UNIT I: CONCEPT,

NEED AND
PURPOSE OF AUDIT
Scope of Audit
◦ Audit is applicable for all types of organizations and entities. Mandatory audit is required for all
companies falling within the purview of Companies Act, 2013.
◦ Audit looks into every aspect of the company’s financial statement which are either prima facie given in
the balance sheet or off balance sheet items as well.
◦ The extent of audit is limited to its primary and secondary objective thereby the auditor can only
provide his opinion on certain matters of materiality.
◦ Audit is an interdisciplinary area.
Objective of Auditing
◦ Primary objective- To provide an opinion on the true and fair view of the financial statements of the
entity and thereby verify the regulatory and compliance requirements for the said financial statements.
◦ Secondary objective- To provide an opinion on the existence of misstatements (errors or frauds) in the
financial records and thereby commenting whether the financial statements are free from material
misstatements.
 Basic Principles governing an audit
As per SA 200, “Overall objectives of the Independent Auditor and the conduct of an Audit in
accordance with Standards on Auditing” , the basic principles governing the auditor’s professional
responsibilities, and which should be complied with while carrying out the Audit are as below:
◦ Integrity, Objectivity and Independence
◦ Confidentiality
◦ Skill and Competence
◦ Work performed by others
◦ Documentation
◦ Planning
◦ Audit evidence
◦ Accounting system and Internal control
◦ Audit conclusion and reporting
Errors
◦ Error refers to an unintentional or innocent mistake in financial statements including mathematical or
clerical mistakes in accounting data or oversight or misinterpretation of facts which existed at the time
when financial statements were prepared.

Different kinds of error:

◦ Error of omission
◦ Error of commission
◦ Compensating error
◦ Errors of Principle
 Frauds
◦ Fraud refers to any illegal act undertaken intentionally for deceiving others.
◦ It includes misappropriation of cash or goods and misrepresentation of financial information for misleading
others.

Different types of fraud:

As per SA 240, “The Auditor’s Responsibility relating to fraud in an audit of Financial Statements” , frauds are of
two types:
1. Misappropriation of Assets
2. Fraudulent Financial Reporting
Audit vs Investigation
Basis for comparison Auditing Investigation
Meaning The process of inspecting the books of An enquiry conducted for
accounts of an entity and reporting on it, establishing a specific fact or truth
is known as Auditing is known as an investigation

