Contents at a Glance

i, ;)itfJ

Introductionto Auditing

l-16

Basic Conceptin Audit

1 1- 2 5

Preparationfor an Audit

26,43

Intemal Controls

44 .56

E . D . P -A u d i t

5 7- 6 2

Vouching

63-80

(lhante.r7

Verification

8t ,89

' ' t ' t i f r t 0 f8

Some lmportantAccounting Concepts

r 'hllrter 9

Company Audit I

94 - lt3

f'hrFter l 0

Company Audit ll

l 14 130

( ihapterl l

Audit Repo(

l3l -t53

t..*ratriter
t2

SpecialAudits

t54- 168

Chapterl 3

Audit Of Govemment Entities \

t69 - 173

(lhapterl4

Miscellaneous

r74- t80

( ihapterl5

Auditing & AssuranceStandards

r 8 r- 2 0 6

t,hapter 2

'ir

.,rt-i:t3

Chapter4

f] , til-f

i r . t 1 ; t e$' P

l-7

90 -93

I
)
)

I
19_h4ptel

lntnocluctionto Auditrng

t
t

D
b
b

i, r.rr iLi{AL i)tjit POSE FIN A NCIAL STATEM ENTS

i.i

I i i n a n c i : r l S t : r t e m e n t si n c l u d e t h e f o l l o * i n g :
;r
(o) Profit .& Lns.r ,4ccount: Wlrich inilicates prolit earned or loss incurred ..Jrrring
(!',.t
Lr;.
li.,;'
rl
p
Yn<r..6{'l
v)
o
1 f.
.
parlicular financial year. T-r
[.,r'.,,"
-it i.
y ldi i i
(h) Bulance Slrcet: Wlrich sho*,s position of assets&liabilities at a particulardate''t t-,t';{
l'
(c) Cash flow & Jimds Jtow Stotement' Which slrorvsrnovenlent of cash/ funils ,:r.iiiffg"
,.,
'";\
p a r l i c r r l alrl r t a n c i a l ; e a r ( H o w e v e r l l t c sacr c n o l O t " n " t " O , l ] , r ;l e
f rrtitles)
..
r" rIr' ' ' '' i \ I
( d ) N o t e st o u c ( ' o u t , l s : i . cD
. i s c l o s u r e so r e x l l l a t l a t o r yl l o t e s . f
\r

b
b
\

:,

.',i. { ! n a n c i a l, Owner

s f : l t , ' : " rl n t S

Managemenl

t
D
t

F
lj

g profitthili4' of business.
Forevaluatin

ilnR.,E C C1

For evaluatingtheirow_nperfcrrtttancc.
',,,r,,
For makingdecisitnrs,
.,lr.,
I
Forjtrdgingtn:r'liabilities-.

For eslinntirrg expectedfuture outconies.

&

Lenders
credilors

I
?

Customers

Co,"'rliiliiro,i
, Emplol,sgg
'

t1

For judging credit wortltiness of the entity.

dues,
r1couerubiliry
Forjrydq11g
1f lfeir
For determining general consislency of the business.

Por .ut.,,iuiiro,r'tof1fir e:ct ri.

For ler.ying excise duty, VAT. etc.

For determiningreosottoblenessof wages & salariesetc.

For creatinedemartd for honus.

t-

Reseurch
, onal_ystselc-

L-

I-A.
:.
'

F
F

F
F

p-erfttrnnnceol-business
For evaluatirtg

F
F
F
lb

q.

For evaluatinglrends.

'

For judginginvestnrcnt opportunities in the enti['.

ATJDITING
.

Audit is an independenl exantirtotiort,

'

Of frnancial

Of any entity whelhterprofit makirrgor not- irrespectiveof its size & legal structure.,
When such an eXaminationis conductedrvith a vierv to exprcssan opinion thereott.

irtformotion,

t't,t I i i t t t g rrltr :; ..1.r.r.'/rrrD.

r

I;er t rrresi

S'i'.r/i,urolrc c&
indeg,e71dgn1

{lha ractt'ristics
o1'Arrilit

!l"l!-" I

. \ u t l i t i r a st , r b e c . n i l i r c G di i r a p r o p e r r u o u .

i',', \'0'lI

i\nr''r,u
Autlitt:,rslroulclbe cornpletcll'otriective (unbiased)in lii-, lrppr"r,a,-rh

li

F { e. l r o u l d i t o t b e i r r f l u e n c eldr r t l i c c l i e n t .
, \ , , , . 1 i , , , - "o l l i r r i t r r irs o n l l r r : r r r c i r isl t a t e m c r i tisr r c l r r t l i l r sl ) v 1 r f i111 1 1111 , ; i
.tcc(-rrtnt.
Iilrlancc slreet& Notes to a(icounts.

Iiitulrtc ial
slulentents

J ' h c [ ' r c p r r r a t i o r r o f f i n a n c i a l s t a t e r n e n t si s t l r c r c s p o n s i b i l i t r o t
nrariat:,t:
rnerlt of-errtitl'.
H i : , r : i i r ' r r ct l r n [ r c a r r yc r r t i l r u l r ; t t c v e r i s t l r e l c g a l l - o n t ri e . . i l r l r ; r rf . , .
p r o p r i e l o r s l r i pp, a r t n e r s l r i p
t r.u s l c l r c o m p a n ye t c .
'Ihe
e r r t i t vn r a v b e p i o f i to r i e n t e do r a c h a r i t a b l eo n e .
F I i s , r l r i r t i t , ni s o n ' I r a e & f i f i r t , i e * , ' o f f n r t L r c i asit a r e r n c n t s

Etiitl'

Opinitirt

F o r t l r i s . i t i s r r e c e s s a rt lyr a t

br wh;;

1.3

(i)

Financial statementhave bcerr preparedusing acceptable policrr.,

r v h i c l ra r e c o n s i s t e n t layp p l i e d .

(ii)

Financial statements have

r e g u l a t i o n s ,&

(iii)

Tlrcre is appropriatedisclosure of all rnaterialiterns.

been prepared as

per

relevant

I r r l n t l i a . a t r d i t i s t o b e c t ' r r r l r r c t c dh y a p r o f c s s i o n a lh a v i n g g o o d u " . o u n t i n g & a u d i r r n u

background. A charteredaccourttanthavingcertillcateof practiceis eligible to conduct audil.

INDEPENDENTAUDIT

rn"i"t tnoiit,.i"Jg"nl.niof n D c r 5 o ni r n o t s u b o i d i r r a rteo u ' i s l r e so l : a r r o t h ( . ' ,

o f (oj l"arp"'raaiia"
Meaning
.
Pcrson
Independence
: (b) It requires that he should not act underany inl-luence.
lnanner.
, (c) Thus, lre carrwork in a conrplete rrnbiased
-.:.
,
.^ --, (a) The necd for auditor independenceis provided in AAS.

au,fitoitt

I n d e p e n d e n c e i ( b ) 1 ' t { E C O M P A N I E S r \ C T . l 9 - 5 6 a l s o c o n t a i r r ss p e c i f i c p r o v i s i o n t o e n s u r e a u d i t o r ' .
,

independence.

, (c) Morcover,as per Tl'lE,CIIAI{TE,REDACCOLJNTANTSACT, 1949as amendedby'fl{L

I
of auditor
Cl-IARTEREDACCOUNTAN'IS (AMENDMtlNl') ACT, 2006,independence
is
required.
.
( a ) l f a r r c l i t orrn a i n r a i rlrrsi g l l trl c g r c co l ' i n t l c P e r r , l c r rt 'cre .d i b i l i royf f i r r i r r r c i sa l a l e n r e r;r\l s
',
i . , 1 p - o : r i ' !i , , ' \ t ; t r "
:
enha'ced.
i,r- ,. ,,r rl:r.\\o
i.ri",', 1l*o \{Sir

Why
i n d e p e n d en ce

& respectecl
by all stakeholders.
auclitreport\!i'll be accepted
, (b; tnOepenclent
i

, Frtr nnnagemertt , (n) 1'lre1,can casilv judge reasorrsfor lossesalong rvith thc reasons&. tr;r
t o c o r r t r o li t .
:'

;i
A.f""tt"g;t
ni
intiepende
audit

, db)

g:neral relialllitV_
o.la.co_uljine
sf'stem
1'he1'canensure

, For Enrployees
. (a) lt discotrragcsthem fronr coinmitting fraudsas it acts as a moral check
o r rt h c r t r .
'
1
.
'
i
\i .\ [,rl'
1 ,
" ) .

