PRINCIPLES AND PRACTICE OF AUDITING.

B COM NOTES.
PREPARED BY:
ABHISHEK D K
M. COM., (B. ED.,).

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ABHISHEKDK,COMMERCELECTURER.
UNIT1:
INTRODUCTIONTOAUDITING:
Introduction:
Theindustrialrevolutionandtheresultingexplosioningrowthoftradeandcommercegave
risetovarioustypesofbusinessorganizations.Itwasatthattime,theJointStockCompany
tookbirth.Thiscompanyformresultedinlargescaleofoperationsrequiringhugeamountof
capitalwhichcannotbeprovidedbytheindividualproprietors.Assuch,thesecompanies
startedraisingcapitalfromthegeneralpublic.Thistypeoforganizationismanagedbythe
boardofdirectorsotherthantheproprietors/Shareholders.Sinceshareholdersdonottook
partinthemanagement,thisnecessitatesthemanagerstopresenttheaccountsatregular
intervalsbymeansofannualaccounts.Thedirectorsofunsuccessfulcompaniesinorderto
hidetheirinefficienciesstartedadoptingfraudulentaccountingpractices.Therefore,the
Governmentsmadelegalprovisionsthattheaccountsshouldbeexaminedbyaperson
independentoftheownersandmanagementinordertoprovidetrueandfairfinancial
positionandprofitandlossoftheundertakings.Thatpersoncametobeknownasan
‘Auditor’.Inthisway,auditingconceptwasdeveloped.
AuditingisasoldasAccounting.ThepracticeofauditingexistedevenintheVedicperiod.
HistoricalrecordsrevealsthatEgyptians,Greeks,MesopotamiansandRomansusedtoget
thispublicaccountsexaminedbyanindependentofficial.
InIndiaalsoauditingexistsinancientperiod.Kautilyahadmentionedinhisbook
“Arthashastra”,thedetailedrulesforaccountingandauditingofpublicfinances.Butthe
auditingevolvedandgrewrapidlyonlyaftertheindustrialrevolutioninthe18
th
century.
Today,duetorapidincreaseinthegrowthofindustriesandcommerceauditinggainedmuch
important.Ithasbeenthebackboneofthecomplicatedbusinessworldandhasalways
changedwiththetimes.
Thecompany’sactof1956,revised(2013)givesregulationsregardingtheauditwork.
Audit:
ThewordaudithasbeenderivedfromLatinword“AUDIRE”whichmeans‘tohear’.
Anauditisanattempttofindoutwhetherthefinancialstatementsreflectthetrueandfair
resultandfinancialpositionofthecompanyorinstitution.

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Auditing:
Auditingmeansverificationandexaminationofaccounts.Itisdonetoascertainthe
reliabilityandvalidityofinformation.Theauditingprocesscanbestartedonlywhenthe
accountingends.
DefinitionofAudit/Auditing:
AccordingtoICAI,“Auditingisasystematicandindependentexaminationofaccounting
data,statements,records,operationsandperformanceofanenterpriseforastatedpurpose”.
AccordingtoR.K.Moutz,“Auditingisconcernedwiththeverificationofaccountingdata
withdeterminingtheaccuracyandreliabilityofaccountingstatementsandreports.”
Auditor:
Anauditorisatrainedprofessionalwhoisresponsibletoreviewandverifytheaccounting
dataofanybusinessundertakingpertainingtoitsbusinessactivities.
InternalAuditorsarethoseauditorswhoareappointedbythecompanyexclusivelyfortheir
company’saudit.
ExternalAuditorsareindependentauditorshavingfirmswhoarehiredbythecompanies
subjecttoanaudit.
ObjectivesofAudit/Auditing:

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1.PrimaryObjectives:
a.Theprimaryobjectiveofanauditoristorespecttotheownersofhisbusiness
expressinghisopinionwhetheraccountexhibitstrueandfairviewofthestateof
affairsofthebusiness.Itshouldberememberedthatincaseofacompany,hereports
totheshareholderswhoaretheownersofthecompanyandnottothedirector.
b.Toexpressanappropriateopinionastowhetherthefinancialstatementspresentfairly,
inallmaterialrespects,thefinancialposition,theresultsofoperations,andthecash
flowsofthecompany’sbusiness.
c.Theauditorisalsoconcernedwithverifyinghowfartheaccountingsystemis
successfulincorrectlyrecordingtransactions.Hehadtoseewhetheraccountsare
preparedinaccordancewithrecognizedaccountingpoliciesandpracticesandasper
statutoryrequirements.
2.SecondaryObjectives:
Thefollowingobjectivesareincidentaltothemainobjectiveofauditing:
1.Detectionandpreventionoferrors:
Errorsaremistakescommittedunintentionallybecauseofignorance,carelessness.
Errorsareofdifferenttypes:
a.ClericalErrors.
b.CompensatingErrors.
c.ErrorofPrinciple.
a.ClericalErrors:
ClericalErrorsreferstothoseerrorswhichariseduetowringposting,
ignorance,carelessnessetc.Iftheseerrorsarediscoveredinthe
processofaudit,theauditorshouldgetthemrectified.Clericalerrors
mainlyareoftwotypes:
1.ErrorsofOmission:
Thesearethetypesoferrorswhichariseonaccountoftransactionomittedtobe
recordedinthebooksofaccountseitherwhollypartially.Ifatransactionhasbeen
totallyomitteditwillnotaffecttrialbalanceandhenceitismoredifficulttodetect.
Ontheotherhandifatransactionispartiallyrecorded,thetrialbalancewillnotagree
andhenceitcanbeeasilydetected.Example:FurniturepurchasedforcashRs.6,000
notrecordedinthebooksofaccounts.

