Auditing concepts.pptx Meaning and Definition of Auditing

Meaning and Definition of Auditing- Objective – Types of audits- Basic Principles governing an audit, Auditor- Qualification - Rights and Duties - Independence, Auditing and Assurance Standards – Overview, Standard setting process, Role Auditing and Assurance Standards Board in India.

1. Unit 1 - Auditing concepts

2. Auditing Concepts  Meaning and Definition of Auditing- Objective – Types of audits- Basic Principles governing an audit, Auditor- Qualification - Rights and Duties - Independence, Auditing and Assurance Standards – Overview, Standard setting process, Role Auditing and Assurance Standards Board in India.

3. Meaning of Auditing . Checking Financial Records Auditing means examining a company's financial records (like bills, receipts, ledgers) to see if they are accurate . Done by an Auditor An auditor is a professional who performs the audit. Ensures Truth and Fairness The goal is to check if the financial statements show a true and fair view of the business . Follows Rules and Standards The audit is done according to set guidelines like accounting standards and auditing standards .

4. Can Be Internal or External Internal audit is done by the company’s own staff. External audit is done by outside professionals (usually required by law). Helps Detect Errors and Frauds Auditing helps find mistakes or cheating in the accounts. Builds Trust Audited accounts give confidence to investors, banks, and government that the business is honest. Required by Law for Some Businesses In many countries, companies must get audited every year to meet legal requirements.

5. Example of Auditing A company like ABC Ltd. prepares its annual financial statements. An external auditor, such as a chartered accountant from XYZ Audit Firm , examines these statements to verify if: Revenues and expenses are recorded properly. Assets and liabilities are valued correctly. There is no fraud or misstatement. The auditor then issues an audit report giving an opinion on whether the financial statements present a true and fair view.

6. Objectives of Auditing To Verify Accuracy of Financial Records Ensure that the accounts and financial statements are correct and reliable . To Detect Errors and Frauds Identify any mistakes, frauds, or irregularities in the financial records. To Ensure Compliance with Laws Check if the business is following laws, regulations, and accounting standards .

7. To Confirm Proper Use of Resources Verify that the company’s assets are used properly and safeguarded . To Evaluate Internal Controls Assess the effectiveness of the company’s internal checks and controls . To Provide Assurance to Stakeholders Give confidence to investors, creditors, and management about the truthfulness of financial information .

8. To Help Management Provide suggestions for improving financial processes and controls . To Prepare Reliable Financial Statements Ensure financial reports reflect the true financial position of the company.

9. Types of Audit Internal Audit Done by the company’s own staff to check internal controls and processes . Helps improve efficiency and prevent errors. External Audit Performed by independent auditors outside the company. Ensures financial statements are true and fair for outsiders like investors. Statutory Audit Required by law for certain companies. Checks compliance with legal and regulatory requirements .

10. Management Audit Evaluates management performance and decision-making . Focuses on how well the company is managed. Operational Audit Reviews business operations and processes . Aims to improve efficiency and effectiveness. Financial Audit Examines financial records and statements specifically. Confirms accuracy of financial data. Compliance Audit Checks if the company follows rules, policies, and laws . Ensures regulatory compliance.

11. Definition of Auditing According to AICPA (American Institute of Certified Public Accountants): "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 users."

12. According to Spicer and Pegler: "An audit is such an examination of the books, accounts, and vouchers of a business as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up so as to give a true and fair view of the state of the affairs of the business."

13. Objectives of auditing Primary Objective of Auditing To express an opinion on the truth and fairness of the financial statements. This involves verifying whether the financial statements present a true and fair view of the company's financial position and performance in accordance with the applicable accounting standards and legal requirements.

14. Secondary Objectives of Auditing These are specific goals that support the primary objective: Detection and Prevention of Errors Ensure that unintentional mistakes in accounting and financial reporting (e.g., arithmetic errors, omissions) are identified and prevented in the future. Detection and Prevention of Frauds Identify deliberate manipulation or misrepresentation of accounts, such as misappropriation of assets or falsification of records. Verification of Assets and Liabilities Confirm the existence, ownership, and proper valuation of assets and liabilities shown in the balance sheet.