, 1b) l

' ! .

--

) . , .

1
-

'.r'

l
l

_)

\r

'/

*:t t salary,o:n1t
of
h:t canjud_ge
"1":
leasolablerressn1v11e1ll
\/

iI i rt,:
i t tt rr ttIuction I o .'1ucl

I:or Iendt:rs

I;'or
Trtr

t"-

Computing

I:ttr ()wners

"

[ ] a n k e r : , c a n p i a c e r < r i i : t r r t c( l r a u d i t e d f i r r a n , . : i i rsl t a t e r n e n t s' r ' h r 1 e

r r i a k i r r :t i e ei - r i o rar b o t t tr ' . : t : i t \ \ ' ( ) r i l l l n e sosl k ) a n l p J l l i c a n t s .

lriier proviclingloait. lhc auclitedstatemcntsol'brtrrou'erheip tlre

L'-,r'cu
l en d c r t o j r r t l g er e c o v e r a [ . i i l i tovf t h e i r f u n d s .

\ u ( l i l r ' ( ls t r r t c r n e r e
r llsr t l r : r r r ct,h' se r c l i a b i l i t )( r f e( \ t n p u t i r t i oor lr' l n c ( ' t r l c
c a r r r e db y e n t i t v .t h u s h el p s i r r c l e t c r n r i n i n ign c o n r et u s .

A r r d i t o ra l s o c h e c : k cs o r r r p u t a t i o no i - e x c i s ed u t 1 , & s a l e st a x c t c .

T l r c r r : c t t " . l p i . r u r l ' u l p r r r if l : & l o s s c .c a r r r c t l .

..

I ; r o r r i s r , r c lsr t a t e n r e r l t st h. c r c o r n e t o k r r o u ' a b c r i rtth e i r s h a r ei n p r o i i l

( a s i r r p a r t n e r s h i pf i r n r s )a n ( l c a l r c x p e c tc l i v i d e n d .

l:or orhitruliorr

s tl i r l c l l r c r ) ltrsc l pi r i s c t l l i n gc l r r i r r r s .
I r rc a : e o l d i s p r r r ea.t r , l i t c <

I'or insurer

I n c A , et r l ' l r ' : >t ' r d a r n a g cl ( ) t l r r ) l ) e l r l-r\ r I l r c .t l r e Re t . . i t l r c l p st h e i n s t r r el ro

s e t l l et h e c l a i n .

prnspi,iirit,o t ) n h a s i s o { - p a s l 1 ' . . . ' , , , , J i t c c l l r n l r r r c i a ls t a l c r r rrer t s . l l r e r c a r r , l c v r s e

Iiir
exltectedprolit trendsfbr dccicline rvltetherto invcst in the entit.vor not.
int,aslor

1.,1 g.a::l{' ASPECTSTO BE COVEITEDBY THE ATJDITOR/ AUDI'IORS FUNCTION-\

,

i':;l:

,.,ii{rfii'

{b} i;,',rl'..r

{c , : *_ " . .l , . . { ( f . i , ' t , r r .r

lusion

Ie) Pt'crFr'r'ness
'

t i.f
i

liri ,rfol-Y
''ilitpliAnce

(ht

l)ist:losure
$ crrfil
i':til atr:Ss

1.5

, E,xaminirrgdocunrentaryevidenceto supporl the books of accounts.

.lChecking
all entries i.l ,],?, book-s of Accounting havl been taken rvhile
-rvhether
: - p r e p a r i n gl l r r a r t c i asll a l e n l e n l s .( f r ' t T " { ' - " ' r - ] r t : ' : i t \ * ' v '
i [-.xaminingr.vhetherin{brrnation corrtaineclin financial.statententsis proper and it docs
not contain any crroneous or fraudulententl]'.

riq'afi1l11 of l C h e c k i n gt h e i r c o n r p l e t e n e s se,x i s t e n c ev, a l u a t i o n& d i s c l o s u r ei n f i n a n c i a ls t a t e n l e n t 5 .

-ir.i.
i-'
!','-i
. i ..' ,,
'
I ,,L,,u{. tir,
' !i:rliilities
" "1 , r 1.. i
\'\
\1'* 11 \
.-_^

ig,

.i)

-i
. Of Accounting systenr& lnternal Controi systernto ensureabout their appropriateness.
'' '
} '"tf
, Chccking books oIaccounts to ensuretheir arithrneticalaccuracy. [o"',{i,,'1

ln case of audit of banks,GeneralInsuranceCompaniesetc., .ntur" io"ipiiiiii. ot

relevant statute.
, financial statements
"vith
. Exarnining rvlretherthe information in financial statementsis disclosed propcrly as
a c c o u r r t i n gp r i n c i p l e s .
/\5
. r h o l e r e p r e s c n t r t t c & f a i r r l i e r vo f n r n t ' t
. $ C l r c e k i n g * . l r c t h e ri i n a n c i t l s t a t e m e n t sa . a
. / l o s s a n d o f A s s e t s& l i a b i l i t i e si n t h e r e q u i r e df r o r n .

t;;

QtiAl,lTIES OF AUDITOR
n i , a l i " . i i r o i i O i r e h o n e s r ,s i n c e r e& s t r a i g h t f o t * " t O * t i i i " p e i f o " n i n g h i s p r o f e s s i t i n a i
d u ti e s .

(a; [ntegrity

, H" ntuit aclopiunbiaserl& impersonit apprnr.t.r.

'
r
H e s h o u l dr r o ts u h o r d i n a t eh i s j u d g e m e u tt o t h e w i l l o f o t l r e r s( c l i e n t o r o l h e rp . r t o n ; rd.'F)trlrpr.:ndence
i'l : .
He should be fqee_ofany interestapparently as well as in reality.
i' r n , r lf l X u \ q ' r
: .
He should audit the financial staiements prepared by the rratragementin unbiased
"
way.
.!

llv

-_l
_F

t_

I
. - I i t ; I it t t : 4 t t t t r i . 1 . r ,L i ' , t r t t r '

.l

( hap- I

' , .i : : : 1 , : i ;,rt t: ): .' i' : - . - . : ; , ' - . : - : r : ; - . . i t , ; i ; .

l l c s l t o i r l ,l lr ; r r i ' r ' ,n r ; ' : , k1r t n u l . , l , , .r'r l ' r 1 ! 1 ' 1 1l y- '1l :' 5
-l'ar.rttir.,rt
.
l l r r r s & C r ) n l r i i { r i , \ \ - ) { . } ' : r t i n c r - c l r iAp c t .
1 \ \ \ , a r e n e s lsr b < l i r : .l a w s l i k c
requirecl.
Act ctr. is alsr-,
I ,,"-,f-lonrpanies
+ r ' ^\ r l 1 . \ ! r r ' , ' l l o n r u s tc o n l i r r r r c r r r sLl vr p t l a tl er i sk r r t r r v l c t i g it:o c o r t t l t t ci tr u d i t c l i c c t i r ' el r
.

{rl'r E{rrot !..rlge

),8

,+

(e) ('rrttuuunictllion

sliills
li 1Li'
(f)Tlltl
Q ', V "'.r.1. -Lr' \'1'
{!.:) trdgc rnc.Pt
"(h) l,cgical skillq

o cl ln r r t l i tl.r cl i a st o i i t l c r i r c t ' . r i lrl;tt r i , r u s , t l f i c . <r s\ l : t l r l l ' , ,, f, tj ; r n i s a t i , r t t , \

l)urirrgeorrclu
t l t i r d p a r t i c st,l r r r sh e r c q u i r c sg o o d so r a l & u r i t t c r tc o n u t t t t t t i e a l i , .u' rhrr l i t i c s .
t e a t . l el o t l : t r l w i t h C i f f e r e npl c r s o t l i r r t l i l ] ' e r c rst ti t t r l r l ! , , rlrl.c l r ; , :t , , t l i r e c l&
lIe rnrrsb
supen iselri.s11-11staf'ta'srvell,lhushe sltortld bc tactful.
I - { e s l r o u l db e c a p a b l c t o t a k i n e f i r r n i u d g e r r r u n ta s t o n ' l t i c h i t c t i r : ;l t t r : t o b c c h e c k o c&l
u , h a t s h o u l db e t h e s a n r p l es i z c .
l l c r n r r s l r t a h l c t ' , i l l i t l y s ( . & i r r t e r p r eptr r , [ t l c t t rsso t l t l t l r c c r l t t, q . ' 1 - , ' ; , l i r 1' lscl i-l' r r r t l r' l r ,
sarne.

