Auditing and Assurance- Introduction to audit

ntroduction to Auditing
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, then communicating the results to interested users. Auditing ensures accuracy, reliability, and compliance of financial information.

1. AUDITING
Dr.P.Manochithra, Assistant Professor, SRCAS 1

2. Meaning -Auditing
•The Word Audit is derived from the Latin word“Audire”whichmeans
tohear.
•In Olden days, some experienced people ordinarily judges the
accounts of businesspeople for the purposeof the correctness of
accounts.
Dr.P.Manochithra, Assistant Professor, SRCAS 2

3. Meaning
Dr.P.Manochithra, Assistant Professor, SRCAS 3
Thegeneralmeaningofanauditisaplannedanddocumented
activityperformedbyqualifiedpersonneltodetermineby
investigation,examination,orevaluationofobjectiveevidence,
theadequacyandcompliancewithestablishedprocedures,or
applicabledocuments,andtheeffectivenessofimplementation.

4. Definition
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SimpleDefinition:-Spicer &Pegler
“Auditisanexaminationofaccounts&recordswhichis
carriedoutbyvouchingtheevidences,supportingvarious
transactions;bysuchanexaminationitisascertainedthatthe
BalanceSheetgivesatrue&fairviewofthestateofaffairsof
business&theProfit&LossAccountgivesatrue&fairview
oftheprofitorlossofbusiness."

5. Characteristics ofAuditing
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1.Systematic & ScientificProcedure
2.Essential Documents are integralpart
3.It is done with the help of vouchers, documents,information
and explanations received from theauthorities.
4.Undertaken by an Independent person orBody
5.Analyticalapproach

6. Cont.
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6.Art & ScienceBoth
7.Verification of theresults
8.The Auditor has to satisfy himself with theauthenticity
9.Compliance
10.Theauditorhastoinspect,compare,check,review,scrutinize
thevoucherssupportingthetransactionsandexamine
correspondence,MemorandumofAssociationandArticlesof
associationetc.,inordertoestablishcorrectnessofthebooks
ofaccounts.

7. Scope ofAuditing
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Thescopeofauditisincreasingwiththeincreaseinthe
complexitiesofthebusiness.Itissaidthatlongrangeobjectivesof
anauditshouldbetoserveasaguidetothemanagementfuture
decisions.
Todaymostoftheeconomicactivitiesarelargelyconducted
throughpublicfinance.Theauditorhastoseewhethertheselarger
fundsareproperlyused.Thescopeofauditencompasses
verificationofaccountswithaintentionofgivingopiniononits
reliability.Henceitcoverscostaudit,managementaudit,social
auditetc.Itshouldberememberedthatanauditorjustexpressed
hisopinionontheauthenticityoftheaccount.Hehasnopowerto
takeactionagainstanybody,inthisregarditssaidthat“anauditor
is a watch dog but not a bloodhound”.

8. Cont.
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1.LegalRequirements
2.EntityAspects
3.ReliableInformation
4.ProperCommunication
5.Evaluation
6.Test
7.Comparison
8.Judgments
9.Work
10.Evidence
11.Misstatement

9. Principles ofAuditing
Fundamental principles ofAuditing
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1.Integrity, Objectivity andIndependence
2.Confidentiality
3.Skill &Competence
4.Responsibility of work performed byothers
5.Documentation
6.Planning
7.Audit Evidence
8.Accounting system & InternalControl
9.AuditConclusions
10.AuditReport

10. Dr.P.Manochithra, Assistant Professor, SRCAS 10

11. Detection &Prevention ofErrors
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•trasanction is to be left out toregister,
partial entry of onetransactionError ofOmission
•Rs. 1500 recorded as Rs.5100Error of
Commission
•ommission to post,posting wrong side & amount to
an a/c, double posting,totalling mistake, balance
b/d & c/f
ClericalError
•fundamental principle ofAccountancy
&AuditingError ofPrinciple
Compensating
Error
•two errors togather which willbe
resulted in trial balance sheet willagree

12. Detection & Prevention ofFrauds
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Misappropriation
OfCash
ByEmployees
Manipulationof
A/c
OfGoods
Showingmore
Profits
Showingless
profit
By Top
Management

