AUDITING AND CORPORATE GOVERNANCE (BCOM)

Module I Advantages of auditing Qualities and qualification of a professional Audit working papers
Reasons for the development of professional ◆ Advantages to the business auditor Audit working papers are the documents which
audit 1. Helps in detecting and preventing errors. Professional qualification record during the course of audit. It is also
1. Renaissance 2. Introduction of double entry. 2. Helps in detecting and preventing frauds. The auditor must pass Chartered Accountant called audit files.
3. Industrial revolution. 4. Introduction of statutory 3. It ensure accuracy of books of accounts. examination conducted by ICAI. Content of audit working paper
audit. 5. Companies act, 1956. 6. International 4. It ensure authenticity and reliability of final Professional qualities 1. The trail balance 2. Schedule of debtors and
standard for accounting and auditing. 7. Court accounts. 5. It can enjoy reputation and • Knowledge of theory and practice of creditors 3. Schedule of investment 4.
judgements 8. Computer accounting. 9. Auditing goodwill of business. accountancy • Knowledge of commercial law Depreciation statement 5. Bank reconciliation
practices. 10 SEBI Act 11. Corporate governance. ◆ Advantages to the owner • Knowledge of techniques of audit • Knowledge statement 6. A draft of final account
12. Emergence of multinational companies. 1. Sole trade can rely on the audited financial of management accounting • Knowledge of cost Advantages/aim/purpose of audit working
13. Globalization. 14. Nano technology. statement. 2. Auditing assure proper mainten- accounting • Knowledge of economics papers
15. Independence of auditor. 16. Removal of ance of accounts of joint stock company Knowledge of mathematics and statistics 1. It is necessary for audit report. 2. It is a guide
restrictions on taking up audit work in US. 17. Right 3. It helps valuation of assets in admission, • Knowledge of industrial management for subsequent audit. 3. It is a valuable
to information Act. 18. The companies Act, 2013. retirement, and death of a partner. 4. Auditor Personal qualities documentary evidence. 4. It helps in
Auditing helps the management to improve functioning • Honesty • Ability to work hard • Impartial coordinating audit work. 5. It helps in controlling
The international auditing practice committee of business. • Courage and ability • Ability to communicate audit work 6. Its a historical record of work done
defines, “the independent examination of an entity, ◆ Advantages to the Society • Commonsense • Ability to maintain secrets Types of audit working papers/ files
whether profit oriented or not, irrespective of its 1. Audited statement of accounts is more • Cautious and vigilant • Ability to trace fact and 1. Permanent file
size or legal form when such an examination is reliable to creditors. 2. Income tax authority figures • Tactful • Inquisitive it is a permanent audit file of the client. It gives
conducted with a view to expressing an opinion consider audited accounts to be reliable. Audit assurance standard brief history of previous audit of the client.
thereon.” 3. Audited accounts of company create a Auditing standards means the measure and 2. Annual file
Difference between audit and book keeping confidence in the mind of investors. 4. Easily quality of audit performed by an auditor. Annual file contains details of the current years
Auditing Book keeping calculate purchase consideration on the basis General auditing standards audit program. It is also called current files.
of audited accounts. Personal Standards Standards of Audit programme
It is verification of It is the art of
Disadvantages / Limitations of auditing standard of field reporting It is a written and predetermined plan of action
accuracy of entries recording daily
1. It is costly. 2. Loss of initiative. 3. It is s work for conducting an audit.
made in the books transactions in the
mechanical. 4. Possibility of alteration. Technical Planning Conformity Types of audit programme
of accounts books of accounts
5. Impossibility of checking all transactions. standard and with accepted 1. Fixed audit programme
It is done by auditors It is done by book
6. Unsuitable for small concern 7. Rely on and supervision accounting It is a pre-planned and detailed programme of
keepers
experts proficiency principles audit. It is also called fixed or pre-determined
It is retrospective. It is of the current
Auditor as a watch dog not a bloodhound Independ Evaluation Consistency audit programme.
period
An auditor is appointed by the shareholders in ence in of internal in applicati-on 2. Flexible audit programme
It is analytical in It is constructive in case of a limited company. He is expected to An audit programme that can be changed as per
mental control of accounting
approach approach play the role of watch dog for shareholders. the need, time, nature of business and auditing
attitude principles
Auditors are Book keepers are His duty is verification not detection. If he finds standard is called flexible audit programme.
Due Sufficient Adequacy of
outsiders paid employees something suspicious he should raise to the Advantages and disadvantages of audit
professio competent information
It is at the It is a continuous shareholders. evidence programme
nal care disclosure
completion of year process In case of frauds and errors the auditor has the Advantages Disadvantages
Basic principles of auditing
Difference between auditing and accountancy duty of reasonable care only. Watch dog It defines duties of Out of date and
Basic principles of auditing are the set of rules
Auditing Accounting concept limit the scope of the audit, that it is clerk clearly useless
according to which the books of accounts of a
Where accounting Where book keeping merely verification of accounts and does not firm should be audited. It defends the Unable to cover all
ends, auditing ends. Accounting deeply cover the object of detection and • Integrity, Objectivity and independence auditor the point
begins begins prevention of fraud. To assess the cost Hurry in
• Confidentiality • Skills and competence
It is done by auditor It is done by Investigation • Documentation • Planning of audit of audit completion
accountant Investigation means an act of detailed • Audit evidence • Accounting system and internal Timely completion Not suitable for all
Auditor is an Accountant is a examination of books and accounts and control • Audit conclusion and reporting of audit types of firms
independent person permanent financial position of a business firm.
