INTRODUCTION TO AUDIT

VIVEK KUMAR
MBA, PGDBM, UGC-NET & RESEARCH
SCHOLAR
 INTRODUCTION TO AUDIT

 Origin of Audit

 Meaning

 Definition

 Purpose and Functions of Audit

 INTRODUCTION TO AUDIT

 Factors responsible for growth of Auditing

 Advantages & Limitations of Audit

 Difference between Book Keeping, Accountancy and

Audit

 Objects of Audit – Primary and Secondary Objectives

 ORIGIN OF AUDIT

 Historical records show that Egyptians, Greeks and

Romans used to get their public accounts scrutinized by
an Independent Official.

 Need felt during the Industrial Revolution (mass

production & economies of scale)
 ORIGIN OF AUDIT

 Creation of Monitoring Authority (review & correction

mechanism)

 Emergence of Appraisal Agencies (external firms)

 Grew as an independent and professional medium

 A class by itself and self regulated discipline

 MEANING

 Derived from Latin word – “Audire” which means “to

hear”

 An Auditor – An Individual appointed by the company

owners to check accounts whenever they suspected
fraud, to hear the explanation given by the person
responsible for financial transactions.
 MEANING

 Luca Pacialo – Italian Mathematician – In 1494 – first

to mention and describe the duties & responsibilities of
an Auditor.

 Object of an audit was mainly to see whether the

accounting party has properly accounted for the receipts
and payments of cash.
 DEFINITION OF AUDITING

ICAI – The independent examination of financial

information of any entity, whether profit oriented or
not, and irrespective of its size or legal form, when such
examination is conducted with a view to expressing an
opinion thereon.
 DEFINITION OF AUDITING

Montgomery, a leading American Accountant –

“Auditing is a systematic examination of the books and
records of a business or other organization, in order to
ascertain or verify, and to report upon the facts regarding
its financial operations and the results thereof”.
 DEFINITION OF AUDITING

Comprehensive Definition – It is an examination of

the accounting books and the relative documentary
evidence so that an auditor may be able to find out the
accuracy of figures and may be able to make report on
the balance sheet and other financial statements which
have been prepared from there.
 FACTORS RESPONSIBLE FOR
GROWTH OF AUDITING
 Adoption of Double Entry System of Book-Keeping

 Industrial Revolution

 Separation of Ownership and Management

 Rising importance of Quality, Transparency and

Independence
 FACTORS RESPONSIBLE FOR
GROWTH OF AUDITING
 Increase in size of business (level of operations)

 Social Objects of Business

 Decisions of the Court of Law

 Dynamic nature of business (change in technology &

processes)

 Statutory Need of Audit

 CHARACTERISTICS OF AUDITING
 There must be an Institution.

 An Auditor must be an independent Person.

 To examine Truthness and Fairness of Books

 Use Of Vouchers

 To get necessary Clarification

 CHARACTERISTICS OF AUDITING
 To Follow the Principles

 Collection and Evaluation of Evidence

 Certain Period

 Tactfully

 Report
BOOK KEEPING, ACCOUNTANCY AND
AUDITING
 BOOK KEEPING

Book Keeping is concerned with :

 Journalising

 Posting into Ledgers

 Totalling Both sides of Ledger

 Balancing
 ACCOUNTANCY
Accountancy is concerned with :

 Examining work of book keeper

 Trial Balance

 Trading and Profit & Loss account

 Balance Sheet

 Rectification of errors and Adjustment Entries

 AUDITING
 Verification of Entries

 Scrutiny of Final Accounts

 Submission of Audit Report

“Accountancy begins where Book-Keeping ends and
Auditing begins, where Accountancy ends.”
“ Accountancy is a necessity while
Auditing is Luxury.”
 ACCOUNTANCY IS A NECESSITY
Arguments in favour of the statement, “Accountancy is a
necessity”

 Limited Memory power of human being.

 Knowledge about Profit or Loss.

 Knowledge of Economic position of Business.

 Proof in the court of Law.

 ACCOUNTANCY IS A NECESSITY
Arguments in favour of the statement, “Accountancy is
a necessity”

 Need on Admission of a new partner.

 Need on Death or Retirement of a new partner.

 Helpful in adjudication as Insolvent.

 Safety from fraud and forgery.