13. Advantages ofAuditing
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A.Businessman's point ofview:-
1.Detection of errors andfrauds
2 . Loan frombanks
3.Proper valuation ofinvestments
4 . Proper valuation ofassets
5.Governmentacceptance
6.Suggestions forimprovement
7.BetterReputation
8.Uniformity inaccounts
B.Investor's point ofview
1 . Protectsinterest
2.Moralcheck
3.Buildsreputation
4.Good security

14. Cont.
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6.For taxation purpose auditing of account is amust.
C. OtherAdvantages
1.Auditedaccountaredetectedasanauthenticrecordof
transaction.
2.Errors and frauds are detected andrectified.
3.It increases the morale of the staff and thus it prevents frauds
anderrors.
4.Becauseofhisexpertisetheauditormayadviseonvarious
matters to hisclients.
5.Anauditoractsasatrusteeofhisshareholders.Hencehe
safeguards their financialinterest.

15. Cont.
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7.Incaseofanyclaimistobemadefromtheinsurance
companyonlyauditedaccountshouldbesubmitted.
8.Evenincaseofpartnershipfirmauditingofaccountshelpsin
thesettlementofclaimatthetimeofretirement/deathofa
partner.
9.Auditoraccounthelpsinmanagerialdecisions.
10.Theyareusefultosecureloanatthetime of
amalgamation, absorption, reconstructionetc.
11.Auditingsafeguardstheinterestofowners,creditors,
investors, andworkers.
12.It is useful to take certain financial decisions like issuing of
shares, payment of dividendetc.

16. Limitations ofAuditing
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able to detectthem.
Trulyspeaking,anauditshouldhavenolimitationsofits
own.Itisdesignedtoprotecttheinterestofallpartieswhoare
interestedintheaffairsofthebusiness.Iftherebeany
shortcomingarisingtherefrom,itmaybeduetoitsnarrow
scopeofapplicationinitsrelatedfieldofoperationand
unextendeddefinitionoftheconcept.
Auditing suffers from the followingshortcomings:
1. Want of completepicture
The audit may not give complete picture. If the accounts are
preparedwiththeintentiontodefraudothers,auditormaynotbe

17. Cont.
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auditor.
2.Problemsofdependence:
Sometimestheauditorhastodependonexplanations,
clarificationandinformationfromstaffandtheclient.Hemayor
maynotgetcorrectorcompleteinformation.
3.Post-mortemexamination:
Auditingisapost-mortemexamination.Thereisnouseof
suchexaminationwheneventshavealreadybeenoccurred.
4.Existenceoferrorsintheauditedaccounts:
Itisnotpossiblefortheauditorinallcases,tocheckeach
andeverytransactionofanorganization.Asaresult,theremay
beerrorintheauditedaccountsevenafterthecheckingbythe

18. Cont.
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done by two different auditors with difference insincerity.
5.Lackofexpertise:
Auditorhastoseekopinionofexpertsoncertainmatterson
whichhemaynothaveexpertsknowledge.Theauditorhasto
dependuponsuchreportswhichmaynotalwaysbecorrect.
6.Diversifiedsituations:
Auditingisconsideredtobeamechanicalwork.Auditors
maynotbeinapositiontoframeauditprogramme,whichcanbe
followedinallsituations.
7.Qualityoftheauditor:
Successofauditdependsonthesinceritywithwhichthe
auditorhasperformedhisduties.Thesameauditworkcanbe

19. Differences Between Accounting &
Auditing
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Accounting Auditing
Meaning
It is the process of recording
classifying and summarizing the
business transactions tomonetary
Terms
It is the process of review ofaccounts
to establish their reliability and the
statementstherefrom
Scope
It entails preparation offinancial
statements and theirinterpretation
Examination of accounts andrecords
Object
It investigates finding out the
operating results and figuring outthe
financial status of anenterprise
The object is to judge thecorrectness
and reliability of financial statement
prepared by the internal staff of
business enterprises
Hierarchy
Auditing succeedsaccounting

