CU-BCOM-SEM-III-Auditing Standards in India

BACHELOR OF COMMERCE SEMESTER III AUDITING STANDARDS IN INDIA BCM215

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:01133002345 For: CHANDIGARH UNIVERSITY 2 First CU IDOL SELF LEARNING MATERIAL (SLM) Institute of Distance and Online Learning

Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit 1 – Introduction To Auditing ...............................................................................................5 Unit 2 – Classes Of Audit..........................................................................................................13 Unit 3 – Audit And Investigation...............................................................................................20 Unit 4 – Working Papers And Evidences...................................................................................26 Unit 5 – Audit Procedure...........................................................................................................33 Unit 6 – Company Auditor ........................................................................................................49 Unit 7 – Divisible Profits And Dividend....................................................................................68 Unit 8 – Auditor’s Report..........................................................................................................79 Unit 9 – International Resources To Auditing Needs .................................................................91 Unit 10 – Rationale To Auditing Standards .............................................................................101 Unit 11 – Auditing And Assurance Standards Board (AASB) .................................................108 Unit 12 – Comparative Statement Of AS And Ind AS .............................................................113 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1 – INTRODUCTION TO AUDITING Structure 1.0 Learning Objectives 1.1 Introduction 1.2 Definition 1.3 Objectives 1.4 Advantages 1.5 Limitations of an Audit 1.6 Principles governing an Audit 1.7 Summary 1.8 Keywords 1.9 Learning Activities 1.10 Unit End Questions 1.11 References 1.0 LEARNING OBJECTIVES After studying this unit students will be able to:  Outline the Meaning of the term Audit  Learn the objectives of Audit  Evaluate the advantages of Audit  Describe the limitations of Audit  Outline the principles governing an Audit 1.1 INTRODUCTION The subject of Auditing is as ancient as Accounting. Its traces can be found in ancient civilization such as Greece, Egypt, Rome, U.K. and India. In India, even the Vedas contain reference to accounts and auditing. Arthasashthra by Kautilya, prescribes rules for accounting and auditing of public finances. The original objective of auditing was to identify and detect frauds or errors. Auditing grew very rapidly and took new shapes and methodologies, when the Stakeholders expectation changed rapidly. The objective of audit shifted, and audit was expected to ascertain whether the financial statements was prepared and presented to convey a true and fair view of the financial position of a Company. In recent days, with the huge investment avenues opened for FDI and drastic economic changes happening everywhere, the traditional method of auditing has further evolved and taken up even 5 CU IDOL SELF LEARNING MATERIAL (SLM)

more responsibilities and opportunities in the industry. Expectation from the stakeholders have doubled and auditors are expected to study not only the financial position but also to check and assess the operational efficiency and also to conduct SWOT analysis (Strength, Weakness, Opportunities and Threats). Study of Auditing practices is very important for students as it entails the basics of vouching/scrutinizing the records, books of accounts of an entity. The objective of this lesson is to develop the basics of auditing, auditing concepts, auditing standards. 1.2 DEFINITION Prof Montgomery has defined Auditing as follows: “Auditing is a systematic examination of the books and records of business or other organization, in order to ascertain or verify and to report upon the facts regarding its financial operations and the result thereof”. The Institute of Chartered Accountants of India (“ICAI”) has defined Auditing as “Auditing is defined as a systematic and independent examination of data, statements, records, operations and performance of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognizes the propositions before him for examination, collect evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report”. With the various definition available, the term auditing can be summarized as follows:  systematic and independent examination  such examination is on the vouchers, documents, information and explanations received from the clients  carried out by the independent qualified person  the auditor after satisfying himself with the authenticity of the financial accounts prepared for a particular period. 1.3 OBJECTIVES The objectives of auditing may be classified into two parts:  The primary objective  The secondary or incidental objective. Primary Objective: The primary objective of the auditors is to report to the owners whether the balance sheet give a true and fair view of the company’s state of affairs and the correct figure of the profit or loss for the financial year. The accounts are said to be true and fair: 6 CU IDOL SELF LEARNING MATERIAL (SLM)

 The books of account have recorded all the business transaction correctly.  The books of account have been prepared according to the accepted principles of accountancy and have followed accounting standards issued by different regulatory bodies.  There are no errors and frauds present in the books of account.  The financial statements that have been prepared by the company are in conformity with the books of accounts and all mandatory provisions of the Companies Act and other relevant laws have been followed  The profit and loss shown in the profit and loss account shows the true and fair results of entity’s operations and the value of assets and liabilities appears in the balance sheet is showing the correct financial picture.  The books of accounts must disclose all material facts regarding revenue, expenses, assets and liabilities. Material means important and essential. The disclosure of important matters in the accounts helps the users in taking business decisions. There should be neither suppression of vital facts nor misstatements. Secondary objective: It is also called the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objectives of auditing are:  Detection and prevention of frauds, and  Detection and prevention of errors. As per the statement on auditing practices issued by the ICAI, an auditor should bear in mind the possibility of the existence of frauds or errors in the accounts under audit since they may cause the financial position to be misstated. Difference between Fraud and Error Fraud refers to intentional misrepresentation Errors refer to unintentional mistake in the of financial information with the intention to financial information arising on account of deceive. Frauds can take place in the form of ignorance of accounting principles i.e. manipulation of accounts, misappropriation of principle errors, or error arising out of cash and misappropriation of goods. It is of negligence of accounting staff i.e. clerical great importance for the auditor to detect any errors. frauds and prevent their recurrence. 1.4 ADVANTAGES 7 CU IDOL SELF LEARNING MATERIAL (SLM)

 It safeguards the financial interest of persons who are not associated with the management of the entity.  It acts as a moral check on the employees from committing defalcations or embezzlement.  Audited statements of account are helpful in setting liability for taxes, negotiating loans and for determining the purchase consideration for a business.  This are also use for settling trade disputes or higher wages or bonus as well as claims in respect of damage suffered by property, by fire or some other calamity.  An audit can also help in the detection of wastage and losses to show the different ways by which these might be checked, especially those that occur due to the absence of inadequacy of internal checks or internal control measures.  Audit ascertains whether the necessary books of accounts and allied records have been properly kept and helps the client in making good deficiencies or inadequacies in this respect. As an appraisal function, audit reviews the existence and operations of various controls in the organizations and reports weakness, inadequacy, etc., in them.  Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.  Government may require audited and certificated statement before it gives assistance or issues a license for a particular trade. 1.5 LIMITATIONS OF AN AUDIT The limitations of an audit arises from 1. Nature of financial reporting: The preparation of financial statements involves judgement by management in applying the applicable reporting framework to the facts and circumstances of the entity. In addition, many financial statement items involve subjective decisions or assessments and there may be range of interpretations. 2. Nature of auditing procedures: There are practical and legal limitations on the auditor’s ability to obtain audit evidences. For example,  Management may not provide the complete information either intentionally / unintentionally.  Fraud may involve carefully organized schemes designed to conceal it. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

