Auditing Short Note.pdf for accounting and finance
- 1. Auditing Practices and Principles By Etebark H.
- 2. Definition of Auditing Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances of an enterprise for a stated purpose. In any auditing situation the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluate the same on this basis formulates his judgement which is communicated through his audit report.”
- 3. Auditing is • The accumulation and evaluation of evidence • Against established criteria • Done by a competent and independent party • To express an opinion
- 4. Auditors ➢ Internal and External Auditors ➢ External auditors come in from outside the organization to examine accounting and financial records and provide an independent opinion on these records. Law requires that all public companies have their financial statements externally audited. ➢ Internal auditors work for the organization as internal employees to examine records and help improve internal processes such as operations, internal controls, risk management and governance.
- 5. Origin of Auditing ➢ Auditing is derived from Latin word “audire” which means to hear. ➢ The system of checking public accounts has been in existence for a long time. ➢ Luca Pacioli in 1494 had given Two aspects that is receiving and giving aspects. ➢ Luca also defined the duties and responsibilities of an auditor since then it is evolving. ➢ 16th, 17th and 18th century ➢ 19th century Joint stock companies ➢ 1913, Companies Act-made it obligatory ➢ 1918, Govt. of Bombay-training professional accountants ➢ 1949- Chartered Accountants Act-ICAI was set up
- 6. Features of Auditing ➢ Verification of activity – In auditing the auditor can verify the activity of company and before auditing of company accounts by qualified person the company examine their own accounts which is known as internal audit. ➢ Examination of Accounts – In auditing process their is systematic and scientific process of examination of books of accounts by a qualified person. ➢ Ascertain financial statements – The Auditor has to ascertain financial statements of the company by inspect, compare, check and review all financial vouchers. ➢ Review of accounting system – Auditing is a review of accounting system and Internal control.
- 7. Principles of Auditing. ➢Auditor should be sincere. ➢Auditor should follow principle of auditing. ➢Auditor should properly examine company accounts. ➢Prevention and Detection of errors and frauds.
- 9. Primary Objective ➢Examining the system of internal check. ➢Checking arithmetical accuracy of books of accounts, verifying posting, casting, balancing etc. ➢Verifying the authenticity and validity of transactions. ➢Checking the proper distinction between capital and revenue nature of transactions. ➢Confirming the existence and value of assets and liabilities.
- 10. Subsidiary Objectives ➢Detection and prevention of errors Errors of principle. Errors of omission. Errors of commission. Compensating errors. ➢Detection and prevention of frauds Misappropriation of cash. Misappropriation of goods. Manipulation of accounts. ➢Under-or over-valuation of stock
- 11. Other objectives • To provide information to income tax authority. • To satisfy the provisions of Companies Act. • To have a moral effect.
- 12. Types of Audits 1. Financial Statement Audits Evaluates correspondence between financial statements and GAAP 2. Operational Audits Evaluates correspondence between org’s procedures and methods and criteria of efficiency and effectiveness 3. Compliance Audits Evaluates correspondence between org’s operations and specific procedures or rules 4. Comprehensive Audits An audit of all the major functional areas within a utility.
- 13. Types of Audits • Independent (External) auditors • Internal auditors • Government auditors
- 14. Types of Errors • Error of Principle • Error of Omission • Error of Commission • Compensating Error
- 15. Fraud • Misappropriation of Asset • Misappropriation of goods • Misappropriation of cash
- 16. Principles governing An Audit • Integrity • Confidentiality • Skill and Competence • Work performed by others • Documentation • Planning • Audit evidence • Accounting System and internal control • Planning • Audit conclusions and Reporting
- 17. Advantages of Audit • Access to Capital Market • Lower Cost of Capital • Deterrent to Inefficiency and Fraud • Control and Operational Improvements • Authenticity of Accounts • Detection of errors and frauds • Identification of loopholes • Acceptable to taxation authorities • Increased creditworthiness • Settlement of dispute among partners • Settlement of insurance claims • Helpful in making comparisons • Accounts department becomes vigilant
- 18. Limitations • Time consuming • Frauds not detected • Costly • Depends on judgement • All frauds can not be detected • Dependence on others
- 19. Qualities of an Auditor • Integrity • Objectivity • Independence • Confidentiality • Skills • Responsible • Intelligent • Vigilant • Communication skills
- 20. An Auditor is a watchdog and not a blood hound
- 21. Difference Between Accounting and Auditing • Accounting is Constructive – Creating Reports • Auditing is Analytical – Determine “Fairness” of Reports
- 22. Audit Planning Procedures ▪ Planning is one of the basic principles. ▪ Plans should be further developed and revised as necessary during the course of the audit ▪ Audit planning process includes: • Pre-plan • Obtained back ground information • Obtain information about client’s legal documents • Develop overall audit programs • Schedule the audit work • Assigning professional staff to engagement.
- 23. Internal control • Internal control is a process effected by the entity’s board of directors, management and other personnel designed to provide reasonable assurance regarding the achievement of objectives in the following categories: • Effectiveness and efficiency of operations, • Reliability of financial reporting, and • Compliance with applicable laws and regulations. Four objectives of internal control system of an organization are; • to safe-guard the assets and records of the organization, • to ensure the accuracy and reliability of the accounting data and information, • to promote efficiency in all the organizations operations, • to encourage adherence to managements prescribed policies and procedures.
- 24. Audit Evidence • During the course of the audit, the auditor should obtain sufficient, reliable, relevant and useful evidence to achieve the audit objectives effectively. • This helps the auditor support his/her findings and conclusions by appropriate analysis and interpretation of this evidence.
- 25. Auditor's report The Auditor's report is a formal opinion by either an internal auditor or an independent external auditor as a result of an internal or external audit performed on a legal entity or subdivision thereof (called an ―auditee).
- 26. Types of audit reports • There are four types of audit opinions namely: • Unqualified opinion • Qualified opinion • Adverse opinion • Disclaimer opinion
- 27. Contents of standardized audit reports Regardless of the auditor, the following are the seven parts of the standardized audit report. • Report title • Audit report address • Introductory paragraph • Scope paragraph • Opinion paragraph • Name of the audit firm • Audit report date