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2.ErrorsofCommission:
Thesearethetypesoferrorswhicharisesduetowrongpostingtoledgeraccounts,
wrongtotaling,wrongcalculationsorbalancinginthebooksofaccountswhollyor
partially.TheseerrorsaffecttheagreementofTrialBalance.Example:CashSales
Rs.20,000recordedasRs.2,000.
b.CompensatingErrors:
Whentwoormoremistakesarecommittedwhichcounterbalanceseachother.Suchan
errorisknownasCompensatingError.Eg:Raman’saccountwhichwastobedebited
forRs.8,000wascreditedforRs.8,000andsimilarly,Raju’saccountwhichwastobe
creditedforRs.8,000wasdebitedforRs.8,000.Thesetwoerrorswillnullifytheeffect
ofeachother.
c.ErrorofPrinciple:
Thesearetheerrorscommittedbynotproperlyfollowingtheaccountingprinciples.
Thesearisemainlyduetothelackofknowledgeofaccounting.Eg:RevenueExpenditure
maybetreatedasCapitalExpenditure,Machinerypurchasedfor50,000debitedto
PurchasesA/c,thisisanerrorofprinciple.
LocationofErrors:
Itisnotthedutyoftheauditortoidentifytheerrorsbutintheprocessofverifyingaccounts,
hemaydiscovertheerrorsintheaccounts.Theauditorshouldfollowthefollowing
procedureinthisregard:
a.Trialbalancemustbechecked.
b.Heshouldcomparethelistofdebtorsandcreditorswiththetrialbalance.
c.Heshouldcomparethenamesofaccountappearingintheledgerwiththenamesof
accountinginthetrialbalance.
d.Hemustcheckthetotalsandbalancesofallaccountsandseethattheyhavebeen
properlyshowninthetrialbalance.
e.Heshouldalsocheckthepostingofentriesfromvariousbooksintoledger.
2.Detectionandpreventionoffraud:
AfraudisanErrorcommittedintentionallytodeceiveortomisleadortoconcealthe
truthorthematerialfact.

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Fraudsmaybeof3types:
a.MisappropriationofCash:
Thisisoneofthemajorfraudsinanyorganizationitnormallyoccursinthecash
department.Thiskindoffraudiseitherbyshowingmorepaymentsorlessreceipt.
Thecashiermayshowmoreexpensesthanwhatisactuallyincurredandmisusetheextra
cash.Eg:showingwagestodummyworkers.Cashcanalsobemisappropriatedbyshowing
lessreceipt,notrecordingcashsales,notallowingdiscountstocustomers,recordingmore
amountthantheactualamount,recordingfeweramountsthantheactualamountofpayment.
Thecashiermayalsomisappropriatethecashwhenitisreceived.Cashreceivedfromfirst
customerismisusedwhenthesecondcustomerpaysitistransferredtothefirstcustomer’s
account.Whenthethirdcustomerpays,itgoesforever.Suchafraudisknownas“Teaming
andLading”.Topreventsuchfraudstheauditormustcheckindetailallbooksand
documents,vouchers,invoicesetc.
b.MisappropriationofGoods:
Hererecordsmaybemadeforthegoodsnotpurchasenotissuedtoproduction
department,goodsmaybeusedforpersonalpurpose.Suchafraudcanbedetectedby
checkingstockrecordsandphysicalverificationofgoods.
c.Manipulation/FalsificationofAccounts:
Thisisfinalizingaccountswiththeintentionofmisleadingothers.Thisisalsoknownas
“WINDOWSDRESSING”.Itisverydifficulttolocatebecauseitisusuallycommitted
byhigherlevelmanagementsuchasdirectors.Theobjectiveofwindowdressingmaybe
toevadetax,toborrowmoneyfrombank,toincreasethesharepriceetc.Eg:Inflatingor
deflatingexpensesandincomes,over-valuationorunder-valuationofclosingstock,
chargingexcessorlessdepreciation,chargingcapitalexpenditurestorevenueandvice-
versa,etc.
DifferencebetweenAccountancyandAuditing/AccountantandAuditor:
Sl.No. Pointsof
Difference
Accountancy/AccountingAuditing
1. Meaning Accountingmeansthe
maintainingofthebooks
ofaccounts.
Auditingmeans
examiningthe
booksofaccounts
andreportingmeans

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2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Performanceof
work
Appointment
Qualification
Responsibility
Submissionof
Report
FixationofRights
Time
Purpose
Employee
Removal
Accountantjobis
performedbythe
accountant.
Accountantisappointed
bythemanagement.
Fortheaccountant,no
specificqualificationis
required.
Accountant’s
responsibilityisfixedby
themanagement.
Accountantisnotrequired
tosubmitanyreport.
Rightsanddutiesof
accountantarefixedby
themanagement.
Incaseofaccounting,
periodisusuallyoneyear.
Accountingpurposeisto
showthefinancial
positionofthebusiness.
Accountantisapermanent
employee.
Accountantcanbe
removedfromhisjobat
toreportabouttheir
accuracy.
Auditingjobis
performedbythe
auditor.
Auditorisappointed
bytheshareholders.
Fortheauditor,
specific
qualificationis
required.
Auditor’s
responsibilityis
fixedbylaw.
Auditorisrequired
bylawtosubmitthe
report.
Rightsanddutiesof
anauditorarefixed
bythelaw.
Theperiodof
auditingisusually
lessthanoneyear.
Auditingverifies
thetruepictureof
thefinancial
statement.
Auditorisnota
permanent
employee.
Auditorcannotbe
removedtillhe