 ACCOUNTANCY IS A NECESSITY
Arguments in favour of the statement, “Accountancy is a
necessity”

 Helpful in getting loans.

 Comparative study of the business.

 For preparing future plans.

 For determination of selling price of the business.

 For getting export licence.

 AUDITING IS LUXURY
Arguments in favour of the statement, “Auditing is
Luxury”

1. Opinion of Small Businessmen.

2. Opinion of Big Businessmen.

 ARGUMENTS IN FAVOUR OF THE STATEMENT,
“AUDITING IS LUXURY”
OPINION OF SMALL BUSINESSMAN

 More Expensive

 Alternative uses of Audit Expenses

 Difficulties in fulfilling the Formalities

 Wastage of time

 Fulfilment of Prestige only

 Decrease in efficiency of Employees

ARGUMENTS IN FAVOUR OF THE STATEMENT,
“AUDITING IS LUXURY”
OPINION OF BIG BUSINESSMAN
 Increases efficiency of employees

 Less Probability of Fraud

 Increase in efficiency of Management

 Helpful in development of Business

 Prompt decision at the time of Insolvency

 Base for future planning

 Protection of the Shareholders’ rights

 CONCLUSION

On the basis of above arguments, it can be said that

accountancy is necessary for businesses of all size and
levels and Auditing is Luxury for all small businesses
but necessity for big industries and businesses.
SCOPE OF AUDITING
 SCOPE OF AUDITING

The scope of audit is increasing with the increase in the

complexities of the business. It is said that long range
objectives of an audit should be to serve as a guide to the
management future decisions.
 SCOPE OF AUDITING
 Detection of Frauds and Errors

 Determination of Fairness and Authenticity of Financial

Statement
 SCOPE OF AUDITING
ON THE BASIS OF NATURE AND TYPE OF BUSINESS

1. Scope of Private Audit

2. Statutory Audit and its Scope

3. Government Audit and its Scope

 SCOPE OF AUDITING
The scope of audit can also be studied from the following
duties of an auditor :

1. To check the arithmetical accuracy of the accounts

2. Checking accounts with the help of all the relevant
vouchers, invoices, minute books etc.
3. Verifying assets and liabilities in the Balance Sheet
4. Reporting to the client
 QUALITIES OF AN AUDITOR
 Acquired Skills

 Born Skills
ACQUIRED SKILLS/PROFESSIONAL QUALITIES

 Knowledge of Book-keeping, accountancy and auditing

 Knowledge about the working of Business

 Knowledge of Language

 Knowledge of Economics

 Knowledge of Business Laws

 ACQUIRED SKILLS/PROFESSIONAL
QUALITIES
 Knowledge of Audit Case Laws

 Technical Knowledge

 Knowledge of other Subjects

 BORN SKILLS/PERSONAL QUALITIES

  Honesty

 Tactful

 Ability to Work Hard

 Impartial

 Cautious and Vigilant

 BORN SKILLS/PERSONAL
QUALITIES
 Methodical

 Ability to Trace out Facts and Figures

 Always Inquisitive

  Courage

 Ability to Communicate

 Common Sense
 PRINCIPLES OF AUDITING
Fundamental principles of Auditing

 1. Integrity, Objectivity and Independence

 2. Confidentiality

 3. Skill & Competence

 4. Responsibility of work performed by others

 5. Documentation
 PRINCIPLES OF AUDITING
 6. Planning

 7. Audit Evidence

 8. Accounting system & Internal Control

 9. Audit Conclusions

 10. Audit Report

 OBJECTS OF AUDITING
 Primary Objects

 Secondary Objects

 Social Objects
 OBJECTS OF AUDITING
PRIMARY OBJECTS

 Examination of Accounting Books

 Verification of Financial Statements

 OBJECTS OF AUDITING
SECONDARY OBJECTS

 Detection of Errors
 Detection of Frauds

 Prevention of errors and frauds

 Creation of Healthy Environment

 Fulfilment of the order of Act

 To satisfy the Govt. Authorities

 Advice to the managers

 Moral effect on the Employees

 OBJECTS OF AUDITING
SOCIAL OBJECTS

 Protection to Shareholders
 To stop evasion of Tax

 To stop capital erosion

 Measurement of fair wages to labourers

 Reasonable prices for consumers

 Fair return and justice to the investors

 Evaluation of social cost and benefits

 TYPES OF ERRORS

Error of Omission
1. Errors of Partial Omission
2. Errors of Complete Omission
 TYPES OF ERRORS
Errors of Commission
1. Recording wrong amount in Subsidiary Books

