Principles and Practices of

Auditing
 Introduction
Audit may be defined as:
1. Systematic and Scientific examination of the books of accounts of a
business, which
2. Is done by an independent person or body of persons qualified for the
job,
3. With the help of vouchers, documents, information and explanation
received from the authorities, so that
The auditor may satisfy with the authenticity of financial accounts
prepared for a fixed term and ultimately report that
Financial statements exhibits the true and fair view of state of affairs and profit or loss
for the financial period; and
The accounts have been prepared in conformity with the law.
Objectives of Auditing

Primary objective : report whether the balance sheet gives a true

and fair view of the company’s state of affairs and profit and loss
a/c.

Secondary (Incidental) objective : it is incidental on satisfaction

of primary objective and includes:
detection and prevention of frauds, and
detection and prevention of errors
 Differences between Accounting and Auditing
Basis Accounting
Definition Accounting is referred to as the
process of recording, classifying,
summarising and interpreting the
financial transactions, statements to
determine the financial position of an
organisation
Purpose Accounting is done with the purpose
of showing the position, profitability
and performance of the business
entity or organisation
Objective To determine profit and loss of the
organisation or the financial position
of an organisation for a period
Auditing
Auditing is referred to as the process of
examining the financial records such as
transactions and statements of an
organisation in order to find any
discrepancies during the process of
recording of the transactions and also to
verify the accuracy of the records
Auditing is done to verify the accuracy of
data presented by accounting. It is done
with the purpose of revealing to what extent
the true and fair view of records is
maintained in the transactions
To determine the correctness of all the
recorded transactions
Differences between Accounting and Auditing (Contin..)

Mode of operation Accounting is done on a daily It is a periodical assessment

basis, as transactions happen and is done monthly, quarterly
on a daily basis for any or yearly
business

Performed by Accounting is done by Auditing is done by auditors

accountants

Sequence Accounting starts at the end of Auditing starts at the end of

bookkeeping accounting
 Advantages of Auditing

❖ Ensures account correctness

❖ Detects and prevents error
❖ Helps in maintaining accounts regularly
❖ Easy procurement of loans
❖ Keeps morale check
❖ Assists in decision making
❖ Stakeholders confidence
 Disadvantages of Auditing

❖ Costly
❖ Depends on the genuinity of books and supporting documents.
❖ Skills of the auditor
 Types of Audit

Classification on the basis of organisational structure/specific objectives/ scope

Classification on the basis of conduct/ approach of an audit work

Classification on the basis of specific objectives

 Types of Audit (Contin..)

Classification on the basis of organisational structure/specific objectives/ scope:

1. Audits under statute (law)

2. Audit of the accounts of private firms
3. Audit of the accounts of private individuals
4. Audits of the accounts of trusts
 Types of Audit (Contin..)

Classification on the basis of conduct/ approach of an audit work:

1. Continuous audit
2. Annual audit/ Final audit
3. Balance sheet audit
4. Interim audit
5. Partial audit
 Types of Audit (Contin..)

Classification on the basis of specific objectives:

1. Cost audit
2. Management audit
3. Tax audit
4. Environmental audit
5. Social audit
 Audit Procedure

1. Audit Planning
❖ understanding the organisation
❖ systems, policies, procedures, internal control systems
❖ preparing audit programme
❖ co -ordination of audit work

2. Real audit work

❖ vouching
❖ valuation and verification of assets and liabilities
❖ reporting
Preparation before commencement of new audit

1. Receiving appointment letter

2. Communication with existing auditor
3. Acceptance of appointment
4. Ascertaining the scope of audit
5. Knowledge about organisation
6. Knowledge about accounting system
7. Knowledge about technical details
8. Complete list of directors/partners
9. Observations in previous auditors report
10. Instruction to the client
 Audit Programme

● 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.
 Audit Notebook

● A register maintained by the audit staff

● To record important points observed, errors, doubtful queries, explanations
and clarifications to be received from the clients.
● Day-to-day work performed by the audit clerks.
● A large variety of matters observed during the course of audit are recorded.
 Audit Working Papers

● Papers and documents which contain important facts about accounts under
audit
● Working papers provide the basis of conclusions and summarizations
● Evidence of work done by the auditor and his staff.
 Audit Planning

Audit planning is a process of deciding in advance what is to be done, who

is to do it, how it is to be done and when it is to be done by the auditor in
order to have efficient and effective completion of work.