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12. Knowledge
anytime.
Accountantmusthavethe
knowledgeof
accountancy.
completeshis
periodof
appointment.
Auditormusthave
theknowledgeof
accountingaswell
asauditing.
Usuallyanauditorconfineshisworkonlytotheverificationofaccounts.Insmall
organizationshemayalsobeaskedtofinalizeaccounts.Inthiscaseheactsbothasan
accountantandasanauditorbuttheauditworkcommencesonlywhentheaccountingwork
isover.Hence,itissaidthat“Auditbeginswhereaccountingends”.
AdvantagesofAudit/Auditing:
1.VerificationofBooksandStatement:
Themainobjectofauditistheverificationofthebooksandthefinancialstatements
ofthecompanyconcerned.
2.DiscoverandPreventionofErrors:
Whileexaminingthebooks,auditorsdetectsomeerrors.Thesearevariouskindsof
errors.Soauditisveryusefulinpreventinganddetectingtheerrors.
3.DiscoveryandPreventionofFraud:
Fraudmeansfalserepresentationmadeintentionallywithaviewtodefraudsomebody.
Itisthedutyoftheauditorthatheshoulddetectthefraud.Soaudit’smainobjective
andadvantageisthatfraudmaybedetectedandprevented.Auditormayalsosuggest
variousmethodsofinternalcheckwhichwillpreventfraud.
4.Moralcheck:
Wheneachstaffofthecompanyknowsthatthisfinancialtransactionswillbe
examinedbytheauditorthenhefearstodothatfraud.Thefearoftheirdetectionacts
asamoralcheckonthestaffofthecompany.
5.Independentopinion:

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Auditingisveryusefultoobtaintheindependentopinionoftheauditoraboutthe
businesscondition.Iftheaccountsareauditedbytheindependentauditor,thereport,
oftheauditorwillbeatruepictureanditwillbeveryimportantforthemanagement.
Keepinginviewthereport,ownerofthebusinesswillbeabletopreventfraudsand
errorsinfuture.
6.ProtectstheInterestofShareholders:
AuditprotectstheinterestofshareholdersinthecaseofJointStockCompany.
Throughaudit,shareholdersareassuredthattheaccountsofthecompanyare
maintainedproperlyandtheirinterestwillnotsuffer.
7.CheckonDirectors:
Auditactsacheckuponthedirectorsandprecautionagainstfraudonthepartofthe
management.
8.ValuableAdvice:
Theauditorhasexpertknowledgeabouttheaccountsandfinanceproblems,sohe
maybeconsultedabouttheseproblems.
9.AdvantageforGeneralPublic:
Auditedfinancialstatementspresenttherealpositionofthecompanybeforethe
generalpublic.Keepinginviewthepositionofacompanyonecandotheinvestment.
10.UsefulForTaxDepartment:
Assessmentoftaxbecomesveryeasyjobforthetaxdepartment.Keepinginviewthe
auditedaccounts,theyimposethetaxes.
Types/ClassificationofAudit:
Thedifferentclassificationsofauditareexplainedbelow:
1.Classificationonthebasisoftheorganization:
Theauditsunderthisclassificationarefurtherdividedintotwotypes:
a.StatutoryAudits.
b.Voluntary/Non-statutoryAudits.
a.StatutoryAudit:
Itreferstotheauditofanorganizationperformedunderastatute.Forcertain
businessorganizationorinstitutions,auditsaremandatory,suchorganizations
comesunderthiscategory.Inthistypeofaudit,therights,powers,dutiesand
responsibilitiesofauditorsarelaiddownbythestatutewhichcannotbe

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alteredorcurtailedbytheclientorauditorhimself.Thefollowingaresomeof
theorganizationswhichrequirestatutoryaudits:
Companies-AccordingtoCompaniesAct1956.
BankingCompanies-AccordingtotheBankingRegulationsAct,1949.
Co-operativeSocieties-TheCo-operativeSocietiesAct,1912.
InsuranceCompanies-TheInsuranceAct,1938.
PublicandCharitableTrusts-VariousReligiousandOtherEndowmentActs.
b.Voluntary/Non-statutoryAudits:
Voluntaryauditreferstotheauditperformedbytheauditorsbecausethe
proprietorsortheGovernmentbodiesoftheorganizationwantstheiraccounts
tobeauditedasitprovidestheassuranceonthereliabilityofaccountsandthe
financialresultsoftheorganizations.Theseauditsarealsoknownas‘Private
Audits’.Inthistypeofaudit,theduties,powersandresponsibilitiesare
decidedaspertheagreementbetweentheauditorandtheclient.The
followingaresomeoftheorganizationswhichgoforvoluntaryaudits:
ProprietaryConcerns.
Partnershipfirms.
Unregisteredclubsandsocieties.
2.ClassificationonthebasisoftheFunctions:
Thefunctionoftheauditordependsuponthecapacityofconductingtheworkbytheauditor.
Basedonthis,theauditisclassifiedintotwotypes:
a.InternalAudit.
b.ExternalAudit.
a.InternalAudit:
Itisatypeofauditconductedbytheownstaffoftheorganizationspeciallyassigned
forthatpurpose.Inthistypeofaudit,thoroughexaminationsoftheaccounting
transactionsaswellasthesystemaccordingtowhichtransactionsarerecordedare
conducted.Itisdonetoverifythereliabilityandauthenticityofthefinancial
accountingandotherrecordspresentedtothemanagement.Thescopeandobjectives
ofthistypeofauditvarywidelyandaredependentonthesizeandnatureofthe
business.