General basic principles of auditing It helps to new No chance to use
employee Objects/ purpose of investigation
• Principles of objectivity • Principles of audit staff intelligence
An auditor is An accountant is 1. When the proprietor suspects fraud 2. When materiality • Principles of independence• Effective control Rigidity
remunerated in the remunerated in the a person intend to purchase business. 3. When Principles of full disclosure • Principles of over audit staff
form of form of salary a person wishes to purchase share of a professional ethics Tick mark
professional fee company. 4. When a person wishes to lend
Basic concepts of auditing Tick marks are the symbols used during the
Auditing was a Accounting is a money to a business. 5. It maybe conducted • Evidence • Due audit care • Fare Presentation course of audit, which indicates how much of
luxury concept necessity on behalf of income tax authority.
• Independence • Ethical conduct audit works are done.
Difference between auditing and investigation Audit techniques
Objects of audit Test checking
Primary object Auditing Investigation Audit techniques are the devices, which are It means to select and examine a representative
To ensure the accounts reveal a true and fair view The purpose of The purpose of adopted in applying the basic principles and sample from a large number of similar items.
of business and its transactions. audit is to investigation varies auditing standards. Routine checking
Subsidiary objects determine true from business to Important audit techniques The process of checking posting, casting
a. Detection and prevention of errors. and fair view business 1. Vouching 2. Confirmation 3. Reconciliation balancing in ledger and subsidiary books are
b. Detection and prevention of frauds. The audit relates Investigation 4. Analysis of financial statements 5. Physical done in a routine manner are called routine
A) Detection and prevention of errors to checking of all relates to critical examination 6. Test checking 7. Scanning checking.
Errors in accounting are books and checking of 8. Verification of the posting 9. Enquiry Surprise check
a) Errors of omission records particular records Audit planning It is a technique used by an auditor. He pays
Errors of omission arises when a transaction is Auditing is Investigation is not Pre-arranging and coordinating the work of audit surprise visit to the client office and make
wholly or partly omitted being properly recorded in compulsory compulsory of a client is called audit planning. surprise checking on certain important items.
the books. The auditing is The investigation is Preliminary steps involved in audit planning Audit classification
b) Errors of commission conducted conducted after • Letter of appointment • Letter of engagement • • Audit on the basis of organizational structure
It arises when a transaction has been recorded and before the the auditing of Study nature, scope, duties • Acquire knowledge • Audit on the basis of degree of independence
wrongly entered in the original entry ledger due to investigation of accounts about business and its nature • Verification of • Audit on the basis of conduct of audit • Audit
negligence. accounts legal documents • He should obtain the list of all on the basis of specific objectives • New
c) Compensating error The person who The person who books maintained in the office. • If it is not a new generation audits
A compensating error is one which is counter conduct auditing conduct audit • Examine the accounting system • Internal Audit on the basis of organization structure
balanced by another error. is called auditor investigation called check system • Duties of the members of the Statutory audit
d) Errors of principles investigator client staff • List of principal officials• Instruction It is a legally required audit to present the fair
It arises when entries are recorded by violating The Qualification There is no specific to the client • Preparation of an audit program picture of the financial health of the
fundamental principles of accounting. of auditor is qualification for • System audit • Distribution of audit work organisation. It is a compulsory audit. Following
B) Detection and prevention of frauds chartered investigator • Preparation and submission of audit report are the undertakings in which statutory audit is
Fraud means false representation or making a accountant Audit note book compulsory
wrong entry intentionally to defraud somebody. It has a narrow It has a wide scope It is a register or dairy maintained by audit clerk a) Joint stock companies b) Banking companies
Types of fraud scope during the course of audit. It is also called audit c) Insurance companies d) Cooperative
Misappropriation of cash. Auditing is done Investigation can memorandum. societies e) Public charitable companies
Computer related fraud. at the end of the done over a period Advantages of audit note book Private audit
Functions of audit financial year of years 1. It helps to prepare audit report. 2. It is a tool for Private audit refers to the audit of accounts of
1. To ascertain system of accounting of the measuring efficiency of an audit. 3. It is a guide private business enterprises. It is not
organization. 2. To examine arithmetic accuracy of for subsequent audit. 4. It is an evidence for compulsory audit. It includes
records. 3. To assess the quality of internal future. 5. It avoid repetition of work. a) Sole trader b) Partnership c) Private
controls. 4. To verify physical assets and inventory. Disadvantages of audit note book individual
5. To make recommendations for improvement. 1. It create misunderstanding between client and
6. To determine compliances with policies and audit staff. 2. It create faultfinding attitude in the
procedures. mind of audit staff. 3. If it is not properly
maintained it considered as evidence for auditors
negligence.

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 AUDITING AND CORPORATE GOVERNANCE (BCOM)
Difference between company and partnership audit
Company Audit Partnership audit
It is compulsory It is not compulsory
The power, duties Defined as per
and rights of auditor agreement.
defined in
companies act
Auditor is appointed Auditor is appoi-nted
by members by partners
It is done year after It is done at discretion
year of partners
The auditor must be Auditor need not hold
qualified u/s 226 of those
companies act qualifications
Auditor reports to Auditor reports to the
the members partners
Government audit
It means audit of accounts of government
department and offices, government companies and
government statutory corporations.
Objectives of government audit
• To ensure every payment is made as per rules. • To
ensure expenditure sanctioned by competent
authority. • To ensure payment made to the right
person. • To verify payment made is duly entered in
proper books. • To verify system of granting travel
allowances to employees. • To verify system of
granting daily allowances to employees. • To ensure
expenditure is classified into capital and revenue. • To
verify existence of stock and store.
Audit on the basis of degree of independence
Independent audit
It is also called external audit. The audit of account of
the firm is conducted by independent professionally
qualified auditors.
Internal audit
It is an independent review of operation and other
records of the firm.
Audit on the basis of conduct of audit
1. Continuous audit
It is a statutory audit. This audit is done by
professionally qualified auditors. It is a detailed
examination of all transactions.
