MODULE A : INTRODUCTION AND TYPES OF AUDIT
ameans overcomingtheproblem unreliable thedecision-makersandotherstakeholderslikeshareholders investors etc. needan assurancemechanismtoensurethatthe providedtothem areliablebasis theirdecisions. This theverygenesis audit as audit is byindependentpersons. Theaudited is thenusedinthedecisionmakingprocessontheassumptionthatitisreasonably complete accurateandunbiased.
1.1.2 Origin and Evolution
Thetermauditisderived theLatinterm ‘audire’ whichmeanstohear. Inearly days anauditorusedtolistentotheaccountsreadoverbyanaccountantinorder tocheckthem.
Thepractice auditingisasoldasaccounting. ItexistedevenintheVedicperiod. HistoricalrecordsshowthattheEgyptians theGreeksandtheRomansusedtoget thepublicaccountsscrutinizedbyanindependent . TheVedascontainerencetoaccountsandauditing. ‘ ’ byKautilya contains detailedrules accountingandauditing public . Inhisbook Kautilyastatedthat “ all undertakingsdependonfinance, henceforemostattentionshouldbepaidtothe treasury”.
Theobjective auditinginitiallywastodetectandpreventerrorsand evolvedandgrewrapidly theindustrialrevolutioninthe18thCentury. Withthegrowth theJointStockCompanies theownershipandmanagement becamedistinctanddifferent. Theshareholders whoweretheowners neededa report anindependentexpertontheaccounts thecompanymanagedbythe Board Directorswhoweretheemployees.
Theobjective audit andauditwasexpectedtoascertainwhethertheaccountsweretrueand ratherthandetection errorsand
InIndia theCompanies 1913madeaudit companyaccountscompulsory. Withincreaseinthenumberandasalsosize thecompaniesandthevolume transactions themainobjective audit toascertainingwhethertheaccounts weretrueand ratherthantrueandcorrect. Hencetheemphasiswasnoton arithmeticalaccuracybutona representation the
TheCompanies 1913alsoprescribed the timethe auditors. now ChapterX TheCompanies 2013 (Section139toSection 148) dealswith Itdealswiththeappointment auditors their
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UNIT 1 : INTRODUCTION TO AUDITING AND TYPES OF AUDIT
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removal resignation eligibility remuneration powers tiesandauditingstandards.
TheInternational StandardsCommitteeandThe Standards Board TheInstitute Chartered India ( ) havedeveloped standardsonaccountingandauditingpracticestoguidetheaccountantsandauditors intheirdischarge duties.
Thelaterdevelopmentsinauditingpertaintotheuse computersinaccounting andauditing.
Conclusion
Inconclusionitcanbesaidthatauditinghascomealongway hearingaccounts totakingthehelp computerstoexamineaccounts. Withtheadvent technology andrapidchangestakingplaceintechnologyandemergence variousrisks the importance dataanalysishasincreasedtoagreatextent. Computer Techniques ( ) havebecomeapart theaudittoprocessdata auditsigandtoimprovethe and theauditprocess.
Thus whiletheoverallobjectiveandscope auditdonotchangesimplybecause thedataismaintainedonComputers theprocedures bytheauditorinhis studyandevaluation
( a )the accounting system
( b )related Internal Controls
( c
are inaComputerised Systemenvironment. Procedures arenow ‘ AuditingaroundtheComputer’ to ‘Auditingthrough thecomputer’. Inpresentdayaudit, thereisparadigmshiftfrom ‘ticks’ to ‘clicks’.
1.1.3 Definitions of Audit and Auditing
Thetermauditing/audithasbeen by authors/entitiesasunder: ( i -
respects it is untrue or incorrect.”
( ii ) Prof. L R Dicksee which they relate.”
MODULE A : INTRODUCTION AND TYPES OF AUDIT
( iii ) The International auditing practices committeeination is conducted with a view to express an opinion thereon.”
( iv )The book “An Introduction to Indian Government Accounts and Audit ” issued the expenditure has been incurred with due regularity and propriety. The
( v ) Wikipedia -
( vi ) Investopedia -
( vii
audit evidence [ i.e.
1.1.4 Features of Auditing
Sr.
No. Details
A issystematicand examination thebooks account abusiness/non-businessentity.
B isa theresultsshownbythe Loss andthestate asshownbytheBalanceSheet.
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Sr. No. Details
C isacriticalreview thesystem accountingandInternalcontrol.
D ison-site activity suchasInspectionorexamination processorqualitysystem toensurecompliancetoregulatoryand otherlaiddownrequirements.
E isundertakenbyanindependentpersonorbody personswho areduly thejob.
F isdonewiththehelp vouchers documents and explanationsreceived theauthorities abusiness/non-business entitytoevaluateevidence documentationandeconomicaspects a transaction.
G Theauditorhasto abouttheauthenticity the statementsandreportastowhetherthesameexhibitsatrueand view thestate theconcern.
H Theauditorhastoinspect compare check review scrutinisethe voucherssupportingthetransactionsandexaminecorrespondence minutesbook shareholders directors Memorandum and byelawsetc inordertoestablishcorrectness thebooks account.