15. Evaluation of Internal Controls Assess the adequacy and effectiveness of internal control systems to reduce the risk of errors and fraud. Compliance with Laws and Regulations Ensure that the organization follows all relevant legal and regulatory requirements, including tax laws, labor laws, and corporate regulations. Assurance to Stakeholders Provide assurance to shareholders, investors, creditors, and other stakeholders regarding the reliability of the financial statements. Improvement in Accounting Practices Recommend improvements in accounting systems and processes based on audit findings.

16. Basic principles governing an audit Integrity Auditors must be honest and straightforward in all professional and business relationships. No deliberate misrepresentation or bias. Objectivity Auditors should remain impartial and free from conflicts of interest. Personal bias or influence from others must not affect audit judgment. Professional Competence and Due Care Auditors must maintain professional knowledge and skill at the level required to perform their duties competently. They should exercise due diligence and apply proper audit techniques and judgment.

17. Confidentiality Auditors must respect the confidentiality of information acquired during the course of the audit. Information should not be disclosed without proper authority or legal obligation. Professional Behavior Auditors must comply with relevant laws and regulations. Their conduct should avoid any action that discredits the profession.

18. Independence Auditors must be independent in both mind and appearance . They should avoid situations that could compromise or appear to compromise their independence. Planning and Supervision Audits should be properly planned and supervised to ensure all important areas are covered efficiently. Evidence-Based Approach Audit conclusions and opinions must be supported by sufficient and appropriate audit evidence .

19. Risk Assessment Auditors should assess the risk of material misstatements in the financial statements due to error or fraud. True and Fair View The ultimate objective of an audit is to express an opinion on whether the financial statements present a true and fair view of the entity's financial position.

20. Auditor – Qualifications Be a Chartered Accountant (CA) Must hold a Certificate of Practice (COP) from the Institute of Chartered Accountants of India (ICAI) . In Case of a Firm Majority of partners must be qualified CAs. Only those partners who are CAs can act and sign as auditors. Disqualifications (Cannot be Appointed if): Not a CA. An employee or officer of the company. A person who is indebted to the company for an amount exceeding ₹1,000 (or prescribed limit). A person holding any security or interest in the company.

21. Rights of an Auditor 1.Right to Access Books and Records Can inspect all accounting and financial records of the company. 2. Right to Receive Notices Can attend and speak at general meetings of shareholders. 3. Right to Information and Explanation Can ask company officers for any information necessary for the audit. 4. Right to Remuneration Entitled to receive audit fees as decided by the Board/shareholders.

22. 5. Right to Report to Shareholders Can express an opinion through the audit report . 6. Right to Visit Branches Can access the books of accounts of any branch office.

23. Duties of an Auditor 1. Examine Financial Statements Ensure they give a true and fair view of the financial position. 2. Report to Shareholders Prepare and submit an audit report based on findings. 3. Compliance Check Verify that the company has complied with all accounting and legal standards.

24. 4. Detection of Errors and Frauds While not primarily responsible for detecting fraud, must take reasonable steps to detect material misstatements. 5. Maintain Confidentiality Must not disclose any confidential information acquired during the audit. 6. Adhere to Auditing Standards Should follow the auditing standards prescribed by ICAI and Companies Act . 7. Report on CARO (if applicable) Must give an opinion on various matters under the Companies (Auditor’s Report) Order – CARO .

25. 1. Duty to Report on Financial Statements Auditor must report whether the financial statements show a true and fair view of the company’s affairs. 2. Duty to Inquire (Sec 143(1)) Auditor must inquire into: Loans and advances Deposits not recorded Sale of assets at undervalue Whether personal expenses charged to business

26. 3. Duty to Report Frauds Auditor must report frauds to the central government if amount > ₹1 crore. If < ₹1 crore, report to Board/Audit Committee . 4. Duty to Maintain Independence Must remain unbiased and professional . Cannot hold shares in the company or have financial interest. 5 . Duty to Comply with Auditing Standards Follow rules issued by the ICAI and NFRA . 6 . Duty to Sign the Audit Report Auditor must sign and date the audit report.