Advantages of continues audit
Detailed checking • Up to date accounting records •
Efficient audit • Greater moral check
• Preparation of interim audit • Early finalization of
accounts • Suggestion from auditor
Disadvantages of continues audit
• Alteration of figures • Involves much time
• Expensive • Dislocation of client work
• Mechanical • Losing the thread of the work
2. Final audit
The final audit take place only after the end of the
trading period. All the transactions for the whole year
completely recorded and balanced.
Advantages of final audit
• Less audit cost • Take only reasonable time
• Not mechanical • No dislocation in the work of client
• Not require large audit staff
Disadvantages of final audit
• Suitable for small firms only • More depend ontest
checking • Errors and fraud remains • Unhealthy delay
in report time • Does not help preparation of interim
accounts
3. Balance sheet audit
It is a type of audit. In this type auditor verify balance
sheet items such as capital, liabilities, reserves,
Provisions, assets and other items given in the
balance sheet.
4. Interim audit
It is a type of audit conducted in between two annual
meetings.
Advantages of interim audit
1. Easy to find out interim results. 2. It helps to
declare interim dividend. 3. Errors and frauds are
quickly detected. 4. It imposes moral check as the
client staff. 5. Final audit can be completed quickly.
Disadvantages of interim audit
1. More expensive. 2. Dislocation of work of client
staff. 3. It required more detailed and exhaustive
checking. 4. It creates additional work of audit. 5. It is
easy to alter already audited figures. 6. Suitable for
large firms only.
5. Occasional audit
If the sole trader or partners conduct an audit for a
specific object on special occasion such audit are
called occasional audit.
6. Partial audit
It is a type of audit, which is carried out in respect of
specified aspect of books of accounts of the business
7. Standard audit
It is a type of audit rarely conducted in business firms.
Under this type certain items in the accounts are
thoroughly scrutinized and analyzed.
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Audit based on special objectives
1. Management audit
It is the systematic evaluation of the performance of
management of an enterprise. It is the critical review
of all aspects and process of management.
2. Cost audit
Cost audit is the verification of the correctness of
cost records with a view to ascertain the cost of
product.
3. Cash audit
It is a type of audit under which only cash
transactions are audited.
4. Special audit
It is a type of audit conducted by the central
government for some special objectives. The person
who conduct special audit is called special auditor.
5. Operation audit
It is a part of management audit. It is usually
conducted by external auditor known as management
consulting services.
6. Efficiency audit
It is a type of audit conducted for the purpose of
increasing efficiency of the firm. It is an aid to
management.
7. Detailed audit
It referred as continuous audit, running audit or
complete audit. Under this type of audit, the auditor
checks detail all books of accounts with regular
intervals.
8. Propriety audit
It is a part of management audit. It is treated as high
form of audit.
9. Performance audit
It is a part of management audit. In this type of audit,
auditor evaluate the performance of the firm.
10. Regulatory audit
It is conducted by private business firm. The main
object is to see whether every transaction is approved
and sanctioned by competent authority.
11. Vouch and post audit
It is a diversion of detailed audit. It is a detailed
examination of all transaction by auditor with the
preparation of original entry till it has been posted.
New Generation audit (Recent trends in auditing)
1. Inflation audit
It is the audit related to inflation accounting. The
accounting effect of change in prices is known as
inflation accounting.
2. Human resource audit
It is the process of evaluating human resources
programs and practices.
3. Social audit
It is the way of measuring, understanding and
reporting an organization’s social and ethical
performance.
4. Energy audit
It is an inspection survey and analysis of energy flows
for energy conservation.
5. Peer review
It is a supervision audit. It is an audit of auditor’s
performance.
6. Forensic audit
It is a detailed examination and evaluation of financial
and non-financial records to collect evidences that
can be used in a court of law.
7. Environment audit
It is a type of audit which provides an assessment of
environmental performance of a business or
organisation.
Module II
Vouching
It means a careful examination of the original
documentary evidence such as invoice, receipts,
minutes, contracts etc.
Objectives of vouching
1. To ensure transactions pertain to the business
only. 2. To detection and prevention of errors and
frauds. 3. It pertains to the year under audit. 4. The
transactions are properly authorized and are genuine.
5. No transaction has been omitted in the books.
Vouchers
Vouchers is documentary evidence, in support of
transactions in the books of accounts.
Types of vouchers
1. Primary vouchers
Primary vouchers are original vouchers. They are
written or printed, or typed evidence in original.
Example: Cash memos, Invoices. Pay in slip
2. Secondary vouchers
When original voucher is not available copy of the
original evidences are produced in support or
subsidiary evidence such vouchers are called
secondary or collateral vouchers.
Example: Bank reconciliation statement, copy of sales
memo.
Essentials of valid voucher
1. The authority of the voucher. 2. The authenticity of
the voucher. 3. The genuineness of the voucher. 4. The
accuracy of the voucher. 5. The correctness of the
voucher. 6. Proper classification of accounts in to
capital and revenue.
While examine the vouchers following points must be
paid special attention
1. All the vouchers are consecutively numbered and
arrange serially. 2. He should examine the date of the
vouchers. 3. He should see that information in the
voucher is fully self-explanatory. 4. He should see that
voucher is related to business in the name of the firm.
5. He should see that each voucher is original in face. 6.
He should accept voucher in printed form. 7. He should
not accept voucher in over writing or erasure. 8. He
should complete vouching work in a one siting. 9. He
should not take help of client staff for vouching.10. He
should see that every voucher is passed in the order by
responsible officer.
Vouching of cash book
Vouching of cash book means checking of cash
receipts and cash payments with supporting
documents.
Vouching of purchase ledger
The auditor has to check and verify the following in
case of purchase ledger:
• Record of all purchase orders. • Verification of
quantity, price and payment terms of purchase invoice.
• Verification about goods are actually received. •
Verification about proper recording of purchase bill.•
Auditor should verify statement of accounts of
suppliers.