 Auditors are not given legal power ie., power of search which may be necessary for specific functions 3. Timeliness of financial reporting and the balance between benefit and cost: There is an expectation from the stakeholders that the auditor will express an opinion within a reasonable period of time and at a reasonable cost. 4. Others:  Fraud, particularly from the senior management  Completeness in disclosure of related party transactions  Non-compliance with laws and regulations  Future events, that affect the concept of going concern 1.6 BASIC PRINCIPLES GOVERNING AN AUDIT Standards on Auditing (SA) 200, “Basic Principals Governing an Audit”, describes the basic principles which govern the auditor’s professional responsibilities, and which should be complied with wherever an audit is carried. They are described below:  Integrity objectivity and independence: An auditor should be honest, sincere, impartial and free from bias. He should be a man of high integrity and objectivity.  Confidentiality: The auditor should respect confidentiality of information acquired during the course of his work and should not disclose the information without the prior permission of the client, unless there is a legal duty to disclose.  Skill and competence: The auditor must acquire adequate training and experience. He should be competent, skillful and keep himself abreast of the latest developments including pronouncements of the ICAI on accounting and auditing matters.  Work performed by others: If the auditor delegates some work to others and uses work performed by others including that of an expert, he continues to be responsible for forming and expressing his opinion on the financial information.  Documentation: The auditor should document matters which are important in providing evidence to ensure that the audit was carried out in accordance with the basic principles.  Planning: The auditor should plan his work to enable him to conduct the audit in an effective, efficient and timely manner. He should acquire knowledge of client’s accounting 9 CU IDOL SELF LEARNING MATERIAL (SLM)

system, the extent of reliance that could be placed on internal control and coordinate the work to be performed.  Audit evidence: The auditor should obtain sufficient appropriate evidence through the performance of compliance and other substantive procedures to enable him to draw reasonable conclusions to form an opinion on the financial information.  Accounting System and Internal Control: The management is responsible for maintaining an adequate accounting system incorporating various internal controls appropriate to the size and nature of business. The auditor should ensure that the accounting system is adequate and all the information which should be recorded has been recorded and internal control system contributes to such assurance.  Audit conclusions and reporting: On the basis of the audit evidence, he should review and assess the audit conclusions. A clean audit report indicates the auditor’s satisfaction in all respects and when a qualified, adverse or a disclaimer of opinion is to be given or reservation of opinion on any matter is to be made, the audit report should state the reasons thereof. 1.7 SUMMARY  Auditing is defined as a systematic and independent examination of data, statements, records, operations, and performance of an enterprise for a stated purpose  The primary objective of an audit is to express an opinion on true and fair view of the state of affairs of the Company  The secondary objective of an audit is prevent / detect frauds and/or errors  Fraud refers to intentional misrepresentation of financial information with the intention to deceive.  Errors refer to unintentional mistake in the financial information arising on account of ignorance of accounting principles 1.8 KEYWORDS  Internal Control  SA – Standards on Auditing  SWOT-Strength weakness opportunities and threats 1.9 LEARNING ACTIVITY 10 CU IDOL SELF LEARNING MATERIAL (SLM)

Mr. Akshay of Jalandhar has started a new business of selling Biscuits and chocolates. He purchases these items from a factory located in Jaipur and sells to local customers . However, he feels that he could expand this business ,for this he needs more money, people and resources. Having seen the potential of Akshaya’s business, Dilip wants to invest. Dilip sets up a business unit and requests Akshay to take care of it along with his business completely and Akshay will be entitled only for a commission of 15% on net profits and a monthly salary of Rs.25,000/-At the end of the year after seeing the financial results he feels that expected profits has not been achieved, he wants more clarity and assurance on the books of Accounts prepared by Akshay Dilip wants a solution for his problem. The solution is that the assurance Dilip is seeking may be given by an Independent Audit of Accounts. 1.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define the term “Audit”? 2. Primary objective of an Audit is to express an opinion. Comment on the statement? 3. What are the objectives of an Audit? 4. Explain the Advantages of an Audit. 5. What are the Limitations of an Audit? 6. Explain in detail the basic principles governing an Audit 7. Comment on the validity of the statement with reasons. a) The audit of financial statements relives management from its responsibilities. b) The duties of an auditor is limited to the arithmetical accuracy of books of accounts Long Questions 1. It is the Duty of an Auditor to detect fraud or misreporting in the Financial statements. Comment 2. Explain in detail the basic principles governing an Audit 3. What are the advantages and inherent limitations of an Audit? B. Multiple choice Questions 11 1. The primary objective of an Audit is to __________ a. Determine fraud b. Find out errors c. To express opinion on the financials CU IDOL SELF LEARNING MATERIAL (SLM)

d. None of these 2.Audit gives 100% assurance about correctness of financials a. True b. False c. Partly True d. None of these 3. ______________describes the basic principles which govern the auditor’s professional responsibilities, and which should be complied with wherever an audit is carried a. Basic Principals Governing an Audit b. General purpose Framework c. Both a and b d. None of these Answers 3-a 1-c 2-b 1.11 REFERENCES Text Books:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 12 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2 – CLASSES OF AUDIT Structure 2.0 Learning Objectives 2.1 Introduction 2.2 Definition - Internal Check (ICH), Internal Control (ICO) & Internal audit (IA) 2.3 Difference between ICH & ICO, ICO & IA and ICH & IA 2.4 Techniques of Internal Control system 2.5 Summary 2.6 Keywords 2.7 Learning Activities 2.8 Unit End Questions 2.9 References 2.0 LEARNING OBJECTIVES After studying this unit students will be able to:  Explain the Internal check, Internal Control and Internal Audit  Describe differences between Internal check, Internal Control and Internal Audit  Outline techniques of Internal control system  Learn about other Audit areas 2.1INTRODUCTION To have Control is a basic human requirement in one’s personal life. As Swami Vivekananda Says’, “The mind uncontrolled and unguided will kill us, drag us down; the mind controlled and guided, will save us and free us”. In the sphere of a business, control is an accepted device to ensure optimum utilization of resources, keeping in mind the entity’s object. Control required by a sole proprietor in small business is not identical with that of the control required in large scale of business organization. Since, in former case, the entrepreneur himself runs the show with the help of very assistants and aware of day-to-day business operations, we can assure that the activities are very much under the control of the owner. The same is not the case in case of later, where the operations are delegated to various persons, one may not be aware of day-to-day ground level operations. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

Human tendency is such that, when things are not under control, people will deviate from the right path. Hence, there has to proper control in place not only to ensure that things move in right direction, but also to see that the ultimate goal is reached. 2.2DEFINITIONS Internal Control As per Standard on Auditing (SA) 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment”, Internal control may be defined as “The process designed, implemented and maintained by those charged with governance, management and other personnel to provide reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, safeguarding of assets, and compliance with applicable laws and regulations”. Internal Check Internal check is best regarded as indicating checks on the day-to-day transactions which operate continuously as a part of the routine systems whereby work of one person is proved independently or is complementary to the work of another, the object being the prevention of or early detection of errors and frauds. Internal Audit According to the Institute of Internal Auditors (IIA), Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. 2.3DIFFERENCES Table 2.1Difference between internal control and internal check Internal Control Internal Check Internal control is broader concept as Internal check system is one part of internal compare to internal check system control system Internal control is the system of control Internal check is a system of allocation of established by the management in order to responsibility, division of work and methods of carry on business in an orderly and efficient recording transactions, whereby the work of one manner, ensure adherence to management employee is checked continuously by another. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

policies, safeguard assets and completeness of records. The essence of internal control system is in The essence of internal check system is that the implementation of Internal check and check should be automatic, continuous and Internal audit. objective In internal control system, controls other It is a routine check on the same work than the internal check system are internal audit system and other nonfinancial control systems like quality control, purchasing controls, marketing controls etc. DIFFERENCE BETWEEN INTERNAL CONTROL AND INTERNAL AUDIT Internal Control Internal Audit Internal control is the system of control Internal auditing is an independent, objective established by the management in order to assurance and consulting activity designed to carry on business in an orderly and efficient add value and improve an organization’s manner, ensure adherence to management operations. It helps an organization accomplish policies, safeguard assets and completeness its objectives by bringing a systematic, of records disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes Internal control system is a broad concept Internal audit system is comparatively a narrow and in includes internal audit system as well concept Internal control system is necessary for Internal audit system is to be implemented as per every organization the suitability of the organization Primary objective of Internal control system The Internal audit is primarily a backward- is to prevent the occurrence of fraud looking activity. DIFFERENCE BETWEEN INTERNAL CHECK AND INTERNAL AUDIT 15 CU IDOL SELF LEARNING MATERIAL (SLM)