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b.ExternalAudit:
Itisatypeofauditperformedbytheauditorsoutsidethebusinessorganizations.
Theyarenowayrelatedwiththepreparationofaccountsormanagementofthe
organization.QualifiedCharteredAccountantsareappointedasexternalauditorsof
theorganization.Thisauditisconductedinordertofulfillthelegalrequirementof
thebusiness.Thevariousproceduresrelatingtothistypeofauditislaiddowninthe
concernedstatute.
3.ClassificationonthebasisofAuditApproach:
Onthebasisofpracticalapproachofauditwork,auditcanbeclassifiedinto:
a.Timebasis:
ContinuousAudit.
InterimAudit.
PeriodicalorFinalAudit.
b.Scopebasis:
CompleteAudit.
PartialAudit.
c.Objectivebasis:
BalancesheetAudit.
OccasionalAudit.
a.TimeBasis:
Furtherauditcanbedividedonthetimebasiswhichisasfollows:
ContinuousAudit:
Continuousauditisalsoknownas‘DetailedAudit’.Underthistypeofaudit,detailed
examinationofbooksofaccountsareconductedatregularintervalssayweekly,
monthlyoronceinthreemonths.Theauditorchecksandverifieseachandevery
transactionbyvisitingclientsplaceregularlyduringthefinancialyear.Thistypeof
auditiscarriedinlargeorganizationswherebulkandvarietyoftransactionare
involved.
InterimAudit:Itisatypeofauditwherethecheckingandverificationofbooksof
accountsareconductedonlyattheendoftheaccountingperiod.Itistakenupbythe
auditorwhenalltransactionsfortheyeararecompletelyrecorded,balancedandfinal

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accountshavealreadybeenprepared.Inthiscase,theauditorvisitstheclientsplace
onceinayearandtakesuphisworkuntilitiscompletedforthewholeperiod.Itis
alsoknownas‘CompleteAudit’.
b.ScopeBasis:Thetypesofauditonthebasisofitsscopeareasfollows:
PartialAudit:Itisatypeofauditwhereanauditorisaskedtocheckandverifyonly
fewbooksofaccountsforaparticularwork.Thistypeofauditcurtailstheworkof
auditor.AccordingtoCompaniesAct,thedutiesofanauditorofacompanycannot
becurtailed.Hencethistypeofauditisnotpermittedinlimitedcompanies.The
auditorshouldmentionthathehasdonepartialauditaspertheinstructionsofthe
clientsinhisreportsinordertoavoiddispute.
c.ObjectiveBasis:Onthebasisoftheobjectiveofaudit,itcanbeclassifiedintotwo
types:
BalanceSheetAudit:Thistypeofauditisofrecentorigin.Underthistypeofaudit,
thecheckingandverificationofbooksofaccountsstartsfromthebalancesheetand
workingbacktotheoriginalbooksofentryandotherrelateddocuments.Inthisaudit,
allthebalancesheetaccountsandtherelateditemsareverified.Thisismorewidely
usedtypeofaudit.
OccasionalAudit:Itreferstoatypeofauditwhichiscarriedoutwheneverthe
clientsdesiresitandwheneverthereisneed.Thistypeofauditcannotbecarriedout
incaseofjointstockcompanies,Banking,Insurancecompanies.Onlyproprietary
concernscanoptforthistypeofaudit.
4.OntheBasisofAuditDimension:Thefollowingarethedifferenttypesofaudit
whichareclassifiedonthebasisofauditdimension:
TaxAudit.
ManagementAudit.
CostAudit.
SystemAudit.
CashAudit.
SocialAudit.
EnergyAudit.

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ProprietaryAudit.
PerformanceAudit.
SecretarialAudit.
TaxAudit:Ataxauditreferstoexaminingofanorganizationsorindividuals
incomesorexpensesandclaimsofdeductionsorexemptionsforthepurposeof
assessmentoftax.Itiscompulsoryinadditiontofinancialaudit.Ithastobedoneby
thequalifiedCharteredAccountant.
ManagementAudit:Itisoneofthetechniquesofmanagementcontrol.Itrefersto
thesystematicexaminationoftheactivitiesofmanagementatalllevelsof
management.ItcoversalltheareasofmanagementsuchasPlanning,Organizing,
Directing,Controlling,etc.Thistypeofaudithelpsinimprovingtheefficiencyof
management.
CostAudit:Itsimplymeansauditofcostrecords.Inotherwords,itreferstodetailed
checkingandverificationofcorrectnessofcostaccounts,costingtechniquesand
system.Itactsasaneffectivemanagerialtoolfordetectionoffrauds,errorsand
inconsistenciesofcostrecords.
SystemAudit:Itreferstoanauditconcernedwithevaluationofaccountingpractices
whichisdirectedtoascertainwhethertheyareup-to-dateandeconomical.Italso
involvedascertainmentofwhethertheexistingaccountingpracticesarerequiredtobe
modifiedsoastocarryontheworkquicker,betterandatlesscost.
CashAudit:Itinvolvestheevaluationofallthecashtransactionsoftheorganization
foragivenperiodoftime.Inthistypeofaudit,theauditorwillcheckallthecash
receiptsandpaymentswiththevouchersanddocuments.Itistheoldestconceptof
auditing.
SocialAudit:Thistypeofauditisconcernedwithexaminationofperformanceofan
organizationoranentitytowardsthefulfillmentofsocialobligation.Thepurposeof
thisauditistopresenttheorganizationalimageamongthepublicastohowan
organizationhasdischargeditsresponsibilitytothesociety.Butthisisnotmuchin
practiceinIndia.
EnergyAudit:Itisofneworigin.Itisanimportantfactorforthepresentdayworld
toconservetheenergyresources.Thistypeofauditaimsatevaluationofwhetherthe