Vouching of purchase return book
The auditor needs to verify following points in case of
vouching of purchase return books:
• He should compare credit notes with purchase return
book. • He should examine goods outward book. • He
should check entries in the purchase returns journal. •
He should check heavy returns at the start or end of the
year. • He should check the totals and postings to
purchase returns and suppliers accounts.
Vouching of credit sales or sales book
The auditor should vouch credit sales in the following
manner:
• He should apply test check. • He should check some
invoices with orders and outward entries.
• He should confirm sales of capital items not included
in the sales. • He should confirm trade discount allowed
is not included in sales ac. • He should send accounts
statements to customers. • He should confirm goods
on consignment is not included in sales. • He should
check cancelled invoice against duplicate invoice copy.
Vouching of sales returns
The auditor should vouch sales return in the following
manner:
• He should vouch sales returns entries with stock
register. • He should verify the copy of the credit note
issued to customer. • He should check posting from
sales returns book to customer ledger. • He should
verify customer returns at the start and end of the year.
Verification of assets and liabilities
It means examination of establishing truth as existence,
ownership, possession and valuation of assets and
liabilities in the balance sheet.
Difference between vouching and verification
Vouching Verification
It examine all the It examine assets and
business transactio- liabilities
ns recorded in the appearing in the
original entry balance sheet
It is based on It is based on both
documentary physical & docume-
evidence ntary evidence
Work done by junior Work done by auditor
staff himself
It is not include It include valuation of
valuation of assets assets
It take place first It take place after
vouching
It is continuous and It is one at the end of
throughout the year the year
Objectives of verification of assets and liabilities
1. To ensure assets and liabilities shown in the balance
sheet actually exist. 2. To satisfy that auditor assets
and liabilities are properly valued. 3. To ensure that
assets are actually the properties of business. 4. To
ensure liabilities are actually held. 5. To verify that they
are free from any mortgage. 6. To see that assets and
liabilities are properly classified. 7. To detect fraud and
check arithmetical accuracy of posting.
Verification of various types of assets
◆ Cash in hand
• Auditor use cash weighing machine to count cash. • He
should count cash, stamps, IOU in hand. • He should check
remittance from branches. • He should check purpose of
holding large cash balances. • Documentary evidences
should be verified in case of cash in transit.
◆ Cash at bank
• Auditor should verify pass book with cash book. • He should
compare pass book with BRS. • He should obtain certificate
regarding bank balances. • He should see outstanding
cheque are genuine.
◆ Loans advanced
• He should examine loans granted through loan agreements.
• He should see that loan amounts are confirmed by the
borrower • He should examine the mortgage deal. • He should
determine adequacy of security offered. • He should see
there is no change in loan agreement terms.
◆ Bills receivable
• He should get a list of total bills receivable. • He should see
that bills are properly drawn, accepted. • He should see that
bills are subsequently matured. • He should enquire from the
bank regarding bills sent for collection.
◆ Debtors
• He should obtain duly certified list of debtors. • He should
scrutinize accuracy of debtors list. • He should verify actual
existence of debtors. • Sales ledger balance should be
checked with debtor’s ledger.• He should see debtors shown
on balance sheet are recovered. • He should see adequate
provision made for bad debt.
◆ Stock in trade (Inventory)
• Auditor should examine internal check system in operation.
• He should check stock sheet with stock register. • He
should examine management control of issue of stock. • He
should check totals, balances and extensions of stock
sheets. • He should check physical existence of stock in
hand.
◆ Free hold property
• He should verify legal existence of title deeds relating to
land. • He must verify both ownership and possession of the
client. • He should compare ledger account with balance
sheet. • He should verify deed, purchase agreement, lease
agreement etc. • He should examine brokers notes,
auctioneers accounts etc.
◆ Plant and machinery
• He should obtain schedule of plant and machinery certified
by responsible officer. • He should verify adequacy of
depreciation. • He should see same method of depreciation
follow year after year.
◆ Motor vehicle
• He should verify vehicle are registered in the name of client.
• He should get schedule of all motor vehicles owned by the
company. • He should see that adequate depreciation is
provided for vehicles. • He should see that vehicles are
shown in balance sheet separately at cost less depreciation.
◆ Copyright
• He should verify copy right agreement. • He should obtain
schedule of copyright. • He should see that copyright are
shown in balance sheet separately at cost less depreciation.
◆ Goodwill
• He should verify purchases agreement to ascertain value of
goodwill. • He should see written off in accordance with
resolution of board.
◆ Loose tools
• He should obtain loose tools register. • He should verify
receipts of issue of loos tools. • He should see that loos tools
are shown in balance sheet separately at cost less
depreciation.
◆ Live stock
• He should obtained schedule of livestock. • He should
compare livestock register with schedule. • He should verify
livestock are revalued annually.
Verification of various types of liabilities
◆ Sundry creditors
• He should obtain schedule of creditors from management. •
He should compare creditor amount with balance of creditor
ledger. • He should verify purchase and purchase return
book• He should verify goods inward book
◆ Bills payable
• He should verify bills payable from bills payable book.
• He should examine the bills payable retired under rebate.
◆ Bank overdraft
• He should verify overdraft agreement with bank. • He should
check the pass book and cash book.• He should verify
whether overdraft is secured or unsecured.
◆ Loans
• He should verify loan agreement. • He should see that loans
and advances shown in balance sheet. • He should verify
whether loan is secured or unsecured.
◆ Debentures
• He should verify memorandum and articles of the company.
• He should verify debenture trust deed. • He should obtain a
certificate from debenture holders to verify amount of
debenture issued
 AUDITING AND CORPORATE GOVERNANCE (BCOM)
Valuation of assets and liabilities
It means estimation of various assets and liabilities.
It is the duty of the auditor to confirm assets and
liabilities appear in the balance sheet in fair value.
Valuation of different assets
◆ Fixed assets
They are acquired for permanent use of business.
