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AUDITING PRACTICES

CHAPTER 1

Need for auditing


1.Authenticity of accounting
statements
2.To ensure that the annual
statements of accounts
are reliable
3.True and fair view

Definition - Dicksee
Auditing
can
be
understood
as
an
examination of accounting
records undertaken with a
view
to
establishing
whether they correctly
and completely reflect the

Need and purpose of accounting


statements
Management - Decision making
Lenders & creditors - Establish the
degree of safety of their money
Government Levy of tax and to
regulate socio economic state of
affairs
Investors & financial analysts Investment decisions
Workers - to assure distribution of a
reasonable and legitimate share of

Basis for auditing


1. International auditing guidelines IAPC, a standing committee of the
International Federation of Accountants
(IFAC). (International Auditing Practices
Committee) now IAASB (International
Auditing & Assurance Standards Board)
2.Statements on standard auditing
practices - APC (1982)- now AASB ,
constituted under ICAI

AUDITING - DEFINITION
The word Audit means , to
listen/hear.
When the business firms want to know
the accuracy of their transactions and
the extent of truthfulness that is being
maintained by the staff in keeping the
records and books of accounts, they
used to conduct an audit of their
transactions to get the true and fair
view of the statements prepared and to
detect the frauds and errors committed.

AUDITING
AUDITING IS THE PROCESS
OF
COLLECTION
AND
EVALUATION OF EVIDENCE TO
REPORT
ON
ECONOMIC
INFORMATION.

AUDITING
ACCORDING TO ICAI,
Auditing is an examination
of the records of a financial
entity, whether small or big,
whether profit oriented or
not, when such examination
is conducted to express a
mere opinion thereon.

AUDITING
SAP 1 (Basic Principles Governing
an Audit)-(Standard Auditing
Practices)
An audit is the independent
examination
of
financial
information
of
any
entity,
whether profit oriented or not,
and irrespective of its size or
legal form, when such an

It

contains
features/points:

the

following

1. ECONOMIC INFORMATION
2. COLLECTION AND EVALUATION
OF EVIDENCE
3. REPORTING

The person conducting this process


1. Should perform his work with
knowledge of the use of the
accounting statements
2. Should take particular care to
ensure that nothing contained in the
statement will ordinarily mislead
anybody.

This can be done by satisfying:


1. The accounts have been drawn up
with reference to entries in the
books of account
2. the entries in the books of
account are adequately supported
by
underlying
papers
and
documents and by other evidence.
3. None of the entries in the books
of account have been omitted in
the process of compilation and
nothing which is not in the books

4. The information conveyed by the


statements
is
clear
and
unambiguous and
5. The statements of account, taken
as an integrated whole, present a
true and fair picture of the
operational results and of the
assets and liabilities.

SCOPE OF AN AUDIT
As per SAP (Standard Auditing Practices)2:
The scope of an audit of financial statements will be
determined by the auditor having regard to the
terms of the engagement, the requirement of
relevant legislation and the pronouncements of the
Institute.
However, the terms of engagement cannot, restrict
the scope of an audit in relation to matters which
are
prescribed
by
legislation
or
by
the
pronouncements of the Institute.

To form an opinion, the auditor should:


1. Assess the reliability and sufficiency of the
information
contained
in
the
underlying
accounting records and other source data by
a. making a study and evaluation of accounting
systems and internal controls on which he wishes
to rely and testing those internal controls to
determine the nature, extent and timing of other
auditing procedures
b. Carrying out such other test, enquiries and other
verification procedures of accounting transactions
and account balances as he considers appropriate
in the particular circumstances.

2. Determine
whether
the
relevant
information is properly disclosed in the
financial statements by
a. Comparing the financial statements with
the underlying accounting records and
other source data to see whether they
properly summarize the transactions and
events recorded therein and
b. Considering
the
judgments
that
management has made in preparing the
financial statementsselection &
application
of
accounting
policies,
classification of information etc

OBJECTIVES OF AUDITING
Main objective:
1. CONFIRMATION OF THE ACCURACY OF
ACCOUNTS AND STATEMENTS.(True and
Fair View)
Incidental and secondary:
1. DETECTION OF FRAUDS AND ERRORS
2. PREVENTION OF FRAUDS AND ERRORS.
3. SPECIFIC OPINIONS ON SPECIFIC FIRMS
OBJECTIVES.

ADVANTAGES OF
AUDITING
Ensures the correctness of accounts
Proper compliance of the law for
maintaining books and accounts
Detection of errors and frauds .
Helpful to inspire the confidence to
enter into business dealings.
It gives correct conclusions for the
management decisions.

Loans and credit facilities can be easily


obtained from the FIs with the help of
audited accounts.
Purchase consideration of the liquidated
company can be easily calculated based on
audited accounts.
Assures the shareholders and stake holders
about the proper running of business and
keeping of books of accounts
Facilitates the concerned person at the time
of valuing the amount of loss for the
damaged business property.
Employees will be kept under check and
controlled.

LIMITATIONS OF
AUDITING
Working under the framework given
Communication and mental abilities
to evaluate the evidence
More pressure from internal and
external sources.
Knowledge of Standard Auditing
Practices (SAP) and updates of the
standards issued by Auditing and
Assurance Standard Board (AASB)

QUALITIES OF AN
AUDITOR
INTEGRITY
INDEPENDENCE (sign vs. resign)
COMMUNICATION ABILITIES
(MOST important confidentiality)
TECHNICAL COMPETENCE
LOGICAL ABILITIES
UPDATION OF KNOWLEDGE

BASIC PRINCIPLES
PRINCIPLE OF INDEPENDENCE
PRINCIPLE OF CONFIDENTIALITY
PRINCIPLE OF MATERIALITY.

BASIC PRINCIPLES
1.
2.
3.
4.
5.
6.
7.
8.
9.

Integrity, Objectivity and Independence


Confidentiality
Skills and competence (3 AAS 1 of ICAI)
Responsible for work assigned to others
Documentation
Planning
Audit evidence
Accounting system and internal control
Audit conclusions and Reporting

Audit techniques
For collection and accumulation of audit
evidence, certain methods & means are
available and these are known as Audit
Techniques. Some of them (most common)
are:

Posting checking..Casting checking


Physical examination & countconfirmation
Inquiry.Year end scrutiny
Re-computation..Tracing
in
subsequent
period
Bank reconciliation