Auditing

Auditing PPT for B.Com.,
Presented By
V.GopalaKrishnan.,M.Com.,MBA.,M.Phil.,PGDMM.,
Assistant Professor,
Dept of Commerce,
Kamaraj College, Tuticorin

1. AUDITING Presented By V. Gopalakrishnan ., M.Com.,M.B.A.,M.Phil.,PGDMM ., Assistant Professor, Department of Commerce, Kamaraj College, Tuticorin .

2. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 2

3. Meaning - Auditing The Word Audit is derived from the Latin word “ Audire ” which means to hear. In Olden days, some experienced people ordinarily judges the accounts of business people for the purpose of the correctness of accounts. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 3

4. Meaning The general meaning of an audit is a planned and documented activity performed by qualified personnel to determine by investigation, examination, or evaluation of objective evidence, the adequacy and compliance with established procedures, or applicable documents, and the effectiveness of implementation. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 4

5. Definition Simple Definition:- Spicer & Pegler “Audit is an examination of accounts & records which is carried out by vouching the evidences, supporting various transactions; by such an examination it is ascertained that the Balance Sheet gives a true & fair view of the state of affairs of business & the Profit & Loss Account gives a true & fair view of the profit or loss of business. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 5

6. Characteristics of Auditing Systematic & Scientific Procedure Essential Documents are integral part It is done with the help of vouchers, documents, information and explanations received from the authorities. Undertaken by an Independent person or Body Analytical approach V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 6

7. Cont. Art & Science Both Verification of the results The Auditor has to satisfy himself with the authenticity Compliance 10. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the transactions and examine correspondence, Memorandum of Association and Articles of association etc., in order to establish correctness of the books of accounts. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 7

8. 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.   Today most of the economic activities are largely conducted through public finance. The auditor has to see whether these larger funds are properly used. The scope of audit encompasses verification of accounts with a intention of giving opinion on its reliability. Hence it covers cost audit, management audit, social audit etc. It should be remembered that an auditor just expressed his opinion on the authenticity of the account. He has no power to take action against anybody, in this regard its said that “an auditor is a watch dog but not a blood hound”. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 8

9. Cont. 1. Legal Requirements 2. Entity Aspects 3. Reliable Information 4. Proper Communication 5. Evaluation 6. Test 7. Comparison 8. Judgments 9. Work 10. Evidence 11. Misstatement V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 9

10. Principles of Auditing Fundamental principles of Auditing Integrity, Objectivity and Independence Confidentiality Skill & Competence Responsibility of work performed by others Documentation Planning Audit Evidence Accounting system & Internal Control Audit Conclusions Audit Report V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 10

11. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 11

12. Detection & Prevention of Errors V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 12

13. Detection & Prevention of Frauds V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 13

14. Advantages of Auditing A. 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 Better Reputation Uniformity in accounts B. Investor's point of view 1 . Protects interest 2. Moral check 3. Builds reputation 4. Good security V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 14

15. Cont. C. Other Advantages Audited account are detected as an authentic record of transaction. Errors and frauds are detected and rectified. It increases the morale of the staff and thus it prevents frauds and errors. Because of his expertise the auditor may advise on various matters to his clients. An auditor acts as a trustee of his shareholders. Hence he safeguards their financial interest. For taxation purpose auditing of account is a must. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 15

16. Cont. 7. In case of any claim is to be made from the insurance company only audited account should be submitted. Even in case of partnership firm auditing of accounts helps in the settlement of claim at the time of retirement/death of a partner. Auditor account helps in managerial decisions. They are useful to secure loan at the of amalgamation, absorption, reconstruction etc. Auditing safeguards the interest of owners, creditors, investors, and workers. It is useful to take certain financial decisions like issuing of shares, payment of dividend etc. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 16

17. 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. 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. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 17

18. Cont. 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. 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. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 18

19. Cont. 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. 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. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 19