( i ) ' l - e c h n i c a ls k i l l s
l\1.,
l\

,!.tt.L\

.,
| \

ru ri r r ' o r i f i d c n t i a l i t v
t.,

l l c r n r r sltr l v e g . , , r t l l r r r t lt r r ra c _ c o r r r r t&i t tigt t r , l i t i l r cg t c .N l o r r - o r c rl,t t s i i , r t r l ldr c ; l \ \ , .r 1' 1) i

l u t e s td e v e l o p n e n ti n a u d i t i n gs t a n d a r dsso t h a t h e c a n p e r l i r r r rat t r d i t i n e { ' l c c t i v et n a n r r o t .
l l c s l r r . r r l dn o t r l i s c l t r s c .c o r r l r d c r t l i ai ln l i , r ' r n a t i o rar c q u i r c d d r t r i r r g c u n d t t c to f t h i prot'essionalduties, t(.)illtv third par11'erccptrvltctt
-

I
t
I
I

t
!
G
!

Permiftedby client or

R c q r r i r e db y l a u

Whatever he does, he rnttsi do rvith proper skill & care.

(k) Caution

I
t

I
RELATIONSHIP OF AUDITING WITH OTHER DISCIPLINES

1.6
I

A".ounting
, t;l ,,r.taitoipi""iOei"piniorron linancialstatemenls.
:) ^
rlrr.*l:(b) For this, lrehasto revierv& elaluatethefirraltcialstatements.
['\.r;t,\-.v\r

L\/,

.)

L ri l, .l)'

tbi

$\r'l

r.r'.'

.i

Statistics
.t

4l-,"
\.rJ5 ,.*,ttt'
,1
v
\
L/
'I nn" .' ,r. - 1 r t

Econo-micrs

deprecation,provisiorrfor tax etc.

is
( c ) lle 6as to make comparisons & perform ratio analysis.Thus. a good lrand on maths
req u i red.
( a ) S a r n p l i n g i s a n i r n p o r l a n ta r r c l i t i ntgc c h n i q u * (b) fror clral,ing random sarnple,he requiresknou'ledge of probabilitv theory'& rarit'rr-rs
statistical concepts.
g"foi"
to obtairrknorvledgeregarding business& economic
u.''itit,iuaitoineeds

f"j

. (b)
: (c)

Law

l-. r

Ll

he s|ould have thorough & soundkrrowle<lgeabout Accountrng principles& form and

contentsof fi nancialstatelllents'
concepts:
o..fagcountirrg
e^rpertise
(d) It requile_s
991ql9te
that appearin financialstatements.
arnout.tts
&
ligures
M : r f h e r n a t i c s (a) AuAiioi tjealswith financial
procedureinvolvedin comptrtingvariousitcmsfor e.g',
knowledgeof calculation
! (b) It requires
tx\r 'r
''.:

lr
,I

'I'6trs

l-JD.

,t,(,
( .) '

/,,"1
I
rt

"o"o,i.ii"g
etrvirotrmentaffecting tlre cl ient.
sales.
Moreover, accountingrccords the data regarding economicactivities (e.g., purchases,
i n c o m e , p a y m e n t sc t c ) .
'fhus
economiccolrceptsare requiredto perfonn audltllg, in a rneaningirrl way'

'i;iA;didh",t";h;"k;;;;ii;;*.;.i"oi'ro""ity;iih:

has been
For example, in audit of partnershipfirnr. he has to check if interest on capital
it
is so" he
If
deed'
paftnership
in
provided in u."ount, even in absenceof such a provision
Act).
The
Partnerslrip
lras to menticn this in audit report(as it is itt ccntraventionof
- r i .. . , ,,(,c) ,, Thus. he shouldhave sound knowiedgeof laws affecting the client
: (b)
:
,

r-

"I"t,;j:!t

e
I

t
I
I
C

t
I

e
t

C
C
C

C
I

b
b

+
b

+
+
\

lt:lro,luclii.trt to Awlitirtg

a c e o t r t r i s i t l e o r r t p r l t e ri p t b r l r l a t i o t t s y s t e t n '
( a ) N r , . , v a t i a i . s . r n o s t o f t l l c . : l i c r r t t l l a i r t t a i t tt l t e i r

{-r':rrr-"
'irl

----*):

in en
is reqtlircd lor audltors ttl cotrtlttct atrdit
r i ) ) I hus \\,orKlllg Iino\\.,lerl{cr)ll conlputer

'\

cff'ectivc waY.

'11

o f v a r i o t t : rt r p c r l t t i o t t si f t t t l c t i t ' t t : ; ; 1 1 s ' r l l t r r r l l '

l r r l r r r : r r rie; r l s t S t c i l t c l )t t, l e l i c r r l . l q i t t l t s
p e r s o t r t r e(lp a y r o l l ) e t c '
{ b ) I r t r r e r a t t t p l e f l n a n c e - p r t r c l t a s e -s a l e ,
o p c - r a t i o r r sl,r e c a l l t t o l , i l r d , q tt:h e i r f i n a n q i a l
(c) tj'til arrdit.r lias kno*,ic6g.e airout basicbusiness
r ( : t l l t i i r r c t - l c c t i r c\ \ a \ '

iir)

llcfrtvioural

(al

r
, . \ r r J i t t , r l' r a s l o t l c l r l r r i l l l t l t i t r t l ' [ ) u 1 5 t - r l l l ) c l '

s t a f f& t l l a n a g e n r e n t '
(b) l l e l t a s t o o b t a i ne x p l a t t i ' t i t r nt i o r l r c l i e n t ' s
his orvn auclit staff'
(c) lr'lrlrettver.lte ltasto riirect & supervise
-l-6rrs,
people'
h c s l o u l d I a y e t a r . to 1 ' g e t t i n ga l o n gw i t h
id)
florvs anal;'sti
Vtis'--ftrn'tls
tiirt t.-n',iqtrL:slike,
' ( a ) t t" ,ir,r.,t,t lr.rveknowlc.'i::l.t:]ic t '
[,irrtlttial t ]'\
1$ilt:lf
t- '
& r v o r k i n g c a p i t a ll n a l l r g c l l l e l l t
l I
wa\'' '
ril:l tl [i li:{.': !l i' i; t
'l'his
& evaluatethe tlnancial staternentIn a t)etter
\1,ill lrclp hinr to rrttclerrstantl
(b)
(oj Auditirlg is a systernatic& logical process'
[,ogic_
.rhrrs.
rnust bc rogicalaccording to given situation.
arrclitor,sproceclrrres
(c.)
rcp'''rt
--.
h , t ' t u J l a s i n r v r i t i t l g( p r e p n r i r l ga u d i t
( a ) A u d i t . r i s r e q u i r e t la ' . . r n r n , u ' . , i c u t e " o r a l l y
,
:
;
,
'
"
t
'
i.tlttg,il
e t c .) .
'fhus,
language' rvhiclr is irt generalusc
he should liave goocl conttnanclovel
(b)

":::111!s'-

AND ACCOUNTING
Ilasis

ino"ptiio"ni Examination of financial

il tle o.t or n.io..ti,ig, l iilJ
^;;,;;**
:
of art entity to expressan opinion
lt"""li"t , informatio'
: Classifying & sun-'n..o.i)itg-

N'!c'.r,:ring

thereon

Itt ftrrtnat trltt

l r ' u r . r . : '!r( l t l

iiiec.xclsn"""ii^ii,p."tio|e,ii.qv:'lil:"1"*'tneic1ouniing,y't"n

onryui conductedby a chartered

oiait
perso. havrnggood knjlledge ,ot ,-stat"tow
"un
Any
't'rN no'C
tli' tr liom
accounting .' , ,j Jt
-fJ
P r i n ei p X e s
iti'Oii iti un eff'ective way is the
fiait't
fina'cial
preparc
*.
-resp.rnsibirir;,i"Co.int.
ir"i"t"i"
i"
of auditor
Itt ltii ll'\
of , responsibility
statenlents is there:iEiGttsibilit-Y
mrnarlejl]cfil
-A;orlirtirig
:
& iuaiti"g Eipertise(both)