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righttypeofenergyisusedintheorganizationandalsoconfirmingthatthereisno
wasteofenergyduetohumandifference.
ProprietaryAudit:Itaimsatexaminingtheallocationsofresourcesandalso
ascertainingwhetherthereisanyviolationoflegal,economicorfinancialaspectsof
theorganization.Thisauditensuresthepublicmoneyhasnotbeenutilizedforthe
benefitofaparticularpersonoracommunity.
PerformanceAudit:Inthistypeofaudit,theauditorexaminesthegrowthofthe
organizationintermsofproduction,salesandprofitabilityoftheorganization.The
purposeofthisauditistoevaluateandcomparetheoptimumreturnwiththeamount
ofcapitalinvested.
SecretarialAudit:Thisisalsoanewconceptofauditing.Itisanauditwhich
ensuresthatthecorporatebody’slegalrequirementshavebeendulycompiledwith
andintime.Ifthereisanynon-compliancenoticedbytheauditor,themanagement
willhavetimetorectifythesituationwithlessproblemandcost.
Preparationbeforethecommencementofnewaudit:
Theprocessingofauditsisamulti-stepprocessandfairlycomplex.Foreffectiveexecution
oftheauditwork,properplanningisneeded.Hence,anauditorshouldpayproperattention
tothefollowingbeforetakingupanewaudit:
1.Receivingappointmentletter:
Generally,theauditorsofthecompaniesareappointedbytheshareholdersintheannual
generalmeeting.Therefore,anauditorshouldgetandexaminethecopyofresolutionpassed
bytheshareholdersinthegeneralmeetingtoconfirmandshouldreceivetheappointment
letterbeforestartinganewaudit.
2.Communicationwiththeexistingauditor:
Incaseofanauditproposalisforanexistingbusiness,theproposedauditormust
communicatewiththepreviousauditortoknowwhetherhehasanyobjectionstoraise.Itis
alsoanofficialrequirementaspertheICAI(InstituteofCharteredAccountantsAct1949),
andhastoadheredtobytheCharteredAccountants.
3.Acceptanceofappointment:

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Iftheauditorissatisfiedofthecommunicationwiththepreviousauditor,theauditorshould
confirmhisacceptancethroughaletterofacceptance.
4.Ascertainingthescopeofaudit:
Anauditorshouldknowthenatureofauditofhisclientbeforestartingthework.Ifthe
natureofauditisastatutoryaudit,thescopeofauditworkshouldbeinaccordancewiththe
statute.Inothertypesofaudit,anauditorshoulddiscusswithhisclientsregardingthenature
ofauditwork.
5.Knowledgeabouttheorganization:
Beforedeterminingabasicapproachtoaudit,anauditormusthaveknowledgeaboutthe
organization.Hemustfamiliarizehimselfwithdetailedknowledgeofbusiness,itsactivities
andvisitthelocationatwhichitoperates.Thishelpshimtoknowthenatureoftransactions
whicharerecordedinthebooksofaccounts.
6.Knowledgeaboutaccountingsystem:
Thesystemofaccountingemployedbytheclientshouldbeexaminedbytheauditorbefore
takinguptheaudit.Heshouldobtainlistofallbooksmaintainedbytheorganizationfor
recordingitsaccountingtransactions.Hemustalsoacquirecompleteinformationaboutthe
internalcontrolsystemoftheorganization.
7.Knowledgeoftechnicaldetails:
Theauditormustensurethathehasgraspedallthetechnicalitiespeculiartothebusiness.
Thenonlyhewillbeinapositiontoidentifythetransactionsoftheaccountingrecords.
8.CompletelistofPrincipalofficers:
Theauditorshouldtakethecompletelistofalltheprincipalofficerswiththeirnames,duties
andpowers.Heshouldalsogettheirspecimensignatures.
9.Observationofthepreviousauditor’sreport:
Ifthecompanynotanewbutold,inthissituationauditorshouldalsoinspectthereportof
previousauditor.Thiswillhelphiminunderstandingthenatureofaccounts,importantareas

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towhichdetailedcheckingisrequiredandthetechniquestobeusedtoconducttheaudit
workefficiently.
10.Instructionstotheclient:
Aftercompletingalltheabovesteps,theauditorshouldissueclearinstructionstotheclient
thattheaccountsshouldbefinalizedandkeptreadyforaudit.
AuditNotebook/AuditMemorandum:
AnAuditnotebookisabookwhichismaintainedbytheauditstaffinwhichlargevarietyof
mattersobservedduringthecourseofauditarerecorded.Itcontainsthoseinformationwhich
requiredfurtherclarificationandexplanation.Itisakindofpermanentbookavailabletothe
auditor.
TheobjectivesofAuditNotebook:
Thefollowingaretheimportantobjectivesofauditnotebook:
1.Theauditnotebookofcurrentyearwillhelptheauditorfor
startingauditforthenextyear.
2.Itprovidesevidence(proof)abouttheextent(level/stage)of
workdonebytheauditor.
3.Ithelpsinpreparationofauditreport.
4.Ithelpstheauditortoknowabouttheprogressofauditwork
andtheefficiencyofhisstaffinauditwork.
5.Italsohelpstheauditorforthesettlementofauditqueries
(problems).
ContentsofAuditNotebook:
Theimportantpointsthatshouldbenoteddownintheauditnotebookisasfollows:
1.Listofbooksmaintainedbytheclients.
2.ThenamesofthePrincipalOfficers,theirpowers,dutiesandresponsibilities.
3.Thetechnicaltermsusedinthebusiness.
4.Thepointswhichrequirefurtherclarifications.
5.Theparticularsofmissingvouchers.