2. Wrong totalling of subsidiary books

3. Posting wrong amount in the Ledger Accounts

4. Posting on the wrong side of the Ledger Account

 TYPES OF ERRORS
Errors of Principles

 fundamental principle of Accountancy & Auditing

 TYPES OF ERRORS
Compensating Error

Two errors together, making trial balance agree

 FRAUD

Fraud means false representation or entry made

intentionally or without belief in its truth to defraud
somebody.
 CLASSIFICATION OF FRAUD
 Misappropriation of cash

 Misappropriation of goods

 Misappropriation of assets

 Embezzlement of labour

 Embezzlement of amenities

 Manipulation in accounts

 Window Dressing
 ADVANTAGES OF AUDITING
Businessman's point of view

1. Detection of errors and frauds

2 . Loan from banks
3. Proper valuation of investments
4 . Proper valuation of assets
5. Government acceptance
6. Suggestions for improvement
7. Better Reputation
8. Uniformity in accounts
 ADVANTAGES OF AUDITING
Investor's point of view

1. Protects interest

2. Moral check

3. Builds reputation

4. Good security
 ADVANTAGES OF AUDITING
Other Advantages

1. Audited account are treated as an authentic record of

transaction.

2. Errors and frauds are detected and rectified.

3. It increases the morale of the staff and thus it prevents

frauds and errors.
 ADVANTAGES OF AUDITING

4. Because of his expertise the auditor may advise on

various matters to his clients.

5. An auditor acts as a trustee of his shareholders. Hence he

safeguards their financial interest.

6. For taxation purpose auditing of account is a must.

 ADVANTAGES OF AUDITING
7. In case of any claim is to be made from the insurance
company only audited account should be submitted.

8. Even in case of partnership firm auditing of accounts

helps in the settlement of claim at the time of
retirement/death of a partner.

9. Audited account helps in managerial decisions.

 ADVANTAGES OF AUDITING

10. They are useful to secure loan at the of amalgamation,

absorption, reconstruction etc.

11. Auditing safeguards the interest of owners, creditors,

investors, and workers.

12. It is useful to take certain financial decisions like

issuing of shares, payment of dividend etc.
 LIMITATIONS OF AUDITING

Truly speaking, an audit should have no limitations of its

own. It is designed to protect the interest of all parties
who are interested in the affairs of the business. If there
be any shortcoming arising there from, it may be due to
its narrow scope of application in its related field of
operation and unextended definition of the concept.
 LIMITATIONS OF AUDITING
Auditing suffers from the following shortcomings

1. Want of complete picture

The audit may not give complete picture. If the accounts
are prepared with the intention to defraud others, auditor
may not be able to detect them.
 LIMITATIONS OF AUDITING

2. Problems of dependence:
Sometimes the auditor has to depend on explanations,
clarification and information from staff and the client.
He may or may not get correct or complete information.
 LIMITATIONS OF AUDITING

3. Post-mortem examination:
Auditing is a post-mortem examination. There is no use of
such examination when events have already been
occurred.

4. Existence of errors in the audited accounts:

It is not possible for the auditor in all cases, to check each
and every transaction of an organization. As a result, there
may be error in the audited accounts even after the
checking by the auditor.
 LIMITATIONS OF AUDITING
5. Lack of expertise:
Auditor has to seek opinion of experts on certain matters
on which he may not have experts knowledge. The
auditor has to depend upon such reports which may not
always be correct.

6. Diversified situations:
Auditing is considered to be a mechanical work. Auditors
may not be in a position to frame audit programme,
which can be followed in all situations.
 LIMITATIONS OF AUDITING
7. Quality of the auditor:
Success of audit depends on the sincerity with which the
auditor has performed his duties. The same audit work
can be done by two different auditors with difference in
sincerity.

