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UNIT – 1

CONTEMPRARY AUDIT

B.COM (H) 6 SEM

INTRODUCTION OF AUDITING

Auditing Origin and Evolution – History of Auditing

In the early stages of civilization, the methods of maintaining accounts were very
unrefined. The person used to listen to the accounts read over by an accountant to check
them, he was known as the auditor.

HISTORY OF AUDITING

Auditing is as old as accounting, and there are signs of its existence in all ancient cultures
such as Mesopotamia, Greece, Egypt, Rome, UK, and India.

Arthashastra by Kautilya detailed rules for accounting and auditing of public finances.

In olden days the key purpose of audits was to gain information about the financial system
and records of the business.

However, recently auditing has begun to include non-financial subject areas such as safety,
security, information system performance and environmental concerns.

With the non-profit organization and government agencies, there has been an increasing
need for performing an audit, examining their success in satisfying mission objectives of the
business.

AUDITING ORIGIN AND EVOLUTION

The auditing origin can be traced back to the 18th century, when the practice of large scale
production developed as a result of the Industrial Revolution.

Systems of checks and counter checks were implemented to maintain public accounts as
early as the days of ancient Egyptians, Greeks and Romans.

The last decade of the 15th century was a crucial period during which a great impetus was
given to trade and commerce by Renaissance in Italy, and the principles of double entry
bookkeeping were evolved and published in 1494 at Venice in Italy by Luca Paciolo.

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This system of accounts was quite capable of recording all types of mercantile transactions.

The Industrial Revolution of England was another landmark in the history of trade and
commerce.

The industrial revolution led to a significant expansion in the volume of trading transactions
which compelled the use of more money, and the ordinary trader was enforced to combine
with the partnership with others.

Consequently, a big enterprise was framed in the form of partnership firms and joint-stock
companies.

This growth of business enterprises before and after the revolution accompanied an
improved accounting system.

Besides British Companies made stockholders realize that an independent and impartial
audit could well protect their interest.

Such developments had a direct effect on the evolution of the practice of auditing, but the
audit of business accounts could not be standard until the 19th century.

A Royal Charter incorporated the Institute of Chartered Accountants in England and Wales
on May 11, 1880. The key purpose of this incorporation was to prepare Auditors.

In January 1923, the British Association of Accountants and Auditors got established, and a
person could be fully competent to work as a professional auditor after clearing this exam.

MEANING OF AUDITING

Auditing is a systematic examination of the books and records of a business or other

organization to ascertain or verify and report upon the facts regarding its financial
operations and the results thereof.

Auditing is concerned with verifying accounting data by determining the accuracy and
reliability of accounting statements and reports.

The Report of the Committee on Basic Auditing Concepts of the American Accounting
Association (AAA) defines,

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding

assertions about economic actions and events to ascertain the degree of correspondence
between those assertions and established criteria and communicate the results to
interested users.

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The audit is one of the most dynamic areas of the accounting sciences.

The word “audit” has Latin origins (audire, means listening). This word has known many
definitions and classifications during this time. Generally, it is a synonym to control, check,
inspect, and revise.

While accounting has suffered a little change in time, the audit has permanently evolved,
answering to the environmental changes and modifying its objectives starting the middle
age, passing through the industrial revolution up to the 21st century.

Companies prepare financial statements of their activities, which represent their overall
performance. These financial statements are examined and evaluated by independent
persons, who assess them according to the industry’s generally accepted standards.

DEFINITION OF AUDITING
1. According to general guidelines on internal Auditing issued by ICAI, auditing is
defined as a

Systematic and independent examination of data, statements, records, operations and

performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing
situation, the auditor receives and recognizes the propositions before him for examination,
collects evidence, evaluates the same and on this basis, formulates his judgement which is
communicated through his Audit Report.
ICAI
The above definitions of auditing have certain important elements. They are:

1. Independence: The auditor has to express an opinion on the financial statements

examined by him. Therefore, the auditor should be free from any interest which
might detract his objectivity.

