Chapter 1.

tybcom auditing notes

1. INTRODUCTION TO AUDITING Prof. Dicksee defines the term as “ An examination of accounting records with a view to establish whether they correctly & completely reflect the transactions to which they purport to relate “. Objectives : a) Reporting b) Detection & prevention of frauds & errors Conclusion : The objective of auditing can further be extended depends upon the specific terms of reference. In case of internal audit. The obj is also examine whether the policies & procedures laid down by the top management are properly adhered to. In case of audit by sole trade obj may be to obtain bank loan, Insurance Claim etc.

2. WRITE SHORT NOTES ON FINANCIAL STATEMENT & USER OF FINANCIAL STATEMENTS Statement of performance = profit and loss account; Statement of financial position = Balance Sheet; Statement o f movement of funds = Funds Flow & cash Flow statements. Users of financial Statements : Users Purpose Management For day to day decision making & performance evolution. Proprietor shareholders To analyze performance, profitability & financial Position. Prospective Investors are interested in the track record of the company. Lenders – Banks & financial institutions To determine the financial position of the company , debt service , Coverage, etc. Suppliers To determine the Creditworthiness of the company. Customers To know the general business viability before entering into long term contract and arrangement. Goverments To ensure prompt Collection of Direct and Indirect Tax revenue To evaluate performance and contribution to social objectives. Research Scholars For study ; Research and analysis purposes.

3. WRITE SHORTNOTE ON INHERENT LIMITATIONS OF AUDIT INHERENT LIMITATION of audit as per AAS – points out that the opinion expressed the auditor is neither an assurance as to the future viability of the enterprise nor efficiency and effectiveness with which management has conducted affairs of the enterprise. This is bcoz the process of auditing suffers from the following inherent limitations : A) Judgment. B) Nature of Evidence. C) Internal Control. D) Test Checking.

4. WHAT IS ERROR ? EXPLAIN DIFFERENT TYPES OF ERRORS Innocent mistakes in bookkeeping & accountancy are called as ERRORS. An error can be defined as “ unintentional mis -statement or mis - description made in the books of accounts or records”. Errors may be broadly classified into 2 categories : CLERICAL ERRORS ERRORS OF PRINCIPLE Errors of Omission. - Errors of Commission. - Compensating Errors. - Errors of Duplication. -

5. WHAT IS FRAUD ? EXPLAIN ITS TYPES ? “The false representation or untrue entry made in the books of accounts, intentionally or without belief in its truth with a view to defraud some body”. All errors made intentionally are frauds as there is an intention to decieve or to mislead the proprietors or somebody else. Fraud also includes willful misrepresentation & an act to conceal the truth. Types : - Misappropriation of cash or embezzlement of cash. Misappropriation of Goods Fraudulent Manipulation of Accounts When cash is received Issuing more quantity of goods dn invoiced Benefits of showing more profits When cash is paid Showing as damaged Benefits of showing less profits

6. WRITE NOTES ON TEAMING N LADING & WINDOW DRESSING It is a type of fraud in which the amount collected from the customer is misappropriated n the amt subsequently received from another customer is used to conceal the amount so misappropriated by crediting d amt to the earlier customers. (teaming and lading). Window dressing is an art of showing financial position of a company at much better level than the existing one. A sound financial position is painted on the face of Balance Sheet by concealing the actual state of affairs. In window dressing, assets are over – valued, liabilities are under – valued and profit is overstated or if there is loss, it is understated. DIFFERENT WAYS OF DOING WINDOW DRESSING : Charging inadequate depreciation on fixed assets than actually required. Providing inadequate reserve for bad and doubtful debts. Charging revenue expenditure to capital account. Over – valuating closing stock at the end of the year. Showing actual liabilities are contingent liabilities. Showing fictitious credit sales and thereby over – valuating debtors. Showing fictitious assets.

7. PRINCIPLES OF AUDIT Audit evidence refers to any information, verbal or written, obtained by the Auditor during the course of audit to arrive at the conclusion on which he bases his opinion on financial statements. Need of audit evidence : Judgment formation. Nature of evidence to be obtained. Process of judgment based on evidences Factors influencing audit evidence : Risk of misstatement. Materiality. Previous experience. Results of work. Information. Analytical reviews. Integrity , objectivity & independence . Confidentially. Skills and competence. Work preformed by others. Documentation. Planning. Audit Evidence. Accounting system and internal control. Audit conclusions & reporting AUDIT EVIDENCE step PROCEDURES 1 identify the assertion to be examined. 2 Evaluate the assertions as to their materially & relative importance. 3 Collect d necessary information or evidence about the assertions. 4 Analyze & evaluate the evidence into valid or invalid, relevant or irrelevant, sufficient or insufficient, appropriate or inappropriate, confirmatory of conclusive etc. 5 Formulate the judgment on financial statements as to the fairness if assertions to be considered.

