B.COM, Auditing standards in India,Unit-1, Introduction to Auditing, 19-05-2021

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B.COM 2MARKETING MANAGEMENT All right are reserved with CU-IDOL Auditing Standards in India  Course Code: BCM215  Semester: 3 1  Unit: www.cuidol.in Unit-1(MCM 605)

International Financial Management 33 COURSE OBJECTIVES COURSE OUTCOMES  Student would be able to understand the  • To nurture the students with the auditing and its conduct in the companies by the various aspect of Auditing auditors   • To acquaint the students with Auditing Students will also be able to analyze the Standards Process of Auditing Learners would be achieving the analytical   skill in Auditing • To render an opinion as to the fair presentation of the financial statements www.cuidol.in Unit-1(MCMQ 61051) INSTITUTE OF DAISllTArNigChEt AaNreDrOesNeLrIvNeEdLwEAitRhNCINUG-IDOL

International Financial Management 43 UNIT OBJECTIVES UNIT INTRODUCTION  Introduction to auditing  Definition and Objectives, Importance      INSTITUTE OF DAISllTArNigChEt AaNreDrOesNeLrIvNeEdLwEAitRhNCINUG-IDOL www.cuidol.in Unit-1(MCMQ 61051)

Introduction To Auditing 5 Introduction To Auditing: Definition and Objectives, Importance www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Auditing Dr. Mahendra Pandey

Syllabus

Unit -1 8 1. Introduction to Auditing 2. Origin & Development of Auditing 3. Meaning, Definition & Characteristics of Auditing 4. Scope & Principles of Auditing 5. Functions & Limitations of Auditing 6. Objects of Auditing 7. Book keeping, Accountancy, Auditing & investigation www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Introduction 9 Economic decisions in every society must be based upon the information available at the time the decision is made. Unreliable information can cause inefficient use of resources to the detriment of the society and to the decision makers themselves. As society become more complex, there is an increase likelihood that unreliable information will be provided to decision makers. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 10 There are several reasons for this: remoteness of information, voluminous data and the existence of complex exchange transactions. As a means of overcoming the problem of unreliable information, the decision-maker must develop a method of assuring him that the information is sufficiently reliable for these decisions. In doing this he must weigh the cost of obtaining more reliable information against the expected benefits. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 11 A common way to obtain such reliable information is to have some type of verification (audit) performed by independent persons. The audited information is then used in the decision making process on the assumption that it is reasonably complete, accurate and unbiased. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Origin And Development 12 The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them. Auditing is as old as accounting. It was in use in all ancient countries such as Greece, Egypt, Rome, U.K. and India. The Vedas contain reference to accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 13 Auditing evolved and grew rapidly after the industrial revolution in the 18th century with the growth of the joint stock companies the ownership and management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the board of directors who were the employees. The original objective of auditing was to detect and prevent errors and frauds. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Development 14 In India the companies Act 2013 made audit of company accounts compulsory. With the increase in the size of the companies and the volume of transactions the objective of audit shifted and audit was expected to ascertain whether the accounts were true and fair rather than detection of errors and frauds. Hence the emphasis was not on arithmetical accuracy but on a fair representation of the financial efforts the companies Act 2013 also prescribed for the first time the qualification of auditors. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 15 The later developments in auditing pertain to the use of computers in accounting and auditing. In conclusion it can be said that auditing has come a long way from hearing of accounts to taking the help of computers to examine computerized accounts. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Exercise

Meaning 17 The general meaning of an audit is a planned and documented activity performed by qualified personnel to determine by investigation, examination, or evaluation of objective evidence, the adequacy and compliance with established procedures, or applicable documents, and the effectiveness of implementation. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Definition 18 Simple Definition:- “Audit is an examination of accounts & records which is carried out by vouching the evidences, supporting various transactions; by such an examination it is ascertained that the Balance Sheet gives a true & fair view of the state of affairs of business & the Profit & Loss Account gives a true & fair view of the profit or loss of business. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 19 Spicer and Pegler:- \"Auditing is such an examination of books of accounts and vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and that the profit and loss account gives true and fair view of the profit/loss for the financial period, according to the best of information and explanation given to him and as shown by the books; and if not, in what respect he is not satisfied.\" www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 20 Prof. L.R.Dicksee:- “Auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate.” www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Characteristics of Auditing 21 www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

22 www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Scope of Auditing 23 The scope of audit is increasing with the increase in the complexities of the business. It is said that long range objectives of an audit should be to serve as a guide to the management future decisions. Today most of the economic activities are largely conducted through public finance. The auditor has to see whether these larger funds are properly used. The scope of audit encompasses verification of accounts with a intention of giving opinion on its reliability. Hence it covers cost audit, management audit, social audit etc. It should be remembered that an auditor just expressed his opinion on the authenticity of the account. He has no power to take action against anybody, in this regard its said that “an auditor is a watch dog but not a blood hound”. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 1. Legal Requirements 24 2. Entity Aspects All right are reserved with CU-IDOL 3. Reliable Information 4. Proper Communication 5. Evaluation 6. Test 7. Comparison 8. Judgments 9. Work 10. Evidence 11. Misstatement www.cuidol.in Unit-1(MCM 605)