Internal Check Internal Audit In Internal check system work is In Internal audit system work is checked automatically checked specifically In Internal check system checking is done Mistake can be checked at an early stage in when the work is being done. internal check system. Thrust of Internal check system is to prevent The thrust of Internal audit system is to detect the errors the errors and frauds In Internal check system checking is done In Internal audit system work is checked after it when the work is being done is done 2.4 TECHNIQUES OF INTERNAL CONTROL SYSTEM There are two types of techniques used in internal control system Preventive internal control techniques and Detective internal control techniques. Both types of internal control techniques are essential to an effective internal control system. From a quality standpoint, preventive controls techniques are essential because they are proactive and emphasize quality. However, detective controls techniques play a critical role by providing evidence that the preventive controls techniques are functioning as intended. Preventive Controls techniques are designed to discourage errors or irregularities from occurring. They are proactive in nature that helps to ensure departmental objectives are being met. Examples of preventive controls techniques are:  Segregation of Duties: Duties are segregated among different people to reduce the risk of error or inappropriate action. Normally, responsibilities for authorizing transactions (approval), recording transactions (accounting) and handling the related asset (custody) are divided.  Approvals, Authorizations, and Verifications: Management authorizes employees to perform certain activities and to execute certain transactions within limited parameters.  Security of Assets: Access to equipment, inventories, securities, cash and other assets is restricted; assets are periodically counted and compared to amounts shown on control records. 16 CU IDOL SELF LEARNING MATERIAL (SLM)

 Detective Controls techniques are designed to find errors or irregularities after they have occurred.  Examples of detective controls techniques are: Reviews of Performance: Management compares information about current performance to budgets, forecasts, prior periods, or other benchmarks to measure the extent to which goals and objectives are being achieved and to identify unexpected results or unusual conditions that require follow-up. Reconciliations: An employee relates different sets of data to one another, identifies and investigates differences, and takes corrective action, when necessary.  Physical Inventory verification  Internal Audits OTHER AUDIT AREAS Propriety audit Kohler has defined propriety as that which meets the test of public interest, commonly accepted customs and standard of conduct and particularly as applied to professional performance, requirements of Government regulations and professional codes. Propriety Audit carry out to check, mean whether the transactions have been done in conformity with established rules, principles and established standard. The Propriety Audit means the verification of following main aspects to find out whether:  Proper recording has been done in appropriate books of accounts.  The assets have not been misused and have been properly safeguarded.  The business funds have been utilized properly.  The concern is yielding the expected results. Compliance audit A compliance audit is a comprehensive review of an organization’s adherence to regulatory guidelines. The objective of a compliance audit is to determine whether the entity is following prescribed laws, regulations, policies, or procedures. These audits can be performed within a business organization for internal purposes or in response to requirements by other stakeholders. Efficiency audit In essence, efficiency indicates how well an organization uses its resources to produce goods and services. It focuses on resources (inputs), goods and services (outputs), and the rate (productivity) at which inputs are used to produce or deliver the outputs. Efficiency audit refers to comparing the actual results with the desired/projected results. It is directed towards the measurement of whether plans have been effectively executed. It is concerned with the 17 CU IDOL SELF LEARNING MATERIAL (SLM)

utilization of the resources in economic and most remunerative manner to achieve the objectives of the concern. 2.5 SUMMARY  Propriety audit is a concept widely used in government audit. Propriety Audit means whether the transactions have been done in conformity with established rules, principles and some established standard  A compliance audit is a comprehensive review of an organization’s adherence to regulatory guidelines, procedures, laws. The objective of a compliance audit is to determine whether the audited is following prescribed laws, regulations, policies, or procedures  Efficiency indicates how well an organization uses its resources to produce goods and services. Efficiency audit refers to comparing the actual results with the desired/projected results. It is directed towards the measurement of whether plans have been effectively executed.  Internal audit activity provides assurance that internal controls in place are adequate to mitigate the risks, governance processes are effective and efficient, and organizational goals and objectives are met. 2.6 KEYWORDS  IIA-Institute of Internal Auditors  IC-Internal control 2.7 LEARNING ACTIVITY 1. Prepare an Internal control Questionnaire to vouch Purchases and Trade Payables. __________________________________________________________________ __________________________________________________________________ 2.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Difference between Preventive control and Detective control 2. Explain Internal audit and its advantages 3. What are the different techniques in internal audit? Explain in brief 18 CU IDOL SELF LEARNING MATERIAL (SLM)

Long Questions 1. Discuss differences between Internal Audit and Internal Check? 2. Discuss difference between Internal Audit and Internal Control? 3. Discuss difference between Internal Check and Internal Control? 4. Explain in detail about Other Audits B. Multiple Choice Questions 1.______________ means whether the transactions have been done in conformity with established rules, principles, and some established standard. a. Efficiency Audit b. Propriety Audit c. Compliance Audit d. None of these 2.______________ are designed to discourage errors or irregularities from occurring a. Preventive Controls techniques b. Detective internal control techniques c. Both a and b d. None of these 3.In ____________ checking is done when the work is being done a. Internal control system b. Internal check system c. Internal Audit d. None of these Answers 1-b, 2-a, 3-b 2.9 REFERENCES Text Books:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 19 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3 – AUDIT AND INVESTIGATION Structure 3.0 Learning Objectives 3.1 Introduction 3.2 Definition 3.3 Audit and Investigation 3.4 Difference between Audit and Investigation 3.5 Steps and Types of Investigation 3.6 Summary 3.7 Keywords 3.8 Learning Activities 3.9 Unit End Questions 3.10 References 3.0 LEARNING OBJECTIVES After Studying this unit Students will be able to  Explain the definition of Audit and investigation  Outline about reasons for investigation  Analyze the difference between Audit and Investigation  Describe the steps and types of Investigation 3.1 INTRODUCTION Investigation is an exercise which is carried out with a specific objective. The investigation means in-depth analysis of books of accounts, transaction, and event. Investigation exercise is voluntary in nature and used extensively by Internal and management auditors. It is neither accounting nor auditing but a special audit limited or extended scope keeping in view the object behind it. It is intensive and comprehensive than auditing. 3.2 DEFINITION Dicksee has defined Investigation as “An investigation is an examination of accounting records for a specific purpose”. Scope of investigation 20 CU IDOL SELF LEARNING MATERIAL (SLM)

