Amity School of Business

Amity School of Business

BBA (All Programs), I Semester
Business Accountancy

Module 5 Part1

1
 Outline Amity School of Business

• Concept: Audit, significance, types and reports.

• Basic legal requirements (retaining and submitting proper
records).
• Preparing and auditing financial reports.
• Failure to comply with the legal requirements for maintaining
and filing accounting records.
• Concept of International accountancy as a profession.

2
 Preparing Financial Statements
Amity School of Business

Financial
Statements Prepare
Trial Balance
Post Transactions

Record Transactions

Analyze Transactions

Examine Source Documents

 Financial Statements Amity School of Business

Companies summarize the results of their business activities in

four financial statements:
1. Balance sheet
2. Income statement
3. Retained earnings statement (or statement of stockholders’
equity)
4. Statement of cash flows (statement of changes in financial
position)

Balance sheet and income statement are primary Retained

earnings statement and statement of cash flows are derived
from the balance sheet and the income statement
 Audit and Auditing Amity School of Business

AUDITING is a systematic process of

objectively obtaining and evaluating evidence
regarding assertions about economic actions
and events to ascertain the degree of
correspondence between those assertions and
established criteria and communicating the
results to interested parties.
 Principle of an Auditor
Amity School of Business

 Ethical

 Professional

 Fair
 Objectives of Auditing Amity School of Business

• Primary Objective (main objective)

– To produce a report by the auditor of his opinion of the truth
and fairness of financial statements so that any person reading
or using them can have belief in them.

• Secondary
– To detect errors and fraud ( Consider materiality)
– To prevent errors and fraud by the deterrent and moral effect
of the audit
– To provide spin- off effects. The auditor will be able to assist
his clients with accounting , systems, taxation , financial , and
other problems.
 Audit Objectives
Amity School of Business

• Validity
• Completeness
• Cutoff
• Ownership
• Accuracy
• Valuation
• Classification
• Disclosure
 Types of Audit Amity School of Business

• Statutory Audit, carried because the law requires them.

Statutes include Companies Act
• Private audits, because of auditor’s desire and not
because of law e.g. sole trader and partnership
• Internal audits, is the one conducted by an employee of
a business into any aspect of its affairs.
• Management audit, an inquiry into efficiency and
effectiveness of management
• Public sector audit, contract audit , computer audit etc
 TYPES OF AUDITS Amity School of Business

-Financial statements audit -Compliance audits

-Operational audits -Comprehensive audits
-Forensic audits

TYPES OF AUDITORS
-External auditors -Internal auditors
-Government auditors -Forensic auditors

ISSUES AFFECTING THE PROFESSION

-Expanded services -Globalization
-Litigation -Independence issues
 Amity School of Business

Internal Audit
 Concept Amity School of Business

• Internal Audit is a thorough examination of the accounting

transactions as well as that of the system according to which
these have been recorded, with a view to reassuring that
management that the accounts are properly maintained and the
system contains adequate safeguard to checks any leakage of
revenue or misappropriation of property or assets and the
operations have been carried out in conformity with the plans
of the management.
 Concept Amity School of Business

• Internal Audit is an independent management function which

involves a continuous an critical appraisal of the functioning
of an identity with a view to suggest improvements thereto and
add value to and strengthen the overall governance mechanism
of the entity, including the entity’s risk management and
function.
 Internal Auditing
Amity School of Business

• There are four major areas of importance for internal audit that
are addressed
– Corporate governance
– Risk management
– Organizational control
– Corporate objectives
 Significance Amity School of Business

Internal auditing activity is primarily directed at

evaluating internal control which includes:
•Effectiveness and efficiency of operations.
•Reliability of financial and management reporting.
•Compliance with laws and regulations.
•Safeguarding of Assets

15
 Difference between Internal and External Audit
Amity School of Business

• Internal auditors who are members of a professional

organization would be subject to the same code of ethics and
professional code of conduct as applicable to external auditors,
however they differ primarily in the relationship to the entity
they audit.
• Internal auditors are part of the organization they audit and
report to management. Typically, internal auditors are
employees of the entity.
• Whereas an external auditor is an audit professional who
performs an audit in accordance with specific laws or rules on
the financial statements of a company and who is independent
of the entity being audited.