2. Auditor’s opinion: The auditor has to express an opinion on the financial

statements examined in the form of an audit report. The audit report is an
expression of opinion rather than a statement of verified facts.

3. Financial statements: The financial statements comprise of Balance Sheet, Profit

and Loss Account, notes and other statements, which collectively are intended to
give a proper understanding of the financial position. The auditor has to express
an opinion on the financial statements.
These three elements are contained in any kind of audit, whether profit-oriented or not and
irrespective of its size or legal form.

2. Montgomery defines the term as “Auditing is a systematic examination of books and

records of a business or other organization in order to ascertain or verify and to
report upon the facts regarding its financial operations and the result thereof”.

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3. Spicer and Pegler defines auditing as, “such an examination of books of accounts
and vouchers of a business as will enable the auditor to satisfy the Balance Sheet is
properly drawn up so as to give a true and fair view of the state of affairs of the
business, whether the Profit and Loss account gives a true and fair view of the profit
and loss for the financial period, according to the best of his information and
explanation given to him as shown by the books, and if not, in what respect he is not
satisfied.”

SCOPE OF AUDIT
 Scope: An auditor will be determined the scope of an audit of financial
statements with regards to –
a) The terms of the engagements
b) The pronouncements of ICAI
c) The requirements of relevant legislation

 Coverage of work: The auditor should be organized to cover all operational

aspects relevant to the financial statements. He has to make study & evaluate the
accounting system & internal controls on which auditor wishes to rely.

 Disclosure: Auditor should ensure whether all relevant information is properly

disclosed in financial statements & as per statutory requirement. The disclosure
requirement can be verified by performing-
– Financial statement analysis
– Evaluation of accounting policies

 Judgment: Absolute certainty is not attainable in auditing because of the need to

exercise judgment. The auditor is also required to examine the reasonableness of
judgment.

 Materiality: Material items are those, which might influence the decision of the
users of financial statements. The auditor should exercise his professional
experience & judgment with material items.

 Technical aspects: Auditor is not expected to perform duties, which fall outside
the scope of his competence. The auditor is not an expert in all fields. So, an
auditor can take the advice of an expert for technical work.

OBJECTIVES OF AUDITING

The objective of an audit is to express an opinion on financial statements.

The auditor has to verify the financial statements and books of accounts to certify
the truth and fairness of the financial position and operating results of the business.
Therefore, the objectives of audit are categorized as primary or main objectives and
secondary objectives.

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PRIMARY OBJECTIVES
The primary or main objective of audit is as follows:

1. To Examine the Accuracy of the Books of Accounts

An auditor has to examine the accuracy of the books of accounts, vouchers and other
records to certify that Profit and Loss Account discloses a true and fair view of profit or loss
for the financial period and the Balance Sheet on a given date is properly drawn up to exhibit
a true and fair view of the state of affairs of the business. Therefore the auditor should
undertake the following steps:
· Verify the arithmetical accuracy of the books of accounts.
· Verify the existence and value of assets and liabilities of the companies.

· Verify whether all the statutory requirements on maintaining the book of accounts has
been complied with.

Meaning of Books of Accounts

· Books of Accounts mean the financial records maintained by a business concern for a
period of one year. The period of one year can be either calendar year i.e., from 1st January
to 31st December or financial year i.e., from 1st April to 31st March. Usually, business
concerns adopt financial year for accounting all business transactions.

· Books of accounts include the following: ledgers, subsidary books, cash and other
account books either in the written form or through print outs or through electronic storage
devices.

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2. To Express Opinion on Financial Statements

After verifying the accuracy of the books of accounts, the auditor should express his expert
opinion on the truthfulness and fairness of the financial statements. Finally, the auditor
should certify that the Profit and Loss Account and Balance Sheet represent a true and fair
view of the state of affairs of the company for a particular period.
Meaning of Financial Statement
Financial Statement means the statements prepared at the end of the year
taking into account the business activities that took place for a year, for example,
transactions that takes place in a business concern from 1st April to 31st March.
Components of Financial Statement
Financial Statement includes the following:
· Trading and Profit and Loss Account, and
· Balance Sheet.