No general principle can be laid down with regard to the scope of every type of investigation. Scope of investigation, in each case, would be limited to the period or area to be covered by the investigator. OBJECTIVES & REASONS FOR INVESTIGATION The real objective of conducting an investigation by an auditor on behalf of his client is to provide him the desired information in the form of a report about the matter specified. Normally the objective of investigation is to collect, analyze and evaluate facts in respect of desired field of activity with a view on some special purpose as determined by the person on whose behalf the investigation is undertaken. The common reasons of getting the investigation done are listed below:  Proposed purchase of business.  Proposed sale of business.  Reasons for low profitability.  Cause of high employee turnover.  Reliability of business data.  Proposed investment in particular securities.  Suspected fraud.  Joining in existing partnership business.  Borrowing funds.  Lending funds.  Proposed purchase of controlling shares in a company. 3.3 AUDIT AND INVESTIGATION To understand auditing in its proper context, one must first understand how auditing differs from investigation. Auditing differs from investigation, which is another important service provided by a professional accountant. An investigation is a thorough review of financial records with a specific goal in mind. For example, if fraud is reported and an accountant is hired to audit the books to see if fraud occurs and, if so, how much money is involved in such a case the inquiry becomes an investigation. Investigations may be carried out in a variety of fields of accounting, such as the amount of waste and loss, profitability, cost of production, and so on. It usually just affects a few regions. Its essence is to approach the situation with a preconceived notion that is appropriate for the goal. The general goal of auditing, on the other hand, is to determine if the accounts present an accurate and reasonable image. Auditing never involves the investigation of particular events, and it never begins with a preconceived idea regarding the state of affairs. Unless circumstances call for a special investigation, the auditor tries to reveal what he discovers in the normal course of reviewing the accounts using commonly accepted techniques: fraud, 21 CU IDOL SELF LEARNING MATERIAL (SLM)

mistake, irregularity, and everything else comes to the auditor's attention in the normal course of checking are all looked into in detail, and occasionally investigation results from the auditor's prima facie findings. 3.4 DIFFERENCE BETWEEN AUDIT AND INVESTIGATION BASIS OF AUDIT INVESTIGATION DIFFERENCE Legal binding Audit of annual financial Investigation is not compulsory statements of a company is under the Companies act, 2013 Objective compulsory under the Companies but voluntary depending upon Act, 2013 necessity. Periodicity Audit is conducted to ascertain Investigation is conducted with a Nature whether the financial statements particular object in view, viz to Limitations show a true and fair view know financial position, earning Evidence capacity, prove fraud, invest Report Audit is conducted on annual capital, etc. basis Investigation may be conducted for several years at a time, say Involves test checking or sample three years. techniques to draw evidences Requires detailed study and Suffers from inherent limitations examination of facts and figures No limitations owing to nature of Audit seeks prima – facie engagement evidence It seeks conclusive evidence Audit report is addressed to the Shareholders It is addressed to the party on whose instruction investigation was conducted 3.5 STEPS AND TYPES IN INVESTIGATION An Investigation requires the following steps in order of sequence: 22 CU IDOL SELF LEARNING MATERIAL (SLM)

Source: Institute of Chartered Accountants of India TYPES OF INVESTIGATION Source: Institute of Chartered Accountants of India Section numbers mentioned above are in reference to the Companies Act 2013. 3.6 SUMMARY  Propriety audit is a concept widely used in government audit. Propriety Audit means whether the transactions have been done in conformity with established rules, principles and some established standard  A compliance audit is a comprehensive review of an organization’s adherence to regulatory guidelines, procedures, laws. The objective of a compliance audit is to 23 CU IDOL SELF LEARNING MATERIAL (SLM)

determine whether the audited is following prescribed laws, regulations, policies, or procedures  Efficiency indicates how well an organization uses its resources to produce goods and services. Efficiency audit refers to comparing the actual results with the desired/projected results. It is directed towards the measurement of whether plans have been effectively executed.  Internal audit activity provides assurance that internal controls in place are adequate to mitigate the risks, governance processes are effective and efficient, and organizational goals and objectives are met.  An investigation is a thorough review of financial records with a specific goal in mind  Auditing never involves the investigation of particular events, and it never begins with a preconceived idea regarding the state of affairs.  Investigation may be statutory or non-statutory 3.7 KEYWORDS  Prima Facie-At First appearance  Statutory - requirement by law 3.8 LEARNING ACTIVITIES 1. List out a detailed program for conducting investigation of financial records to determine the financial strength of a company ______________________________________________________________________________ ________________________________________________________________ 3.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define the term Investigation? 2. State any 5 reasons for getting Investigation done? 3. Difference between Audit and Investigation Long Questions 1. Explain the stages involved in Investigation? 2. What are the types of Investigation and explain them in detail? 3. Discuss in detail about Audit and Investigation 24 CU IDOL SELF LEARNING MATERIAL (SLM)

B. Multiple Choice Questions 1. Audit of Financial Statements is Compulsory under ______________ a. Companies Act 2013 b. Income Tax Act 1962 c. Central Excise Act 1944 d. None of these 2. A ___________ is not an official investigation into alleged wrongdoing a. Audit b. Internal Control c. Internal Check d. None of these 3. When an Audit is conducted there is a preconceived notion of existence of Fraud a. True b. False c. Partly True d. None of these Answers 3-b 1-a, 2-a, 3.10 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 25 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 4 – WORKING PAPERS AND EVIDENCES Structure 4.0 Learning Objectives 4.1 Introduction 4.2 Types of working papers 4.3 Need for working papers 4.4 Quality control for Audit Work 4.5 Audit Sampling 4.6 Summary 4.7 Keywords 4.8 Learning Activities 4.9 Unit End Questions 4.10References 4.0 LEARNING OBJECTIVES After studying this unit students will be able to:  Explain the meaning of working papers  Learn about need for working papers  Outline about Quality control for Audit work  Describe about Test check and Routine check 4.1 INTRODUCTION AUDIT WORKING PAPERS Audit working papers are the record of the planning and execution of the audit engagement. Auditors retain a set of working papers for each audit engagement for each year. The audit working papers for the current year are referred to as the current working papers. Audit working papers are covered by the Auditing standard SA 230 “Audit Documentation” Audit working papers are properties of Auditor and he must retain it for a specified minimum period of time as required by the statute. It can be in both physical and electronic form. 4.2TYPES OF WORKING PAPER FILES The form and content of audit documentation should be designed to meet the circumstances of the particular audit. The information contained in audit documentation constitutes the principal record of the work that the auditors have performed in accordance with standards and the 26 CU IDOL SELF LEARNING MATERIAL (SLM)

conclusions that the auditors have reached. The quantity, type, and content of audit documentation are a matter of the auditors’ professional judgment. The Audit documentation therefore is not restricted to being only on papers but can also be on electronic media. Generally, the factors that determine the form and content of documentation for a particular engagement are as follows:  The nature of the engagement.  The nature of the business activity of the client.  The status of the client.  Reporting format.  Relevant legislations applicable to the client.  Records maintained by the client.  Internal controls in operation.  Quality of audit assistants engaged in the particular assignment and the need to direct and supervise their work. CONTENTS OF PERMANENT AUDIT FILES  Copy of initial appointment letter if the engagement is of recurring nature.  Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.  NOC from previous auditor.  Information concerning the legal and organizational structure of the entity.  In the case of a company, this includes the Memorandum and Articles of Association.  In case of partnerships- Partnership deed.  In case of trusts- Trust deed.  In case of societies- Certificate of registration/ Rules and Bye-laws.  Organizational structure of the client.  List of governing body including Name, Address and contact details. For instance, the list of directors in case of a company, list of partners in a partnership and list of trustees in a trust.  Copies of audited financial statements for previous years  Details of sister concerns  Details of Bankers, Registrars, Lawyers etc CONTENTS OF CURRENT AUDIT FILE The current file normally includes:  Correspondence relating to acceptance of annual reappointment. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

