UNIT 1

1844 - British parliament passed the Joint Stock Company Act

Features
➔ Systematic

➔ Independent

➔ Contract (shareholders, management, auditors)

➔ Engagement letter

➔ Subject Matter and Clarity of Purpose

➔ Evidence

➔ Standards & Principles (Criteria)

➔ Report

➔ Other Features:

◆ Safeguard

◆ Assurance

◆ Assessment/ Evaluation

◆ Review

Aspects of Business Transactions

● Recognition - Transactions should be of business

● Measurement - Quantitative Transaction

● Presentation - GAAP

● Disclosure - of Relevant and Material Data

Audit Process
I. Audit Planning

A. Knowledge about client

B. Scope of Audit

C. Audit Program

D. Manpower Planning

II. Conduct of Audit

A. Audit Evidence

B. Examination

C. Coordination

D. Control

E. Documentation

III. Audit Report

Unless you plan your activities, you will not be able to minimize the risk

Objectives of Audit
Primary

● To give an opinion on truthfulness and fairness of the financial statements through report

Secondary

● To detect and Prevent errors

● To detect and prevent frauds

Types of Errors
● Clerical Error

○ Error of Commission

○ Error of Omission

● Error of Duplication

● Compensating Errors

● Error of Principle

Types of Frauds
Employee Fraud

● Embezzlement of Cash

● Misappropriation of Accounts

Management Fraud

● Manipulation of Accounts

● Omission of events

● Misapplication of Accounting Policies

● Internal Control System Override

Standard Setting Processes
1. IAASB (International Auditing and Assurance Standards Board) determines the broad
areas in which engagement standards are to be issued and prioritizes the area required
urgently.

2. Various study groups help IAASB to prepare an exposure draft of the proposed
engagement standards.

3. IAASB issues an exposure draft and invites suggestions and comments on it.

4. After taking into consideration the suggestions and comments received, the draft is
finalised by the board and submitted to the board of ICAI.

5. ICAI considers the final draft of proposed audit and assurance standards and if necessary,
modifies it.

6. The engagement standard is then issued by ICAI.

Standards on Auditing - IAASB

● Facilitates the convergence of international & national standards

● Setting High Quality

● To ensure the quality & uniformity of practice throughout the world.

IAASB
Its efforts are focused on (Role of IAASB)

1. Development

2. Adoption

3. Implementation of International Standards

Audit Working Papers (Essay 230 Documentation)

“Audit Working Papers are the written records kept by the auditors as it regards evidence
accumulated during the course of audit, methods and procedures followed and conclusions
drawn.”
Working Papers relate to an Audit Notebook in which the auditor maintains date-wise records of
any activity that has been undertaken along with the disclosure of financial data that has been
provided.

Objectives

● To support the preparation of audit report

● To provide evidence in case of any suit against the auditor for any negligence

● To aid the auditor in conducting and supervising the audit.

● To enable the auditor to point out to the client the weakness of the internal control system

● To help the auditor plan the audit for the succeeding years

ICAI Guidelines Essay 230 | Audit Documentation

● Must record the auditors planning, nature, timing, extent of auditing procedures and
conclusion drawn from the evidence is obtained

● Should be sufficiently completed and detailed to enable an auditor to obtain overall

understanding of the audit

● All significant matters which require the exercise of judgment with the auditor's
conclusion is to be included

● It should be designed and properly organized to meet the auditor’s need for each
individual audit

● To improve audit efficiency, the auditor generally plans with the help of previous
working papers

Factors affecting form and content of working papers

● Nature of the engagement

● Form of audit report

● Nature and complexity of client’s business

● Nature and condition of client’s records

● Degree of reliance on internal control

● Need for direction, supervision and review of work performed by assistants

 UNIT 2
Why are comparative Financial statements important for trend analysis?
Scope of Audit and procedures involved

1.

2.

3.

4.

5. Evaluation of Assets

6. Evaluation of Liabilities

7. Comparison of Financial Statements

8. Truth and Fairness of Financial Statements

9. Statutory Requirements & appropriate Reporting

Test Checking
Where is it applicable

1. When Transactions are large in number

2. When the auditor has past experience with the transactions

3. When satisfactory system of internal control exists

Where is it not applicable

1. Bank Reconciliation Statements, high amount bank transactions

2. Transactions related to seasonal fluctuation

3. Transactions involving related parties

4. Non recurring transactions

5. Transactions requiring disclosure

6. Transactions requiring computation and calculation

7. Transactions involving foreign exchange

 8. Significant transactions during the start and the end in the year

9. Compliance with statutory provisions

10. Presentation and disclosure of information in Balance Sheets, P/L statements

11. When Internal control systems are weak.

Methods of Test Checking

1. Enquiry – confirmation from outside sources

2. Observations – Observation of methods used to keep track of transactions

3. Examination – Manually inspecting memos, bills, etc

4. Reperformance – Match the ratios, checking the figures in the BS

5. Computer assisted audit Techniques (CAAT):

Precautions Taken During Test Checking

● To ascertain the reliability of the internal control system

● Consider his past experience while selecting samples

● Selection of transactions from various books of accounts

● Chosen transactions must be homogenous

● Must form adequate Samples

● The client must not know the period selected for sampling

● Transaction selection should be random

● First and last months of the period must me checked

● Results of the transactions must be checked for errors

● Transactions related to stock and cash must be checked thoroughly

● The Client should not be consulted while selecting transactions.