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6.Themistakesanderrorsdiscovered.
7.Thepointstobeincorporatedintheauditreport.
8.Accountingmethodfollowedinthebusiness.
9.Dateofcommencementandcompletionofaudit.
10.Particularsofaccountingandfinancialpoliciesfollowed.
AuditWorkingPapers:
Auditworkingpapersarethosepaperswhichcontainessentialfactsaboutaccounts,which
arebeingaudited.Itisdefinedasthefileofanalysis,summaries,commentsand
correspondencebuildupbytheauditorduringthecourseofaudit.
Theauditormaintainspapersassupportingevidencetotheauditwork.TheInstituteof
CharteredAccountantsofIndiastatesthat“anauditorisexpectedtomaintainevidenceof
workdonebyhimandhisstaff”.Usually,auditworkingpaperscontainacopyofthetrial
balances,scheduleofdebtorsandcreditors,reconciliationstatementsimportant
correspondence,etc.Theyarethedirectaidintheplanning,performanceandsupervisionof
theaudit.
PurposeofAuditWorkingPapers:
Thefollowingaretheimportantobjectivesofauditworkingpapers:
1.Theyshowtheextentofadherencetoaccountingprinciplesandaccountingstandards.
2.Theyareusefulasevidenceagainstthechargeofnegligence.
3.Theyassisttheauditorinco-coordinatingandorganizingtheworkofauditassistants.
4.Theyensurethepossibilityofquickpreparationofauditreport.
5.Theycanbeusedasapermanentrecordforfuturereferences.
6.Theyhelpincontrollingtheongoingauditwork.
ContentsofAuditWorkingPapers:
1.AuditProgram.
2.AuditNotebook.
3.Auditappointmentletter.
4.Correspondencedoneinrelationtotheauditprogram.
5.Listofdebtorsandcreditors.

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6.Openingandclosingtrialbalance.
7.Acopyoftheauditreport.
8.Rulesoftheorganization,MemorandumofAssociation,ArticlesofAssociation,
prospectus,etc.
9.Listofcostvouchers.
10.Documentsrelatingtodepreciation.
AuditProgram:
Anauditorpreparesaplanaftertheselectionofseniorandjuniorstaffsallocatingthejobsto
them,mentioningwhentostart,howtodothework,etc.Thisplanisknownasaudit
program.Anauditorshouldincludealltheproceduresinwrittenform,objectivesofeach
sectorandallthedirectionswhicharetobegiventothestaffswhichhelpstocontroltheir
worksandhelpstoimplementsuchprogramsintoaction.
Definition:InthewordsofHowardSettler,“AnauditProgramisanoutlineofallprocedures
tobefollowedinordertoarriveatoptionconcerningtheclient’sfinancialstatements.”
TypesofAuditProgram:
AuditProgramscanbeclassifiedintofollowingtwogroups:
1.FixedAuditProgram.
2.FlexibleAuditProgram.
1.FixedAuditProgram:Generally,auditorpreparesauditprogramonthesuggestions
andrecommendationofassistantstaffsbutsuchprogramcannotbechangedduring
thecourseofauditwhichisknownasfixedauditprogram.Suchprogram,dueto
changeinthesituationandsizeoftheclientneedstochangeeventhoughitcannotbe
changed.FixedAuditProgramcanbeusedinalltheorganizations.
2.FlexibleAuditProgram:Anauditprogramwhichcanbechangedaspertheneed,
time,natureofbusinessandauditingstandardisknownasflexibleauditprogram.
Suchprogramshouldbereviewedontherecommendationsandsuggestionsof
assistants.Suchchangecanbemadeduetochangeinnumberofwork,natureof
business,changeinmanagementandtheirfeelings.Itisjusttakenashelpingpartbut
assistantscanusetheirknowledge,caliberandintelligence.

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ObjectivesofAuditProgram:
Thefollowingtheobjectivesofauditprogram:
1.AuditProgramhelpstochecksystematicallythebooksofaccountswhichhelpto
conductfairaudit.
2.AuditProgramspecifiesthetimeperiodclearly,whichhelpstocompletetheworkof
auditinlesstime.
3.Assistantshouldsignafterthecompletionofworkwhichspecifiestheresponsibility
andaccountabilityofstaffs.Italsohelpstoprovethecompletionoftask.
4.Reviewofproposedscopeofauditpreparingproperplan.
5.AuditProgramshowthewaytothenewstaffstoperformworkofaudit.
RecenttrendsinAuditing:
TaxAudit:Ataxauditreferstoexaminingofanorganizationsorindividualsincomesor
expensesandclaimsofdeductionsorexemptionsforthepurposeofassessmentoftax.Itis
compulsoryinadditiontofinancialaudit.IthastobedonebythequalifiedChartered
Accountant.
Definition:TaxAuditcanbedefinedas“anexaminationoffinancialrecordstoassess
correctnessofcalculationoftaxableprofits,toensurecompliancewiththeprovisionsofthe
IncomeTaxActandalsotoensurefulfillmentofconditionsforclaimingdeductionsunder
thetaxact”.
TheIncomeTaxAct1961,containsseveralprovisionswhichrequireauditfortaxpurposes,
i.e.,sections12A,33AB,35D,35E,44AB,80IB,80IA,and142(2A).
CompulsoryTaxAuditu/s44AB:
Undersection44ABprovidesforthecompulsoryauditofaccountsofcertainpersons
carryingonbusinessandprofession,statesasunder:
1.IncasethetotalsalesorgrossreceiptsexceedsRs.40lakhsofabusinessinthe
previousyear.
2.IfgrossprofessionalreceiptsexceedsRs.10lakhsinthepreviousyearinthecaseof
profession.