Audit plans should cover knowledge about client’s accounting systems and
policies, internal control procedures and coordinating the work to be
performed. Plans should be flexible so that they can be developed or revised
as and when required by the auditor.
 Benefits (or) Advantages of Audit Planning
Accomplishment of Objectives: Audit plan ensures that it provides right means to
accomplish audit objectives. Further it also ensures that appropriate attention is devoted
to important areas of audit.
Identification of Problems: A well drawn and established audit plan helps in
identifying potential problem.

Timely Completion of Work: It ensures that work is completed properly within the
specified time and no important area is left out. It also ensures that all important areas of
management receive attention.
Facilitates Coordination: It facilitates coordination of the audit work done by auditors
and other experts.
 Differences between Audit Program(programme)
and Audit Plan
● Purpose: An audit plan outlines the overall goals and objectives of an audit,
while an audit program outlines the specific steps and procedures that will be
used to achieve those goals.

● Scope: An audit plan defines the scope of the audit, including the areas and
transactions that will be examined, while an audit program details the specific
procedures that will be used to test those areas and transactions.

● Flexibility: An audit plan is generally more flexible and can be adjusted as the
audit progresses, while an audit program is more detailed and specific, and is
less likely to be changed.

● Audience: An audit plan is intended for management and other stakeholders,

while an audit program is intended for the audit team and other internal
audiences.
 Audit Strategy

Audit strategy refers to the overall approach and plan designed by auditors to
conduct an audit engagement effectively and efficiently. It outlines the scope, timing,
and direction of the audit, taking into consideration the specific characteristics of the
entity being audited, its industry, and the level of risk associated with the
engagement.
An effective audit strategy enables auditors to:
● Identify the significant areas of the financial statements that require special
attention.
● Determine the extent of audit procedures to be performed.
● Allocate audit resources, such as personnel and time, efficiently.
● Coordinate the efforts of the audit team members.
● Communicate with the client and manage their expectations.
Audit Engagement

An audit engagement is an arrangement that an auditor has with a client to perform

an audit of the client's accounting records and financial statements. The term usually
applies to the contractual arrangement between the two parties, rather than the full
set of auditing tasks that the auditor will perform. To create an engagement, the two
parties meet to discuss the services needed by the client. The parties then agree on
the services to be provided, along with a price and the period during which the audit
will be conducted. This information is stated in an engagement letter, which is
prepared by the auditor and sent to the client. If the client agrees with the terms of
the letter, a person authorized to do so signs the letter and returns a copy to the
auditor. By doing so, the parties indicate that an audit engagement has been initiated.
This letter is useful for setting the expectations of both parties to the arrangement.
Audit Documentation
Audit documentation refers to written records created during the time
of auditing, including working papers, notes, and other related
documentation. These records serve as evidence of the auditor's work
and support the auditor's audit report and opinions expressed. In
essence, Audit documentation is a trail of evidence that allows
auditors to trace their steps to the initial audit planning, fieldwork, and
conclusions.
Audit Evidence
Audit (Auditing)evidence is all the information, whether obtained from
audit procedures or other sources, that is used by the auditor in arriving at
the conclusions on which the auditor's opinion is based.

Examples of auditing evidence include bank accounts, management

accounts, payrolls, bank statements, invoices, and receipts.
 Characteristics of Auditing Evidence
Good auditing evidence can be measured by the extent of the
following characteristics:
Sufficiency: Sufficiency takes into account whether or not the material provided is of an adequate quantity
that would allow auditors to make an accurate judgment. If an auditor was given just one bank statement of a
company, it would not be enough to make any determinations on the financial standing of that company.

Reliability: Reliability seeks to determine whether or not the material can be trusted and counted on for
forming an opinion. Reliability typically factors from the source of the information.

Source: The source of accounting evidence can be obtained directly from the company or externally.
Externally sourced information is generally regarded as more trustworthy and is therefore preferred.

Nature: Nature refers to the type of information that is received. For example, the information can be
provided through legal documents, presentations, orally from employees, or through a physical confirmation.

Relevance: Depending on the type of audit being conducted, how pertinent the information received is in
relation to the overall analysis is a guiding factor.
Written Representation
Written representation – A written statement by management provided to
the auditor to confirm certain matters or to support other audit evidence.
Written representations in this context do not include financial statements,
the assertions therein, or supporting books and records.