The utility of this asset is for long period. Eg: Plant,
machinery, land, building, motor
vehicle, furniture etc.
• Fixed asset valued at cost less than reasonable
depreciation.• Provision for depreciation on fixed
asset is necessary.
◆ Current assets
They are acquired for resale or converting them into
cash. They are purchased for a short period. Eg:
Stock, debtors, bills receivables, cash in hand, cash
in bank
• Cash and bank balance no valuation required
• Debtors are valued at book value.• Provisions for
bad and doubtful debts proceed for book debt.
• Raw material valued in FIFO and LIFO method.
• Closing stock valued at cost or market price,
whichever is lower.
◆ Intangible assets
Intangible assets are those assets which cannot be
seen or touched. They are not visible in physical
form. Eg: Goodwill, copyright, patent, trademark.
• These assets are shown at cost price. • These
assets treated as fixed assets for the purpose of
valuation.
◆ Wasting assets
Wasting assets are fixed in nature which are
depleted gradually in process of earning income. Eh:
Mines, quarries, oil wells, etc. • Wasting assets are
shown in original cost in balance sheet • Provision is
made for depreciation and depletion.
◆ Fictitious assets
Fictitious assets are huge revenue expenditure that
has been capitalized with the object of spreading
amount to number of years. Eg: Special
advertisement cost, preliminary expenses,
debenture discount. • These have no exchange
value • Every year, a portion of these expenditure are
written off in P&L ac.
Valuation of different liabilities
◆ Current liabilities
These are the liabilities of the business, which are
short term liabilities. They are settled with a period
of one year. Eg: Creditors, Bills payable, outstanding
expenses.
◆ Fixed Liabilities
These are the liabilities of the business, which are
long term liabilities. They are to be settled in long
term basis. Eg; long term loans, long term deposits
accepted.
◆ Contingent liabilities
These are liabilities which are not actual liabilities,
but which may become an actual liability on
happening or non-happening of a future event.
Contingent liabilities
A contingent liability is one, which is not a real
liability but it will became an actual liability on
happening or non-happening of an event.
Characteristics of contingent liability
• Uncertain • Conditional • It involves additional
expenditure • Actual liability on happening of an
event • It may be a past or possible future act
Window dressing
It means manipulation done by the management of
the company in the financial statements in order to
present more favorable picture of the company.
Window dressing done through following ways
• Increase the inventory value. • Postponement of
purchase of fixed assets. • Selling a fixed asset or
cash. • Paying of current liabilities. • Considering
short term liabilities as long term.
Difference between verification and valuation
Verification Valuation
Verification includes Valuation is a part of
valuation verification
Auditor verify Ensure value of
existence of assets assets shown in the
balance sheet are
correct
It is done by the It is done by
auditor management team
It is made at the end It is made
of the year throughout the year
It is the final work It is the initial work
The auditor is In this case there is
guarantee in the no such guarantee
case of verification
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Module III Internal check regarding cash transactions
Internal control ◆ Cash receipts
It is an overall control system of the internal • There should be separate cashier to deal with
management. In this system number of checks and cash receipts. • Cash received should be entered
control exercised in the business to ensure its efficient through a rough cash book. • All receipts should
and profitable working of the firm. be banked daily •BRS should prepared to reconcile
Internal audit cash and bank transactions.• All unused receipt
It is an independent review of operation and other book should be kept by responsible officer • There
records of the firm. should be separate arrangement for custody of
Objectives of internal audit B/R. • All cash receipts should be acknowledge by
1. To ensure efficient conduct of business. 2. It is an printed receipts.
independent review of operational performance. ◆ Cash payments
3. Completeness and accuracy of final accounts. 4. To • There should be a separate paying cashier. • He
keep control overall activities of the organization. should not have access to the ledgers. • In case
5. To verify organizations policies and procedures. 6. To of petty transactions, impressed system is
keep a checks on errors. followed. • Petty cash payment must made to the
Features of internal audit petty cashier only. • All payments Is to be made
1. It is compulsory. 2. It is continuous audit. 3. It is by proper authority. • Acknowledgement shall be
suitable for large business organizations. 4. It is obtained for all payments made. • All cancelled
generally conducted by own employees of the firm 5. Its cheques must be destroyed • Unused cheque
object is vary from business to business. 6. It is book should be kept under lock and key.
conducted to ascertain internal control system. ◆ Petty cash
Advantages / Merits / Benefits of internal audit • Separate person appointed for dealing petty
1. Helps to identify accounting errors. 2. It makewinds cash payments. • Petty cash book should kept on
final audit easier. 3. It helps to maintain better impressed system. •Petty cash book maintained
management. 4. It promotes proper use of resources. on analytical form. • No petty cash payments
5. It increases efficiency of the firm made without proper voucher. • Petty cashier
Disadvantages / Demerits of internal audit should not give any amount other than imprest
1. It is not useful for external reporting 2. It is not system. • All vouchers must be properly filed and
suitable for small firms. 3. It is expensive. 4. It is time kept under the custody of petty cashier.
consuming. 5. It involves chances of errors. ◆ Cash sales
Difference between internal check and internal audit a) Sales over the counter
Internal check Internal audit • Separate salesman should be appointed for
The work of one clerk is The work of one clerk each counter. • A specific number may be allotted
automatically checked checked by another for every salesman. • Different numbers should be
by another after the former has used for different counters. • Each salesman
at the same time. completed the work. should be provided with sales memo book.
It minimize errors and It detect errors and • Sales memo provided different counters of
frauds. frauds. different colors. • The sales memo prepared by
the counter sales man should be checked by
No separate staff Specially appointed.
another officials. • Total amount of cash sales
appointed
should be entered in the general cash book.
It is for internal It is for top
b) Sales by travelling agent
management management.