Nature General examination Critical and in depth examination

Evidences The evidences are persuasive in nature. The evidences are decisive in
nature.
Time horizon Annually As per requirement
Performed by Chartered Accountant Experts
Reporting General purpose Confidential
Obligatory Yes No
Scope Seeks to form an opinion on the financial Seeks to answer the questions that
statements are asked in the engagement
letter.
Classification of Audit
Organization structure-wise:
1. Statutory audit-
◦ It is conducted compulsorily as per statute.
◦ It is completed before the statutory meeting.
◦ The Report of the statutory auditor is placed in the statutory meeting for perusal and consideration of the
members.
◦ Example, Banking company’s, Insurance company’s etc need to get their account’s audited as per laws
governing them.
2. Non-statutory audit-
◦ It is conducted without any legal requirement.
◦ Example, Audit in sole-proprietorship concern, partnership concern etc
 Classification of Audit
Objective-wise:
1. Internal audit - SA 610
◦ It is an independent and continuous appraisal and review of accounting, financial and other operations of the
undertaking.
◦ It checks transactions with large financial impact to see whether there is any revenue leakage in disguise.
2. Independent Financial audit-
◦ It is the audit conducted by a person who is “independent” of the firm.
◦ He verifies the books of accounts on the basis of the supporting documents and vouchers to form an unbiased
opinion on the reliability and fairness of financial statements.
Classification of Audit
Periodicity-wise:
1. Periodical-
◦ It is undertaken after the end of the accounting year.
◦ The auditor starts his job after all the books are balanced and the compilation of accounts is over.
2. Continuous-
◦ It is undertaken throughout the course of the accounting year.
◦ A thorough and detailed checking of the books of accounts is undertaken.
3. Interim-
◦ It is conducted in between two annual audits.
◦ It is conducted for some specific purpose.
4. Final-
◦ It is the audit which is statutorily recognized and is carried out by professionally qualified auditors.
 Classification of Audit
Technique-wise:
1. Balance sheet-
◦ It means verification of all items appearing in the balance sheet.
◦ Under this type of audit, examination starts from the balance sheet and goes back to the books of original entry and supporting
documents.
2. Standard-
◦ It is a thorough checking and analysis of certain items in the accounts which are of material importance.
◦ There is an appropriate test check applied to the remaining items based on auditing standards provided there is an adequate
system of internal check in operation.
3. Systems-
◦ It examines the sustainability of various systems of accounting prevalent in the firm.
◦ It is a kind of an investigation of the system of accounts whose purpose is to design appropriate system of accounts.
4. EDP-
◦ EDP auditing is the process of collecting and evaluating evidence to determine whether the computer system in the
organization is being operated in a way to safeguard its assets properly, generate data smoothly, maintaining the integrity of
data, achieve organizational goal effectively and consume resources efficiently.
Why are SA’s required?
◦ Enhance quality and relevance of auditing practices
◦ Consistency and comparability in reporting
◦ Uniformity / standardization of practice
◦ Guidance in performing an audit
◦ Strengthen public confidence in auditing and assurance profession
 Standards on Auditing
◦ 200-299 General Principles and Responsibilities

◦ SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards o
n Auditing
◦ SA 210, Agreeing the Terms of Audit Engagements
◦ SA 220, Quality Control for an Audit of Financial Statements
◦ SA 230, Audit Documentation
◦ SA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
◦ SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements
◦ Revised SA 260, Communication with Those Charged with Governance
◦ SA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management
◦ Revised SA 299, Joint Audit of Financial Statements
Standards on Auditing
◦ 300-499 Risk Assessment and Response to Assessed Risks
◦ SA 300, Planning an Audit of Financial Statements
◦ SA 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its E
nvironment 
◦ SA 320, Materiality in Planning and Performing an Audit 
◦ SA 330, The Auditor’s Responses to Assessed Risks 
◦ SA 402, Audit Considerations Relating to an Entity Using a Service Organisation 
◦ SA 450, Evaluation of Misstatements Identified During the Audit
Standards on Auditing
◦ 500-599 Audit Evidence
◦ SA 500, Audit Evidence
◦ SA 501, Audit Evidence-Specific Considerations for Selected Items
◦ SA 505, External Confirmations
◦ SA 510, Initial Audit Engagements – Opening Balances
◦ SA 520, Analytical Procedures
◦ SA 530, Audit Sampling
◦ SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disc
losures
◦ SA 550, Related Parties
◦ SA 560, Subsequent Events
◦ Revised SA 570, Going Concern 
◦ SA 580, Written Representations
Standards on Auditing
◦ 600-699 Using Work of Others
◦ SA 600, Using the Work of Another Auditor
◦ Revised SA 610, Using the Work of Internal Auditors
◦ SA 620, Using the Work of an Auditor’s Expert
Standards on Auditing
◦ 700-799 Audit Conclusions and Reporting
◦ Revised SA 700, Forming an Opinion and Reporting on Financial Statements
◦ SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
◦ Revised SA 705, Modifications to the Opinion in the Independent Auditor’s Report
◦ Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report 
◦ SA 710, Comparative Information—Corresponding Figures and Comparative Financial Statements
◦ Revised SA 720, The Auditor’s Responsibilities Relating to Other Information
Standards on Auditing
◦ 800-899 Specialized Areas
◦ SA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Fra
meworks
◦ SA 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items
of a Financial Statement
◦ SA 810 , Engagements to Report on Summary Financial Statements