Sl Particulars

1 Introduction
2 Process flow from Transactions & Events to Audit Report
3 Audit Risk
4 Audit Assertions
5 Audit Procedures
6 Materiality
7 Audit procedures for Items of Financial Statements
8 Audit Report
Content
Meaning ,Abbrevations
Flow chart
Meaning ,Types
Types ,Meaning ,Examples ,Purpose
Types ,Audit Tools
Meaning
Audit procedures for each Items of Financial Statements Refer Audit Working Templates for each items of FS
Types
r each items of FS
 Auditing Meaning Abbrevia
An Audit is an independent examination of financial information MM
of any entity ,whether profit oriented or not ,irrespective of its size or legal form F/E
with a view to express an opinion on true & fairness of Financial statements TRN
P&D
FS
AFRFW
DCP
IC
APRs
MNGT
S&AE
T&F
 Abbreviations
Material Misstatements
Fraud/Error
Transactions & Events T/E
Presentation & Disclosure
Financial Statements
Applicable Financial Reporting FrameWork
Detect,Correct,Prevent
Internal Controls
Audit Procedures
Management
Sufficient & Appropriate Audit Evidence
True & Fair
 Process Flow from T/E to Audit Report

T/E

Accounting

Responsibility of MNGT to prepare FS using ASSERTIONS

Auditor will perform Audit by applying APRs

Auditor obtaining S&AE on T&F of FS

Auditor Reaches to a conclusion based on AE, whether to issue

Modified / Unmodified opinion

Adjustment Entries

Audit Report
Audit Risk

Risk faced by the auditor by issue of inappropriate audit opinion when FS having MM
Meaning i.e, Auditor issuing unmodified opining in FS having MM

1.Inherent Risk (IR)

Types 2.Control Risk (CR)
3.Detection Risk (DR)

It is a Risk of MM due to F/E at TRN / Account balance /P&D levels in FS when there
1.Inherent Risk
are no Adequate Internal Controls in the Company

1.Controls Exists in the Company ,But Auditor Unable to DCP the MM due to F/E .
2.Control risk
2.It Arises due to ineffeciency operations of IC

1.It is a failure on part of auditor in DCP of MS due to F/E

3.Detection Risk
2.It arises to lack of knowledge & applying inappropriate APR

1. Audit Risk = ( IR * CR ) * DR
Conclusion
2. It is Inverse relation ship between( IR ,CR ) and DR
Audit Assertions

1.Assertion basic meaning

2.Definition

3.In simple words

4.Example

5.Purpose

6.Types of Assertions
To state a Fact / Belief confidently
(eg : Co asserts that it has accounted all material items in books,it means Co is stating the fact & beliving
confidently that it has Accounted all material items in books )

Audit Assertions are Implicit / Explict claims & Representations made by MNGT Responsible for prep of
FS regarding the appropriateness as the various elements of FS & Disclosures

In preparing FS ,MNGT is making direct/indirect claims (Asserting)

Regarding the RECOG,Measurement ,P&D of A,L,I,E as per AFRFW

BS of ABC Ltd shows that buildings withh carrying amount of 10 lakhs

Here Auditor shall assume that MNGT has claimed (assert) that ;
a) Building Recognised in BS that EXIST the period end
b) Entity Owns/Controls those buildings
c)buildings are valued Accurately in accordance with measurement basis
d)All building owned & controlled by entity are INCLUDED within the carrying amount of 10 lakhs

a)Auditor will Perform Audit procedures to satsify the assertions made by MNGT
a)Assertion assist the auditor in considering wide range of issues that are relevant to quality of FS
b)It helps for Auditor to reduce AUDIT RISK

Types
Ref/Types of assertions sheet
Audit Assertions

Types
Transaction level Account balances level
Occurrence Existence
Completness Rights & Obligations
Accuracy Completness
period Cutoff Valuation
Classification

