UNIT 3

Audit Sampling:
1. Design
2. Selection
3. Evaluation
1. Design
 Specific audit objectives
 Population from which sample is chosen
 Sample size
Sampling risk
Tolerable error
Expected error
2. Selection
 Random selection
 Systematic selection
 Convenience selection
3. Evaluation
 Auditor carries out appropriate audit procedure on
each sample item
 Auditor analyses any errors detected in the sample
 He projects the errors found in the sample to the
population
 Reassess the sample risk
Vouching of Cash Transactions
Meaning:
A Voucher is documentary evidence in support of a transaction
in the books of accounts. The act of establishing the accuracy and
authenticity of entries in the account books is called vouching.

Definition:
Ronald A. Irish of Australia defines vouching as “Technical
term which refers to the inspection by the auditor of documentary
evidence supporting and substanting a transaction.
Voucher
A Voucher is documentary evidence in support of a transaction
in the books of accounts.
While examining the voucher, following points must be in mind
1. All the vouchers must be consecutively numbered and filed in the
order of the entries in the accounts. If the client has not done so, the
auditor has the right to ask him to do. If they are not properly
arranged much valuable time will be lost in finding out a particular
voucher to check it.
2. He should pay special attention to the dates which must correspond
with the cash book, name of the party to who voucher is issued, the
name of the party issuing the voucher, the amount etc.
3. The vouchers inspected should be cancelled by a stamp lest they
may be produced again.
 4. Special attention must be paid to those vouchers which are in the
personal name of one of the partners, directors, managers, secretary
etc.
5. He should see that every voucher is passed as in order by a
responsible officer. The signature of the officer shall be noted.
6. He should also note whether the voucher is stamped or not. If the
amount of voucher is above 20 rupees
7. He should see as to which account the payment is posted; revenue
or capital.
8. He should also find out the nature of payment as to whether it relates
to the business.
9. Attention should be paid to the amount both in words and figures.
10. If the duplicate voucher for a missing one is produced, it
should be properly scrutinized to avoid any fraud.
11. The Audit clerk should not take the help of any members of
the staff of the client for an explanation while vouching the
receipts.
12. Receipted invoices should not be accepted as a voucher
because there is a danger of the payment being made twice.
Once as a credit purchase and again as a cash transaction
against the receipted invoice.
13. While examining the vouchers for an insurance, rents, rates
and taxes etc. the audit clerk should note the period for which
the payment has been made.
Procedure with regard to vouching the debit side of a cash book
1. Opening balance
2. Cash sales
3. Receipts from debtors
4. Income from interest, dividend etc.
 5. Loans
6. Rent received
7. Bills receivable
8. Commission
9. Sale of investment
10. Bad debt dividend
11. Subscriptions
12. Insurance claim money
13. Share capital
14. Sale of fixed assets
15. Income from Hire Purchase agreement
16. Miscellaneous receipts
Credit side or Payment side of a Cash Book
1. Payment to creditors
2. Wages
3. Capital expenditure
4. Loans
5. Salaries
6. Agents and travelers commission
7. Travelling allowance
8. Insurance of premium
9. Bills payable
10. Bills receivable discounted and dishonored
11. Freight, Carriage and custom duties
12. Bank charges
13. Partner’s drawings
14. Postage
15. Petty cash
16. Director’s fee
 17. Miscellaneous expenses such as rent, rates, taxes,
advertising, lighting etc.
18. Bank account
Verification and valuation
1. Cash in hand
2. Cash at bank
3. Loans
a. Against land and property
b. Against security of stock and share
c. Against security of goods
d. Against insurance policy
e. Against personal security
4. Bills receivable
5. Investment
6. Stock in hand
Basic principles of stock in trade:
1. The Auditor should compare the prices with original and
independent data
2. Discounts, duties, freight, and insurance should also be
taken into consideration
3. Ascertain that obsolete, damaged, slow moving stock has
been properly valued
4. Investigate material changes if any, in the inventory from
the commencement and the close of the year
5. Check the computation of extensions