8. Existence of defective policies

The auditor can only report on the truth and fairness of
the financial statements. But other defects, i.e. defects
relating to management and control may not be possible
to be covered by the auditor.
 CLASSIFICATION OF AUDIT

 Based on organisational structure

 Based on Practical approach to Audit

 CLASSIFICATION OF AUDIT
BASED ON ORGANISATIONAL STRUCTURE

 Statutory Audit

 Government Audit

 Private Audit( Non-Statutory Audit)

 STATUTORY AUDIT

Statutory Audit is compulsory audit prescribed under

statute or Law. Organisations established under
following Act, conduct statutory audits :

1. Companies Act, 2013

2. Banking Companies regulation Act, 1949
3. Insurance Companies Act, 1938
4. Trust Act, 1950
5. Co-operative Societies Act, 1912
 GOVERNMENT AUDIT

Audit of Government Companies.

 PRIVATE AUDIT( NON-STATUTORY AUDIT)

The audit which is not required by Statute is known as

Private Audit. Followings are examples of private audit :

 Sole Proprietorship Audit

 Partnership Audit

 NPO Audit
 CLASSIFICATION OF AUDIT
BASED ON PRACTICAL APPROACH TO AUDIT

 Continuous Audit
 Periodical/Annual/Final Audit

 Interim Audit

 Procedural Audit

 Standard Audit

 Occasional Audit

 Partial Audit

 Cost Audit

 Management Audit
 CLASSIFICATION OF AUDIT
BASED ON PRACTICAL APPROACH TO AUDIT
 Balance Sheet Audit
 System Audit

 Complete Audit and Partial Audit

 Internal Audit

 External Audit

 Cash Audit

 Propriety Audit
 CONTINUOUS AUDIT

Continuous Audit means audit wherein the audit work

starts right from the very beginning of the year and
continues throughout the year.
 ADVANTAGES OF CONTINUOUS AUDIT
 Early detection of Errors and Frauds
 Detailed and Close Checking

 Moral Check on the employees

 Early Presentation of Final Accounts

 Convenience to Auditor

 Important Suggestions for Improvements

 Declaration of Interim Dividend

 Easy presentation of Half-yearly Results

 Up-to-date maintenance of Accounts

 Efficient Audit

 Audit staff can be kept busy

 DISADVANTAGES OF CONTINUOUS
AUDIT
 Alteration of accounting Figures
 Dislocation of Client’s Work

 Thread of the work is lost

 Collusion between Auditor’s and client’s Staff

 Client’s staff may become lazy

 Highly Expensive

 Auditor’s work may become Monotonous

 Greater chance of Fraud in impersonal Accounts

 PERIODICAL/ANNUAL/FINAL AUDIT

This type of audit is usually done at the end of the

financial year when all the accounts have been balanced
and Statement of Profit and Loss balance sheet have
been prepared.
 ADVANTAGES OF PERIODICAL AUDIT
 Economical
 Saving of Time

 Continuity of Work

 No chance of Figure Alteration

 Thread of Work is not lost

 Lesser chance of collusion between Client’s Staff and

Auditor’s Staff
 No chance of Client’s Staff becoming lazy

 Audit work less monotonous

 Reduced Chances of Fraud in Impersonal Accounts

 DISADVANTAGES OF PERIODICAL
AUDIT
 No Early Detection of Errors and Frauds

 Lack of Deep Checking

 Greater Chances of Errors and Frauds remaining Undetected

 Delay in Audit Report

 Less Suitable for Big Concerns

 Greater Chances of Frauds and Misrepresentation by

Management
 INTERIM AUDIT
An Audit conducted between two annual audits is called
Interim Audit.
 ADVANTAGES OF INTERIM AUDIT
 Base for the Payment of Interim Dividend

 Early Completion of Final Audit

 Helps in Tax Planning

 Early Detection of Errors and Frauds

 It exercises the Moral Check on the Employees

 It Facilities Publication of Interim Results

 It Facilities Raising further Capital

DISADVANTAGES OF INTERIM AUDIT

 Chances of Alteration of accounting Figures

 Expensive

 Additional Work for the Auditor

 COST AUDIT

A system of audit introduced by the Government of

India for the review, examination, and appraisal of the
cost accounting records and attendant information,
required to be maintained by specified industries.
 MANAGEMENT AUDIT

It is a structured review of the systems and procedures of

an organization in order to evaluate whether they are
being conducted efficiently and effectively.
 PROPRIETY AUDIT

Under this type of audit, the expenditure is analyzed with

a view to ascertain the cases of improper, avoidable or in
fructuous expenditure even though the expenditure has
been incurred in conformity with the existing rules and
regulations.
 TAX AUDIT

The objective of such audit is to assist the tax authorities

in making the correct income tax assessment of the
assesses concerned.
 BANK AUDIT

The Banking Regulation Act, 1949 contains the

provisions relating to the maintenance of accounts and
their audit.
 OCCASIONAL AUDIT
Audit conducted occasionally when necessity arises is
called Occasional Audit.

