Syed Tahir Hussain Lecturer

Commerc
e

Auditing
“Systematic examination of financial statements; records and related operations to determine the
adherence of generally accepted accounting principles, management policies or stated
requirements”. (Robert E. Schlosser)

Objectives of Audit:
A) Primary Objectives
1.Fairness of Statements 2.Prescribed Laws 3.Accounting Policies 4.Independent Opinion

B) Secondary Objectives:
1.Detection of Errors 2.Detection of Frauds 3.Prevention of Errors 4.Prevention of Frauds
C) Special Objectives:
1.Management Audit 2.Tax Audit 3.Social Audit 4.Propriety Audit
5.Cost Audit 6.Operational Audit 7.Bid Offer 8.Purchase Consideration
9. Loan 10.Admission 11.Profits

Internal Control:
Internal control consists of all measures, taken to provide management with assurance that
everything is functioning as it should be. (Walter B. Meigs)

Objectives of Internal Control:

1.Assets Protection 2.Accurate Record 3.Follow Policies 4.Prevention of Errors
5.Prevention of Frauds 6.Best use of Resources 7.Reliable Record 8.Reduce work Load
9.Location of Errors and Frauds

Internal Check:
Internal Check refers to the organization of office duties. In such a way as to prevent or disclose
both errors and frauds. (Ronald A. Irish)

Internal Audit:
Internal audit consists of a continuous, critical review of financial and operating activities by a
staff of auditors functioning as full time salaried employees. (Walter B. Meigs)

Kinds of Audit
A) Authority Basis:
1.Statutory Audit 2.Private Audit 3.Internal Audit 4.Government Audit
B) scope Basis:
1.Complete Audit 2.Partial Audit
C) Purpose Basis:
1.Management Audit 2.Cost Audit 3.Special Audit
D) Time Basis

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 Syed Tahir Hussain Lecturer
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1.Interim Audit 2.Continuous Audit 3.Final Audit
E) Others
1.Occasional Audit 2.Social Audit 3.Procedural Audit 4.Balance sheet Audit
5.System Audit 6.Propriety Audit 7.Operational Audit 8.Cash Audit
9.Joint Audit

Audit Standards:
Overall guidelines for auditing work are known as generally accepted auditing standards.
(John W. Cook)

Generally Accepted Auditing Standards

A) General Standards
1.Technical Training 2.Independence 3.Due Care
B) Field Work
1.Proper Planning 2.Evaluation of Internal Control 3.Obtaining Evidential Material
C) Reporting Standards
1.Proper Financial Statements 2.Application of Accounting Principles
3.Indication of Inadequate Information 4.Expressing an Opinion

Principles of Auditing:
1.Integrity 2.Objectivity 3.Independence 4.Confidentiality
5.Competence 6.Documentation 7.Planing 8.Audit Evidence
9.Accounting System 10.Internal Control 11.Audit Conclusion 12.Reporting
13.Disclosure 14.Consistency 15.Compliance with legal formalities

Error:
Error refers to an unintentional misstatement in financial statement, including the omission of an
amount or a discourse.

Fraud:
Fraud means intentional misrepresentation of financial information by one or more individuals
among management, employees or third parties.

Window-Dressing:
Window-dressing is a creative accounting practice in which changes in short-term funding has
the effect on disguising or improving the reported liquidity position of the reporting organization.

Teeming and lading:

Teeming means take out money from one account and lading means put back money in the same
account after some time. It is a method of misappropriation of cash received by falsifying record
of subsequent transactions.

Lapping:

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 Syed Tahir Hussain Lecturer
Commerc
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The act of abstracting receipts from customers and covering the shortage with receipts from
subsequent collection received from other customers.

Kitting:
Kitting is a method of misappropriating cash in which client personnel includes an amount of
cash in two or more bank accounts simultaneously. It involves writing a Cheque on one bank
account and depositing it in another just before the end of the accounting period. The amount of
the Cheque is included in the balance of each bank because it takes several days  for the Cheque
to be cleared.

Audit Evidence:
Audit evidence is the information obtained by the auditor in arriving at the conclusion on which
the audit opinion is based.

Tracing:
Auditor selects sample from basic source documents and proceeds forwards through the
accounting and control system to find the final recording of the accounting transaction.

Vouching:
Auditor selects sample items from an account and goes backward through accounting control
system to find the source documentation that supports the item selected.