Erpertise
'I'ime
;i
{r(:cttrrence

; ir

'

:i

Accotrntitrg exPertlse

iG-A;iiii,igii;iontinatiorroffinaniiafi"iot*^r;oii"
are
PreParetl bY
Accounts
priorto accounting
i tl us carit be conducted
audited'
tlrcm
get
to
rnanagetnetrtprior

.-.^-*".-_

-*-

rrASl _ tsffiaIpLE--,RNINcFTuntr

I Il l"sg'IItJ '
l.' Integiity,
oUlectivitY

Dlsco fAtp-

<

- '-- t
honest
iitr U" straightfonvard'
(a)
luo',tot:'l:t
.
,^.-r
-rrrci
.nt
he
hiased.
biased'
be
fair and mustnot
and I (b) He shouldbe

o"
inairlta'l
i"l *:nou'rd
l:ll""li]i"-:'l:il:"ic
iniepenoence
ffi:ffi":l'

p\
lA
r
r-:1tLt
a
trl
r71
tfl
/al
t+t
tiJ
lu
T _o-^^,J

+t / LffiFL I
^TT
pr*,*
.Jr,'ir T'
5;,, .1
I
,^ fh"'T I W*'
Fr--f
r..."ffi,
wn,^^r:1;uur,
Ff

J*k{^ry 1r^{Mry
M,
til***

'{,$duv
1h,,, R{.1n7

I
t
Auditing utd ,7ssiu iitri i,

l l c s h o r r l dr n a i t r t z r it :ro r r l l r l t r r t i a l i to- f' , i r r f i r t r n r t i i ; rat r : u r r i r c r l r r r i r r ll r i . r , . o r k

{r)

( t r ) l l e s l t o L r l dn o t d i s c l o s c a n ' u s t t c h i n l i r r r n a t i o r tL r a t h i r c l p i u ' t \ ' \ \ i t l r o u t s p e l r i f i c

tlrrtr to disclose.
qerurlss!onclf clierrt or legal or prrof'cssiorral
( a ) l l e s h o u l dp e r l b n r t r v o r k u , i t ht l r r cp r o { c ' s s i o r r ca nl r c .
( b ) A u d i t s h o u l d b e p e r l b r r n e db y ' p c r s o r t s l r a v i n r la c l e q u a t et r a i n i r r g . , : . x p c n c n cacn t l
con)netcnce.
-l'lre
(a)
a u d i t o rc a n d c l e g a t er v o r kl o a s s i s t a n t so r t r s e* ' o r k p c r { i r r r n c d[ l , o t h e r a u d i t r r r s
and experts.

3. Skilt and
competence
4. Work
pcrfornled by
others

(b)
(c)

ii

tr':
, 1 . , . . . r ' , t ' . ^ - 1 , ; , . 1- 1 1 , 9 , ' . . 1 t

'

"

I I

.r.

1.,

::

'r{

r,,,'','(

\,'f t \t..t"

iiJ',

I)tir,',

"t'*\'i"i;ur.

l{e exercisesacle<ruate
skills arrd care atrd

T h e r ei s n o t h i n g t o d o u b t .

, ( a ) l l e s h o u l t pl l a n h i s

u o r k t o c o n t l r r cat r r d i ri i r c l f r : t t i i c a r r dl i r r r c l r r n i u l l l c r .

require
Plansshould be further developed :rnd reviseclcluringaudit if circrrnrstanccs
so.

:,
: (a) A u d i t o r s h o u l d o b t a i n s u f f i c i e n t a n d : r p p r o p r i a t ea u c l i t e v i d c r r c c b v p e r l o r m r r r g
complianceand substantiveprocedtrres.

. (b) Evidencesenable the auditor to drarv reasonalrleconclusion.

Compliance proceduresmean the tests designeclto obtain reasonableassurancethat

intemal controls l',-avebeen properly designed & operating eflectil'ely throughout
the year.

. (d)

Substantive'Proceduresare performed to obtain ev'idenccas to the conrpleteness,

,t"'

by llreaccountilssl1stern,
produced
ol_da1a
vali_ditV
T::i1"I 1nd
Internal control system ensuresthat the accountingsysteni is adequateand that all
the accounting infbrrnationhas been duly recorded.
The auditor should understandthe accounting systernand related intemal controls
adoptedby the management.

: (a)
8. Accounting
sYstemand -f ,' :
internal control . (b)
:: t 1 lt-1 1'lll
,{,r
r J \ (r,u\u.q\l
N f i , l i r , { it (c)
I

He should study and evaluate internal controls systenr to determir,e the nature,
timllg aqd e1t3nt of other audit prdCedures.

(a)
9. Audit
conclusionsand .
',(b)
reporting
lr'r ''"'
Lr $:i1:rt o r ? l\ ,L\i ,Nu'lt
(c)

L)-?-",'\u
4 f""''''
i i / , b c " , ' i , ' r i \ i t " { I \i ,".!.' ,a \ , ' . ,r,- ; '" . \ , , . i . 1 l t ' ;

I
I

t ' ' \ a d ( h ) Plansshould be basedon knorvlcdgeof the clients bttsiness.

.",1r..;\,\'-fr,cl-:
:ri
7. Audit Evidence
..
I 1'\ *i. '' :'t
t'
Q ,l',,u t

w i t h t h e b a s i cp r i n c i p l e s .
accordance

a"'t,'.
.,ti,.t,r,.v,.)
','

Ail-

6.rPlhnning"'
'

t rl

I
I

I l u t h c r v i l l c o n t i n L r et o b e r c s p o n s i b l ct o r l r i s o p i n i o r ro n f i r r a n c i a li r r l o n r r a i i r - - r r
'fhe
Auditor is entitlcd to relv on rvork perforrrrcdby' others.provirft:il

(a) I l e s l r o u l cctl o c u m c r rnt l u l [ e r sr c l r r t i n gt o t l r ee r t i l i t( r r r r r i n t a si ror r k i r r g p a p c r s ) .

( t r ) Working papers are maintaineclto denrorrstratcthat the arrdil u'as carrisd cut iri

5. Documentation
1\''- l \y: r,,.,,').\,1

t
?...i d'..,,t

{ l h a p "i

T h e a u d i t o r s l r o u k l r e v i e u a n d a s s e s s t l r c c o r r c l u s i o n st l r a r v t t f r o m t h e a u d i r
evidencesobtained through performanceof procedures.
The audit report slrould containclear rvritten expressiono1-opirrionon the financial
statements.

His report is on whether:

The financial infonnation has been prepared using accei;iable irccounting
, .
policies which havc beenconsistentlyapplied;
'
'

The financial information cornplies rvith relevant regulation and statutory

requirements;and
There is adequatedisclosure of all material matters-

(d) The report shouid be as per legal requirement. When other than clean opinion is
given, tlre audit report should state the reasonsthereof-

I
I

a
I
I
I

a
I

I
I
I
I

t
I

C
I

t
I

t
I

a
I
I
I
I
I

I n tr<ttiuct iortto

"lud

i t ittg

{ is.r[,L't-IVES O F .\UDI'[
is condtrctcd to express illl ()llltllorl o r t f i t u t t t c i l r l s l a f t n l c n t s . l . l t t r s
p r i r r t a r l ' , r b i c r li v c i : R c p o r l i r r 3 .

t sp e r A A S - l

Autlit

' I tp t r , , l A S - 2

T h e o b i e c t i v e o 1 - a u d iot f f i n a n c i a ls t a t e l l l r : r l ti s t o e r l a t r l et i r e lru<litort0 er:prc'ss

a n o p i r t i t ' r.tr t t s r t c l ti i n r n c i l l s t a l el l t c l l t s .
fh. i.rait"t repons rvhctherllnancial statcnlentsreprescltttrrtc & f air r ierr'

Ileporlittl4ttrr
*,ltttt?