20. Accounting Auditing
Qualification
No formal qualification is insistedfor
acting as anaccountant
Auditor should be a qualifiedcharted-
accountant.
Expertise
Accountant is expected to be familiar
with audit techniques andprocedures.
Auditor is one who has the expertiseto
apply not only accounting principles
but also auditing techniques and
processes
Nature ofEmployment
Accountant is permanent staff ofan
enterprise.
He is an independent outsider. Heis
working on an assignmentbasis.
Remuneration
Accountant receives salaryasper Remuneration of auditor isPre-fixed
The terms of his service.
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21. FACTORS INVESTIGATION AUDITING
Description Audit means the inspection,
examination or verification of aperson,
organization, system, process,
enterprise, project orproduct.
Investigation means aninquiry,
or is the act of detail
examination of activities so as
to achieve certainobjectives.
Owners Audit is conducted on behalf ofowners
only and they make theappointment.
Investigation may beconducted
either by owner of the
undertaking or by anoutsider.
Purpose To determine the true and fairview. Varies from businessto
business
Process Routineprocess Investigation is not aregular
process
Scope It includes only an examination ofthe
accounts of abusiness
It covers an examination of the
accounts bur also covers an
inquiry into other matter thatare
connected with the purpose for
which it isundertaken
Period Year or sixmonths May cover severalyears
Employees Does not examinepersonally May examine personally
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22. Audit
Procedure
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Audit
Programme
AuditNote
Book
Working
Papers
Routing
Checking
Test
checking

23. Audit
Programme
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•“An Audit programme is an outline of all procedures to
be followed in order to arrive at an opinion concerninga
client'sfinancialstatement.
•An audit programme is a written scheme prepared bythe
auditor to distribute the work to be followed duringaudit;
i.How much work is to bedone?
ii.Who is going to do a particular portion ofwork?
iii.What is the duration of thetime?

24. Types of Audit Working
Programme
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FixedAudit
ProgrammeFlexibleAudit
Programme

25. Specimen of AuditProgramme
M/s.M.BalaMuruganLtd.,
For the year ended on31.3.2015
Particularsof
Work
Extent of
Worktobe
Done
ActualWork
Completed
Time Takento
Complete
Completedby
(Signature)
A.CashBook:
1.Posting
2.Costing
3.Vouching
1month
Full
3months
June
Full
July,November
B.Debtor’s
Legder:
1.Posting
2.Costing
3.Vouching
1month
1month
3month
April
March
May,October
Physical
verification
1.Cash
2.Fixedassets
3.Stock
As on31.3.20
As on31.3.20
As on31.3.20
As on31.3.20
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26. Audit Note
Book
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•During the course of an audit, the audit staff makes a
note of the points that require clarification, explanationor
investigation.
•Contents of the Audit NoteBook;
Technical Details about theBusiness
MissingVouchers
Frauds and Errors found in thebook
Suggestions made by audit staff

27. Audit
Procedures
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Adoptionof
Distinctive
Ticks
Routing
Checking
Test
Checking
Difference
inBalance
Books

28. I. Adoption of Distinctive
Ticks
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He should use different types of ticks for differentpurposes
He should issue clear instructions to themembers
Tick should be small andclear
The kinds of ticks used by auditstaff
The auditor should have the pencils and inks ofdifferent
colours of pencils everyyear

29. Example of
Tick
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30. Routine
Checking
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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 simplenature.
Advantages:
 Detection of errors andfrauds
 Checking ofpostings
 Checking of finalaccounts
 Arithmetical accuracy ofentries
 Simple Job

31. Test
Checking
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•Test Checking is also known selective verification
“Sampling Process” Test checking is a substitute for
detailedchecking.
•Advantages
 Saves Time andenergy
 Useful &Purposive
 Easy for theauditer

32. Various Techniques
of Audit
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•Routinechecking
•TestChecking
•Vouching
•Valuation
•Physicalexamination
•Confirmation
•Inquiry
•Confirmation
•Examination of subsidiaryBooks
•Analysis of FinancialStatements

33. Dr.P.Manochithra, Assistant Professor, SRCAS 33