• He should not allowed to collect cash from
It is treated as an It treated
customers. • He should not allowed to meet any
instant audit management audit.
expense in connection with sales. • Final receipts
Itis a continues process It is done periodically
of cash collected should issue by head office. •
Internal check The head office should be informed about
Internal check simply refers to an arrangement of balance over due by customers. • Reminder to the
transactional work amongst the members of the staff. customer should be sent by head office.• He
Objectives of internal check should be instructed to submit periodical
1. It is the division of work among the staff. 2. It prevent statements of sales. • He should not be allowed
errors and frauds.3. Errors and frauds are automatically to continue work for a long period in the same
discovered. 4. Work of one staff automatically checked area
by another. 5. No staff allowed to do any single work. c) Postal sales/ sales under mail order business
Advantages of internal check • There should be separate section in sales
Advantages to the owners department to deal with postal transactions.
1. It provide accurate and reliable accounting records. • Separate VPP register should be maintained.
2. It leads to better efficiency and economy in operation. • Proper records should be maintained for goods
Advantages to the business returned by customers. • Total amount received in
1. Division of work 2. Early detection of errors and a day should deposited into bank •A proper officer
frauds 3. Preparation of final accounts 4. Fixation of should check VPP register frequently. • Order
responsibility 5. Makes audit work easy received for postal sales should be properly filed.
Advantages to the auditor d) Online trading
1. No need for detailed checking 2.Rely on test checking •Auditor verify the list of all. •Close examination of
Disadvantages/ limitations of internal check credit money register. • Verify amount of e-money
1. Not suitable for all firms 2. Sacrifice the quality of received.
work 3. Tends to slacken efforts 4. It create chaos and Internal check regarding purchase return
disorder 5. Risky for auditor • A separate return outward book is maintained.
Essentials of good internal check system/ How to plan • Record return of goods to supplier’s in return
a good internal check system? / Principles of internal outward book. • A statement should prepared by
check system stores department for goods return. • Purchase
1. The system should be practical and simple. 2. The department should check goods and prepare
system should be economical. 3. The system should be advice notice. • All incoming credit notes should
carefully designed and suitable to nature of business. be numbered and stamped. • Responsible officer
4. Careful selection and proper training should be should examine the credit note.
provided. 5. Division of work among staff should be Internal check regarding credit sales
allowed. 6. Rotation of employees should be made. • There should a separate department to deals
7. Proper register should be provides. 8. Annual stock with credit sales.• All orders received should be
verification should be done. 9. The internal check numbered. • All orders received should record
system should be flexible. 10.Budgetary control system orders receivable book. • Separate record is
should be established. maintained for different orders. • Credit sales is
Difference between audit report and audit certificate allowed only for minimum period. • A copy of cash
Audit report Audit certificate order should be send to dispatch section.
It is an expression of It is a certificate of truth • The entries should be made in sales day book.
opinion of financial • Sales day book should be checked by
statements responsible officer.
It is based on facts, It based on fact, figures Internal check regarding sales return
estimates and supported by • All goods returned should be recorded in goods
assumptions documentary evidence inward book. • All sales return are approved by
It is only a test not It is a guarantee of truth responsible officer. • Credit note should be
guarantee prepared and signed by responsible officer. • The
The scope of report is The scope is limited. details of credit note should be entered in sales
large returns book.
Rights and powers of an auditor
1. Right to access books of accounts and vouchers.
2. Right to visit branches. 3. Right to obtain
information and explanation. 4. Right to correct
wrong statement. 5. Right to have legal and
technical advice. 6. Right to be indemnified. 7. Right
to receive remuneration. 8. Right to sign the audit
report. 9. Right to receive notice and attend general
meeting.
Duties of an auditor
Statutory duties
1. Duty to make enquires. 2. Duty to report on
accounts audited by him. 3. Duty to report for
prospectus. 4. Duty to certify declaration of clarity.
5. Duty to assist inspectors. 6. Duty to assist public
prosecutors. 7. Duty according to the direction of
central government.
Duties arising out of common law
1. To ascertain unutilized capacities of the industry.
2. Extent of over stocking stores. 3. Position of
current assets.
Duties arising out of professional etiquette
1. Auditor should carry his duty to public interest.
2. Auditor must be honest, competent and
independent. 3. He should disclose all material facts
related to firm. 4. He should strictly follow rules
formulated by ICAI.
Duties imposed by court
1. It is the duty of the auditor to check stock
properly. 2. He should perform his duties with
proper care and skill. 3. He should examine the
terms of debenture trust deed. 4. He should
physically count cash on the last day of financial
year.
Liabilities of an auditor
Civil liability
1. Liability for negligence 2. Liability for
misfeasance
Liabilities under companies Act
1. Liabilities for misstatement in the prospectus
2. Untrue statement in prospectus 3. Failure to
assist investigation 4. Failure to return property,
books or papers 5. Penalty for falsification of assets
6. Penalty for deliberate act of commission or
omission
Criminal liability
1. Falsification of any books or material 2. Liability
for frauds
Audit report
It is a written document which present the purpose,
scope and result of the audit.
Qualities of a good audit report/ Characteristics
1. It should be based on fact. 2. It should not be
brief and not lengthy. 3. It should be free from
mistakes. 4. It should express the opinion of the
auditor. 5. It should exhibit true financial position of
the company 6.it should reflect the result ofthe audit
Content of audit report
• If Identification of financial statement being
audited. • If proper books of account have been
kept. • If accounts of branches have been audited.
• If balance sheet are in agreement with books of
accounts. • If any other statement included as
required by government. • Certificate of corporate
governance.
Types of audit report
1. Clean report
If the auditor satisfy the affair of the company and
the fairness of the final accounts of the company,
the auditor issue clean report. It is also called
positive, unqualified and conventional report.
2. Qualified report
If the auditor does not satisfy the affair of the
company and the fairness of the final accounts of
the company, the auditor issue qualified report. It is
also called negative report.
Audit certificate
It is a certificate of truth of the statement that the
auditor makes. It is a written confirmation of the
accuracy of affairs of the company.