● The Auditor must select the transactions carefully based on his intelligence, professional
skill and knowledge.

● Test Check should be so devised that a sizable portion of the work done by each
employee should be checked.
Benefits of Test Checking

● Ensures Speed of Audit Work.

● Helps to locate deficient areas & helps to conclude acceptability of financial records.

● Labour Saving device.

● Gives assurance of accuracy and reliability to some extent.

● Keeps Accounting staff alert and careful as the auditor checks random transactions.

● Helps the auditor to arrive at a definite conclusion in regard to the True and Fair view of
the states of Affairs of the concern.

● Useful and purposeful if performed intelligently

● Completion of various Audit by an Auditor in given stipulated time.

● Get time to check an item in detail rather than checking the same item.

● Scientific Assessment of Risk: The risk of material misstatement in the financial

statement is assessed by the auditor in a scientific manner by drawing samples and
studying them in detail.

Disadvantages of Test Checking

● It is not possible to detect all the errors and fraud.

● The clerks of the client may become careless because they know that their work will not
be checked in detail.

● Under test checking, although the auditor checks the whole of the work through test
checking, suspicion and doubt will remain in his mind.

● It is of no use if proper and effective systems of internal checks and controls are not being
adopted in business.

● Complicated Transactions are not Checked.

● It is not suitable for small business concerns.

● It does not offer any consistency in selecting the percentage of checks that will be
adopted by all concerns.

● Risk cannot be measured.

Vouching
1. Vouching means and includes the examination of every business transaction with its
supporting Documentary evidence, the checking of which enables the Auditor to satisfy
himself that the transaction -

2. Has actually occurred and recorded in the proper account.

3. Has been properly Authorized

4. Has been correctly allocated to the revenue/expense of that accounting period.

5. Has been entered in the books as per the recognized accounting policies & practices.

Definition

Lawrence R. Dicksee

"Vouching consists in comparing entries in the books of account with documentary evidence in
support thereof."

Joseph Lancaster

"Vouching is a device used to prove that various transactions for the period are fairly, truly and
sincerely reflected in the books of accounts."

B. Bose

"By Vouching means the verification of the Accuracy and Authenticity of transactions as
recorded in the books of accounts.”

Vouchers and Types of Vouchers

A voucher is nothing but a written or printed piece of documentary evidence, which

authenticates the transactions, i.e. it proves that the entries made in the books of accounts are real
and genuine.

Examples: Vouchers can be sales invoice, purchase invoice, bank statements, minutes book, cash
memo, bills, bank paying slip, purchase requisition slip, receipt, salaries and wage sheet, gate
keeper's note, bank passbook, memorandum and articles of association, delivery challans, stores,
records, counterfoil of cheque book, etc.
Types of Vouchers

● Primary Vouchers: The bills or the documents that are available in the original copy are
known as primary vouchers.

● Collateral vouchers: These are the bills that are available in a duplicate copy.

Sources of Vouchers

● Internal vouchers: The vouchers prepared by the company itself are termed as internal
vouchers, such as sales invoices.

● External vouchers: The vouchers created outside the organization are termed as external
vouchers such as bank statements.

Objectives of Vouching

● To check that all transactions recorded in the books of accounts are supported by
documentary evidence.

● To ensure that no transaction goes unrecorded in the books of accounts

● To judge the accuracy, authenticity and credibility of such documentary evidence.

● To verify that no fraud or error has been committed while recording the transactions.

● To see that each and every transaction recorded has been adequately authorized by a
responsible person.
Precautions to be taken while examining Evidence of Payments
● Name of the Client is stated as Payee.

● Payee's name is correctly stated in the cash book.

● The date in the payee's acknowledgement slip agrees with the corresponding entry in the
cash book.

● Payment is authorized by the person competent to do so & is chargeable as

● The amount of payment together with the head of the account debited is entered correctly
in the cash book.

● The allocation in respect of the head of account is correctly done.

● The voucher bears a proper Revenue Stamp.

● Auditor should prepare a list of missing Vouchers.

● Auditors should accept only printer Vouchers as they are considered to be true and are
legally acceptable.

Precautions to be taken while Examining Evidence of Payments

● As a voucher is examined, it should be cancelled with a rubber stamp.

● Any explanations needed for any voucher should be noted in the Audit Notebook.
● The voucher relates to the period under audit.
● Duplication of the voucher should not be accepted, if needed then the client should give
reason in writing.
● Overwriting on a voucher should not be accepted.
● Any change should be supported by signature (initials) of a responsible official.
● Payments such as wages and petty expenses where vouchers are not there should be
checked with Wage register, petty cash book etc.
● Auditors should not accept Vouchers in Personal Name.
● Auditor should check whether payment is described partially or for complete
transactions.
Differences Between Vouching and Routine Checking

Vouching Routine Checking

In vouching, entries are checked with the The auditor verifies the arithmetical
help of related documentary evidence. accuracy of the entries through routine
checking.