Elements of Financial Statements include the following:

· Assets: Assets include cash and bank balance, value of closing stock, debtors, bills
receivable, investments, fixed assets, prepaid expenses and accrued income.
· Liabilities: Liabilities include capital, profit and loss balance, creditors, bills payable,
outstanding expenses and income received in advance.
· Revenue: Revenue includes sales, collection from debtors, rent received, dividend,
interest received and other incomes received.
· Expenditure: Expenditure includes purchases, payment to creditors, manufacturing
and trade expenses, office expenses, selling and distribution expenses, interest and dividend
paid.

SECONDARY OBJECTIVES
The secondary objectives of audit are: (1) Detection and Prevention of Errors, and (2)
Detection and Prevention of Frauds.
Detection And Prevention of Errors

The Institute of Chartered Accountants of India defines an error as, “an unintentional
mistake in the books of accounts.” Errors are the carelessness on the part of the person
preparing the books of accounts or committing mistakes in the process of keeping accounting
records. Errors which take place in the books of accounts and the duty of an auditor to locate
such errors are discussed below:

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1. CLERICAL ERROR
Errors that are committed in posting, totalling and balancing of accounts are called as Clerical
Errors. These errors may or may not affect the agreement of the Trial Balance.

Types of Clerical Errors:

(A) Errors of Omission:

When a transaction is not recorded or partially recorded in the books of account is known as
Errors of Omission. Usually, it arises due to the mistake of clerks. Error of omission can occur
due to complete omission or partial omission.
(1) Error of Complete Omission: When a transaction is totally or completely omitted to be
recorded in the books it is called as “Error of Complete Omission”. It will not affect the
agreement of the Trial Balance and hence it is difficult to detect such errors.
Example – 1: Goods purchased on credit from Mr. X on 10.5.2016 for Rs. 20,500, not recorded
in Purchases Book.
Example – 2: Goods sold for cash to Ram for Rs. 10,000 on 1.7.2016, not recorded in Cash
Book.
(2) Errors of Partial Omission: When a transaction is partly recorded, it is called as “Error of
Partial Omission”. Such kind of errors can be detected easily as it will affect the agreement of
the Trial Balance.
Example – 1: Credit purchase from Mr.C for Rs. 45,000 on 10.12.2016, is entered in the
Purchases Book but not posted in Mr.C’s account.
Example – 2: Cash book total of Rs. 1,10,100 in Page 5 is not carried forward to next page.
(B) Errors of Commission:
Errors which are not supposed to be committed or done by carelessness is called as
Error of Commission. Such errors arise in the following ways:

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(1) Error of Recording

(2) Error of Posting
(3) Error of casting, or Error of Carry-forward.
(1) Error of Recording: The error arises when any transaction is incorrectly recorded in the
books of original entry. This error does not affect the Trial Balance.
Example – 1: Goods purchased from Shyam for Rs. 1000 wrongly recorded in Purchases Day
Book as Rs. 100.
Example – 2: Goods purchased from Ram for Rs. 1,000, instead of entering in Purchase Day
Book wrongly entered in Sales Day Book.
(2) Error of Posting: The error arises when a transaction is correctly journalised but wrongly
posted in ledger account.
Example – 1: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted to debit side
of Repairs account instead of debit side of Rent account.
Example – 2: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted to credit side
of Rent account instead of debit side of Rent account.
(3) Error of casting, or Error of Carry-forward: The error arises when a mistake is committed
in carrying forward a total of one page on the next page. This error affects the Trial Balace.
Example – 1: Purchases Book is totalled as Rs. 10,000 instead of 1,000.
Example – 2: Total of Purchases Book is carried forward as Rs. 1,000 instead of Rs. 100.