16
 Amity School of Business
Internal auditing External auditing
Objectives To advise management on whether the To provide an opinion on whether the
organization has sound systems of financial statements provide a true
internal controls to protect the and fair view
organization against loss

Legal basis All areas of the organization, Financial focus

operational as well as financial

Scope All areas of the organization, Financial focus

operational as well as financial

Approach Increasingly risk base Increasingly risk based

Assess risks Test underlying transactions that form
Evaluate system of controls the basis of the financial
Test operation of system statements
Make recommendation for
improvements
Responsibility To advice and make recommendations To form opinion on whether the
on the internal control and financial statements provide a true
corporate governance and fair view.
 Types of Audit Reports
Amity School of Business

Type of Report Interpretation

Unqualified Financial statements taken as a whole present fairly the
Opinion financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles
(GAAP).
Qualified Opinion “Except for” the effects of a particular matter, the financial
statements present fairly the financial position, results of
operations, and cash flows in conformity with GAAP.
Adverse Opinion Financial statements do not present fairly the financial
position, results of operations, and cash flows in
conformity with GAAP.
Disclaimer of Auditor does not express an opinion on the financial
Opinion position, results of operations, or cash flows.
 Audit Documentation Amity School of Business

• This Standard on Auditing (SA) deals with the auditor’s

responsibility to prepare audit documentation for an audit of
financial statements.
• Necessary in the circumstances when applied to audits of other
historical financial information.
• Laws or regulations may establish additional documentation
requirements.
• The record of audit procedures performed, relevant audit
evidence obtained, and conclusions the auditor reached (terms
such as “working papers” or “workpapers” are also sometimes
used).
Nature and Purposes of Audit Documentation
Amity School of Business

• Evidence of the auditor’s basis for a conclusion about the

achievement of the overall objectives of the auditor;
• Evidence that the audit was planned and performed in
accordance with SAs and applicable legal and regulatory
requirements.
• Assisting the engagement team to plan and perform the audit.
• Assisting members of the engagement team responsible for
supervision to direct and supervise the audit work, and to
discharge their review responsibilities in accordance with SA.
• Enabling the engagement team to be accountable for its work.
Nature and Purposes of Audit Documentation
Amity School of Business

• Retaining a record of matters of continuing significance to

future audits.
• Enabling the conduct of quality control reviews and
inspections
• Enabling the conduct of external inspections in accordance
with applicable legal, regulatory or other requirements.
 Assembly of the Final Audit File
Amity School of Business

• The auditor shall assemble the audit documentation in an audit

file and complete the administrative process of assembling the
final audit file on a timely basis after the date of the auditor’s
report.
• After the assembly of the final audit file has been completed,
the auditor shall not delete or discard audit documentation of
any nature before the end of its retention period.
• In circumstances other than those envisaged in paragraph where
the auditor finds it necessary to modify existing audit
documentation or add new audit documentation after the
assembly of the final audit file has been completed, the auditor
shall, regardless of the nature of the modifications or additions,
document
 Amity School of Business

Penalties Chart under Income

Tax Act
 Basis of Quantum
Section Nature of Default
Charge of penalty
Amity School of Business
Failure to pay tax; i.e.,
221(1) non-payment of tax – Amount of tax in arrears
required by notice u/s. 156.
Non-compliance with
notice u/s. 142(1) to file
returns or to produce
documents required by
271(1)(b) assessing officer or u/s. – Rs. 10,000
143(2) to produce evidence
on which assessee relies or
u/s. 142(2A) to get
accounts audited.
Concealment of the
particulars of income, or 100 % to 300 % of tax
271(1)(c) Tax sought to be evaded
furnishing inaccurate sought to be evaded
particulars thereof.
Failure to maintain books
271A – Rs. 25,000
or documents u/s. 44AA.