It ciri tre exarrrineclbv coniideririg rvhetircr:

( a ) F i r r a p c i a l . s t i i t e n l e nh!a l e t r c e t r p r c p a r e du s i n g c o n s i s t e r r t& a c c c p ! a b l c
a c c o u n t i r r gP o l i c i c s&
( b ) F i r r a n c i a ls t a t e r n e n ct so r n p l l 'r v i t l t r e l e v a nrt t r l e s& r c g t r l a t i o p s&

T'rtitc & JuiirLI errtri tr14

Scr:olrd:rrY
; , ! ;I ' - ., i , ' t

qontain isclosuleof'all rttaterialrnatters

(c) Financial stat-enlents_
f
A . i , a i t . ' , ri :s c * p e c t e at o p r o v i d c o p i r i o n o n t r u e & l r r i r r ' i e * ' o f l l n a r r c i ; r l
f
i
l
.
statenlent as above.
:
( b ) l l e c a n r r o t i r a r n es u c h o p i n i o n i l - h e i s n o t a b l e t t i c o n l l r t n / d i s p e lt h e
possibility of existencecif fraud & error in financial statellrents.
( c ) T h u s i p c i d e n t a l i s e c o t r d a r yo l r j e c t i v e i s d c t e c t i o n o f r t l i s s t a t e t t t e ri rt it

Detec'tion d
rrtisstulenrcnl

fi ttancial staternents.

of frauilen<l
& correction
: (if pii,riit i;td'iaibitiry;{'t;ventiori. detection

,rsp"i iA'i-t

error is that of management.

are d<lubtftrl situationthat sotne matcrial pis5lsleillernl
; (b) Horvevcr, if there

doubt.

I'f
Audit may not revealall the ntisstatement(due to inherent Iirnitations
audit).
If eruditor performs his rvork in accordance with basic prineiples
<-;f
governing an audit, he cannot be held liable for non-detection
misstatenrentin financialstatementsof clicnt'
;
hc
ljowcver. if he notices material misstatementresultirlg from fraucl'
i G)
'
should communicatethe same at appropriatelevel of tnanagement.
:
are found. he should ensuretheir appropriatedisclosure
: to If rnisstaterneltts
report'
either in financialstatementsby tlie managenlcnlor in his audit

: t.l
:
: (d)'
;'

'
uuiiiotis totaliyluitiiieOin r"tyi"g
iltuuiioniii" tt.,er",
: i"i U"f"r, AouUit"f
As pr,, c:useof
'
u p o n t h e m a n a g e m e n/ te m p l o y e e so f t h ec l i e n t '
"Kittgslon cotton :
mills t:omPanY" : (b) He is a watclidog_no! a blood hor,rnd,

_JDIT
OF FINANCIAT,STATEMENTS
I . I O AA S ' - OB JE C T IV E A N D S COPE OF THE AT
.'-.

ort financial statenetlts

the objective is to enablethe atrditor to expressart opiniorr
preparedby managementof entiw'
statementsare prepared as pcr the recognized
. (b) For this, it is essentialthat financial
requiremeitt atrdthey should
accountingpolicies and practiceand relevant statutory
discloseall material matters.
a s l o future viabilityof the
(' c ') H o w e v c r ,h i s o p i n i o n d o e sn o t c o n s t i l t l t ea n a s s u r a n c e
its management!tas
rvhich
rvith
enterprise or tire efficiency or effectiveness
:
;
conductedthe affairs ofthe enterprtse'

. 6i

oni""ti". oruii
t uclil

'i

ir',

i.

l,\

"\ ! '
|','

.,

-[

J-

I
I
, , 1: r r! i t ! i t q r : ! tL i , ' i . \ J t t i '( u t r :( '

ti
(e)

bility' for
ILes1tortsi
tht lrnttnctal

I i t e r n a r r l r g c n r c n ti s l c ' s p t , r r s i b l ct o r t t t a i r r t a i r t i i r gl r i r r r t r t o t l a l c ; r r r t ip r ' , r p r r . r r \ r ) ! i n t i l ' , s

. , , : l ; l i i . r ir . i i l , i . , i l , t r { Jl / ' L t r . r t . ,i l r , . r , ei . r i s t i i t u l tr \ : rI t \ .
'l
l i c a u , l i t o r i s r c s p r . n s i t ' t l fr, r r f b r u r i r t r :a n d c r p r c s s i r t t u n q 1 ' i 1 1 i 1 ,r 1l r1 r i r , , i i l i l r r r c i i i i

(b)

s t a t c n t e nt s

{ !ilp. I

su.llcnl.-'r)t:i.
I t r e a r r d i t r t l - t h c f l i r a n c i a l s l i r l e n r c n t t k r c s n o l r c l i e v e l h c n r i r r r r r g , , ' i r i L rol if i t s
r c s l r () i l s i l ) i l i t - .\

; (c)

-l

r)

l r r . ' l r r r d i t ttrlrc c i t l c r t l r r : e , , g ' . , , r 1l r i s l r t r , l i ll u n ' i r t r :r e r : l t r t l r ' :

'l
l r e r e q i r i r c n r e n tc J l - l h ct ' r l e v a t t t l e g i s l l r t i o n
.Iire
rr>
p r ' l r r t . r t t t l c e l : r c tnl tf st l i c i r l s t i t u t e( I C A I )
'l-errrts
:)
o l ' e n g a g c t t t er t t

S c o p co f a n a r r d i t

I I o . u v g v ' e rt.l t c t c n r r s o l ' t ' r i I r { e r r r c r i I t i e r r t t o t s t t p e r s c t i ct h c p r o n o t t n c ] g n r . l i t , i ' t ] r c i r t s t i t t r t t :

r i r l l t c p r r' r i si (' l l s ( )I r c l c r l l r l l t ' .i t l l l i t ' t t.
(a) i\r,rditor uses sarnplitrg during pe rfirrrttattcc erf lnrtlit,
I n h c r e n t l i r n i t a t i o n sr, I. Test c'hecking
u,..
tt
lLr;':
(t.,) lts not ptlssiblc lirr hirn to condrrct detailetl clrcckiirg r.hrr:fcr
\t')
6 f a u t l i l . W h a t a r c Ltfrr.rAr\
""".t. Urr\\t";\ . .
t i n r ec o n s t r a i n t sa r r do t h c r p r a c t i c a lp r o b l e n t s .
thts',:'.f
o
li',^il tl'(.)
/u

r! , , " . , . , \ .

\l

l, \.'

'

of
2. lYotura
evidenccs

f;, 1."ot.ue
'-', HO r-tu\il'

tr.
i,:,'."d}'

u r r,'{'J{*"
'P,ri '
"'t
-1.Involvenrcnt
of judgement

( 9rl,itr,n tr

: 4. Inherent
', Iimitutiorrs of
,
[,imitation on
scope-eff'ecton
alrdit repgrt

tirgunitingan auJii

internul
controls
lf tlrereiiJ uny
audit reporl-

l2.
i.

l.1l

A s l r c d o e sn o t c h t - ' c ke a c l r& e v e r y i t e r n ,i t ' s i n t p o s s i t r l cl i r r l t i r r r

to dctect all fl'aud & errors.
(a) l l r c e r i t l c n c e so b t a i n c t l l r r t l t e r r u r l i t o rl l r r : / , ( ' r . T l l r Ji v e r u ! l t e ,
thon t'ouclusive.
I he1'can't ensurcthe auditor in a certain \\'a)'- '
'l'he;-'
1O)
(c)
can enable auditor to drarv onlv reasottableconclusiotts
I
therc from (not absolutecortclusiorrs),
judgernent
irr
evaluating
tlte reasonablertc's'i
(a) Auclitor exercises
lllatlilgcrlrerrl itl
made
by
the
of -iudgernent & estitnates
preparingthe fi nancial staternents.
'l-he
jLrdgenrentby auditor rnay 1ot always bc correct(b)
( a ) Internal controls sufler frorn limitetion suclt as collusion arnottLl
cmployeesor wrong use of authority by managelnentetc.
(b) lf internal controls are rveak,auditor may not be in a positiorttu
clbtainassurance.

"onitiuintr,,t

i"gi.dr tire scopeof audit,lte shouldntentionthenrin his

Auclitor should coniluct audit irr suclr a way that he rvould be able to obtairl
sufflc ient and appropriateaLrdit el' idettces.
I l e s h g u l dc o v e r a l l - i n r p o r t a nal s p e c t sa f f - e c t i n gf i n a n c i a ls t a t e t l r e n tosf - t h ec l i e n t .
l f t h e r ei s i n c l i c a t i o uc i f n t i s s r . a t e m e nl tte. s i r o u l de x t e r t dh i s a t r d i tp r o c c d u r c s .

