IPCC Audit Notes 2
Nature of Auditing
|Scope of Audit of Financial Statements||Scope will be determined by Auditor in regard to-terms of engagement-requirement of relevant legislation
-pronouncement of ICAI.
Terms of engagement cannot restrict scope of Audit in matters
-prescribed by legislation
-pronounced by ICAI.
|Objective of Audit of Financial Statement||Reliability & Sufficiency of Information||The auditor assesses reliability & sufficiency of info by:-making a study & evaluation of accounting systems & internal controls on which he wishes to rely to determine the nature, timing & extent of audit procedures.
-carrying out other tests, enquiries & other verification procedures of accounting transactions & account balances he considers appropriate.
|Disclosure of relevant info||The auditor determines whether relevant info is properly disclosed in financial statements by:-comparing financial statements with underlying accounting records & other source data
-considering judgments that management has made in preparing financial statements
-assessing the selection & consistent application of accounting policies, classification of info & adequacy of disclosure.
|Forming of Opinion||-In forming an opinion, the auditor follows procedures which determine that financial statements reflect a true & fair view of financial position & operation results of enterprise.-There is an unavoidable risk that some material misstatements may remain undiscovered.
-Auditor cannot be relied upon to ensure the discovery of each & every fraud or error.
-Auditor is not expected to perform duties which fall outside the scope of his competence.
|Inherent Limitations of Audit||Judgment||-Auditor’s work involves exercise of judgment.-Since many areas of accounting & auditing involved the use of judgment, different judgments cause different outcome.|
|Audit Evidence||-Evidence available to the auditor only enables him to draw reasonable conclusions.-This is so because evidence obtained by auditor is generally persuasive in nature.
-Therefore absolute certainty in audit is rarely attainable.
|Inherent Limitations of Internal Control||-There is always risk of an internal control system failing to operate as designed.-Fraud involving collusion among employees cannot be detected by internal control system.|
|Management override of Controls||-Certain levels of management may be in a position to override controls.-They can perpetrate greater fraud than the employees.|
|Difference between Audit & Investigation||Definition||Auditing is general examination of records in the ordinary course of business.Investigation is a critical examination of accounts with a special purpose.|
|Specific Areas||Auditing takes each and every aspect of accounts into consideration.Investigation concerns only specified areas.|
|Pre-Conceived Notion||There are no pre-conceived notions as to the outcome of auditing.Investigation is always conducted with some pre-conceived notion suited to the objective.|
|Statutory Obligation||Audit is required by the statute.There is no such case where investigation is concerned.|
|Types of Audit||Required Under Law||-Companies under Companies Act-Banking Companies under Banking Regulations Act-Electricity Supply Co. under Electricity Supplies Act
-Co-Operative Societies under Co-Operative Societies Act
-Public & Charitable Trust
-Corporations set up under an Act of Parliament or Stare Legislature
- Specified Entities under Income Tax Act
|Voluntary Audits||-Proprietary Audit-Audit of Partnership Firm-HUF (Hindu Undivided Families)
There is no mandatory law requirement.
|Advantages of Independent Audit||Reliability||The financial statements are more reliable if an independent audit is carried out.This is so because the auditor will then be free of any bias.|
|Safeguarding Financial Interest||It safeguards the interest of persons who are not associated with the management of entity.|
|Moral Check||It acts as a moral check on the employees from committing defalcations or embezzlement.|
|Settling Liability & Trade Disputes||Audited statements of account helps in-settling liability for taxes
-determining purchase consideration for a business
-settling trade disputes
-settling claims for damage of property.
|Detection of Losses||-It can help in detection of wastages & losses.-It also shows different ways to check such losses.|
|Books of Account||It ascertains whether proper books of accounts have been prepared or not & also helps in rectifying mistakes in this regard.|
|Appraisal||It reviews the existence & operations of various controls on organization & reports weaknesses in them.|
|Settlement of Accounts||Audited accounts are of great help in settlement of accounts at the time of admission or death of partner.|
|Statutory Requirement||Government may require audited & certified statement before it gives assistance or issues a license.|
|Relationship of Auditing with other Disciplines||Accounting||-Auditor should have knowledge of generally accepted accounting principles before he can review the financial statements.|
|Law||Auditor should be familiar with business laws affecting the entity. For example:-Law of contracts
-taxation laws, etc.
|Economics||-Auditor is expected to be familiar with the overall economic environment in which his client is operating.-he should also be familiar with macro & micro economics though, micro is more important from auditing point of view.
-macro economics should include economic nature of force which affects the firm, relationship of price, productivity, role of government & government regulations.
|Behavioral Science||Auditor should be able to interact with people on a regular basis.He should have knowledge of human behavior to effectively discharge his duties.|
|Mathematics & Statistics||With emergence of test check procedure the necessity of knowledge of statistics is gaining momentum.The knowledge of mathematics is also required particularly at the time of verification of inventories.|
|Data Processing||-Now-a-days, the organizations are carrying out their financial accounting activities with the help of computers.-Therefore, the auditor should have good knowledge of components, general capability of the system and related terms.
-In fact, EDP auditing in itself is developing as a discipline in itself.
|Financial Management||In general, auditor is required to have knowledge of financial techniques such as-working capital management
-capital budgeting, etc.
He is also required to have knowledge about
-institutions comprising the market place
-government activities that influence operations of financial market.
|Production||-A good auditor is one who understands his client & his business.-He is required to evaluate transactions from accounting aspect in relation to processes through which it has passed.
-Knowledge of accounting of joint & by products is also required.
Auditor should also know about
-cost system in operation in factory
-terminology of production, etc.
|Types of Errors||Errors of Omission||Where a transaction is omitted wholly or partially.|
|Errors of Commission||Where a transaction has been mis-recorded either wholly or partially.|
|Compensating Errors||Where there are two or more errors which exactly counter balance each other, so trial balance agrees in spite of them.|
|Procedural Errors||Whatever errors occur in the implementation of the procedures.|
|Errors of Principle||Errors arising as a result of transactions having been recorded in a fundamentally incorrect manner.|
Following are the categories of errors according to Mautz:
- Self-revealing errors
- Unintentional & intentional errors
- Unconcealed & concealed errors
- Affecting & not affecting general ledger balances
This entails the end of the first chapter…..
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