Example :
1. Revaluation of Assets

2. Valuation of Goodwill

3.
 INTERNAL AUDIT

Internal auditing is an independent,

objective  and consulting activity designed to add value
to and improve an organization's operations.

OR
The audit of accounts by Internal Auditor is called
internal Audit.
 DIFFERENCE BETWEEN INTERNAL
AUDIT AND CONTINUOUS AUDIT
Basis Of Difference between internal Audit and
Continuous audit
1. Appointment of Auditor
2. Qualification of Auditor
3. Period of Checking
4. Liabilities of Auditor
5. Moral Effect
6. Preparation of Audit Report
7. Dependency of Auditor
8. Dependence of Audit
 AUDIT TECHNIQUES

Audit techniques are tools, methods or processes by

means of which an auditor collects necessary evidence to
support his opinion in respect of the propositions or
assertions submitted by the client to him for his
examination.
 AUDIT TECHNIQUES
 Physical Examination and Counting
 Confirmation

 Examination of Original Documents and Contracts

 Recomputation

 Examination of book-keeping Procedures

 Scanning

 Enquiry

 Examination of Subsidiary Books

 AUDIT TECHNIQUES
 Correlation with related Information
 Test Checking

 Routine Checking

 Detailed Checking

 Vouching
 PREPARATION BEFORE
COMMENCEMENT OF AUDIT
In Case of New Institutions
 To Examine Appointment Letter

 To Communicate the Previous Auditor

 Scope of work to be Determined

 To Study the Nature of the Organisation

 Object of Audit
 Study of Methods of Maintaining Accounts
 Obtaining the List of Books of Accounts

 Technical Aspects

 Knowledge of Distribution of Work among the

Employees
 Name of the Officers, Their Authorities and Signatures

 Examination of system of Internal Check

 To Open permanent Audit File

 To study Managerial policies

 Preparation of Audit Programme

 BASIC PRINCIPLES GOVERNING AN
AUDIT
 Integrity, Objectivity and Independence
 Confidentiality

 Skills and Competence

 Work Performed by Others

 Documentation

 Planning

 Audit Evidence

 Accounting System and Internal Control

 Audit Conclusions and Reporting

 AUDIT PROGRAMME

An audit programme is a detailed plan of the auditing

work to be performed. It specifies the procedures to be
followed in the conduct of audit more efficiently. The
auditor outlines the whole procedure of audit from
beginning till the finalization of audit report.
 FEATURES OF AUDIT PROGRAMME
 Written
 Clear-cut

 Flexible

 Distribution of Work

 Fixation of Audit Staff’s Responsibilities

 Overall Checking

 Examination with Original Vouchers

 Based on Accounting System

 Keep in Mind the Weak and Strong Points of the Internal

Check System
 Knowledge of Concerned Rules

 Signature, Date and Column

 CONSTRUCTION OF AUDIT
PROGRAMME

1. How much work is to be done ?

2. Who is going to do a particular portion of the work ?

3. What is the duration of time by which the work is to be

finished ?
 CONTENTS OF AN AUDIT PROGRAMME
 

The following are the details of an audit programme:

1.      Name of the client.

 
2.      Nature of operations and business of client.
 
3.      Review of system of internal check.

4.      Date of commencement of audit work.

 
5.      Duration of audit work.
 
 CONTENTS OF AN
AUDIT PROGRAMME
6.  Accounting system followed in client organization.
 
7.  Review the report of the previous auditor.
 
8. Review the remarks, instructions or objections raised in
the previous audit report.
 
9. Examine the various ledger accounts and subsidiary books.
 
10.Examine the statutory books and registers, profit and loss
account, and balance sheet.
 Audit File

 Audit Note Book

 Audit Working Papers

 AUDIT PROCEDURES
 Adoption of Different Tick Mark

 Routine Checking

 Test Checking
INTERNAL CONTROL, CHECK AND
AUDIT