Meaning : T&E that have been recorded have actually occurred relating to the entity
(A).Occurrence Eg-Transaction Level : A ltd recorded Sale TRN of 1 lakh with Inv no 01 for Sale of laptop to B ltd
Here MNGT is asserting that sale has been Actually Occurred during that period

Meaning: All T/E that should have been recorded have been recorded
Eg-Transaction level : Ram ltd have recorded 5000 transactions relating to purchases in FY
Here MNGT is asserting that all the purchases happened during the year have been recorded,not even one
Eg-Acc Bal Level: Co BS has stated 200 no of computer assets are owned in Fy
(B).Completness Here the co is asserting that All the computers has been accounted ,not even one asset is missed
Eg-P&D Level: Co has disclosed in notes to accounts that it has done 20 transactions with related parties in
Here the co is asserting that total no of transactions are 20 and all has been disclosed in notes,not even one

(C)Accuracy
Meaning T/E has been appropriately recorded in books i.e, all the amounts ,information has correctly reco
Examples
Co has recorded a salary of 70,000
Here the company is asserting that the salary paid to employee has beed calculated correctly after deductin
etc.. & the same is accounted
1.Transaction level
Co FS has disclosed Outstanding loan of 10 lakhs & Interest on it is 20000 to a bank
here the company is asserting that the loan amount is correct ,it is ap per bank statement ,interest is calcula
with corret interest rate & period
2.P&D level

(e)Classificaton
Meaning T/E has been properly classified in FS
c
 Types
P&D level
Accuracy & Valuation
Completeness
Classification
Occurence And Rights & Obligations

curred relating to the entity

h with Inv no 01 for Sale of laptop to B ltd
urred during that period

been recorded
actions relating to purchases in FY
during the year have been recorded,not even one TRN is missed
ssets are owned in Fy
accounted ,not even one asset is missed
t it has done 20 transactions with related parties in FY
0 and all has been disclosed in notes,not even one trn is missed

i.e, all the amounts ,information has correctly recorded

ployee has beed calculated correctly after deducting pf,esi,lop

est on it is 20000 to a bank

rrect ,it is ap per bank statement ,interest is calculated correctly

on
properly classified in FS
Audt Procedures

(A)Risk Assessment procedures

Audit procedures performed to obtain an understanding of the entity and its
environment, including the entity’s internal control, to identify and assess the
Meaning risks of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels

In simple It is the procedures to identify risky areas where there can be fraud Or errors
1.It is the first procedure which is performed after the engagement at the time
of Understanding of the business
2.It gives the result of risky areas where Auditor need to perform additional
audit procedures to reduce the Audit risk
3.It gives the result where the controls are weak and helps in performing Test
of controls
Other points

Legal & Consultancy expenses ,Rates & taxes are the risky areas

Incase of legal charges paid to Advocate ,After examining the report given by
the advocate ,it states that company Is going to loose the case ,It means the
company has done some thing wrong ,which increases the Audit risk

Similarly Rates & taxes include penalty,late fee for PF,ESI,PT etc...It means
company is not depositing the statutory dues payable regularly ,& not
Eg complying with the law

(B) Test of Controls (Compiance Procedures)

Audit procedures performed by Auditor to ensure Whether Internal Controls
Meaning placed in company are Operating Efficiently & Effectively
1.Risk assessment procedure provide the Auditor at which Area Auditor need
to Check the controls
2.Those controls are examined in Compliance procedure
3.These Controls are examined in Key Items Testing(in Test of Details)
4.Test of items in P&L is known as Vouching & Balance sheet Item known as
Verification
Other points
 Risk assessment procedure reveals that there is drastic decrease in employee
benfit expenses compare to previous years

Here Auditor need to examine the Controls regarding the Employees ,These
controls include examining HR policies & procedures,Proper biometric
attendance is there or not,etc...
Eg

( C ) Test of Details
Meaning Audit procedures performed to examining the Items of P&L ,B/S Items
It includes Examing the Transactions & events,Account balances by examining
the Documentary evidence
Other Points
Transaction of sale which accounted in books are verified with physical
documents like Invoices,Agreements,supporting documents etc…
Eg

