (SAs), to be applied in the audit of historical financial

Standards on Review Engagements (SREs), to be applied in the review of

Standards on Assurance Engagements (SAEs), to be applied in assurance

Standards on Related Services (SRSs), to be applied to engagements involving

Interaction on Due Diligence by Auditors during Company Audit

IICA Forum on Financial Reporting & Disclosures

Powers and Duties of Auditors

The auditors report shall also state

Whether, in his opinion, proper books of account as required by law have

IICA Forum on Financial Reporting & Disclosures

Whether any director is disqualified from being appointed as director under

Where any of the matters referred to is answered in the negative or with a

Statutory duties of Auditor (Section 227)

Duty to report as to disqualification of Director

Duty in case of private companies

Duty to attend audit committee meetings

Duty to consider Laws and Regulations of Financial Statements

Duty as regards initial engagements-Opening balances

Duty to submit Report

IICA Forum on Financial Reporting & Disclosures