20. Differences Between Accounting & Auditing Accounting Auditing Meaning It is the process of recording classifying and summarizing the business transactions to monetary Terms It is the process of review of accounts to establish their reliability and the statements therefrom Scope It entails preparation of financial statements and their interpretation Examination of accounts and records Object It investigates finding out the operating results and figuring out the financial status of an enterprise The object is to judge the correctness and reliability of financial statement prepared by the internal staff of business enterprises Hierarchy Accounting Precedes the Auditing Auditing succeeds accounting V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 20

21. Accounting Auditing Qualification No formal qualification is insisted for acting as an accountant Auditor should be a qualified charted-accountant. Expertise Accountant is expected to be familiar with audit techniques and procedures. Auditor is one who has the expertise to apply not only accounting principles but also auditing techniques and processes Nature of Employment Accountant is permanent staff of an enterprise. He is an independent outsider. He is working on an assignment basis. Remuneration Accountant receives salary as per Remuneration of auditor is Pre-fixed The terms of his service. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 21

22. FACTORS INVESTIGATION AUDITING Description Audit means the inspection, examination or verification of a person, organization, system, process, enterprise, project or product. Investigation means an inquiry, or is the act of detail examination of activities so as to achieve certain objectives. Owners Audit is conducted on behalf of owners only and they make the appointment. Investigation may be conducted either by owner of the undertaking or by an outsider. Purpose To determine the true and fair view. Varies from business to business Process Routine process Investigation is not a regular process Scope It includes only an examination of the accounts of a business It covers an examination of the accounts bur also covers an inquiry into other matter that are connected with the purpose for which it is  undertaken Period Year or six months May cover several years Employees Does not examine personally May examine personally V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 22

23. Audit Procedure V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 23

24. Audit Programme “An Audit programme is an outline of all procedures to be followed in order to arrive at an opinion concerning a clients financial statement. An audit programme is a written scheme prepared by the auditor to distribute the work to be followed during audit; How much work is to be done? Who is going to do a particular portion of work? What is the duration of the time? V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 24

25. Types of Audit Working Programme V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 25

26. Specimen of Audit Programme M/ s.M.BalaMurugan Ltd., For the year ended on 31.3.2015 Particulars of Work Extent of Work to be Done Actual Work Completed Time Taken to Complete Completed by (Signature) A.Cash Book: Posting Costing Vouching 1 month Full 3 months June Full July, November B.Debtor’s Legder : 1.Posting 2. Costing 3. Vouching 1 month 1 month 3 month April March May, October Physical verification Cash Fixed assets Stock As on 31.3.20 As on 31.3.20 As on 31.3.20 As on 31.3.20 As on 31.3.20 As on 31.3.20 V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 26

27. Audit Note Book During the course of an audit, the audit staff makes a note of the points that require clarification, explanation or investigation. Contents of the Audit Note Book; Technical Details about the Business Missing Vouchers Frauds and Errors found in the book Suggestions made by audit staff V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 27

28. Audit Procedures V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 28

29. I. Adoption of Distinctive Ticks He should use different types of ticks for different purposes He should issue clear instructions to the members Tick should be small and clear The kinds of ticks used by audit staff The auditor should have the pencils and inks of different colours of pencils every year V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 29

30. Example of Tick V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 30

31. Routine Checking Routing checking is the checking of Common records and books or original entry and ledgers with a view of detect clerical errors and frauds of a very simple nature. Advantages: Detection of errors and frauds Checking of postings Checking of final accounts Arithmetical accuracy of entries Simple Job V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 31

32. Test Checking Test Checking is also known selective verification “Sampling Process” Test checking is a substitute for detailed checking. Advantages Saves Time and energy Useful & Purposive Easy for the auditer V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 32

33. Various Techniques of Audit Routine checking Test Checking Vouching Valuation Physical examination Confirmation Inquiry Confirmation Examination of subsidiary Books Analysis of Financial Statements V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 33