2. ERROR OF DUPLICATION
Errors of duplication arise when an entry in a book of original entry has been made twice and
has also been posted twice. These errors do not affect the agreement of trial balance, hence
it can’t located easily.
Example: Amount paid to Anbu, a creditor on 1.10.2016 for Rs. 75,000 wrongly accounted
twice to Anbu’s account.

3. ERROR OF COMPENSATION (or) COMPENSATING ERRORS

When one error on debit side is compensated by another entry on credit side to the same
extent is called as Compensating Error. They are also called as Off-setting Errors. These errors
do not affect the agreement of trial balance and hence it cannot be located.
Example: A’s account which was to be debited for Rs. 5,000 was credited as Rs. 5,000 and
similarly B’s account which was to be credited for Rs. 5,000 was debited for Rs. 5,000.

4. ERROR OF PRINCIPLES
An error of principle occurs when the generally accepted principles of accounting are not
followed while recording the transactions in the books of account. These errors may be due

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to lack of knowledge on accounting principles and concepts. Errors of principle do not affect
the trial balance and hence it is very difficult for an auditor to locate such type of errors.
Example – 1: Repairs to Office Building for Rs. 32,000, instead of debiting to repairs account
is wrongly debited to building account.
Example – 2: Freight charges of Rs. 3,000 paid for a new machinery, instead of debiting to
Machinery account wrongly debited to Freight account.
Detection and Prevention of Frauds
Fraud is the intentional or wilful misrepresentation of transactions in the books of accounts
by the dishonest employees to deceive somebody. Thus, detection and prevention of fraud is
of great importance and constituents an important duty of an auditor. Fraud can be classified
as:

MISAPPROPRIATION OF CASH
This is a very common method of misappropriation of cash by the dishonest employees by
giving false representation in the books of accounts intentionally. In order to detect and
prevent misappropriation, the auditor should verify the system of internal check in operation
and by making a detailed examination of records and documents. Cash may be
misappropriated in the following ways:
(1) By omitting to enter cash which has been received.
Example: Cash received on account of cash sales for Rs. 35,000 is not accounted in the debit
side of the cash book.
(2) By accounting less amount on the receipt side of cash book than the actual amount
received.
Example: Cash received on account of cash sales for Rs. 35,000 is accounted in the debit side
of the cash book as Rs. 25,000. The difference of Rs. 10,000 may be defrauded by the cashier.

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(3) By recording fictitious entries on the payment side of cash book.

Example: Cash book is credited for Rs. 44,000 as amount paid to Mr X for goods purchased
on credit but actually no amount is paid. Hence, cashier misappropriates Rs. 44,000 of cash
as paid to Mr X.

(4) By accounting more amount on payments side of cash book than the actual amount paid.
Example: Amount paid to Gopal for Rs. 5,000 is accounted on the credit side of cash book
as Rs. 15,000. The difference of Rs. 10,000 may be defrauded by the cashier.

(5) Teeming and Lading of Fraud which means cash received from one customer is
misappropriated and remittance received from another debtor is posted to the first debtor’s
account.
2. MISAPPROPRIATION OF GOODS
Fraud which takes places in respect of goods is Misappropriation of Goods. Such a type
of fraud is difficult to detect and usually takes place where the goods are less bulky and are
of high value.
· By showing less amount of purchase than actual purchase in the books of accounts.

· By showing issue of material more than actual issue made.

· By showing good materials as obsolete or poor line of goods.

· By showing fictitious entries in the books of accounts.

Example – 1: Goods purchased amounting to Rs. 58,000 is wrongly accounted in Purchases
Book as Rs. 50,000. Hence, showing a smaller number of purchases than the actual and
misappropriating goods worth Rs. 8,000.
Example – 2: Goods issued from stores for 1000 units is wrongly accounted in the Ledger
accounts as 3000 units issued. The difference of 2000 units may be misappropriated by the
storeskeeper.
Example – 3: Entries in the Purchases Book may be suppressed or inflated to show more or
less profit.