 Extracts of important matters in the minutes of Board Meetings and General Meetings, as are relevant to the audit.  Evidence of the planning process of the audit and audit programme.  Analysis of transactions and balances.  A record of the nature, timing and extent of auditing procedures performed, and the results of such procedures.  Evidence that the work performed by assistants was supervised and reviewed.  Copies of communications with other auditors, experts and other third parties.  Copies of letters or notes concerning audit matters communicated to or discussed with the client, including the terms of the engagement and material weaknesses in relevant internal controls.  Letters of representation or confirmation received from the client.  Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated.  Copies of the financial information being reported on and the related audit reports.  Audit review points and highlight.  Major weakness in Internal control. 4.3THE NEED FOR WORKING PAPERS The need for Working papers listed as follows:  They aid in the planning and performance of the audit;  They aid in the supervision and review of the audit work and to review the quality of work performed, in accordance with AAS 17 “Quality Control for Audit Work”;  They provide evidence of the audit work performed to support the auditor’s opinion;  They document clearly and logically the schedule, results of test, etc.  The working papers should evidence compliance with technical standards.  They document that Internal control has been appropriately studied and evaluated.  They document that the evidence obtained and procedures performed afford a reasonable basis for an opinion; AUDIT NOTEBOOK  An audit book is usually a bound book in which a large variety of maters observed during the course of audit are recorded.  The audit notebook is a permanent record of the auditor.  For each individual audit, the auditor usually maintains a separate audit notebook.  The audit notebook should be maintained clearly, completely and systematically. 28 CU IDOL SELF LEARNING MATERIAL (SLM)

 An audit notebook is a great evidential tool available as a defense with the auditors in the event of any charge is brought against them. 4.4 QUALITY CONTROL FOR AUDIT WORK The objective of this standard is to establish standards on quality control as to the policies and procedures of an audit firm for audit work generally, and procedures regarding the work delegated to assistants on an individual audit. Factors to be considered for incorporating quality control in audit work The following essential factors should be considered for incorporating quality control in audit work-  Professional Requirements: Adherence to basic principles such as independence, integrity, objectivity, confidentiality, etc.  Skills and competence: Audit personnel should have required degree of skill and competence.  Assignment: Audit work should be assigned only to competent personnel.  Delegation: There is to be sufficient direction, supervision and review of work at all levels.  Consultation: Whenever necessary, consultancy within and outside the firm with experts.  Acceptance and Retention of clients: Evaluation of prospective client and review of existing client should be done on an ongoing basis.  Monitoring: Continued adequacy and operational effectiveness of quality control policies and procedures should be monitored.  The firm’s quality control policies and procedures should be effectively communicated to its personnel. RETENTION OF WORKING PAPERS/ DOCUMENTS Period of retention The auditor should retain the working papers for a period of time sufficient to meet the needs of his practice and satisfy any pertinent legal or professional requirements of record retention. Under companies Act 2013, Auditor must preserve working papers for a period of minimum of 7 years 4.5AUDIT SAMPLING:  The main objective of an audit is to formulate an overall opinion on the financial statements being examined by the auditor.  The accounts of a large size enterprise have a large number of transactions. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

 So it may be physically impossible for the auditor to check each and every transaction.  So Auditor selects few transactions from the entire lot on a rational basis and checks the selected sample lot to form an opinion on the entire lot of transactions Test Checking The method of selecting and testing a few transactions from a large volume of transactions is known as test checking. If the auditor determines that the entries reviewed are correct, he or she believes that the remaining entries are correct as well. The approach is based on sampling theory, which is a widely used statistical method. For the auditor, checking each and every transaction that happens during the year is both wasteful and inefficient. As a result, the auditor verifies and reviews a few representative transactions in order to gather ample audit evidence on which to base his conclusion. Test checking decreases the auditor's workload; if the auditor finds that the documents, he reviewed are accurate during test checking, no further thorough checking is needed. The Test Checking Responsibilities of the Auditor The following are the auditor's responsibilities or measures to take while using test checks: 1. Entries chosen for test check should be representative of all transactions and should be chosen at random. 2. The test should be chosen by the auditor independently of any feedback from the client's staff. 3. The auditor should choose the entries for the test check with caution, using his intelligence and technical abilities. 4. When vouching entries in the cash book and bank passbook, no test search should be used. 5. When reviewing the entries for the first and last months of the year, the auditor should not use a test search, and all entries should be thoroughly reviewed. 6. The test check should be structured in such a way that it encompasses a large portion of each employee's job. 7. When choosing the type and size of the samples to be checked, the auditor should also consider about his previous experiences. Routine checking Routine checking entails checking entries as they appear in the books of account to ensure that the routine bookkeeping mechanism has been correctly applied and that accounting documents are arithmetically accurate. It's important to note that this form of work does not establishes that the accounts are right in any way because it doesn't go behind the entries in the books and will not be able to completely substantiate the transactions. As a result, routine checking is not widely regarded as a critical component of auditing, especially when self-balancing ledgers are used and a trial balance has been duly agreed. Routine check-ing, on the other hand, should not be overlooked by an auditor; 30 CU IDOL SELF LEARNING MATERIAL (SLM)

it has its own value in finding minor errors. He should be particularly cautious about audit clerks skipping or neglecting this form of work because it can become monotonous. 4.6SUMMARY  Audit working papers are the record of the planning and execution of the audit engagement.  In case of recurring audits, some working papers files may be classified into permanent audit files and current audit files  They aid in the supervision and review of the audit work and to review the quality of work performed, in accordance with AAS 17 “Quality Control for Audit Work”;  The method of selecting and testing a few transactions from a large volume of transactions is known as test checking.  Routine checking entails checking entries as they appear in the books of account to ensure that the routine bookkeeping mechanism has been correctly applied and that accounting documents are arithmetically accurate. 4.7 KEYWORDS  AAS- Auditing and Assurance standards  SA- Standards on Auditing 4.8 LEARNING ACTIVITIES 1. Learn about the different types of sampling techniques available in selection of sample for Audit ______________________________________________________________________________ ______________________________________________________________________________ 4.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1.Write a short note about Audit working papers 2.Describe briefly about Current and permanent Audit file 3.What is meant by the term Test check Long Questions 31 CU IDOL SELF LEARNING MATERIAL (SLM)

1.Explain in detail about Test check in Audit and how is it different from routine check 2.What is meant by Audit documentation, explain in detail about the different types of working papers B. Multiple choice Questions 1._________ is an example of Current Audit file a. MOA of a company b. Trust deed copy c. Bank statement d. Both a and b 2.____________ is a tool where less than 100% of transactions are checked to form an opinion on the Financial statements a. Audit Documentation b. Routine Check c. Audit sampling d. None of these 3.For which the following Test check cannot be used a. Vouching purchase of Fixed Assets b. Vouching Year end Transactions c. Vouching petty cash book d. Both a and b Answers 1-d, 2-c, 3-d 4.10 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 32 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 5 – AUDIT PROCEDURE Structure 5.0Learning Objectives 5.1Introduction 5.2Audit plan / Audit programme 5.3Vouching 5.4Verification 5.5Difference between Vouching and Verification 5.6Audit documentation 5.7Audit procedures 5.8Summary 5.9Keywords 5.10Learning Activities 5.11Unit End Questions 5.12References 5.0 LEARNING OBJECTIVES After studying this unit students will be able to  Explain the meaning of Audit procedure  Learn about Routine check and test check  Appreciate the concept of Audit plan  Learn concepts relating to Vouching and verification  Analyze the Audit procedure in obtaining Audit evidence 5.1 INTRODUCTION Audit procedure refers to the way in which the audit work should be conducted. It is the procedure followed by an auditor for the actual conduct of his audit work. There are certain aspects of audit procedure which are common in all audit works. They are: Routine checking:- The checking of castings and postings of the common books of the organization is called routine checking. In other words it is the checking of subsidiary books ,LEDGER accounts by an auditor. Routine checking involves the following operations, a) Checking of the castings, sub castings, carry forward and other calculations in the books of original entry b) Checking of the postings into the ledgers c) Checking of the casting and balances in the ledgers 33 CU IDOL SELF LEARNING MATERIAL (SLM)