Vouching also includes examination of Routine checking is a part of vouching.

documentary evidence in support of
recorded transactions besides routine
checking.

Vouching is done by senior audit clerks. The work of routine checking is generally
done by junior audit clerks.

Vouching traces the sources of information Routine checking is limited to recorded

beyond the books of accounts. entries.

Wider Concept Narrow Concept

Vouching of Cash Payments

Type of Expense Relevant Supporting Document

Cash Purchases Stock Ledger, Cash Book

Wages and Salaries Attendance register, Time or piece records,

Leave register, Overtime register, Wage sheet,
Bank statement, Register of casual labourers,
Payroll

Travelling Expenses Copy of Tickets, accommodation bills

Donation Board Resolution, AoA, Income Statement,

Receipt

Custom Duties Bills of Entry

Remuneration Paid to the Directors AoA, attendance register, payment receipt duly
acknowledged by the directors.

Advertisement Expenses Advertisement Contract, Financial Statements,

Bank Statements

Freight and Carriage Relevant Ledger A/Cs, Statement of Accounts,

Transporter’s Receipt, Cash book, Bank
Statement

Repairs and Renewals Cash books, Statement of Estimates, Repair Bills

Agent’s Commission Rate of commission on sale, Cash receipt issued

by agent.
 Payment of Income Tax Advance Tax Challan, Self-Assessment Tax
challan, Income Tax demand notice, Payment
Acknowledgment Receipt, IT Act 1961, Form C

Excise Duties Rate of Excise Duty, Excise records and sale

invoice for verification of excise duty, Issue
Permit Challans

Research and Development Bank Statement, Board Resolution, Relevant

Expenditure Bills and Invoices

Retirement Gratuity Legal Provisions

Verification

Proof of existence or confirmation of assets and liabilities on the date of the balance sheet.

According to Spicer and Pegler “Verification of assets implies an enquiry into the value,
ownership and title, existence and possession and the presence if any charge on the assets”

Verification Process:

1. Confirmation about the existence of the asset

2. Confirmation of Ownership

3. Valuation of the asset at its proper value

4. Condition that they are free from charge or mortgage

Valuation

Meaning –

Examination of accuracy and propriety of valuation of those assets which are shown in the
balance sheet of any entity at the end of the financial year.

Methods of Valuation
 · Cost Price − This is the cost price paid at the time of acquisition of assets plus the
freight charges, octroi charges, and commissioning and installation charges, etc. to
bring that asset in usable condition.
· Book Value − This is the value as appearing in the books of accounts; the cost price
less depreciation.
· Realizable Value − A Value which can be realized from the sale of assets.
· Market Value − A value which the asset can fetch at the time of sale.
· Replacement Value − A value on which an asset can be replaced.
· Conventional Value − It means the cost price less depreciation written off ignoring
any kind of fluctuation in the price.
· Scrap Value − If the asset is not in working condition and sold as scrap, then the
sale value of the asset is scrap value.

Basis of Valuation

Auditors should ensure that the basis of valuation is correct and reliable. He should keep in
mind the process of valuation which is as follows −

● Type of asset
● Original cost
● Expected working hours of the assets
● Depreciation/Amortization rate
● Valuation done by an Expert
● Wear and tear expenses
● Scrap value
● Chances of asset become obsolete

Fixed asset is valued at cost price less depreciation and current assets should be valued at cost
or market price whichever is less.
Difference Between Verification and Valuation
Point of Difference Verification
1. Concept Concerned with examination of
existence and possession,
ownership rights of an asset
along with their valuation and
charge if any
2. Function Deals with assessment of the
genuineness of ownership
3. Scope Broader Concept, includes
among different other aspects,
the valuation of assets and
liabilities
4. Objective To ascertain whether the assets
and liabilities owned by the
entity are disclosed in the
financial statements at their
proper value
5. Nature The nature of work involved is
to some extent complicated as it
involves assessment of legal
ownership as well as title
6. Without proper valuation, the
Interdepend verification process cannot be
ence completed. Verification is
dependant on valuation
Valuation
It is concerned with
determination of value of the
assets and liabilities of an entity
at which it will be disclosed.
Deals with only the assessment
of the rightness of valuation at
which assets are valued
Narrower concept as compared
to verification as it is part of the
whole process
To ensure that the assets and
liabilities are correctly valued by
following the prescribed norms
of the competent authority (ICAI
in this case)
Involves determination of the
value of the assets and liabilities
as per the prescribed norms and
guidelines of the competent
authorities
It is a process which facilitates
proper verification of assets and
liabilities. Without valuation,
verification cannot be
completed.
7. Services Verification work usually does It requires the service of the
from other not require services from other experts because the auditor is
Experts experts not a valuer in true sense

8. Certificate Auditor is not supposed to issue If an expert service is sought for

for the a separate certificate for the proper valuation of assets
work verification of assets and and liabilities, the concerned
liabilities expert is supposed to give a
certificate for the valuation he
has done