Method of finding cost price out of the stock of goods

 1. Unit cost method
2. Actual cost method
3. Average cost method
4. First In First Out(FIFO)
5. Last In First Out(LIFO)
6. Base stock method
7. Standard cost method
8. Adjustment selling price method
Methods used in the valuation of different kinds of goods
1. Raw material
2. Semi finished goods
3. Finished goods
4. Stores
Duty of an Auditor in connection to stock in trade
1. To verify the existence of stock
2. To check the ownership of the stock
3. To see that the stock is properly valued
Ensures correct valuation
1. Physical verification of stock
2. Ensuring ownership over stock
3. Valuation of stock
4. Book debts
5. Endowment policy
6. Patent, rights, trademark
7. Copyright
8. Assets in foreign country
9. Furniture and fixtures
 10. Plant and machinery
11. Loose tools, patents etc.
12. Freehold property
13. Goodwill
Verification of liabilities
1. Capital
2. Reserve account and funds
3. Debentures and mortgage
4. Trade creditors
5. Bills payable
6. Outstanding expenses
7. Loans
8. Contingent liability
Vouching of Trading Transactions
Internal check as regards purchases:
1. All the orders sent out should be recorded in the
purchases order book which should have two carbon
copies. One to be sent to the supplier of the goods and
the other to be retained for the reference purpose.
2. When the goods are received, the gatekeeper or the store
keeper should make a record in the goods inward book
after having checked the quantity, weight etc.
3. The invoice should then be checked with the goods
inward book maintained by the storekeeper and the
delivery note, if any to see that the goods received are
correctly recorded in the stock register according to the
invoice.
 4. Another clerk should check the invoice regarding
calculations etc..
5. After this, the invoice should be sent to the HOD who
placed the order for the goods to the see that the prices
and qualities etc. are correct
6. The Departmental head will then pass over the invoice to
the clerk who will record the same in the purchase book.
7. Every person who has to deal with the invoice and the
goods should initial the invoice

UNIT-4
Liabilities of an auditor
1. Liability of Negligence:
 Reasonable skill and diligence
 If not, will be sued in civil court for damages

Liability in case of loss

No case auditor is proved negligent legal case
2. Liability for misfeasance:
 Breach of trust, duty including the company in
loss
 Can claim damages suffered
 Arise winding up company
3. Criminal liability:
 If the auditor does not comply with requirement
of law
 Default is done knowingly and willfully by the
auditor
  Proved that auditor falsified the accounts or any
report, statement, balance sheet, or any document
he will be criminally liable
4. Liability of honorary auditor
 If negligence is proved, auditor has no excuse for
not being paid or receiving less amount
5. Liability for liable
Sometimes auditor criticizes the officers of the
company in audit report, his report should be in such type that it
should not defame or disgrace any person

If the report verifies the goodwill and the

reputation of any person then it will be held responsible on the
grounds of defamation. Auditor will not be held liable

Report should contain the following

It should not misstate the facts
It doesn’t go beyond what is relevant to its subject
Statement should be bonafide
It is not actuated
6. Liability to third party
Auditor has no contact with the third party

Recent trends in Auditing:

 Cost audit or detailed checking of costing system
technique and accounts to verify their correctness
and to ensure adherence to the objective of cost
accountancy
 Books must be kept on cash basis
 Filing incorrect tax returns
 Not recording previous year audit adjustments
 Lack of fidelity insurance
 Not recording all year end accruals
 Not recording insurance claims
 PROFESSIONAL ETHICS
MEANING:
Professional ethics is defined as the personal and
corporate rules that govern behavior within the context of a particular
profession.

DEFINITION:
According to The Institution of Chartered Accountants
of India, “Professional ethics signify the behavior of an accountant
towards his fellow accountants, members of other professions and the
members of the public.
QUALITIES OF AN AUDITOR:
1. An Auditor should be fair and not biased.
2. He should be honest and perform his duties with diligence.
3. He should be straight forward towards his profession.
4. He should continuously update his profession skills and knowledge.
5. He has certain responsibility towards the government, investors and
other persons who rely on his profession.
6. While performing his duties, he shall not allow his interest to
conflict with his responsibilities.
7. He shall maintain confidentiality with respect to information which
has come to his possession while performing his duties as a professional.
EXPLANATIONS:
Honesty:
A Professional accountant in performing professional service
must be honest.
Neutrality:
A professional accountant should be neutral and should allow
any prejudice, bias, conflict of interest or influence of others,
professional service impartiality undermined him.
Secrecy:
An Accountant cannot make any secret in his job and have
confident in his work.
PROFESSIONAL CONDUCT:
Professional accountant should act in a way that is
consistent with the good reputation on his words and actions that would
undermine the creditability of her profession refrain.
PRINCIPLES AND PROFESSIONAL STANDARDS:
Professional accountant should carry out professional
service with accordance with the principles and criteria relation to
professionalism and the employer or his employer request such the Skill
and precise to perform the requirements of integrity, impartially and
professional independence of the independent accountant be consistent.
COMPETENT AND PROFESSIONAL CARE:
Professional accountant should do his professional service
with care, competence and diligence to do. He always has the duty do
keep the level of knowledge and skills in their professional in order to
ensure, so he accepted the service based on the latest developments in
his profession and the rules and regulations is provided

CONCLUSION:
These are the above qualities and causes of the professional
ethics and the components of the professional ethics.
 Unit 5
AUDIT COMMITTEE

Definition:

An audit committee is the section of an organization’s board of directors

that is in charge of monitoring an organization’s financial reporting and
authenticating its accuracy.