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3.Incaseofbusiness,iftheprofitsandgainsfromthebusinessaredeemedtobethe
profitsandgainsofapersonundersection44AD(businessofcivilconstruction)or
Section44AE(businessofplying,hiringorleasingofgoodsandcarriage)andsection
44AF(businessofretailtrade)andsections44BBor44BBBandthatpersonhas
claimedhisincomeineachcasetobelowerthanthepresumptiveincome.Itis
obligatoryonthepartofsuchpersontogettheaccountsauditedbyaspecifieddate
andsubmittheprescribeddetailsandreportofsuchauditintheprescribedformduly
signedandverifiedbyanaccountant.
Itshouldbenotedthatifsuchpersonisrequiredtogethisaccountsauditedunderany
otherlaw,hewillthenberequiredtogetaccountsofsuchbusinessorprofession
auditedunderthatlawbeforethespecifieddateandobtainareportoftheauditorand
alsoaauditreportundersec44ABbeforethespecifieddateintheprescribedmanner.
Appointmentoftaxauditorwithinthemeaningofthecharteredaccountantsact1949and
includesapersonwho,undersection226(2)ofthecompaniesactisentitledtobeappointed
asanauditorofthecompany.Undersection7oftheactonlyapracticingchartered
accountantcanperformtaxauditofalltheabovementionedprovisionsoftheIncomeTax
Act,1961.
DisqualificationofTaxAuditor:
1.Anemployeeoftheassesseofaconcernunderthesamemanagement.
2.Acharteredaccountantwhohaspreparedthebooksofaccountoftheassesse.
CeilingonTaxAudits:
Undersection44ABoftheIncomeTaxAct,thespecifiednumberoftaxauditassignment
thatacharteredaccountantinpracticecanundertakeduringafinancialyearwillnotexceed
30.
Somerelevantpointsinthisconnectionshouldbenoted;
1.Incaseofcharteredaccountantsfirm,thenumberoftaxauditis30perindividual
partnerofthefirm.

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2.Nodistinctionistobemadebetweencorporateandnon-corporatewhilecounting
thenumberoftaxaudit.
3.Whenataxauditassignmentisconductedjointlybytwoormorefirm,itwillbe
countedasonetaxauditassignmentforeachfirm.
RemovalofTaxAuditor:
Underthenormalcircumstancesanauditorisnotremovedbutiftherearevalidgroundsthen
thetaxauditorcanberemoved.Howeveracharteredaccountantshouldnotaccepttheaudit
assignmentiftheremovalofthepreviousauditorwasnotonjustifiedgrounds.
TaxAuditbroadlyrelatestothefollowing:
1.Booksofaccountsexamined.
2.Methodsofaccountingemployedandtheirconsistency.
3.Methodsofvaluationandquantitativereconciliationofinventories.
4.Borrowingandrepaymentsofcertaintypesofloans.
5.Prior-periodadjustments.
6.Deductionsoftaxatsourceanddepositthereofwithappropriateauthorities.
PurposeofTaxAudit:
1.Thepurposeoftaxauditistoensurethatbooksofaccountshavebeenmaintainedin
accordancewiththeprovisionsoftheIncomeTaxAct.
2.Accordinglyaproperauditfortaxpurposeswouldensurethatproperrecordsare
beingmaintained,andthattheaccountsproperlyreflecttheincomereportedbythe
Assesse.
3.ThisauditeffectivelycurbsTaxEvasionandensuresTaxCompliance.
4.TaxAuditalsoensuresthattheAccountsareproperlybeingpresentedtothe
AssessingOfficerswhencalledfor.
5.TheprecioustimeoftheAssessingOfficersisalsosavedfromtheroutineand
ineffectiveverificationslikecheckingoftotalsandvouchingofPurchaseandSales
transactions.
6.TheycandevotetheirtimeinmoreimportantinvestigationaspectsofaCase.
7.Thus,TaxAuditsavesconsiderabletimetotheIncomeTaxDepartment.

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CostAudit:Itsimplymeansauditofcostrecords.Inotherwords,itreferstodetailed
checkingandverificationofcorrectnessofcostaccounts,costingtechniquesandsystem.It
actsasaneffectivemanagerialtoolfordetectionoffrauds,errorsandinconsistencies(non-
uniformity)ofcostrecords.
Definition:CostAudithasbeendefinedbytheCharteredInstituteofManagement
Accountants,Londonas“theverificationofcostaccountsandacheckontheadherenceto
thecostaccountingplan”.
ObjectivesofCostAudit:
Thefollowingaresomeoftheobjectivesforwhichcostauditisundertaken:
1.Toestablishtheaccuracyofcostingdata.Thisisdonebyverifyingthearithmetical
accuracyofcostaccountingentriesinthebooksofaccounts.
2.Toensurethatcostaccountingprinciplesaregovernedbythemanagementobjectives
andthesearestrictlyadheredinpreparingcostaccounts.
3.Toensurethatcostaccountsarecorrectandalsotodetecterrors,fraudsandwrong
practiceintheexistingsystem.
4.Tocheckupthegeneralworkingofthecostingdepartmentoftheorganizationandto
makesuggestionsforimprovement.
5.Tohelpthemanagementintakingcorrectdecisionsoncertainimportantmattersi.e.
todeterminetheactualcostofproductionwhenthegoodsareready.
6.Toreducetheamountofdetailedcheckingbytheexternalauditorifeffectiveinternal
costauditsystemisinoperation.
AdvantagesofCostAudit:
Theimportantadvantagesofcostauditarebrieflydiscussedasfollows:
A.AdvantagesofCostAudittotheManagement:

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1.CostAuditprovidesreliablecostdataformanagerialdecisions.
2.CostAudithelpsmanagementtoregulateproduction.
3.CostAuditactsasaneffectivemanagerialtoolforthedetectionoferrors,fraudsand
irregularitiessothatreliableandsmoothfunctioningofthesystemiscontinued.
4.CostAuditreducesthecostofproductionthroughpluggingloopholesrelatingto
wastageofmaterial,laborandoverheads.
5.CostAuditcanfixtheresponsibilityofanindividualwhereverirregularitiesor
wastagearefound.
6.CostAuditimprovesefficiencyoftheorganizationasawholeandcostingsystemin
particularbyconstantreview,revisionandcheckingorroutineproceduresand
methods.
B.AdvantagesofCostAudittotheShareholders:
1.CostAuditensuresthatproperrecordsaremaintainedastopurchases,utilizationof
materialsandexpensesincurredonvariousitemsi.e.wagesandoverheads,etc.it
alsomakessurethattheindustrialunithasbeenworkingefficientlyandeconomically.
2.Thecostauditenablesshareholderstodeterminewhetherornottheyaregettingafair
returnontheirinvestments.Itreflectsmanagerialefficiencyorinefficiency.
3.CostAuditensuresatruepictureofcompany’sstateofaffairs.Itrevealswhetherthe
resourceslikeplantandmachineryarebeingproperlyutilizedornot.
C.AdvantagesofCostAudittotheSociety:
1.CostAudittellsthetruecostofproduction.Fromthistheconsumermayknow
whetherthemarketpriceofthearticleisfairornot.Theconsumerissavedfromthe
exploitation.
2.CostAuditimprovestheefficiencyofindustrialunitsandtherebyassistsineconomic
progressofthenation.
3.Sincepriceincreasebytheindustryisnotallowedwithoutjustificationastoincrease
incostofproduction,consumerscanmaintaintheirstandardofliving.
D.AdvantagesofCostAudittotheGovernment:
1.CostAuditassiststhe‘TariffBoard’indecidingwhethertariffprotectionshouldbe
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2.CostAudithelpstoascertainwhetheranyparticularindustryshouldbegivenany
subsidyinordertodevelopthatindustry.
3.CostAuditprovidesreliabledatatothegovernmentforfixingupthesettingpricesof
thevariouscommodities.
4.CostAudithelpsthegovernmenttotakenecessarymeasurestoimprovetheefficiency
ofsickindustrialunits.
5.CostAuditcanreveal(disclose)thefraudulentintentionsofthemanagement.
ManagementAudit:Itisoneofthetechniquesofmanagementcontrol.Itreferstothe
systematicexaminationoftheactivitiesofmanagementatalllevelsofmanagement.It
coversalltheareasofmanagementsuchasPlanning,Organizing,Directing,Controlling,etc.
Thistypeofaudithelpsinimprovingtheefficiencyofmanagement.
Definition:InthewordsofT.G.Tokhe,“TheManagementAudithasbeendefinedasa
comprehensivecriticalreviewofallaspectsorprocessofmanagement”.
FunctionsofManagementAudit:
ManagementAuditisadifficultandcomplextask.Itperformsthefollowingfunctions:
1.ManagementAuditidentifiestheobjectivesofanorganizationifsuchobjectivesare
notsetup.
2.Itallocatestheoverallobjectivesofanorganizationinsmallparts.
3.Itreviewsthestructureoforganizationandassetoftheorganizationanddecides
whethergoalscanbeobtainedornot.
4.Itexaminesallthescopeofworkandliabilitycenters.
5.Itprovidesvaluablesuggestionstothemanagementafterevaluationofallabovefacts.
ObjectivesofManagementAudit:
1.Toformulatethegoalofanorganization.
2.Toensurethefulfillmentofgoals.
3.Tohelpmanagementtoimprovetheactivitiesandprocedures.
4.Tohelpallthemembersofmanagementtomakeeffectivedischargeoftheirduties.
5.Tohelpintheimprovementofprofits.

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AdvantagesofManagementAudit:
1.Managementauditprovidesinformationaboutstrongandweakpointsofthe
managementafterreviewingpoliciesandprograms.So,ithelpstothesmooth
operationofanorganization.
2.Itprovidessuggestionstothemanagementwhichhelpstomaintaineffective
management.
3.Ithelpsthemanagementprovidingsuggestionstoattaingoalofanorganization.
DisadvantagesofManagementAudit:
1.ManagementAuditorcannotunderstandthepracticalproblems.So,thesuggestions
providedbythemaretheoreticalbutnotpractical.
2.Scopeofmanagementauditisvague.So,itdoesnothelptoachievespecificgoal.
3.Generallymanagementgivesmoreemphasisonmaintainingbooksofaccountsrather
thanconcentratingonotherfactors.So,itconsumestimeoffarsightedmanagement.
DisadvantagesofAuditing:
1.FraudsbyManagement:
Auditingfailstocheckplannedfrauds.Themanagementcanplaytricksto
manipulatetheaccountsinordertoconcealtheirinefficiencies.Theauditedaccounts
couldnotshowthetrueview.
2.WrongCertificate:

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Auditingisbasedonmanycertificatestakenfrommanagementandotherpersons.
Auditingmayfailtoprovidethedesiredresultswhencertificatesprovidewrong
information.
3.MisleadingClarification:
Auditingfailstodisclosecorrectinformation.Themanagementmaynotprovide
correctclarification.Theauditorisboundtopresenthisreportevenafterthe
clarificationisnottrue.
4.NoTruePicture:
Theauditingdoesnotpresenttruepicture.Auditingfailstodisclosetruepicture
whenfigureshavebeenmanipulated.
5.NoCorrectView:
Auditingfailstopresentcorrectview.Therearelimitationsofaccountingsofigures
arenotfacts.Thesefiguresarebasedonopinion.Thusauditingisunabletodisclose
correctview.
6.NoSuggestion:
Auditingisnotconcernedwiththemanagementpolicies.Theauditorcannotguide
managementforbetteruseofcapital.Heisunabletosuggestwhatshouldhavebeen
done.
7.AbsenceofHonesty:
HonestyandIndependencearehighlyessentialtraits.Theauditormustcertifywhatis
true.Theabsenceofhonestyandindependencemeansfailureofauditpurpose.
8.BiasofAuditor:
Theauditingfailstopresentfairviewduetobiasofanauditor.Itisthequalityofan
auditorthatheshouldbeindependent.Thebiasauditingfailstohelpmanypeople.
9.HighCost:
Theauditworkiscompletedwithoutcost.Thecostofauditshouldnotexceedof
errorsandfrauds.Auditingfailstoservemillionsofbusinessentities.
10.PastAction:
Auditingisnothingmorethancheckingofpastactivities.Itisnotconcernedwith
presentorfuture.Theauditfeesincreasethecostofbusiness.Suchcostdoesnot
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