d) Checking of the transfer of the balances from the ledgers to the trial balance. Generally, routine checking is conducted for the following books a) Cash book b) Petty cash book c) Purchase book d) Sales book e) Purchase return book f) Sales return book g) Bills receivable book h) Bills payable book i) Journal proper j) Sales ledger k) Purchase ledger l) Private ledger m) Wages and salaries book n) Stock sheet Advantages of routine checking 1) It facilitates thorough checking of the book’s original entry 2) Under routine checking, postings are completely checked 3) It helps in verifying arithmetical accuracy of the entries in the books of accounts 4) Clerical errors and simple frauds are located by routine checking 5) Checking of posting and casting is helpful in preparation of trial balance 6) It is easy and simple job which can be done by any audit clerk Disadvantages of routine checking 1) It can reveal only arithmetical errors and ordinary frauds 2) It is a mechanical checking, so it causes monotony 3) It is not important in the audit of a concern where self-balancing system is in operation 2. Test checking or sample checking or selective verification:- Test checking means checking by an auditor, a few transactions selected at random here and there so as to form his final judgement on the whole set of transactions. It means to select and examine representative sample from a large number of similar items. Test checking involves sampling. One objective of test checking is to arrive at characteristics present in the mass transactions from the checking of representative sample. Conditions or essentials or precautions of test checking 1) The success of test checking largely depends upon the system of internal check in operations the business. 2) The sample selected for test checking should be at random. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

3) It should be applied only to homogeneous transactions. 4) The sample of test checking should be selected without bias. 5) One selection of sample should be made in such a way that it covers the work of each of the staff of the client. Test checking should not be applied to cash book items. No indication should be given to client as regards the method of test checking. One sample for test checking should be selected by the auditor himself. There are certain transactions which are not suitable for test checking. They are. 1) Opening and closing entries. 2) Cash book entries. 3) Transactions of seasonal industry. 4) Nonrecurring transactions. 5) Bank reconciliation statement. 5.2 AUDIT PLAN An audit plan is a step-by-step, methodical approach that enables auditors to focus on important areas under review. Audit Planning involves:  Establishing the overall audit strategy  Developing an audit plan Establishing overall audit strategy The Audit strategy sets out in general terms how the audit is to be conducted and sets the scope, timing and direction of the audit. The audit strategy then guides the development of the audit plan, which contains the detailed responses to the auditor’s risk assessment. The auditor to consider specific matters when establishing the audit strategy and the same are given below:  Identify the characteristics of the engagement that define its scope  Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required  Consider the factors that are significant in directing the audit team’s efforts in the auditor’s professional judgment  Consider the results of preliminary engagement activities and knowledge gained on other engagements  Ascertain the nature, timing and extent of resources necessary to perform the engagement Developing an audit plan 35 CU IDOL SELF LEARNING MATERIAL (SLM)

In order to ensure a high standard of performance, it is important that the auditor should prepare adequately for his work. Planning for an audit, just like every human endeavor, is essential for the smooth performance of the audit work and its successful completion. Planning ahead for an audit work will not only guarantee a valid audit opinion but will also help the auditor to ensure that:  The audit objective is established and achieved;  The audit is properly controlled and adequately directed at all stages;  High risk and critical areas of the engagement are not omitted but that adequate attention is focused on these areas;  The work is completed economically and expeditiously, hence, saving on audit resources. Points for consideration in Audit planning: In order to make the planning more meaningful, the auditor should take into consideration the following matters in relation to the audit engagement:  Preliminary Work to be done in addition to the real audit work  Changes in legislation, accounting or any auditing standards or guidelines  Analytical review of available management accounts and other management information that relate to the accounts  Changes in the business or management  Changes in the accounting system  Deadline for submitting audit report AUDIT PROGRAMME Most of the time audit is conducted by a team instead of just an individual. If business is small or if there is not much to be done then it might be possible to conduct the whole engagement easily by an individual. But usually amount of work, time constraints and other factors require the audit engagement to be conducted by more than one person. Depending on the audit, audit team can have different number of members. Usually the team is structured in a Partner, Manager and Assistants which may further be divided into senior assistants and juniors. In order to properly assign work to each individual and what is required to be done by whom there must be some kind of instructions set, otherwise, more than one member might be auditing the same area or in other case some areas may be left completely unaudited. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

To ensure efficient and effective conduct of audit assignment, audit programmes or audit programs are used. Audit programme contains step by step instructions to be carried out by team members i.e. it is simply a list of audit procedures to be executed by team members. Mostly it is in the form of a checklist which can be used by the juniors to make sure every required procedure has been implemented. This can also help in monitoring the work of juniors in specific or assistants in general. Audit programs may be laid down in advance for the whole year for some aspects of the audit which auditor expects to be audited after regular intervals of time or when needed. For understandability and convenience, audit programs are written for each audit area separately and then assigned to specific team members. Sample audit programme for verification of Cash payments may look like as follows: Sl. No Particulars Yes/ No Remarks 1 What is the petty cash limit? Whether instances of Cash held more than the limit observed? 2 Whether cash register is maintained and all receipts and payments are properly recorded? 3 Whether the register is daily updated and closing balance are properly matched and signed by the cashier? Frequency of physical checking by the person other than cashier, if any? 4 Whether Maker / Checker concept is followed? 5 Whether any instances of difference in closing balance observed? 6 Whether “I Owe you” / “Suspense” vouchers are maintained for cash advance given to staffs during the day? 7 Whether Cash collected are deposited without any delay? 37 CU IDOL SELF LEARNING MATERIAL (SLM)

8 Whether cash payments are properly authorized? 9 Is there any authorization limit for the cash payments? If Yes, whether the payments are duly authorized by the responsible person? 10 List of bank accounts maintained 11 Whether BRS have been prepared and reconciled periodically? 12 Monitoring of stale cheques and reversal thereof 5.3 VOUCHING Vouching means the examination of documentary evidence in support of entries to establish the arithmetic accuracy. When the auditor checks the entries with some documents it is called vouching. Vouching is the acid test of audit. It tests the truth of the transaction recorded in the books of accounts. It is an act of examining documentary evidence in order to ascertain the accuracy and authenticity of the entries in the books of accounts According to Dicksee, “Vouching consists of comparing entries in the books of accounts with documentary evidence in support thereof”. VOUCHER: 38 CU IDOL SELF LEARNING MATERIAL (SLM)