OF ERRORS
T"YPT],S

As per nature

(,l

tritl r"iirt'liiig
errors

lb Nii,,,-i"i
reveaiing
errors

p."potutiot.'
of aCcounts.
(o) 1-n"r"npp"ii ..tuii'ig
(b) For example,if a clreqtredepositedis not shorvn.lt becomes
appareltduring Bf.S,,
'fhey
(a)
do not appear themselvesduring preparationof
accounts.

(b) :fhesecan be krtown only by detailed analysis.

(c) For e g: capital expenditure shown as revenue expe1l{-itui9,

t
1

Inli'i xl uct ion t o A ud i t ittg

(t,)

L,nirttentiottul
crror

(d)

Intentionsl
errors

(e)

Unconcealecl

'l
( a , \ l r c s ea r e n o t d c l i L r c i u t el r i i s t a k i : i
( b ) I t n r a yb e d u e t o i g l l . , r r r r c : . / i ) \ c r s i { l ) 1
rri-flrcts.
( c ) [ " o r e x a r n p l e .i l P e t t r c a s r r i e r i r r g c t st o
rccorij licigrrr,-ri'r(s
l0i- in petty cash bool,.
( a ) D c l i b c r a t er n i s t a k e si . e. f r a u d s .
(b) Bad debts rccovercd rrot recr.lrrletl
ui hooks, tlrir..;
m i s a p p r o p r i l r t i ntgl r e n l o n e v s < ,r.. ec e r i v e db y e n r p l o y e e
oi tlre
entity.
S a n r ea s u n i n t e n t i n n a i

_Ery9p

_ (l)
c> *

. N o e f f i r r l su r , . ,n r a r l et o l r i , . l ci h e r r r . r ' r

",.,,,by pe11on
conrrnittingit.
(a) Wlierebytlre per-sonioriirnittingtlre
*'avsto hideit.

concesled
Error

, ( b ) T h e s ec a n b e a s c e r l a i r r e d
o n l - vb t d e i i r i l e ccl h e c k i r r g .

' (;i ct". iia"a

(g) Error
ro u,hich
triall.aluncc
a.,"-.i,nirutt".
affecting trial . ( b ) F o r e x a r n"iroi..l,,.
p l eg: o o d s s o l c lt o . A ' e r r t e r e riln s a l c sl : r r t r kL r r t n o r
bulance
,
i'l_A_1ac9oL111!,
,
| (h) Errors
not ' (a) Two sided
tir.li ir .oiiip"n.t"tirrg
eir.r ,rr i.,i,1,r,r,,.
'.
offecting triol
o m i s s i o no f t".roi
r
a
n
s
a
c
l
i
r
)
n
.
',
balance
. ( b ) folelgqnf el No provision lbr bad delrrs.
':
', (,
Ercor
of . ("i RecordingAn erltry in ft,nArirrrentally,
ilrcorreCtn,nn,,"r"
'
principle
: a p i t a l . . x p e i r d i t t r rceh a r g e ctl o r e v e n u e .
i ( b ) F o r e x a m p l eC
.

&.i'tt

t,

ilCCOdir:lrlg

. t.

ASpeCt

!-,
r'

, (ii)
,

Compensating :
Errors
:

\ rlr' i
, g.\l
""
, . ^ ^ .r rr \. ., \ . r\ - \ r\ ,r
Irl
.1
I

y\
'/ / rr ' ., ,\ " . r ,

t'{Vl";*

o'i'-G"r-\

I o'L

:
(iii)

'Omission

:
i
,

( c ) No effecton trial balance.

(d) B_y1
profit.
1!eyn1a.y
9ll_"-c!
(a) Which
arenultified
t y iirei,npait
oi inotiiei
( b ) For example.: expenses amounting to Rs."iior.
6000 u,re.rrgiv
recordedat Rs. 8000 rvhilc anotherexpense arnourrlingto il.s.
2000 not recordedat all.
(c) No effecton Trial Balance.
(d) But may affect prolits if one error arises in revenue
A/c &
other in a balance sheet item.

i (;i--Wn"i;;;;;i6;
:

't {- t n'.'1 '--:"

lil:\

i\.-lr

. (b)
:
, (c)
:
, (.d)

(iv) Error
of , (a)
'.,
commissian
; (b)
],\
I
\ tr ' r ' l ' e .

fl\\"i
(;

. .'- **\i
\r..tr

;'ri

is 'ioi-i*coid"d
i; ai",,iiti. w h o l l y o r
PartlY.
For exarnple,Sales of 1000to A eiiher not recordedwhollv or
shown in salesAccounts but not posteclt o A ' s a c c o u n t Full onrission does not affect trial balance but partial
o m i s s i o nd o e s .
May affect profit.
Incorrectr..oidit,g ofi trinsiirion
Maybe of follorr,,ingt-r,pes:
,. Postingerror: - wr-ongAccounL/AntounVSide.

,. CastingError:- Wrong totalling/balancing.

. Duplicationerror: - entry recorded
,
twice .
. Carry forw,arderror:- Wrong arnounlr
side.
,
(c) For example: - Sales amounting to Rs. 1000i- recordedas
100/- or page totai of rvage sheets 500/- carried f'orr"varr.l
ris:
(d)

Rs.5500/-.
May cr may noi affect triai balance.Same ts
impacton profit.

lhe r,.:irsclr{

C
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l0

C h a p ,I
I ! Irc Ul Crrot s

A s p e r n :rtu re

As pcr accoun{ing
aspect
I

I
t
C
I
I

Seit-rerealing
inclt,qclt-

Unintentional/
irrtentional

U rrconcea
led/
corrcealed

Alibcting'l'.ll inot
atTecrting'l-.R.

revealing

+
Error of'
prirrciple

Error of
omission

Conrpensating
error

Erroro{'
cornmission

t
C
I

Conditions rvhich increasethe risk of misstatement in financial statement

'I (
W e a k n e s si n i n t e r n a cl o n t r o l s y s t e m .
t.
2"

Doubt about competenceand integrityof managernent.

3-

Unusual pressurewithin entity e.g.,entify facing problerrs in gettingfinance.

U n u s u a l t r a n s a c t i o nes. 9 . . t r a n s a c t i o nw i t h r e l a t e dp a f t i e s .

5.

Problems in obtainirrgsufficient & appropriateatrdit evidence.For exarnple. managenlentdeliberately not c<-rope rating with the auditcir.

AAS-4 - THE AUDITOR'S RESPONSIBILITYTO CONSIDER FRAUD AND

ERROR IN AN AUDIT OF FINANCIAL STA'IEMENTS

I.I2

: Intetrtiorral

Nature

Fraud

: BJ whom*

rr

-''l--l-T-1-|

'l

I
I
I

Ernployees,
or

Management,
or

rvithgovernance,
or
Thosecharged

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F

'

'
:
:
I r
:i '
:
i r

D-j 'l'\)-)
--i \
\t,
$

' |
:
: '

Example-

-'-

Un*iU

tfr*,,*"r;:$'*

-l-hird

parlies

Falsificationofaccounts
lvlisappropriationof assets
Suppressionof transactions
Omissiorr of ef'fectsof transactions

Wrong accountingProcedures

Misapplication of accgunting Policies

rl
;

6
d
d
il
C

l,rror

it

I r t lr , t t ,:'t , ' Ii t t t t t " . I t r 'i i t i t i . 4

]
_C_i',gr,
Nrtlttrt

I I t ti t r i , i l l t i , r l l lIi

B-1,*,ltottt

Sante ti.r
.

l r ' l a t h e r r t a t i c anl r i s t a k c s .

( ) r c r . i S l l tt ' l ' l l r e t s .

i r , l i s a f p l i c a t i 6 r rg t ' A c c r r u t r t i r r g I ' t t l i c i e s .

On port o.ftfutse

Prcvcnlion & detcction of liarrtl & errciris tlreir resllr.rnsibilit!

Chorgedwilh

I;or

Exumplt

Responsibilitv

'*n[ri:rvc

this- rnanagetnetlt cstlblishes

stritablc intc-nlal 'io!l1I()l

s\ slell-I.