Applicability:

Every listed companies and

i. All public companies with a paid up capital of Rs. 10 Crores or

more;
ii. All public companies having turnover of Rs. 100 Crores or more;
iii. All public companies, having in aggregate, outstanding loans or
borrowings or debentures or deposits exceeding Rs. 50 Crores or
more, Shall have to constitute Audit Committee.

Composition:

i. Minimum of 3 directors.
ii. Independent Directors forming a majority.
iii. Majority of members including chairperson shall be persons
with ability to read and understand the financial statements.

Right to attend Meeting of Audit Committee:

The auditors of a company and the KMP shall have a right to be

heard in the meetings of the Audit Committee when it considers the
auditor’s report but shall not have the right to vote.
Penalty;
 The company shall be punishable with fine of Rs. 1 Lakh to Rs. 5
Lakhs and every officer of the company who is in default shall be
punishable with imprisonment up to 1 year or with fine of Rs. 25,000/-
to Rs. 1 Lakh, or with both.
Types of Audit Opinion

 Unqualified opinion
 Qualified opinion
 Disclaimer of opinion
 Adverse opinion

Unqualified Opinion
 An auditor expresses an unqualified audit opinion when he
concludes that the financial statements of an entity are prepared in
accordance with the applicable financial reporting framework,
considering all the material aspects.
 Auditor expresses an unqualified audit opinion when in his opinion
and based on the information provided to him and audit evidence
obtained by he considers that the financial statements of an entity
give a true and fair view.
 An unqualified audit opinion assures that any changes made in the
accounting policies or method followed by the entity on a
continuous basis and their effects have been considered and
disclosed in the financial statements appropriately.

Modified Opinion

When an auditor expresses his opinion other than an unqualified audit

opinion it is said he is modifying his opinion. When an auditor expresses a
qualified opinion or disclaimer of opinion or an adverse opinion it is said
he has modified his opinion.
Qualified opinion

The auditor shall express a qualified opinion when he concludes that

unqualified opinion cannot be expressed and the misstatements
individually or in aggregate are material but not pervasive as to require an
adverse opinion or the limitation of scope is not material as to require a
disclaimer of opinion. The auditor should express a qualified opinion as
being “subject to” or “Except for” the effects of material items which are
qualified.

Disclaimer of opinion

An auditor expresses a disclaimer of opinion when he is unable to

obtain sufficient and appropriate audit evidence. Another reason is that he
considers that the undetected misstatements could be both material and
pervasive.

The auditor should disclaim an opinion when there is a limitation on the

scope effect of which is both material and pervasive and he is unable to
obtain sufficient and appropriate audit evidence.

Adverse opinion

An auditor expresses an adverse opinion when he considers that the

misstatement is so material and pervasive that a qualification of the report
is not adequate to disclose such misstatements of financial statements. The
auditor shall express an adverse opinion after obtaining sufficient and
appropriate audit evidence. Thus, on the basis of such evidence, he
concludes that the misstatements, individually or in aggregate are material
and pervasive to the financial statements.
Information System Audit:

Organizations undertake audits for many reasons.

An audit can help the enterprise ensure effective operations.

It can confirm for management that the business is functioning well

and it is prepared to meet potential challenges.

An important component of the audit plan is the audit program, also

known as work program.

Meaning:

Information system audit is an examination of the management

controls within an information technology infrastructure.

Scope and approach:

This is intended to provide practical guidance to develop audit

program from the ground up. The guide has been organized into three
main areas.

1. Audit process overview

2. Audit program
3. List of resources

Audit Process:

The audit process requires the IS auditor to gather evidence,

evaluate the strengths and weakness and recommendations for
remediation in an objective manner to stakeholders.
The steps are:
1. Requesting financial documents
2. Preparing an audit plan
3. Scheduling an open meeting
4. Conducting onsite fieldwork
5. Drafting a report
6. Setting up a closing meeting

Audit Program:

The first step in creating an audit program is to develop an audit

plan.
An audit plan should comprise all five steps.

STEP1: Determine audit subject.

STEP2: Define audit objective.
STEP3: Set audit scope.
STEP4: Perform Pre audit planning
STEP5: Determine steps for data gathering.

Terminology:
The term audit plan, audit program and work program are frequently
used in interchangeably, however they are different types of documents
that serve different purposes with specific audit engagements. The main
Difference between audit plans and audit programs is the scope of
document, as described in the following list:

1. Audit plan.
2. Audit program.
3. Work program.
4. Internal control questionnaire.
5. Checklist.
6. Test scripts.
7. Work papers.