( D ) Analytical procedures
Audit procedures performed for examining the Financial information by using
Meaning Financial Data & Non Financial data through observation of
Ratio,Trends,Comparability ectc…
Other points In simple words,It is Analysis part in auditing
1.Sales of a company has grown 200 % compare to previous year.
Here auditor has to analyse why & how there is drastic change in sales

2.Auditor of company has to verify total wages paid by company having

factories in various states
Eg Here auditor can verify by analyzing the relation ship between Wage per
worker and total no of employees (Total wages = Wages per worker * Total no
of workers )
Wage per worker is financial information & No of workers is non financial
information
 n understanding of the entity and its
rnal control, to identify and assess the
due to fraud or error, at the financial

as where there can be fraud Or errors

med after the engagement at the time

Auditor need to perform additional

k
re weak and helps in performing Test

taxes are the risky areas

,After examining the report given by

oing to loose the case ,It means the
which increases the Audit risk

ate fee for PF,ESI,PT etc...It means

dues payable regularly ,& not

ures)
r to ensure Whether Internal Controls
ntly & Effectively
e Auditor at which Area Auditor need

iance procedure
ems Testing(in Test of Details)
hing & Balance sheet Item known as
 here is drastic decrease in employee
ars

rols regarding the Employees ,These

& procedures,Proper biometric

ng the Items of P&L ,B/S Items

events,Account balances by examining

books are verified with physical

pporting documents etc…

ing the Financial information by using

ough observation of

diting
ompare to previous year.
there is drastic change in sales

wages paid by company having

e relation ship between Wage per

wages = Wages per worker * Total no

n & No of workers is non financial

Audit Tools

Meaning Audit tools are those which helps in performing Audit procedures & to obtain Audit evidence
1.Inspection
2.Observation
3.External confirmation
4.Recalculation
5.Reperfoemance
6.Inquiry
Types

( 1 ) Inspection
It Involves examining records or documents, whether internal or external, in paper form,
Meaning electronic form, or other media, or a physical examination of an asset.
Eg Examining Invoices,Agreements,Title deeds,Certificates,Mail approvals …etc

( 2 ) Observation
Meaning Observation consists of looking at a process or procedure being performed by others.
The auditor’s observation of inventory counting by the entity’s personnel, or of the performance
Eg of control activities.

( 3 ) External Confirmation
An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic
or other medium
Meaning
Eg

( 4 ) Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records.
Meaning Recalculation may be performed manually or electronically
Recalculating the depreciation amount on Assets
Eg Recalculating the Interest in Fixed deposits

( 5 ) Reperformance
Re-performance involves the auditor’s independent execution of procedures or controls that were
Meaning originally performed as part of the entity’s internal control.
Re-performing the reconciliation of bank statement, re-performing the aging of accounts
Eg receivable.
g Audit procedures & to obtain Audit evidence

n
ether internal or external, in paper form,
mination of an asset.
ificates,Mail approvals …etc

n
ocedure being performed by others.
by the entity’s personnel, or of the performance

mation
ce obtained by the auditor as a direct written
nfirming party), in paper form, or by electronic

on
cal accuracy of documents or records.
ctronically

nce
ent execution of procedures or controls that were
al control.
nt, re-performing the aging of accounts
Materiality

Particulars Amount
A Total revenue 10,000,000
B Planning Materiality ( 1 % of A) 100,000
C Tolerable Error ( 50 % of B) 50,000
D Key Items Testing Threshold 37,500

Testing Tresholds Limits

Assets , Expenses 50 - 75 %
liabilities ,Income 15 - 75 %

Note The above figures & percentages are rough purpose only , However It wil differ from company to company
 Remarks
Total turnover of the company
It is the overall materiality for all items in FS as a whole,which is designed in planning stage
It is the maximum amount for Misstatements ,where Auditor can ignore
It is the minimum limit for key Items Testing

ough purpose only , However It wil differ from company to company