Oovarnonceantl
Manayement
0n purt ttf

Ilc ltlrist \\'ork irt accordancel,rith AAS'

rl udilors

iri:;
I f t h e r e i s i n d i c a t i o n o f n r i s s t a t e t l l e l l th. c s h o u l i l c x t c n t i
proce(lttresto corrllrrn/clispelthe cloubt'

I l e s h o u l d l l l o i t l l a i r ld o c u m c t t t a t i t t r t

But he can't be held responsiblefbr preventionof fiaud & error.

11'auclitor u,orks in accordancervith AAS, he can llof bc heid
responsiblefor tron-detectionof fraud or error'

'fest
natureof Audit lSngPlye)-

lnhel't,nt lrnrltations
of audit due to
whith detection of
is
:rl! rrlis:rtatements

j,&nglt
Prol'essiorral

ratherthanconclusive
natureof Audit eJ1dep-qe
Perstrasive
'7 {
of internalconfol system
l-irrritations

n0i tlossible
flis;'nlssion
rnqtlIr"!es

members of audit
vy1fl', llith
, teqtn
: -.
:',
H/ilh motrtgernenl
:
',
With those charged witlt
:
SOvernarl('e

Managcment
representation
letters that auditor
obtain
*ho'*!r1
.,.
.J\t\

of ,\uditor'

Probabilityof Fraudand Error in financialstatements'

and internalcontro!ttt,"-:,
Itegardingacc3untrn8

f.'

fraudby managementILegarding

prevent and detect &

responsibiliry*for accounting and l'C' systenl to
N4anagement
correct Fraud & Errorlbr finarlcial rrltbrrnatiorrrn
( b ) Aggregate uncorrected tttisstlttetnentsare immaterial
opirrionof nlanagement-

(a)

(c)

It has disclosedthe auditor all lacts regarding

.

Known frauds &

'

Suspectedfrauds.

!
l2

. 1t t i l i t i l t g r i i r i { i . . 1 . \ r i i t ' i . r r r ( ,

i i h : r p ,I

t
t

i 1 ' a r t iiii r I l r : i . : t r l l j c l t t i t i rnr i - r n i s s l r i t r ' l n c pi ri r ' . d r , r r i r t i l r:l ; i t r r ; r l i . , r n \

,
l ' l e s l r r ; i r l . i c . r r r _ !o u t c x t e i r r i t : i ll l f ( , L t : ( ' l l u c si n r c s p r c t , . , 1s ; r n r e

4---

i-_--.---'-l\..-\\--\
*-"t

I)otrbt is disrrcllcd

l ) t , u b li s c o r r f l r r n c d

ljnable to conclude

Ji.i
().K.

I l e s i t r l r r lcJo n s i c i c r ' i,rrc i l i c ri t i s

i i e - s h i , r r lct lt ' r n s i c lrcl irs c i o s t r r . e

l r r t l i c a t i itc/ - c n , ' r o r l l t t t t l
\--\'=

irr{lrrlrtrci;rl\tatcllcr;i

\r---

-l

^--'tt

a----'t

I:,rrol

lrraud

lf rnglt.cices il

fr l-.

itt
llc siioukl

O.K"

E { T c r .,{, n , \

C o r r s i d c li t s c { l b c t s
\-

,Y--

, ./

i{e should ask rngt. for suitatrledisclosure in

Documentation

l.
:^

I:raud risk factors.

[{is response
to same.

Commrtnication

, I.

offroud ond crror

'
level.
At appropriate

t
t
t
I

I
I

on Timelybasis.

If rnanagementis involved, consider conlnunicating to thlr,tc '-hargeOwrth

govemance.

of weakness in I.C. s),stenr

. If IC. fails to prevent/cletectmisstatement.
. Therr, comnrunicatethis fact to management.
continue performirrgarrdit.
Discuss all factsrvith nrarragcrnentandthose chargcd with governarrce
C o n s i d e r w i t h d r a w a lf r o r t t e n g a g c m e l t t .

:a

Consider his responsibilitiestowardsappointing authority.

:
i

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!

ii; a;;;i,d"i itroidire t,'' *ii"riui *littii.i".',is. ii is not nossibleibr hirnto

: l

t
t
||

FinancialStaternerrts

Auditor unable to , '

the'
complete
'
engagement
,

I
t
I

/ |

:'

Consider his responsibilitiestowardsregulatoryauthority.

ia

If lre resigns due to misstatements, he should estate the facts regarding these nratters
to incomins auditor.

t
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t
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I
C

.r
!

I
C
C
C

l-l

I ttt rorl u c I i ort iri .'1ud i t itr,tl

i. i J

FItAtr D { i I._ttRr } l l

ilEGAIrnlN(;

s.li ii,\iAI{Y OF I)U]'lES OF AUDII'(}R

a,S-{
1'r ,

: i : r : r o u l ct al k e i n t r ' e , ' n s i t l c r a t i otnt r e i i i t o { - n r a t c r i anl ' i s s t a t e t t r e t t t .

,i
rnanagclrtetttas tQ ilnv fratrclor siqnillcant errtlr.
, ,,.1.:
i
i nsd i c a l r :t l r e p o s s i b l ee x i s t r : n c eo t ' l } a u d o r e n o r . t h e a u d i t o r s h o u l dc o n : , i d e rt l i c e1 ' l c ' ' 't. l it h e
lf circrrnrstance
d r c r r o r o l l t h e f i r l a n c i ailn l b r r r l a t i o r r .
: j u s p c c t e (i ir ' a t r o
:-

i,

I I e s h o u l dp e r f o r r ni i p p r o p r i a t ea d d i t i o n apl r o c c d t r r e s .
'lr
i l i i , . r i d i t o r s h o l l d s a t i s f \ l r i n r s e l ft h a tt h e c f f e c t o f l i a u d i s p r o p c r l " r e t l e c t e d i n t h t : l l r r a n c i ' r li n t b r t t l a t l r , r ,
f he crrtr is corrected.
fur case audrtoris unablc to otrtainevidenceto con{lnri or dispel lr rlottlrt rcgarding liatrd, tlre atttlilrtt -'ilL.rri'.J
latvs attcl regtrlationsalld ma)/ obtait] lcgal advice'
r rr:l'.:\'011t
!',r!ij.it!.:
t o t l l c l l r a t l a glen e n t .
, l : . r , ! r , , , i i . i: , l r ;ct o
- rm t t t u t t i c a l ct l r i ss i t t r a t i o n
: f thc i:alr,i
h a s o c c u r r e dt,h e a u d i t o r s h o u l dc o n s i d e rt h c n c c c s s i t l ' f o ra t l i s c l o s t i r t o
W i r c r , :i r ; j ! g 1 i f i c a 1ftr : r r - r d
statenrentsand if adequatedisclosure is not nradc,the rtccessitt'for a suitable discltlsrire:'t iiir
i,l tl,, {'in.rncial
r:r,!r',C1,.,1

;"1{

OF ACCOUNTING POLICIES
A{]{]OTINTINGCONCEPT-DISCLOSUI].8

':''*
- ,"
i tii;.
i\f
AeJrr r i r l { i : l ! 1 p o l i c i e s

-:
.;
& rnethodsof applyingthoscprinciple'
to specificaccountiugprinciples
It ret'ers

adoptedby entrty,
ln preparation& presentationoffinancial statenrents.
'flrcrc'is
p o l i c i e st l r a tc a n b c a p p l i c a b l ci r rx l l 5 i 1 1 1 xi ,rri '
n o s i n g l el i s i o f A c c o u n t i n g
Vr
,i tr,cltlsltrc is (a)
( b ) Managementchoosesthe appropriateaccounting policy.
,'I
i'
il, t il '.,
(c) F-ore.g.,depreciationcan be chargedas per rvritlen dorvnvalue method or straightt-'
tine rnethod.San.rervay.s,differentpolices may' be adoptedfor fbllou'ing:Jl^ 'J{ tr'i"J'u \r:*[u-a]'*"r
r Valuation of inventor;'
'ahtu
t-i
I
1'l;
o,l
q
r Treatmentof experrditureduringconstruction
1r'
"tr.-"li. 1,\
I

'!
'
. , \ r' . , , , \ l t . \ ' , 1 \
.
vrtu ? t, i
, nl,r
, ,:, r o),sc,h '
f\{'
' ..1'.'.,"\'on