Any documentary evidence supporting the entries in the records is termed as a voucher. Any document, which supports the entries in the books of accounts and establishes the arithmetical accuracy, is called a voucher. OBJECTIVES OF VOUCHING:  To ensure that all the transactions are properly recorded in the books of accounts. To see the proper evidence supports all the entries of the transactions.  To make sure that fraudulent transactions are not recorded in the books of accounts.  To see that all transactions relating to business are recorded in the books of accounts.  To see that all transactions are properly authenticated by a responsible person. IMPORTANCE OF VOUCHING  Ensures genuineness of the transactions  Enables to know transactions  Helps to know relevance of the transaction  Facilitates proper allocation of capital & revenue, expenditure  Detects frauds and errors  Decides authenticity of transactions  Ensures proper accounting  Compliance with law  Ensures proper disclosure CONSIDERATIONS TO BE BORNE IN MIND BY THE AUDITOR IN THE COURSE OF VOUCHING  The date of the voucher falls within the accounting period;  The name as recorded and as contained in voucher is same  Voucher/transactions therein are duly and properly authorized by the relevant signatory;  The transaction for which payment have been made or amount have been received relates to business.  The transactions being examined belongs to the entity and took place during the relevant period;  Whether any alteration has been done in the voucher, if so whether it has been duly recorded and authorized.  Whether any control number maintained on voucher or not.  Whether there is any missing number or voucher. 39 CU IDOL SELF LEARNING MATERIAL (SLM)

 The transaction is recorded in the proper account and revenue or expenses is properly allocated to the accounting period.  All transactions which have actually occurred have been recorded.  The posting from the voucher of the amount needs to be correctly taken in the final accounts, disclosed in accordance with recognized accounting policies and procedures. 5.4 VERIFICATION Spicer and Pegler have defined verification as, “it implies an inquiry into the value, ownership and title, existence and possession and the presence of any charge on the assets”. Verification is a process by which an auditor satisfies himself about the accuracy of the assets and liabilities appearing in the Balance Sheet by inspection of the documentary evidence available. Verification means proving the truth, or confirmation of the assets and liabilities appearing in the Balance Sheet. Thus, verification includes verifying:-  The existence of the assets  Legal ownership and possession of the assets  Ascertaining that the asset is free from any charge, and  Correct valuation According to the ‘statement of auditing practices’ issued by the ICAI, “the auditor’s object in regard to assets generally is to satisfy that:  They exist,  They belong to the client,  They are in the possession of the client or the persons authorized by him,  They are not subject to undisclosed encumbrances or lien,  They are stated in the balance sheet at proper amounts in accordance with sound accounting principles, and  They are recorded in the accounts. OBJECTS OF VERIFICATION  To show correct valuation of assets and liabilities.  To know whether the balance sheet exhibits a true and fair view of the state of affairs of the business.  To find out the ownership and title of the assets.  To find out whether assets were in existence. 40 CU IDOL SELF LEARNING MATERIAL (SLM)

 To detect frauds and errors, if any.  To find out whether there is an adequate internal control regarding acquisition, utilisation and disposal of assets.  To verify the arithmetic accuracy of the accounts.  To ensure that the assets have been recorded properly ADVANTAGES OF VERIFICATION  It avoids manipulation of accounts.  It guards against improper use of assets.  It ensures proper recording and valuation of assets.  It exhibits true and fair view of the state of affairs of the company. TECHNIQUES OF VERIFICATION Inspection: It means physical inspection of the assets i.e. company cash in the cash box, physical inventory, inspection of shares certificates, documents etc. Observation: The auditor may observe or witness the inspection of assets done by others. Confirmation: It means obtaining written evidence from outside parties regarding existence of assets. 5.5DIFFERENCE BETWEEN VOUCHING AND VERIFICATION Basis of Vouching Verification difference Meaning Vouching is the act of checking the Verification is the act of checking records with the help of evidential title, possession and valuation of documents. assets Nature Vouching is related to all the Verification is specially related to accounting documents. the assets and liabilities Person Generally audit staffs / assistants Auditor himself verifies perform vouching Time Vouching is made at the beginning of Verification is made at the end of auditing auditing or at the time of checking 41 CU IDOL SELF LEARNING MATERIAL (SLM)

balance sheet. 5.6 AUDIT DOCUMENTATION “The skill of an accountant can always be ascertained by an inspection of his working papers”. - Robert H. Montgomery The word “document” is used to refer to a written or printed paper that bears the original, official, or legal form of something and can be used to furnish decisive evidence or information. “Documentation” refers to the act or an instance of the supplying of documents or supporting references or records. “Audit Documentation” refers to the working papers prepared or obtained by the auditor and retained by him, in connection with the performance of the audit. FORM AND CONTENT OF AUDIT DOCUMENTATION PERMANENT AND CURRENT AUDIT FILES In the case of recurring audits, some working paper files may be classified as permanent audit files, which are updated currently with information of continuing importance to succeeding audits. In contrast current audit files contain information relating primarily to the audit of a single period. CONTENTS OF PERMANENT AUDIT FILES  Copy of initial appointment letter if the engagement is of recurring nature.  Record of communication with the retiring auditor, if any, before acceptance of the appointment as auditor.  NOC from previous auditor.  Information concerning the legal and organizational structure of the entity.  In the case of a company, this includes the Memorandum and Articles of Association.  In case of partnerships- Partnership deed.  In case of trusts- Trust deed.  In case of societies- Certificate of registration/ Rules and Bye-laws.  Organizational structure of the client.  List of governing body including Name, Address and contact details. For instance, the list of directors in case of a company, list of partners in a partnership and list of trustees in a trust.  Copies of audited financial statements for previous years  Details of sister concerns 42 CU IDOL SELF LEARNING MATERIAL (SLM)

 Details of Bankers, Registrars, Lawyers etc CONTENTS OF CURRENT AUDIT FILE The current file normally includes:  Correspondence relating to acceptance of annual reappointment.  Extracts of important matters in the minutes of Board Meetings and General Meetings, as are relevant to the audit.  Evidence of the planning process of the audit and audit program.  Analysis of transactions and balances.  A record of the nature, timing and extent of auditing procedures performed, and the results of such procedures.  Evidence that the work performed by assistants was supervised and reviewed.  Copies of communications with other auditors, experts and other third parties.  Copies of letters or notes concerning audit matters communicated to or discussed with the client, including the terms of the engagement and material weaknesses in relevant internal controls.  Letters of representation or confirmation received from the client.  Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in which exceptions and unusual matters, if any, disclosed by the auditor’s procedures were resolved or treated.  Copies of the financial information being reported on and the related audit reports.  Audit review points and highlight.  Major weakness in Internal control. 5.7 AUDIT PROCEDURE Audit procedures are the processes, techniques, and methods that auditors perform to obtain audit evidence which enables them to make a conclusion on the set audit objective and express their opinion Following are the Audit Techniques or procedures used for obtaining Evidence Inspection It involves examining records or documents that provides Audit Evidence of varying degree Inspection of a documents/ Assets will show the ownership and value of Assets and reliability with regards to existence Inquiry Inquiry is raising questions to the management with an intention to obtain a response. Inquiry is conducted to get a clear understanding about the evidence obtained External Confirmation 43 CU IDOL SELF LEARNING MATERIAL (SLM)