Audit committee
Audit committee is an independent committee
formed with the board of directors of the company
to oversee financial reporting and disclosure.
Role of auditor in audit committee
• Implementation of accounting policies and
practices. • To make suggestion for strengthening
internal control system. • Provide requirements and
issue certificate of governance. • Assisting
management for better standard of governance.
 AUDITING AND CORPORATE GOVERNANCE (BCOM)

Tax audit Module IV Board Committee Module V

Tax audit refers to verification of books of Corporate governance Board committee is a committee identified or formed by Major corporate governance failure
accounts maintained by a tax payer. The purpose Corporate governance may be defined as a broad range the board with the objective of supporting the board work. • BCCI (UK) • Maxwell communication • Enron USA
of tax audit is to validate income tax of policies and ethical practices which are adopted by an a. Audit committee • Satyam computers services ltd • Tata finance
computation made by the tax payer. organization in its dealings with the stakeholders. It is the one of the standing committee formulated by the • King fisher airlines
Objectives of Tax Audit Importance of corporate governance board. ◆ BCCI (UK)
• To ensure books of account of the assessee 1. Protect stakeholders. 2. Attract investors. Functions of audit committee Bank of credit and commerce international was an
are properly maintained. • To assist assessing 3. Promotes accountability. 4. Mitigate risk. • Appointment and removal of external auditor international bank established in 1972 by Agha
officer in computing total income of the 5. Ensure compliance. 6. Improve efficiency. • Observing of internal audit policies and its Hasan Abedi, a Pakistani financier. The bank was
assessee. • To enable proper assessment of tax 7. Ensure corporate social responsibility. implementation. • Connecting link between internal and established with the objectives of serving the need
by the department to reflect through income of Benefits of corporate governance external auditor. • Proper financial reporting • Performing of the Asian and third world countries.
the tax payer. • To ensure assessment are made ◆ Benefits to society internal control •Compliances with law and procedures. Reason for BCCI failure
simpler and faster. • To facilitate administration • It avoids banking crises and economic stability b. Nomination and remuneration committee • Lack of vigilance by the regulators • Supremacy of
of tax law by a proper presentation of accounts. • Provide larger and liquid capital market • More inflow of It is the standing committee of the board. The main the promoter • Lack of attention of auditors •
Management audit fund • It eliminates corruption • Development of better objective is to review the composition of full board and Laziness of the board
It is the systematic evaluation of the corporate strategy • Improvement of management check the expertise of the board. ◆ Maxwell communication
performance of management of an enterprise. It ◆ Benefits to corporations Functions of nomination committee Maxwell communication Ltd was a renowned British
is the critical review of all aspects and process • It avoids fraud • It follows law and regulation • It • Identify the qualified person to be a director. media company. It was established in 1964.
of management. improves rating grade • It improves the competitive • Appointing and removal of a board member. Reason for Maxwell communication failure
Objectives of management audit advantages • Shareholders interest will be taken care • Director’s performance evaluation. • Setting standards. • • Concentrated ownership • Inefficient board •
1. To ensure smooth running of business. 2. To Theories of corporate governance Succession planning. Unethical usage of professional standards • High
identify overall objectives of organization. 3. To 1. Agency theory c. Stakeholders relationship committee rate of borrowing • Lack of transparency in transfer
ensure optimum utilization of human resources. Agency theory defines the relationship between the It is established in accordance with company’s of asset • Issues in audit
4. To ensure proper utilization of physical principals and agents. Here the principle is the constitution to ensure statutory fiduciary and regulatory ◆ Enron USA
facilities. 5. To assist all level of management. shareholder and agent is the board of directors. responsibilities. Enron scandal was the largest of all corporate
6. To pinpoint deficiencies in functional areas. 2. Stewardship theory d. Corporate social responsibility committee accounting scandal which has surprised the entire
7. To suggest improved methods for managerial Under this theory manager act as a steward. Steward It is a committee to ensure corporate responsibility corporate world. The company was specialized in
operations. protect and maximizes shareholders wealth through firm practices in an organisation. natural gas, electricity marketing, energy and other
Features of management audit performance. The role of management is to facilitate and Credit Rating physical commodities.
1. It is purely voluntary in nature. 2. It is explore. Credit rating is an opinion of a particular credit agency Reason for Enron USA failure
performed on continuous basis. 3. No 3. Stakeholders theory regarding the ability and willingness of an entity. • Misleading accounting policies and practices
professional qualification required for This theory incorporated the accountability of Rating agencies • Hides huge amount of debts
management auditor. 4. The management management to a board range of stakeholders. According These are the independent financial service agency which ◆ Satyam Computers Services Ltd.
auditor submit report to management. 5. It is to this theory stakeholders are eligible for fair return from provides different types of rating to the organization. Satyam computers was one of the largest software
performed for a specific purpose. 6. Approach of the organization. Corporate governance rating development and Consultancy Company in India. It
management audit objective and constructive. 4. Resource dependency theory It is the evaluation or assessment of the system through was incorporated in 1987 as a private sector company
Advantages of management audit This theory focuses on the role of board of directors in which an organization is managed. Reasons for Satyam Computers failure
1. It help management to achieve target. 2. It is a providing access to resources needed by the firm. Hence, Global rating agencies • Misrepresentation of facts • Embezzlement of fund
good tool for management control. 3. It ensure the owners have to appoint resourceful directors into the • Moody’s Investors service • Insider trading • Accounting malpractices • Lack of
optimum utilization of men and material. 4. It board. It is a credit rating agency in New York to provide credit vigilance by auditors.
identify overall objectives of the enterprise. 5. It Models of corporate governance services across the globe and also to provide financial ◆ Tata Finance
ensure coordination among different 1. The American Model analysis. It is one of the company operated and owned by
departments 6. It ensure smooth running of It is a rule based model. This model gave emphasize on • Standard and Poor’s (S&P) Tata group, India’s largest and most social
business. 7. It pinpoint deficiencies in functional interest of shareholders, management and directors. It is S&P global is one of the global financial service agency responsible business group. It was incorporated as a
areas. also known as Anglo-Saxson model. In this model the provides various financial services to the global capital private limited company in 1984, later converted into
Limitations/ disadvantages/ criticism of chairman and CEO of the company will be one & the same market. public limited company.
management audit 2. United kingdom Model • Fitch Rating Reason for Tata Finance failure
1. It is a costly affair. 2. It is expensive, so no It is a principle based model. This model is mandatory to It is an international credit rating agency at New York. It • Poor investment policies by the management.
suitable for small firms. 3. It does not have a well follow code of governance. There is a clear separation provides all the rating services that generally done by any • Insider trading by the company executives.