27. Rights Duties Access to books and records Report on financial statements Ask for information Detect and report fraud Visit branches Maintain independence Attend general meetings Follow standards Receive remuneration Sign audit report

28. Independence of an Auditor -Meaning Independence of an auditor means the auditor must carry out their duties in an objective, unbiased, and impartial manner—without being influenced by the management or stakeholders. It is the foundation of audit credibility .

29. Types of Auditor Independence: Type Explanation 1. Programming Independence Freedom to plan the audit, select procedures and schedule work 2. Investigative Independence Right to access any documents, people, or places without restriction 3. Reporting Independence Auditor can express opinion freely without pressure or fear 4. Personal Independence Auditor must not have any relationship (financial or personal) with client

30. Legal Provisions (as per Companies Act, 2013): Section 141(3)(d): Disqualifies a person from being auditor if: They hold securities in the company They have a business or employment relationship with the company They are relatives of directors or employees

31. Threats to Independence: Threat Type Description Self-interest Auditor has a financial interest in the client Self-review Auditor reviews their own previous work Advocacy Auditor promotes client’s position (e.g., in a legal case) Familiarity Close relationship with client staff or directors Intimidation Client pressures or threatens the auditor

32. How to Safeguard Auditor Independence: Rotate auditors regularly (as per Sec 139 of Companies Act) Prohibit auditors from offering non-audit services to the same client Avoid conflicts of interest (e.g., loans, employment offers) Maintain Unbiased Evaluation

33. Assurance : Assurance refers to a broader concept than auditing. It involves providing confidence or assurance to stakeholders that information (financial or non-financial) is reliable and free from material misstatement. It includes audits but also extends to reviews, agreed-upon procedures, and other assurance services . It aims to improve the quality of information for decision-makers.

34. Example of Assurance: A company wants to assure its investors that its sustainability report (non-financial) is accurate. An independent firm conducts an assurance engagement to verify the information in the report, such as carbon emissions data and social responsibility metrics.

35. Difference in a Nutshell : Feature Auditing Assurance Scope Focused on financial statements Broader – can include non-financial info Objective Give an audit opinion Provide confidence in information Performed by Auditors Auditors or other professionals Example External audit of financials Assurance on sustainability reporting

36. Auditing and Assurance Standards Definition Auditing Standards : Prescriptive rules for conducting audits of financial statements, ensuring compliance with laws, regulations, and ethical principles. Assurance Standards : Broader than auditing standards; these cover engagements where practitioners provide conclusions designed to enhance the confidence of users (e.g., reviews, agreed-upon procedures).

37. Key Objectives To ensure independence , objectivity , and professional skepticism . To promote uniformity in auditing practices across jurisdictions. To enhance the credibility of financial information for stakeholders. .

38. Types of Standards Standard Type Description Auditing Standards (AS) Apply to audits of financial statements. Provide guidance on procedures, evidence, and reporting. Review Engagement Standards Apply to limited assurance engagements where the auditor provides a conclusion based on inquiry and analytical procedures. Other Assurance Engagement Standards Apply to engagements like compliance, performance, or sustainability reporting. Related Services Standards Apply to services like agreed-upon procedures and compilation engagements.

39. Standard-Setting Bodies Body Standards Issued Jurisdiction/Reach IAASB(International Auditing and Assurance Standards Board ) International Standards on Auditing (ISA) Global (under IFAC) AICPA(American Institute of Certified Public Accountants .) Statements on Auditing Standards (SAS) USA PCAOB( Public Company Accounting Oversight Board) Auditing Standards for public companies USA ICAI (India) Standards on Auditing (SAs) India (based on ISAs) FRC (UK )(Financial Reporting Council ) International Standards on Auditing (UK) UK

40. Structure of Standards Auditing standards typically follow a consistent structure: Introduction – Scope, purpose, and responsibilities. Objective – Goal to be achieved by applying the standard. Requirements – Actions auditors must perform. Application and Other Explanatory Material – Guidance on implementing requirements.

41. Key Principles of Auditing Standards Integrity and objectivity Professional competence and due care Confidentiality Professional behavior Sufficient appropriate audit evidence Risk-based approach

42. Importance of Compliance Enhances the reliability of audit opinions. Ensures legal and regulatory adherence. Reduces the risk of litigation and reputational damage. Builds stakeholder confidence in financial reports.