Principles of Auditing 25 Fundamental principles of Auditing 1. Integrity, Objectivity and Independence 2. Confidentiality 3. Skill & Competence 4. Responsibility of work performed by others 5. Documentation 6. Planning 7. Audit Evidence 8. Accounting system & Internal Control 9. Audit Conclusions 10. Audit Report www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Functions of Auditing 26 1. Accounting control Audit is an instrument of accounting control. The truth and fairness of the accounting information is controlled and checked by auditing activities. 2. Safeguard Audit acts as a safeguard on behalf of the proprietor/s (whether an individual or a group of persons) against cost control, carelessness or fraud on the part of the proprietors’ agents or servants in the realisation and utilisation of his/their money and other assets. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 27 3. Assurance Audit assures on the proprietors’ behalf that the accounts maintained truly represent facts and expenditure has been incurred with due regularity and propriety. 4. Assessment Audit assesses the adequacy of the accounting system in order to ascertain its effectiveness in maintaining accounting records of an organization. 5. Review Audit carries out a review of the financial statements to know whether the accounting records are in agreement with those statements. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 28 6. Reporting tool Audit is a tool for reporting on the financial statements as required by the terms of the auditors’ appointment and in compliance with the relevant statutory obligations. 7. Practical subject Auditing is a practical subject. It is something that people do. How it is done today is a result of long history of marginal changes and responses to new commercial and legal developments over the centuries with the most rapid progress in the last few years. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Advantages of Auditing A. Businessman's point of B. Investor's point of view:- view 1. Detection of errors and 1 . Protects interest frauds 2 . Loan from banks 2. Moral check 3. Proper valuation of 3. Builds reputation investments 4 . Proper valuation 4. Good security of assets 5. Government acceptance 6. Suggestions for improvement 7. Better Reputation 8. Uniformity in accounts

Cont. 30 C. Other Advantages 1. Audited account are detected as an authentic record of transaction. 2. Errors and frauds are detected and rectified. 3. It increases the morale of the staff and thus it prevents frauds and errors. 4. Because of his expertise the auditor may advise on various matters to his clients. 5. An auditor acts as a trustee of his shareholders. Hence he safeguards their financial interest. 6. For taxation purpose auditing of account is a must. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 31 7. In case of any claim is to be made from the insurance company only audited account should be submitted. 8. Even in case of partnership firm auditing of accounts helps in the settlement of claim at the time of retirement/death of a partner. 9. Auditor account helps in managerial decisions. 10. They are useful to secure loan at the of amalgamation, absorption, reconstruction etc. 11. Auditing safeguards the interest of owners, creditors, investors, and workers. 12. It is useful to take certain financial decisions like issuing of shares, payment of dividend etc. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Limitations of 32 Auditing Truly speaking, an audit should have no limitations of its own. It is designed to protect the interest of all parties who are interested in the affairs of the business. If there be any shortcoming arising there from, it may be due to its narrow scope of application in its related field of operation and unextended definition of the concept. Auditing suffers from the following shortcomings: 1. Want of complete picture The audit may not give complete picture. If the accounts are prepared with the intention to defraud others, auditor may not be able to detect them. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Limitations of 33 Auditing Truly speaking, an audit should have no limitations of its own. It is designed to protect the interest of all parties who are interested in the affairs of the business. If there be any shortcoming arising there from, it may be due to its narrow scope of application in its related field of operation and unextended definition of the concept. Auditing suffers from the following shortcomings: 1. Want of complete picture The audit may not give complete picture. If the accounts are prepared with the intention to defraud others, auditor may not be able to detect them. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 34 2. Problems of dependence: Sometimes the auditor has to depend on explanations, clarification and information from staff and the client. He may or may not get correct or complete information. 3. Post-mortem examination: Auditing is a post-mortem examination. There is no use of such examination when events have already been occurred. 4. Existence of errors in the audited accounts: It is not possible for the auditor in all cases, to check each and every transaction of an organization. As a result, there may be error in the audited accounts even after the checking by the auditor. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 35 5. Lack of expertise: Auditor has to seek opinion of experts on certain matters on which he may not have experts knowledge. The auditor has to depend upon such reports which may not always be correct. 6. Diversified situations: Auditing is considered to be a mechanical work. Auditors may not be in a position to frame audit programme, which can be followed in all situations. 7. Quality of the auditor: Success of audit depends on the sincerity with which the auditor has performed his duties. The same audit work can be done by two different auditors with difference in sincerity. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Cont. 36 8. Existence of defective policies The auditor can only report on the truth and fairness of the financial statements. But other defects, i.e. defects relating to management and control may not be possible to be covered by the auditor. www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Objects of Auditing 37 Primary Secondary Other Objective Objective Objectives Varification Detection & Moral of a/c Prevention Check of Errors B/s shows Detection & Complaince true & Prevention of Co.'s of Frauds Act fair state to create P & L a/c shows true trust in govt. & fair state www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Detection & Prevention of Errors 38 Error of Omission • trasanction is to be left out to register, partial entry of one transaction Error of • Rs. 1500 recorded as Rs. Commission 5100 Clerical Error • ommission to post,posting wrong side & amount to an a/c, double posting,totalling mistake, balance b/ d & c/f Error of Principle • fundamental principle of Compensating Accountancy Error & Auditing • two errors togather which will be resulted in trial balance sheet will agree www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

Detection & Prevention of Frauds 39 Misappropriation Of Cash By Employees Of Goods Manipulation Showing more By Top of A/c Profits Management Showing less profit www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL

40 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-1(MCM 605) All right are reserved with CU-IDOL