External confirmation refers to obtaining written responses from third parties either in physical or electronic form. Observation Observation consists of looking at a process or procedure being performed by others, Observation provides audit evidence about the performance of a process or procedure. Analytical Procedures Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. Re performance Reperformance involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control Recalculation Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically Methods of Evaluating Audit Evidence 1.Test of control 2.Substantive procedure Test of control deals with evaluation of Internal control, whether it exists, functions properly , reliable and functioning consistently Substantive procedures deal with evaluation of transactions it consists of Test of details of transactions and Analytical procedures Test of details of Transactions is nothing but vouching and Verification of Financial Assertions like Existence,Ownership,Rights,Valuation,Disclosure,Obligation. Existence-Whether Assets exist as on the said balance sheet date Ownership-Whether the client is the owner of the Assets concerned Rights-Whether the client has absolute rights over the Assets Valuation-Whether the Assets are properly valued Disclosure-whether Assets and liabilities are properly disclosed Completeness-Whether Assets and liabilities are properly recorded in all aspects completely 44 CU IDOL SELF LEARNING MATERIAL (SLM)

Analytical procedures As per the Standard on Auditing (SA) 520 “Analytical Procedures”, the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount. Examples of Analytical Procedures having consideration of comparisons of the entity’s financial information with are: 1.Comparable information for prior periods. 2 Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation. 3. Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry. EXAMPLE EXPLAINING ANALYTICAL PROCEDURES PARTICULARS X LTD INDUSTRY 20-21 GROSS PROFIT 19-20 22.5% 19-20 20-21 RATIO 27% DEBT EQUITY RATIO 3.076:1 31% 21.35% 2.67:1 3.123:1 3.6726:1 Examples of Analytical Procedures-Ratio Analysis , Comparison Method , Trend Analysis etc. 5.8 SUMMARY  An audit plan is a step-by-step, methodical approach that enables auditors to focus on important areas under review. Audit Planning steps run the gamut, from engagement preparation and staff appointment to testing financial accounts and internal processes  Audit program contains step by step instructions to be carried out by team members i.e. it is simply a list of audit procedures to be executed by team members.  Vouching means the examination of documentary evidence in support of entries to establish the arithmetic accuracy 45 CU IDOL SELF LEARNING MATERIAL (SLM)

 Verification is a process by which an auditor satisfies himself about the accuracy of the assets and liabilities appearing in the Balance Sheet by inspection of the documentary evidence available. Verification means proving the truth, or confirmation of the assets and liabilities appearing in the Balance Sheet.  Verification and vouching are not the same. Verification is made based on vouching. So, verification is a part of vouching.  Documentation refers to the working papers prepared or obtained by the auditor and retained by him, in connection with the performance of the audit.  In the case of recurring audits, some working paper files may be classified as permanent audit files, which are updated currently with information of continuing importance to succeeding audits. In contrast current audit files contain information relating primarily to the audit of a single period. 5.9 KEYWORDS  Audit Evidence- Documentary and other evidence used by the Auditor in arriving at conclusion  Plausible relationship- Reasonable or probable relationship 5.10 LEARNING ACTIVITIES a.Prepare an overall Audit plan to conduct Audit of a bottling plant ______________________________________________________________________________ ______________________________________________________________________________ 5.11 UNIT END QUESTIONS 46 A. Descriptive Questions Short Questions 1. Define Audit Plan. What are the two stages involved in an Audit plan? 2. Benefits of developing Audit plan 3. Briefly explain Audit Program. 4. Define the term Vouching. CU IDOL SELF LEARNING MATERIAL (SLM)

5. What are the objectives of Vouching? 6. Advantages / Importance of Vouching 7. What are the factors to be kept in mind during Vouching? 8. Define the term Verification. 9. What are the objectives of Verification? 10. List the Advantages / Importance of verification 11. State whether the following are True or False with reasons (a) The establishment of overall audit strategy and detailed audit plan are not necessarily discrete or sequential process, but are closely interrelated since changes in one may result in consequential changes to the other (b) Establishment of overall audit strategy that sets the scope, timing etc and guides the development of detailed audit plan is prerogative of the management. (c) Planning is discrete phase of an audit. (d) A detailed audit programme once prepared for a business can be used for all business under all circumstances. (e) The audit plan is more detailed than overall audit strategy. (True: a & e ; False: b, c & d) Long Questions 1.Explain in detail about Audit Procedures in obtaining Audit Evidence 2.Explain in detail about Vouching and verification along with the differences B. Multiple Choice Questions 1. Purchase invoice is an example of ____________. a. External Evidence/confirmation. b. Internal Evidence c. Both a and b d. None of these 2. What are analytical procedures? a. Substantive tests designed to assess control risk b. Substantive tests designed to evaluate the validity of management representation letter c. Substantive tests designed to study relationships between financial and non-financial d. All of the above 3.Auditor can depend on routine checks to disclose all the mistakes or manipulation that may exist in accounts. a. True 47 CU IDOL SELF LEARNING MATERIAL (SLM)

b. False c. Partly True d. None of these Answers 1-a , 2-c, 3-b 5.12 REFERENCES Textbook:  T1 ArunaJha, Auditing, Taxmann’s Publications, University Edition  T2 Ravinder Kumar, Auditing: Principles and Practice :PHI Learning Pvt. Ltd Reference Books:  R1 N.D Kapoor, Auditing, Sultan Chand & Sons  R2 Gupta; Contemporary Auditing, Tata McGraw Hill 48 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 6 – COMPANY AUDITOR Structure 6.0 Learning Objectives 6.1Introduction 6.2 Appointment of Auditor 6.3Filling of Casual Vacancy 6.4 Rotation of Auditor 6.5 Audit Committee 6.6 Powers/Duties of Auditors 6.7Punishment for Non compliance 6.8 Summary 6.9 Keywords 6.10 Learning Activities 6.11 Unit End Questions 6.12 Refrences 6.0 LEARNING OBJECTIVES After studying this unit students will be able to,  Explain the provisions of Companies Act 2013  Learn provisions relating to Filling of Casual vacancy  Describe about Audit Committee  Learn about Powers and Duties of Auditor  Describe about Punishment for non-compliance 6.1 INTRODUCTION Companies Act, 2013 is rule based Act. Sections 139 to 148 of the Companies Act, 2013 (hereinafter referred to as the Act unless otherwise mentioned) deal with provisions relating to audit of companies Following are the sections covered in this chapter 139. Appointment of auditors. 140. Removal, resignation of auditor and giving of special notice. 141. Eligibility, qualifications and disqualifications of auditors. 142. Remuneration of auditors. 143. Powers and duties of auditors and auditing standards. 144. Auditor not to render certain services. 49 CU IDOL SELF LEARNING MATERIAL (SLM)

145. Auditors to sign audit reports, etc. 146. Auditors to attend general meeting. 147. Punishment for contravention. 6.2 APPOINTMENT OF AN AUDITOR Section 139 of the Companies Act, 2013 contains provisions regarding Appointment of Auditors. It can be categorized into a. Appointment of First Auditors b. Appointment of Subsequent Auditors Government Company A “Government company” is a company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company Appointment of First Auditors- Government Company Section 139(7) provides that in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India within 60 days from the date of registration of the company. In case the Comptroller and Auditor-General of India does not appoint such auditor within the above said period, the Board of Directors of the company shall appoint such auditor within the next 30 days. Further, in the case of failure of the Board to appoint such auditor within next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall hold office till the conclusion of the first annual general meeting Appointment of First Auditors- Non-Government Company As per Section 139(6), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company. In the case of failure of the Board to appoint the auditor, it shall inform the members of the company. The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of the first annual general meeting. Appointment of Subsequent Auditors in case of Non-Government Company Section 139(1) of the Companies Act, 2013 provides that every company shall, at the first annual general meeting appoint an individual or a firm as an auditor who shall hold office from the 50 CU IDOL SELF LEARNING MATERIAL (SLM)