Detection of Misappropriation of goods is a difficult task for an Auditor. Only through efficient
system of inventory control, periodical stock verification, internal check system and adequate
security arrangement the scope for such frauds can be eliminated or minimized.
Auditor has to thoroughly scrutinize the inward and outward registers, invoices, sales memos,
audit notes, etc., to detect the goods-related frauds.

3. MANIPULATION OF ACCOUNTS
There is a very common practice almost in every organization, some dishonest employees
have intention to commit this type of fraud. Manipulation of accounts is the procedure to

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alter books of accounts in such a way that there will be an increase or decrease in the amount
of profit to achieve some personal objectives of the high officials. It is very difficult for the
auditors to identify such frauds which may be due to manipulation of accounts.

Causes of Manipulation of Accounts

· There are different reasons for manipulation of accounts. The reasons are:

· To get more commission calculated on profit

· For evasion of income tax and sales tax

· To get huge loan from financial institutions by showing more profit in the books of
accounts.
· To declare more dividend to the shareholders.
· By showing more profit than actual to get confidence of the shareholders.
· To make secret reserves by showing less income or by showing more expenses in the
books of accounts.
Ways of Manipulation of Accounts
Manipulation of accounts may be made in the following ways:
· By showing more or less amount on fixed assets,

· By showing over valuation or under valuation of stock,

· Over or under valuation of liabilities,
· Creation of over or under provision for depreciation,
· Charging capital expenditure as revenue expenditure or vice versa,
· By making more or less provision for bad debts and for outstanding liabilities,

· By showing advance income or expenditure in the current year accounts.

Objectives of Manipulation of Accounts

The objectives of Manipulation may be window dressing or creation of secret reserves.
Window Dressing: In window dressing, accounts are manipulated in such a manner to reveal
a much better and sound financial position of the business than what actually it is, in order to
mislead the outsiders by inflating the profit.
Secret Reserves: Accounts are prepared in such a manner that they disclose a worse financial
position than the real. The real picture of the business is concealed and a distorted one is
revealed.

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BOOK-KEEPING, ACCOUNTANCY AND AUDITING

Book-Keeping is the art of recording the business transactions in the books of original
entry. It involves the process of recording all the transactions, journalising, posting to the
relevant ledger accounts and balancing.
Accountancy involves the process of recording, classifying, summarising and interpreting all
the financial transactions that take place during a particular period in a concern. It is the work
of an accountant in maintaining financial books, checking of numerical accuracy of the books
of accounts, preparation of trial balance, trading account, profit and loss account and balance
sheet. Hence, it is commonly said “Accountancy begins where Book-keeping ends”.
Auditing involves a detailed and critical examination and verification of accounts by an
independent and qualified person to ascertain the true and fair view of the financial position
of the concern. For example, after verification the auditor has to submit a report to the
management that the financial statement represents a true and fair view of the statement of
affairs of the business. Hence, it is said “Auditing begins where Accountancy ends”.

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The duty of an auditor with regard to the detection and prevention of fraud and error has
been a matter of discussion for a long time. It has been laid down by several legal decisions
and has been considered in many professional pronouncements. In this blog, we are going
to throw light on some of these decisions and discuss the meaning of the famous quote
“Auditor is a watchdog, not a bloodhound”.

THE LEGAL PERSPECTIVE ON “AUDITOR IS A WATCHDOG, NOT A BLOODHOUND”

In the last century, the way an auditor’s duty is perceived with regard to the detection and
prevention of fraud and error has undergone many changes. Initially, it was more to do with
the decision given in the Kingston Cotton Mills Co. case (1896). In that case, the learned
Judge Lopes categorically defined an auditor’s duty by stating that an auditor is a watchdog,
but not a bloodhound. Unless doubtful situations are there, the auditor is totally justified in
relying upon the management/employees of his client.