34. Internal Check A System of Internal check is an arrangement of duties where by no one person is allowed to carry through and to record every aspect of a transaction. Objectives To allocate the duties & responsibilities of clerk To minimize the Errors & Frauds To detect error of fraud easily it is committed To prepare final a/c To exercise moral pressure over staff V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 34

35. Internal Control V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 35

36. Advantages – Disadvantages Internal Check Advantages Proper distribution of work Detection of errors and frauds Minimization of errors and frauds Increase the deficiency Disadvantages No Seriousness Carelessness Expensive Disorder V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 36

37. Vouching Vouching means checking of entries with the help of documentary evidences. For each entry it is to be ascertained which is properly authorised V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 37

38. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 38

39. Precautions to be taken by the auditor while examining vouchers Each voucher should be consecutively numbered Voucher should be inspected and cancelled by the auditor Voucher name should be correctly mentioned Auditor verify the voucher date and time Auditor verify the official seal & Authorized sign When voucher is missing, the auditor should satisfy himself with regard to the reason of its being lost and demand for duplicate copy V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 39

40. Verification - Meaning Verification means truth proving or confirming the Truth. Verification signifies “Proving the truth or Confirmation”. Verification includes the following, Existence Valuation Ownership Possession V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 40

41. Valuation - Meaning Valuation of assets is an important part of their verification. Valuation means to test exact value of an asset on the basis of its Utility. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 41

42. Classification of Assets Fixed Assets – Plant & Machinery, Land, Buildings Current Assets – Stock in hand Wasting Assets – Coal, Mines Intangible assets – Goodwill, paten right, copyright Fictitious Assets - Shares V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 42

43. Company Audit Company audit is conducted is accordance with the provisions of the Companies Act,1956. To Conduct a Company audit, a company must appoint qualified Auditor. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 43

44. Qualification of Auditor A person shall not be qualified for appointment as auditor unless he is Charted Accountant within the Meaning of CA Act, 1949 A Person who holds restricted Auditors Certificate (Part –B) 1956 An Auditor must possess adequate educational qualification He is independent of all influences A Charted Accountant means a person who is a member of the Institute of Charted Accountants of India. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 44

45. QUALITIES OF AN AUDITOR Independence Integrity Objectivity Ability for expression and communication Tactfulness Awareness V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 45

46. RIGHTS & POWERS OF AN AUDITOR V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 46

47. DUTIES OF AN AUDITOR Compliance with Audit Standard Duty to Report Fraud Duty not to render certain services He can not render "consulting and specialized services" which means any one or combination of- Accounting and Book keeping services Internal Audit Design and implementation of any financial information system actuarial services investment advisory services investment banking services management services any other kind of consultancy services V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 47

48. 4) Duty to sign audit reports etc. 5) Duty to attend General meeting 6) Duty to Report Under section 143 of the Act the auditor has a duty to report to the members of the company on: accounts examined by him every financial statement laid before a general meeting during his tenure 7) Duty to Enquire- Secures loans and advances transactions represented merely by book entries personal expenses issue of shares for cash loans and advances made by the company etc. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 48

49. APPOINTMENT OF AN AUDITOR

50. WHO CAN BECOME AN AUDITOR? V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 50

51. DISQUALIFICATIONS OF AN AUDITOR A body corporate An officer or employee of the company under audit A person who is a partner, or who is in the employment of an officer or employee of the company A person who is indebted to the company for an amount exceeding Rs.1000 A person holding security of that company A person who has been disqualified for appointment as an auditor of a company on above mentioned grounds, shall also not be eligible for appointment with any other body corporate which may be that company’s subsidiary or that company’s holding company. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 51

52. WHO CAN APPOINT AN AUDITOR? V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 52

53. APPOINTMENT BY DIRECTORS FIRST AUDITORS : The board of directors shall appoint the first auditor(s) of the company within One Month of the Date Of Registration of the company. CASUAL VACANCY : The directors have been empowered to fill any casual vacancy in the office of an auditor, except which is caused by prior resignation of an auditor. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 53