Verification:
Spicer and pledger say that verification of assets implies an enquiry into the value ownership and
title, existence and possession; The presence of any charge on the assets.

Auditor Report:
Auditor's report is the expert opinion expressed by auditor as to the fairness of financial
statements. (Meigs and Meigs)

Kinds of Audit Report

1.Statutory Report 2.Report for Prospectus 3.Solvency Report 4.Final Report
5.Partial Report 6.Interim Report 7.Clean Report 8.Qualified Report
9.Management Report 10.Internal Report 11.Annual Report

Types of Audit Opinion

Unqualified Opinion:
The auditor can give unqualified opinion if he is satisfied in all respects

Qualified Opinion:
A qualified opinion is given when the auditor feels that he cannot issue an unqualified opinion.

Adverse Opinion:

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 Syed Tahir Hussain Lecturer
Commerc
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An adverse opinion is issued when effect of disagreement is so material and pervasive to the
financial statements that auditor concludes that the qualification of his report is not adequate to
disclose the misleading or incomplete nature of the financial statements.

Disclaimer of Opinion:
A disclaimer of opinion is issued when the possible effect of a limitation on the scope is so
significant that the auditor is unable to express an opinion on the financial statements.

Clean or Unqualified Report:

When the auditor is satisfied with performance of the management he can submit clean or
unqualified report.

Unqualified Report:
When performance of management is not up to the standards he can submit report with certain
qualification. The weaknesses of management are disclosed in audit report. Such report is called
qualified report.

Business Math
Ratio:
The ratio usually indicates relationship how one quantity is of the other.

Rate:
Rate is also a ratio but not free from unit of measurement.

Productivity:
A measure of effective use of resources. It is defined as the ratio of output to input.

Probability:
It is a measure of chances of occurrence or non occurrence of an event as may be the case in an
uncertain situation.

Interest Rate:
It suggests, at what rate the loaned amount or amount of investment shall increase over certain
period of time.

Discount Rate:
It tells the extent to which amount is deducted by the purchase on purchase of treasury bills.

Proportion:
The equality of two ratios provided that two ratios are equal logically and numerically.

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 Syed Tahir Hussain Lecturer
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In proportion
Product of Extremes = Product of Means

Types of Proportions:
1.Direct proportion 2.Inverse Proportion 3.Compound Proportion 4.Continued Proportion

Percentage:
Percentage is also a ratio or a rate. "Ratio of a given number with a standard number 100 is
called Percentage".

Profit:
Difference of selling and purchase prices of an article provided that the difference is positive.

Loss:
Difference of selling and purchase prices of an article provided that the difference is negative.

Interest:
Interest is just like a rent which is paid for having the use of money.

Principal:
The amount of money that is lent it invested is called principal.

Interest Rate:
The rate at which interest accumulates is called interest rate.

Simple Interest:
Interest chargeable to fixed principal for every period of the deal is called simple interest.
SI = PIN Where SI = Simple Interest P = Principal
I = Interest rate N = Number of Time periods

Compound Interest:
The interest chargeable to changing principal on every period of deal is called compound
interest.
1. Principal keeps on changing from period to period
2. Amount of interest also keeps on changing
3. Rare if interest remains fixed for all periods.
C.I = P [(1 + i)n -1]

Annuity:
The regular, fixed and periodic sequence of payments with the charging of compound interest

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accordingly is called an annuity.

Application of Annuity in Business:

1.Insurance Business 2.Leasing Companies 3.Goods Sold on Installments
4.House Building Finance Corporation 5.Bonds or Debentures 6.Amortization of Debt

Type of Annuity:
1.Ordinary Annuity 2.Annuity Due 3.Perpetuity
Ordinary Annuity:
An annuity is considered as to be ordinary annuity if every payment is made at the end of each
payment period and continues for a definite period. This annuity is also called ending mode
annuity.

Annuity Due:
An annuity is considered as to be annuity due if every payment is made at the beginning of each
payment period and continues for a definite period. This annuity is also called beginning mode
annuity.

Perpetuity:
An annuity is considered as to be perpetuity if every payment is made at the end of each payment
period and continues for an indefinite period.

Present Value of an Annuity:

Present value of annuity is the lump sum amount taken at the beginning of the annuity and
returned in future, the actual amount and its interest on outstanding balance in the form of an
annuity.

Present Value of Perpetuity:

P = R/I where P = present value of perpetuity
R = Per Period fixed periodic payment i = Interest Rate

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