An auditor is not expected to act as a detective or approach his or her work with undue
suspicion or having preconceived notions in mind. He is not a bloodhound, but he is a
watchdog. This statement means the following:

 In the case of a limited company, an auditor is appointed by the company’s

shareholders. He is expected to work on their behalf in the role of a watchdog and
should look after their best interests.
 Unlike a bloodhound, the auditor’s main duty is towards verification of the client’s
books rather than detection. During the course of his audit, if he finds something
suspicious, he should extend his audit procedures to examine the matter in detail
and should communicate the same to the shareholders. However, in the absence of
any such suspicious circumstances, he is completely justified in relying upon the
representations made by the client’s staff and management. When it comes to fraud
and error, he has to exercise reasonable care only.

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Later, in the case of Westminster Road Construction and Engineering Co. (1932), it was
pointed out that an auditor should adopt necessary audit procedures to confirm the facts
stated through management representations. Hence, it broadened the scope of an auditor’s
duty with regard to the detection and prevention of fraud and error and provided stricter
norms to be followed while exercising reasonable care.

Further, in some other cases, this scope was all the more extended to include the auditor’s
accountability not only towards shareholders but also towards third parties provided that
his negligence is proved. This means that in case an auditor is found negligible and fails to
detect misstatements that he could have easily found had he exercised due care, he shall be
held accountable. Since auditors play a major role in enhancing the creditability of financial
statements, they are under societal pressure to take more responsibility for fraud detection.
Hence, for the first time in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963),
the liability of auditors towards third parties was recognized. Also, a similar decision was
taken in Caparo’s case (1990) wherein the principle of the auditor’s duty towards third
parties was acknowledged in case he is found negligent to detect and prevent fraud and
error.

PROFESSIONAL PERSPECTIVE

SA 240 entitled “The Auditor’s Responsibility to Consider Fraud and Error in an Audit of
Financial Statements” gives guidance on what ought to be the responsibility of an auditor
for identifying fraud and error and reporting on them.

According to SA 240, an auditor conducts a financial audit of an entity in order to obtain a

reasonable assurance (and not absolute assurance) that its financials are free from any
fraud/error and material misstatements.

In addition, the auditor must approach the work with a certain degree of professional
skepticism. He must always be alert to any signs of misstatement. If there are any doubtful
situations, the auditor should extend his procedures to confirm or dispel that doubt.

When a misstatement is identified, the auditor has to evaluate whether such misstatement
is indicative of fraud or not. He has to also consider whether the representations given by
management in this regard are satisfactory or not. He should look for situations that may
indicate fraud involving management, employees, or third parties. The possibility of such
fraud and its implications for the audit must be evaluated well. However, it should be noted
that he is not responsible for the subsequent discovery of frauds as long as he undertakes
adequate audit procedures.

The auditor is liable for failure to detect fraud only when such failure is substantially due
to a lack of reasonable care and skill being exercised on his part.

Status of the auditor: “Auditor is a watchdog, not a bloodhound”

The point now arises as to what an auditor’s true status in a corporation is. Clearly, an
auditor has legal standing. To put it another way, a company auditor is a statutory auditor

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since he is appointed strictly according to the law’s regulations. The following principles
determine the status of an auditor in a company:

An agent: The auditor is an agent of the company’s members assigned to execute tasks
outlined in (a) the Companies Act, (b) the company’s Articles of Association, and (c) the
audit engagement between the auditor and the client.

Not an advisor: An auditor is not a company advisor. It is not his responsibility to advise the
board of directors or the shareholders.

Not a detective: An auditor is neither a detective nor a company employee. He (the auditor)
is a watchdog, not a bloodhound. He does not need to be overly suspicious in his work.

Not to discover frauds: It is not the auditor’s responsibility to uncover scams that have been
carefully planned and committed. He can rely on the honesty of the company’s employees,
who have a high level of trust in the organization.