1.1.5 Importance of an audit
Withoutasystem internalcontrolsorauditsystemsto the thereanentitywouldnotbeabletocreatereliable statements internal orexternalpurposes. anauditsystemiscrucialinpreventingmaterial misstatementsinan entity’s statements.
1.1.6 Purpose of an audit
Themainpurpose anauditistoprovide
(D)To reduce risk to investors
UNIT 1 : INTRODUCTION TO AUDITING AND TYPES OF AUDIT 9
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MODULE A : INTRODUCTION AND TYPES OF AUDIT
Thusthebasicpurpose anauditcanbedescribedas:
C.To ensure compliance with established internal control procedures by examining organisation.
1.1.7 Scope of Audit
Thescope auditisincreasingwiththeincreaseinthecomplexities thebusiness. Itissaidthatthelong-termobjectives auditshouldbetoserveasaguide totheManagement’s decisions. Thescope auditencompasses accountswithanintention givingopiniononitsreliability. Henceitcovers costaudit managementaudit social etc.
Itshouldberememberedthatanauditorjustexpresseshisopinionontheauthenticity theaccounts. Hehasnopowertotakeactionagainstanybody. Thatiswhy itissaidthat “ anauditorisawatchdogbutnotabloodhound.”
1.1.8 Objectives of Auditing
arebasicallyconcernedwith whethertheaccountsexhibitatrue and view thebusiness. Theobjectives auditingdependsuponthepurpose hisappointment.
Primary objective
accounts are prepared in accordance with the recognised accounting policiescial statements comply with the accounting standards.
(B) Secondary Objectives
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sition to be misstated.
principles i.e. principle i.e . clerical errors.
I.Errors are mistakes committed unintentionally
TypesofErrors
Types of ErrorsDetails
Omission
will not agree and hence it can be easily detected.
C. Compensating Errors
as compensating error.
D. -
B. Commission -
ciple the accounting principles. These arise mainly due to the lack
treated as Capital Expenditure or vice versa.
E. Clerical Errors the above except D.
UNIT 1 : INTRODUCTION TO AUDITING AND TYPES OF AUDIT 11-
LocationofErrors
MODULE A : INTRODUCTION AND TYPES OF AUDIT
Itisnottheduty theauditorto theerrorsbutintheprocessingaccounts hemaydiscovertheerrorsintheaccounts. Theauditorshouldmay oneormore the procedureinthisregardtolocateerrorsand to same:
( a ( b ( c ( d ( e ( f mistakes etc.
Timely scrutinyistheonlyremedy detection errors.
isanerrorcommitted intentionally todeceive/tomislead/toconcealthe truthormaterial . Fraudsmaybe threetypes.
Types of Frauds Details
a . Misappropria-
takes place either by showing more payments or recording less receipts.
1. The cashier may show more expenses than what are actually incurred and may misuse the extra cash. e.g. showing wages to dummy workers.
Cash can also be misappropriated by showing less receipts.
“Teeming and Lading
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UNIT 1 : INTRODUCTION TO AUDITING AND TYPES OF AUDIT
Types of Frauds Details
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Tillrecently theprincipalemphasiswasonarithmeticalaccuracy.
b . Misapproprianot issued to the production department and the goods may c . others. This is also known as “ Window Dressing”. It is very
TheCompanies requiredtheauditortostate interalia whetherthestatements accountaretrueand . Thisiswhatwecantakeasthepresentday auditobjective. Therehasbeena emphasis arithmeticalaccuracytothe question reliability the statements.
TheCompanies 2013 (section143) nowrequirestheauditortoexpresshis opiniononwhetherthe statementscomplywiththeaccountingstandards. Itisnotthemainobjective theauditortodiscover anderrors. But he anything asuspiciousnature heneedstomakeadetailedenquiryandverreporthis . Theprovisions theCompanies ( and ) Rules issuedinDecember require interalia ( Theserulesget amendedfromtimetotime ( lastamendmentcameineffectfromApril1, 2021 )
( a ( b
1.1.9 Advantages and inherent limitations of Audit
Thepublicgoodderived auditingisreasonableassurancethat statementsanddisclosuresare materialmisstatements.
The advantages variousviewpointsarederived audit :
( a ( b ( c
Sr. No. Business Point of view Investors Point of view
Other Advantages
1 Protects interest Evaluates Financial Status
2Helps in Loan Formalities Moral check dividend
3Builds reputation Proper valuation -
4 assets Good Security accounts are treated as an auGovernment acceptaxation. Updated positionable then and there consideration
The inherent limitations are :
i.
ii.
the evidence available to the auditor can enable him to draw only an auditor is generally persuasive in nature rather than conclusive
There is also a likelihood that some material misstatements in the may not be detected.
Any system of Internal control may be ineffective against fraud involving collusion relating to transactions.
MODULE A : INTRODUCTION AND TYPES OF AUDIT 14
Sr. No.Limitations of Auditing Details
1 with mala fide intentions.
2Dependence on explanations by others
3 Dependence oners viz -
4 othersjudgment plays an important role. It
tions Financial Statements may not disclose are prepared on historical cost basis) Corrupt practices auditors The management may use corrupt the company.
8 Inherent lim-
ments liabilities. Many items are based on the true position.
9 Detailed checking not possible transaction.
UNIT 1 : INTRODUCTION TO AUDITING AND TYPES OF AUDIT 15