Valuationof fixed assets

ki )..J"'
(d)
(e)
,

Conversionof foreign currencyitems

Valuationof investtnents
Treatmentof researclr & developmentexpenditure

"
r Treatmentof contingent liability
'fhe
profit or loss can be significantly affected by adopting diff-erent accountrng
policies.
T'6us disclosureof accounting policiesfollowed, becontesnecessaryso tlrat re;r,Llstri
o{-financialstatementcan propcrlyunderstandthe vierv presented.
hc
All significant accounting policies adopted in financial statements shoulil
d i s c l o s e d&
:
Disclosureshould,usually. be madeat one place; &

of : t+l
ltequirement
, '
Acc*lrnting
st:rusi:lrd regarding 9r)
(c) f)isclosureshotrldfrom part of financialstatement;&
I I 5 - : : , { 1 1g . 6 t
of :
' (d)'
sltin g policies"ii,:riilii
i ,
.{s-"t
,
, (e)

alorrg
Any changein Accounting poticieshaving material effect should be disclt''sed
(
is
with amountby which financial statementis affected by such change if amount
the fact shouldbe stated' &
) If amoult is not ascertainable,
"r"".tainable
be
lf any funclarnentalaccounting assumptiotr is not followed, tlre fact shculd
-1

ii'.,rf ;.,, \ ri' .: {_

1
'-,
f
f \ i \ y , 1 , ' - ; r,

1.,

| I
',"ri I' l'., i'\
\ '-, \ . \ ;-"- - -"' ' -\ '\
t , . 1v ' ' \ *
,j!
\
,, t I

l\

l)..1+-

I
,'|

IJ

f r " .*, " : ,

, "l

h "

t$ !.

i'

'i

i; i\

"

r; l.l'.

tt,

ri.

;t'.i

''

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lr-'

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1i'

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,

ra {t ,

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. r,r\*.,;.'-

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r-15

I\CC]fX]NT I TiG CON (. I. I''T.-I; tJN DAIT T.-]\.f.\ I, AC]COII N.T.IN {; ASSUM P.TI ON

N'[e:rrring

Three
[unrlatttental
:rccottnting
:rssunrptiolls

[-lisc!osure
r e q r j ; r c m c l t ta s
per AS-l

( l c r t a i r r{ i r r r i l l r r r i c n t a ic c o r r n t i r rags s r t n r l ' r t i i t tttrsn d e r l i ci l r c p r c p a r a t i o r r& p r e s ; c r n t a l r ( ) t l

o f l l r t l r t ci l i l ' ' t a t c l n c r l t s .
'l'hcir
.
t t s ci : - , t s s i t t r t e t l .
(
'
r
r n c t ' ln : I l r e c r r l c r l r i : .i.s r i c r r , ' , 1; t s s o i t t gt..o t t c L ' t t rl .l r r r tr s .c o r r t i r l r r i nogP C r 3 t i r ) l l s
(
l
t
!
n
g
ta)
h r r t l r e1 i , 1 3 5 ; g g l r f{licr 1 r ; r el t. i s : i " s r r n r c t1l } r a t h e e t r t e r p r i s cl r a s r t c i t l r e rt l r c i n t e n t i o nn o r t h c
.

r r e c e s s i tovl c l o s c . l t t * t t .
( b ) C o n s i s t c l c 1 ; I t i s a s s r r r n et' ij r a t a c c o L r n t i n gp o l i c i e s a r e c o t r s i s t c n tf r o n l o t t e p e r i < l d1 o
i r t t o t h epr c r i , r r ! .
( c ) A c c r u a l : l { e r c r r r r e sa r r d c o s t s a r e u c c r t t c c l ,t h a t i s , r c c o g n i z . e da s t h e l a r e e a r t t c d o r
) t r dr e c o r t l e <i lr r t h e f i n a n c i a ls t a t e n l c n t ts' f
i n c r r r r e i( a 6 d l r o t i l s n l o n e vi s r c c r i v c d o r ' p ; r i c l a
t l r c p c r i o dt o u h i c h t h e l r e l a ' , c .
n
( u ) l l ' a l l t I r t . r l i r r r t l : r r r r c r rilrl cr lu r r u r r l i r trsr s s t r r t t p t i o an rse h e i n g f , t l l o w e d i n p r e p i r r n t i o &
n
e
e
d
e
d
n
o
t
i
s
d
i
s
c
l
o
s
u
r
e
p
c
c
i
f
i
c
s
t
a
i
e
n
r
e
n
t
s
.
p r e s e r r t a t i ocr,rf f l n a n c i a l
is rrot ftlliou'ed the facl lrasto bc
( b ) l l o r v c v e r .i f ' a r r y l i r n c l e r n c n t aalc c o r r n l i n ga s s t r t t t p t i o n
d i s c l o s e tilt t t l r c f i r t a r t c i asl t a t e n t c n t s .
'l'lrus
d i s c l o s r r r ei s n c e d e d o n l l , i r r c a s e o f n o n - c o r r p l i a n c c r v i t h t l t e f u n d a n r c r r t a l
(c)
l c c ( ' r u l ittl l c ; t s s t t l t t pi ol t t .

t
I
I
I
I
I
-

T
I

G
;

C
;

OI]JECTIVE TYPE QUESTIONS

Clomment alongrvith reasonsrvhether follo$'ing are'frue or Fllse.
not notes to nccortnts'
I i i n * n c i a l s t a t e m e n t si n c l u t l e P . t L a c c o u n t i n ga n d B a l a n c e S h e e tb u t
P&L account, Balance sheet and
including
Financial staternentsrnean rvlrole set of accouttts
FAt,Sll +
d i s c l o s t r r ie. c . . t r t > t c tso a c c ( r t t n i s .
managemcnt'
(2) Audit is inrlcpendent examination of operations conductcd by
express opinion
Arrtlit is indepcrrrlcrrtexarnination ol-finont'iol slatemurls of arr cntity to
FALsill +
o
f
'
e
n
t
i
t
y
.
n
o
t
o
p
e
r
a
t
i
o
n
s
i
r
r
f
o
r
r
n
a
t
i
o
n
,
t h e r c o n .I t i s t h u s e x a r n i n i t t sf i n a n c i a l
i
(3) . Autlitor,s opinion is on True & F'air vierv of financial stltements.
applied,
()n lrue & fairvierv, it is seen whether acceptablepolicics are consistelrtl.v
For reporting
+
TRUI,,
*ha.,,e
financial
in
nrade
beetr
lrave
t,ee,r observecl& appropriate disclosures
regul"tion,

(l)

staten':ints.
(4)

(5)

(6)

J
Auditor needs to be indepentlcnt'
subortlirtatcto rvishesof any pers'()nis
not
juclgernent
a
of
c)
llerson
Independcncerncalrs that
TRtjE,
of clicrrt'
statcrnellts
firtancial
audit enhancescredibilit-vof
Indepenclent
Audited financial statementshclp the lenders'
making dccision abotrtcredit r'vofthitress
+
Lenderscan rcly on atrditedfinancial statemcntsr,vlrile
TR{lE
of tlreir lunds.
of loan applicant& later on, they can judge recoverability
concerned only with financial information'
Arrdi{or does not need communication skills, as he is
oft-rcers and staff of client & third
During concluct of audit, he has to interact with various
4,
FAL5E
skills'
col.nmunication
partiei rvhich requires good rvritten& orai

I
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I
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I

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t
;

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I

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f
C
;

r5
(?)

i \ r r r ! i l o r r r r u s tn r a i n t i r i l rc o n t i d c t t t i a i i t r s u b j e c t t o c er t : r i r l e x c e p t i o t r s .
io clicttt llrr.''r'"' ittl
?
l l c ( A t r d r t r t r )s l r o t r k l t o t d i s c l r ) s ca l r v c c . n l l d c n l i ai nl f t r r r l a t i r r rri' : l a t i t t g
r iir i.
c a l l d i s c l ( ) s ei l - i t i s p c r r n i t : ' : dL r vc . l i er t t o r r c ( l t l i r c db r l : t u .

ix]

{ , r . : t , t j r r l ' !D o tn e e ( lk l l o \ \ ' l c t l g eo l ' t c c o u r l t i t l g .

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