54. APPOINTMENT BY SHAREHOLDERS FIRST AUDITORS : In case the directors fail to appoint the first auditor(s), the shareholders shall do so at a general meeting by passing a resolution. SUBSEQUENT AUDITORS : ( i ) By Ordinary Resolution (ii) By Special Resolution CASUAL VACANCY : If a casual vacancy in the office of an auditor arises by his resignation, such vacancy should only be filled by the company in a General Meeting . The company shall within 7 days give intimation to the auditor so appointed. The auditor shall inform in writing to the Registrar of Companies within 30 days of his appointment. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 54

55. APPOINTMENT BY CENTRAL GOVERNMENT If a company, at an annual general meeting, fails to appoint or re-appoint an auditor, the Central Government may appoint a person to fill the vacancy. The company has to give notice of the above fact to the Government within 7 days of the Annual General Meeting. The appointment by the Central Government is made from the panel of names suggested by the applicant company. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 55

56. APPOINTMENT BY THE COMPTROLLER AND AUDITOR GENERAL In case of Government Companies, the Comptroller and Auditor General appoints or re-appoints the auditor. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 56

57. The retiring auditor shall NOT be re-appointed in the following cases: RE-APPOINTMENT OF AN AUDITOR V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 57

58. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 58

59. Ceiling on Number of Audits V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 59

60. REMUNERATION OF THE AUDITOR

61. Fees to the Auditor Expenses Cost of any facility provided to the auditor CONSTITUENTS OF REMUNERATION V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 61

62. WHO CAN FIX REMUNERATION? V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 62

63. REMOVAL OF AUDITOR

64. REMOVAL OF AUDITOR BEFORE THE EXPIRY OF HIS TERM Section 224(7) The purpose of this section is to make the removal of an independent and conscientious auditor difficult. Removal of First Auditor Removal of Subsequent Auditor V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 64

65. APPOINTMENT OF AN AUDITOR IN PLACE OF A RETIRING AUDITOR Section 225 SPECIAL NOTICE OF THE RESOLUTION : For appointing a person other than the retiring auditor, a special notice of such a resolution should be given to the company at least fourteen days before the meeting. RIGHT OF RETIRING AUDITOR TO MAKE REPRESENTATION: The retiring auditor has a right to make representations in writing to the company, not exceeding a reasonable length, and request for their notification to the members. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 65

66. RIGHT TO GET REPRESENTATION CIRCULATED : The company, on receipt of the representation, shall mention the fact of the representation in the notice of the meeting and send a copy thereof to every member to whom the notice of the meeting is sent. GROUND FOR EXEMPTION : If the Central Government, on the application, is satisfied that the auditor is securing needless publicity of a defamatory matter, it can exempt the company from sending the copy of representations to the members. OTHER RIGHTS : Besides the rights mentioned, the retiring auditor also has a right to be heard at the meeting. PASSING OF RESOLUTION : The general meeting may by passing an ordinary resolution, remove such an auditor. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 66

67. PENALTY FOR NON-COMPLIANCE According to section 232 of the Companies Act, 1956, if default is made by a company in complying with any of the provisions contained in section 225, the company and every officer of the company who is in default, shall be punishable with fine which may extend up to five thousand rupees. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 67

68. Audit Report A Report is a statement of collected and considered facts so drawn up as to give clear and concise information to persons who are not already in possession of the full facts. Kinds of Audit Report Final Report Interium Report Partial Report V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 68

69. Characteristics of a Good Audit Report It should be unbiased It should be expressed in clear It should be accurate It should be in simple style It should be brief It should be coherent V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 69

70. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 70

71. V.Gopalakrishnan.,M.Com.,MBA.,M.Phil.,PGDMM 71