Not to guarantee: The opinion of an auditor on the financial statements of the company
does not imply an inherent assurance of correctness of books of accounts.

An officer: Although an auditor is not an employee of a company, he is treated as an official

of the company under many provisions of the Companies Act.

Final thoughts

By combining the above legal and professional perspectives, it can be seen that the auditor’s
roles and responsibilities have been extended and made stricter over time. He is required to
maintain an attitude of professional skepticism at all times, should confirm the
representations made by management, and remain alert to any signs of misstatement.

Also, even though he is not needed to provide absolute assurance, it is his duty to exercise
all reasonable care to ensure that the financial statements are free from fraud. But unless
he has been negligent in his approach, he can’t be held liable for non-detection of
misstatements.

AUDIT PROCESS

INTRODUCTION

Audit process usually starts from the appointment of auditors until the issuance of the audit
report as shown in the audit process flowchart. As auditors, we usually need to follow many
audit steps before we can issue the audit report.

However, those audit steps can be categorized into the main stages of audit, including the
planning stage, audit evidence-gathering stage, and completion stage which is the final
stage of audit where we can issue the report.

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Audit Process Flowchart

Below is the audit process flowchart that shows an overview of auditing and the
main stages of audit.

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To make it easy we can make a summary which follows the audit process flowchart
above as in the table below:

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Summary of Audit Process

This is the first step in the audit process flowchart above where we, as
1. Appointment auditors, are appointed to perform the audit work on the client’s financial
statements.

After being appointed as auditors, we can start the initial planning of the
2. Plan the audit audit. This may include evaluating compliance and ethical matters as well as
forming appropriate audit team members.

This is where we obtain an understanding of the client’s business and

3. Understand controls environment. While obtaining an understanding of the client in this
client stage of audit process, we also need to identify any risks that the client’s
accounts expose to.

In this step of audit process flowchart, we assess the risk of material

misstatement that can occur on the client’s financial statements. This step
4. Risk
also includes how we respond to the assessed risk, e.g. we will perform the
assessment
test of controls or go directly to substantive audit procedures by ticking the
control risk as high.

This where we perform the test of controls to support our assessment of

internal controls. However, we only perform this type of test if we believe the
client’s internal controls can reduce the risk of material misstatement; and
5. Test of
we intend to rely on internal controls to reduce our substantive procedures.
controls
If we assess that the internal controls are ineffective, we will go directly to
substantive procedures.

This step of audit process flowchart is where we gather audit evidence by

6. Substantive
testing various audit assertions of the client’s accounts. Substantive audit
audit procedures
procedures include substantive analytical procedures and tests of details.

After we have obtained sufficient appropriate audit evidence, we will

7. Overall review perform an overall review of financial statements before we express our
of financial opinion. This is to see if the financial statement as a whole looks reasonable
statements and is in conjunction with the conclusion drawn from other audit evidence
obtained.

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This is the final audit process where we issue the audit report by giving our
opinion on financial statements. Usually, we give an unqualified or clean
opinion as most of the time the audit adjustment is usually made if there’s
8. Audit report
any material misstatement.
However, sometimes other audit opinions such as qualified opinion, adverse
opinion, or disclaimer of opinion may be given instead.

For the report of internal control weaknesses which shows in the audit process
flowchart, we do not include in this summary of audit process. This is due to this type
of report is not the audit report and it’s not the main objective of our audit.

Though, we will issue this report when we found that internal controls are ineffective
to prevent or detect material misstatement, either during the risk assessment or
after the test of controls. This way, it can add more value to the client as they can
make more improvements in the internal control to prevent or detect the risk of
error or fraud.

AUDIT PROGRAMME

MEANING
An audit programme is a detailed, written statement designed by the auditor
indicating the work to be performed by the audit assistants, specifying the time
limit for completion of work, instructions and guidance to the audit staff. In
short, it is a tool for planning, directing and controlling the audit work.