-defined scope. 4. It locks management in taking between chairman and CEO. Self-regulation and credit rating agencies. • Backdated sales • Concealment of material facts.
risky decisions. compliance is voluntary in this model. Itis also called National Rating Agencies ◆ Kingfisher Airlines
Qualities of a management auditor commonwealth model • CRISIL Kingfisher airlines was a privately owned airlines
1. He should have knowledge in management. 2. 3. Continental European Model CRISIL is the first credit rating agency in India established company in India. This company played a significant
He should have knowledge in accounting. 3. He It is a rule based model. It is very common in European in 1987. It provides independent rating services to role in Indian aviation industry. It was the second
should have knowledge in marketing. 4. He countries. It is a two tier model. One is management corporate instruments. largest company in Indian aviation industry.
should have knowledge in economics. 5. He board dominated by top mangmnt and the other is • CARE Reason for Kingfisher Airlines Failure
should have knowledge in various tax laws. supervisory board dominated by employees. CARE rating is considered to be the second largest credit • Luxurious service in flight travel • High fuel prices
6. He should have ability to hard work 7. He 4. Japanese business network model rating agency in India. It provide independent rating • Adverse government policy by taxation
should be impartial. 8. He should have courage It is popularly known as Keiretsu. In this model financial regarding quality and the extent to which they have • Competition from other airlines.
and ability to discharge duties. institution plays an important role in governance adopted the corporate governance. Corporate governance problems/ Reasons for
Difference between financial audit and mechanism. This model follow • ICRA corporate governance failure
management audit stakeholders approach. Investors does not have a crucial ICRA is a leading credit rating agency. It provides various • Regulators mistake • Supremacy of the CEO
Statutory audit Management audit role in this model. grading services of financial instruments and assess • Lack of vigilance by auditors • Incompetent board
Compulsory Not compulsory 5. Asian family based model corporate governance practices. • Misleading accounting policies • Insider trading
Appointed by Appointed by a. Overseas Chinese model: E-governance • Poor investment policies • Exorbitant rate of
shareholders management They follow a paternalistic style of management. In this It is the usage of information and communication interest • Concentrated ownership
Conducted by Conducted by a model, families own the equity stake of the company. The technology by the government to provide and facilitate Cadbury Report on Corporate Governance
qualified chartered team of mangemnt board plays only a supportive role in decision making. government services, exchange of information, The Cadbury report is published in December 1992.
accountants experts b. Chaebol model communication transaction etc. Adrian Cadbury is the chairman of Cadbury committee.
It review historical It concerned with In this South Korean model, power is vested with a family. Green governance The major recommendations of Cadbury reports are
records past and future They will have great influence in government. The board It is a systematic life cycle approach for ensuring the as follows:
activities have limited role in the affairs of the business. The sustainability of the business. • A single person should not be vested with the
number of family members always exceeds the Objectives of green governance decision making power. • The non-executive
Report submitted Report submitted
independent directors. • To ensure sustainable development • To control the directors should act independently. • A majority of
to the shareholders to the mangmnt
Insider trading human intervention • To permit the companies for online directors should be independent non-executive
Accountable to Answerable to
It is an unlawful act when the insiders are using the complains • To conserve non- renewable natural directors • The term of the directors can be extended
shareholders management
unpublished information’s for their self-benefits. resources beyond three years only after the prior approval of
Difference between cost audit and management
Reason for controlling insider trading Features of green governance the shareholders. • The remuneration of the
audit
•To protect the interest of investors •To protect • Separate board committee • Distinct corporate directors should be both fair and competitive.
Cost audit Management audit governance code • Appointment of independent directors
reputation of the company • To maintain confidence in Codes and standards of corporate governance
Compulsory audit Not compulsory the stock market • To maintain stability in the financial • Reporting of disclosure • Board composition • Board development
Conducted by Conducted by a system Green governance initiative in India • Shareholders relations • Remuneration
qualified chartered team of Clause 49 listing agreement • E-certification of forms by professional • E-voting • Accountability • Audit
accountants or management The clause 49 has laid down seven conditions that are • Video conferencing facility for shareholders
cost accountant experts furnished by the listed companies in order to ensure their • Video conferencing facility for directors • Online
Limited scope Wider scope listing in the official list of stock exchanges. application and online fee payment • Issue of e-certificate
It covers period of It covers more than Provisions under clause 49 agreement by using digital signature
one year one year • Board of directors •Audit committee • Subsidiary Shareholders activism
Report submitted Report submitted companies • Disclosures • CEO/CFO certifications It is simply refers to shareholders intervention in the
to government to management • Report on corporate governance • Compliance affairs of the company.
Class action suit Reasons for shareholders activism
It is the law suit against the company or individual against 1. Self-dealing 2. Fragile management 3. Lack of
by plaintiff. transparency Objectives of shareholders activism 1. To
Whistleblowing act as monitor of management 2. To protect the interest
It is the act of reporting malpractices within an of the shareholders 3. To ensure accountability and
organization to the internal or external parties. transparency

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