8. ACCOUNTING SYSTEM & INTERNAL AUDIT Review and assess the conclusions drawn from the audit evidence obtained from his knowledge : a ) The financial information has been prepared using acceptable accounting policies, which have been consistently applied; b ) d financial information complies with relevant regulations & statutory requirements. c ) Adequate disclosure of all materials matters relevaNT An audit report should contain a clear written expression of opinion on the financial information & in the form or content of the report is laid down. Audit report is a means of communicating the results of an audit. This principle explains the various concepts relating to an audit report. Size & nature of the business. Adequate accounting system. Internal controls. Different procedures. Evaluation of various internal controls for greater likelihood of material misstatements. AUDIT CONCLUSIONS & REPORTING RISK OF FRAUD & ERROR IN AUDITING Audit involves exercise of judgment Unavoidable risk that some material misstatements may remain undiscovered. Cannot be relied upon the discovery of all frauds or errors . Material either individually or as a group. Constraints.

9. CONTINOUS AUDIT Final audit is one which is undertaken at the close of the financial year when the final accounts are ready. In annual or final audit visits his clients only once a year and the entire audit work is completed in one time ir in a single uninterrupted session. Interim audit is one, which is conducted between the two annual audits in order to ascertain profit to declare interim dividend. It involves a complete examination and review of the accounts and records of business upto the date of interim audit. It may be ordered for six months. A continuous audit is one in which audit works is carried out almost simultaneously with the recording of the transactions. Under this, auditor visits his clients throughout the year is periodical intervals, which may be regular say monthly or two monthly or weekly or fortnight. INTERIM AUDIT BALANCE SHEET AUDIT Balance sheet audit means verification of all the items appearing in the balance sheet such as assets, capital reserves & liabilities of the business. Under the balance sheet audit the auditor commence audit on the basis of the balance sheet and he works back to the books of original entry and other evidence bcoz balance of profit & loss account appears In the balance sheet. Thus, in balance sheet audit all the d items contained in d balance sheet and other related items are verified completely. ANNUAL AUDIT

10. CONCURRENT AUDIT Expert in fundamental principles and theory of accounting. Knowledge of the company law and mercantile law. Knowledge of industrial management, financial administration & Business Organisation . Honest & tactful and always exercise reasonable skill & care in duty. Not adopt the attitude of suspicion. Intelligent questions to his clients. Not influenced directly or indirectly. Not disclose secrets of his clients to others. Necessary courage and ability to write his report correctly. Knowledge of the principles of economics and economic laws. Possess a pleasing personality and other qualities like tact, judgment, self control, dignity and diligence. Methodical, hardworking and accurate. Knowledge of principles of accounting. Possess knowledge of computer. Concurrent audit is a comprehensive, continuous and systematic examination of all transactions of an entity, by a person other than involved in the operations, to ensure accuracy , authenticity & due compliance with the internal systems, procedures & guidelines. INFERENCE : Concurrent audit is a management process and looks into the establishment of sound internal functions and effective control systems. QUALITIES OF AUDITOR

11. TRUE AND FAIR VIEW Protection of Interest. Moral Check. Tax Liability. Credit Negotiation. Trade Dispute Settlement. Control over Inefficiency. Funds in Trust. Arbitration. Appraisal. Partnership cases. Assistance to Government. AS PER THE SECTION 227(2) of the companies act, 1956 the auditor of a limited company has to report to the shareholders whether the accounts, give true and fair view. In case of the balance sheet of the state of company’s affairs at the end of the financial year. In case of the profit and loss account of the profit or loss for the financial year. section 209 (3) states that the books of accounts would be so kept as are necessary to give a true and fair view of the state of affairs of the company or its branch office, as the case may be and to explain its transactions. ADVANTAGES OF INDEPENDENT AUDIT OR USE OF AUDIT ACCOUNT

12. GOING CONCERN MATERIAL MEANS IMPORTANT OR ESSENTIAL. The convention of materiality is the common rule followed by all accountants of separately recording and reporting the material details of business transactions. Many business decisions are based on the details available in the accounts. Material details mean details which might influence a business decision. Thus what Is material depends upon the facts of each case. Effect on Accounts. Recording only material details. Separate Record in Individual Accounts. Reporting only Material Details. THE GOING CONCERN IS THE BASIC IDEA THAT THE BUSINESS WILL COONTINUE FOR A LONG TIME, followed by all accountants, while recording and reporting the business transactions. The going concern concept is known as the concept of continuity. A business may be set up for a particular work Going concern concept assumes that the business would continue for a long time. The accounts are kept on the basis that business will go on and on and will not be closed down or stopped in the near future. MATERIALITY