An audit programme is a detailed plan of the auditing work to be performed. It

specifies the procedures to be followed in the conduct of audit more efficiently.
The auditor outlines the whole procedure of audit from beginning till the
finalization of audit report. Audit programme is generally contained in the audit
notebook.

Definition

Prof. Meigs defines an audit programme as, “an audit programme is a detailed
plan of the auditing work to be performed, specifying the procedures to be
followed in verification of each item and the financial statements and giving the
estimated time required.”

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Features (or) Characteristics of an Audit Programme

The features of an audit programme may be of the following:

1. It is a set of procedures to be adopted to conduct the audit more
efficiently.
2. It is a written scheme designed by the auditor.
3. It is a blue print of the audit work.
4. It facilitates delegation of work, based on the capabilities of audit staff.
5. It acts as evidence in future for the audit work being performed.
6. It specifies the work to be done by the audit staff, the manner and time
limit for completion of the work.

Objectives of Audit Programme

The following are the objectives of audit programme:
1. To provide clear instructions to the audit assistants specifying the nature of
work to be performed and fixing the time span for completion of each work.
2. To facilitate coordination among various parts of audit work.
3. To ensure uniformity in the performance of audit work and to avoid
duplication and repetition of work.
4. To attain a fair allocation of work among audit team.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future.
7. To serve as evidence in future showing the date of completion of audit work,
methods or procedures undertaken, persons involved in completion of audit work
etc.

Contents of an Audit Programme

The following are the details of an audit programme:
1. Name of the client.
2. Nature of operations and business of client.
3. Review of system of internal check.
4. Date of commencement of audit work.
5. Duration of audit work.
6. Accounting system followed in client organization.
7. Review the report of the previous auditor.

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8. Review the remarks, instructions or objections raised in the previous audit

report.
9. Examine the various ledger accounts and subsidiary books.
10. Examine the statutory books and registers, profit and loss account, and
balance sheet.

Advantages of an Audit Programme

An audit programme can give the following advantages:

1. Helps in Estimation and Division of Work: Audit Programme helps

in estimating the quantum of audit work in advance and also helps in dividing the
work among the audit assistants based on their capabilities.

2. Helps in Fixation of Responsibility: It enables to fix responsibility on the

audit assistants by clearly defining the scope of work.

3. Helps in Future Planning: Audit programme serves as a basis for planning

the audit work for subsequent year.

4. Serves as a Guide: It serves as a valuable guide for the audit staff in

execution of the audit work for succeeding years.

5. Valuable Evidence: It serves as evidence for the work done as initials of

those who have done the particular work are appended to it. The auditor can
produce the audit programme as a proof when a charge of negligence being
brought upon him.

6. Uniformity: It provides for uniformity in audit work as the same work will
be done every year.

7. Continuity: When an audit staff goes on leave others can continue the work
by referring to the audit programme, hence, audit programme provides for
continuity of work.

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8. Coordination: If facilitates coordination and helps in supervising the work

of the audit staff.

Disadvantages of an Audit Programme

The disadvantages that may be experienced by conducting audit as per

predetermined audit programme are -

1. Mechancial: When audit work is conducted mechanically every year based on

the audit programme, it causes monotony and boredom to the auditor and audit
staffs.
2. No Quality in Work: The audit staff will be more interested to complete the
work in time rather than to maintain any standard in the work.

3. Loss of Initiative: Audit staff cannot take their own decisions and they are
compelled to comply with the audit programme. Hence, an efficient audit clerk
loses his initiative and interest as he cannot make any suggestions.

4. Rigidity: A rigid and inflexible audit programme cannot be laid for all types
of business. During the course of audit, new areas to be verified may come to the
notice of the audit staff. Unless the audit programme is revised, such areas may
escape from auditing.

5. Shelter for Inefficient Staff: Inefficient audit staffs conceal their mistakes or
weakness on the basis of audit programme. Hence, it provides shelter for
inefficient audit staff.

6. Unsuitable: Pre-determined audit programme is not suitable for small

business organizations.

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