Module 1:

Introduction
to
Auditing
Dr. Hemal Vora
Asst. Professor
Gurukul College of Commerce,
Ghatkopar, Mumbai.
FINANCIAL STATEMENTS INCLUDES:

 Balance sheet

 Statement of Profit & Loss

 Cash Flow Statement

 Explanatory Notes

 Supplementary Schedules and Information

 USERS OF FINANCIAL STATEMENTS
Definition’s
According to Spicer & Pegler, “Auditing is such an
examinationof books of accounts and vouchers of business, as
will enable the auditor to satisfy himself that the balance-sheet
is properly drawn up, so as to give a true and fair view of the
state of affairs of business and that the Profit & loss Account
gives true and fair view of the Profit & loss for the financial
period, according to the best of information and explanation
given to him and as shown by the book, & if not, in what
respect he is not satisfied.”
  According to R.K.Mautz, “Auditing is concerned
with verification of accounting data, with
determining the accuracy and reliability of
accounting statement and Reports.”

Objectives of Auditing:
1. Primary Objective - True and Fair View
2. Incidental Objective - Detection of Error & Fraud
 Unintentional /
Bonafide mistake

TYPES

Error of Principle Clerical Errors

1. Overvaluation 1. Errors of Omission

(Assets / Liabilities / Stocks /
Depreciation)
2. Undevaluation
3. Capital as Revenue
4. Revenue as Capital
5. Ignorance
(Prepaid / Outstanding / Receipts)
2. Errors of Commission
 Posting error
 Casting error (Totaling Error)
 Mathematical Errors
3. Errors of Compensation
4. Errors of Duplication
 Fraud – Intentional / Malafide Mistake.
 TYPES OF FRAUD:
1. Misrepresentation of cash
a) Cash received (No Entry / Teeming & Lading)
b) Cash Payments (Dummy / Excess payments)
c) Cash Balance (Theft)

2. Misrepresentation of Goods
a) Goods received (No Entry / Teeming & Lading)
b) Goods Dispatched (Dummy / Excess payments)
c) Stock Balance (Theft)

3. Falsification of records
a) Not recording transactions
b) Dummy transactions
c) Intentional Window Dressing / Secret Reserve
  Teeming & Lading
(iski Topi Uske Sar)
1. An attempts to hide loss of cash received from
one customer by using cash received from another
customer to replace it.

2. This is also called short Banking / Lapping / delayed

accounting of money received.

3. A method to cover past frauds by present receipts.

  Window Dressing
Skill of presenting account in a way that
creates good impression. Showing better
position than actual position over stating
profits and net worth. Financial position seems
to be better in the market.
 Why ?  How ?
1. Mislead Investors 1. Over statements of Assets
2. Hide Losses 2. Under statements of
3. Higher Commission Liabilities
  Secret Reserves (only allowed to
banks)
Secret Reserve means Part of Profit Secretly reserve

for future use. It is not shown in the Balance Sheet. It

means Understating Net worth.

 Why ? How ?
1. Mislead competitors 1. Under Statement of
2. High abnormal profits Assets
2. Over statements of
3. Banks only
liabilities
 Objections
1. No true & Fair View
2. Shareholder suffer
3. Hides Inefficiency of Management
4. Against Companies Act, 2013

 Auditors Duty
1. Disclose in Audit Report
2. Report to central Government
3. Verify Assets & Liabilities
4. Verify Incomes & Provisions
5. Verify Closing stock
6. Prevent Omission of liabilities
7. Disclose change in method of Accounting
 Advantages of Auditing
1. True and Fair views
2. Tally with the books of accounts
3. As per accounting standards and standards of
Auditing
4. Disclose all material facts
5. Detection and prevention of errors and fraud
6. Moral check on employee
7. Advise on system, Taxation and finance
 Disadvantages / Limitation of Auditing

1. Not possible to check each and every transaction

2. Evidence is not the conclusion

3. No assurance on future profitability and prospects or

efficiency of management

4. Intended dependability on documentation &

information

5. Auditors supposed to be Independent but may not be

6. Misstatements may remain undiscovered

 Principles of Audit (SA 200)
1. Integrity, Objectivity & Independence

2. Confidentiality

3. Skill & Competence

4. Work performed by others

5. Documentation

6. Planning

7. Evidence

8. Systems and Controls

9. Conclusion

10. Reporting
  Types of Audit
 Statutory Audit – Compulsory Audit (Joint Stock
Companies, Banks, Insurance, Co-operative
Societies,Trusts, Electricity Boards,Tax Payers)

 Non – Statutory Audit – Voluntary Audit (Small

Entities - Sole trading, Joint Hindu, Partnership)

Conduct Final Interim

Of
Audit Continuous
Continuous Audit – Large Volume of
transactions, Weak or new system, Regular / Frequent
visits
• Quick Preparation of Final
Accounts
• Early Dividends
Advantages • Updated for Bankers / Investors
• Moral Check
• Familiarity with Clients Business
• Thorough Utilised Audit Staff

• Expensive
• Audit in Installments
• Disturbance in Routine
Disadvantages
• Malafied in Books Already Checked
• Undue Reliance on Auditors
 Interim Audit – Average Volume of
transactions, between Two Annual Audits
• Quarterly Results
• Quick Preparation of Final
Accounts
• Interim Dividends
Advantages
• Updated for Bankers / Investors
• Check on Employees
• Thorough Utilised Audit Staff

• Expensive
• Audit in Installments
Disadvantages • Disturbance in Routine
• Malafied in Books Already Checked
Final / Annual Audit – Less volume of
transactions, @ the end of the year.
• Inexpensive
• Audit at Stretch
Advantages
• No Disturbance in Routine
• Less Falsification in Books

• Delay in Final Accounts

• Late Dividends
• Stale Accts for Bankers / Investors
Disadvantages • No Moral Check
• No Familiarity with Clients Business
• Sample Check with Uneven Load
Qualities of Auditor
 Chartered Accountant
 Skills and Competence
 Honest
 Knowledge of Business
 Confidential
 Watchdog but not Bloodhound
 Independent
 Judgement
 Methodical
 Materiality (SA-320)
Planning and Performance in conducting an
Audit, “Materiality means information and
matters relatively important for True
& Fair Presentation of financial
statements.”

Materiality

Legal Professional
Requirements Requirements
 Legal Requirements:
1. Material Items as per schedule 3 of Indian
Companies Act 2013
2. Non Recurring items
3. Previous year figures
4. Quantitative Information
5. Percentage Cutoffs

 Professional Requirements:
1. Extra ordinary Items as per A/S-5
2. Ordinary Items on the Profit & Loss statement
as per A/S-5
3. Prior period Items
4. Changes in Accounting Policies
  True & Fair View (SA-700)
Accounts prepared by the organization are used by different
categories of people for reference and reliability. Opinion as to
whether the financial statements represent the actual
financial position.

It is said to be True & Fair When:-

1. P&L A/c is true & fair

2. Neither window dressing nor secret reserve

3. Valuation of assets and liability is true & fair

4. As per financial reporting frame work

5. In accordance with company Laws