43. Recent Trends Increased emphasis n sustainability and ESG assurance . Adoption of technology and data analytics in audit. Rising importance of cybersecurity and IT controls . Greater scrutiny on auditor independence and quality control .

44. Purpose of Auditing and Assurance Standards Auditing and Assurance Standards serve as official guidelines to help auditors perform high-quality, consistent, and reliable audits and assurance engagements. Their main purpose is to establish uniformity , credibility , and professional discipline in the auditing process.

45. Purpose Explanation 1. Ensure Audit Quality Provide a structured and standardized approach so that audits are conducted professionally and ethically. 2. Promote Consistency Ensure all auditors follow the same basic procedures and principles across different industries and regions. 3. Guide Auditor's Work Act as a step-by-step guide for planning, performing, and reporting on audits and other assurance engagements. 4. Build Public Confidence Enhance the credibility of financial statements and build trust among investors, regulators, and the public. 5. Legal and Regulatory Compliance Help auditors comply with laws, regulations, and professional ethics, reducing the risk of misconduct. 6. Support Auditor Judgment Encourage use of professional skepticism and judgment by giving clarity on procedures and documentation. 7. Assist in Training and Evaluation Act as a benchmark for auditor training, performance appraisal, and disciplinary actions if needed. 8. Enhance Transparency and Accountability Lead to transparent financial reporting and hold companies and auditors accountable.

46. Auditing and Assurance Standards ensure that audits are conducted in a professional, ethical, and consistent manner to improve the reliability of financial information and promote public trust.

47. Standard Setting Process in Auditing and Assurance 🔍 Identify Need → 📝 Draft Preparation → 📢 Exposure Draft → 🗣️ Public Comments →🧠 Consider Feedback → ✅ Final Standard → 📚 Implementation → 🔄 Review & Update

48. Identification of Need Issues or gaps in current practices are identified. Can arise from regulatory changes, economic developments, or stakeholder input. Preparation of Discussion Paper / Draft A concept note or draft is prepared by the standard-setting body (like AASB). May involve research, consultations, or expert panels.

49. Exposure Draft Issued for Public Comments A draft of the proposed standard is published for public review. Stakeholders (auditors, firms, companies, regulators) are invited to provide feedback. Consideration of Comments Comments and suggestions are reviewed and analyzed. Draft may be revised based on the feedback received.

50. Finalization of the Standard After revisions, the final version is approved by the board. Final standard is then published. Implementation and Guidance Issuance of guidance notes, FAQs, and training programs. Practical guidance is provided to help implement the new standard . Review and Update Standards are periodically reviewed to ensure relevance. Updated to reflect changes in laws, technology, and global practices.

51. Role of Auditing and Assurance Standards Board Introduction: AASB is a board constituted by the Institute of Chartered Accountants of India (ICAI) . It is responsible for formulating auditing and assurance standards in India.

52. Formulation of Standards: AASB formulates Standards on Auditing (SAs) , Standards on Review Engagements (SREs) , Standards on Assurance Engagements (SAEs) , and Standards on Related Services (SRSs) . These standards are aligned with international benchmarks like the International Standards on Auditing (ISAs) issued by the IAASB . Advisory Role to ICAI Council: Recommends new or revised auditing standards to the Council of ICAI for approval and implementation.

53. Revision and Updating: Continuously re views and updates standards based on: Emerging audit practices. Changes in laws (e.g., Companies Act, 2013). International developments. Guidance Notes and Technical Publications: Issues Guidance Notes , Practice Manuals , and FAQs to help auditors in proper application of the standards .

54. Public Consultation and Stakeholder Engagement: Engages with auditors, regulators (like SEBI, RBI), and industry bodies to seek feedback before finalizing new or revised standards. Capacity Building and Education: Conducts seminars, training programs, and workshops to spread awareness and ensure proper implementation of standards. Support in Peer Review & Quality Reviews: Assists in the Peer Review process and the Quality Review Board by ensuring that audit firms follow the prescribed standards.

55. Coordination with International Bodies: Keeps close coordination with IAASB (International Auditing and Assurance Standards Board) to ensure Indian standards are in line with global practices.