AUDITING PRACTICES

CHAPTER 1
 Need for auditing

1. Authenticity of accounting
statements
2. To ensure that the annual
statements of accounts are
reliable
3. True and fair view
 Definition - Dicksee
• Auditing can be understood as an
examination of accounting
records undertaken with a view to
establishing whether they
correctly and completely reflect
the transactions to which they
purport to relate.
Need and purpose of accounting statements

Management - Decision making

Lenders & creditors - Establish the degree of
safety of their money
Government - Levy of tax and to regulate socio
economic state of affairs
Investors & financial analysts - Investment
decisions
Workers - to assure distribution of a reasonable
and legitimate share of revenue earned.
 Basis for auditing
1. International auditing guidelines -
IAPC, a standing committee of the
International Federation of Accountants
(IFAC).

2.Statements on standard auditing practices

- APC , constituted under ICAI
 AUDITING - DEFINITION
• The word “ Audit” means , to listen/hear.
• When the business firms want to know the
accuracy of their transactions and the
extent of truthfulness that is being
maintained by the staff in keeping the
records and books of accounts, they used
to conduct an audit of their transactions to
get the true and fair view of the statements
prepared and to detect the frauds and
errors committed.
 AUDITING
“AUDITING IS THE PROCESS OF
COLLECTION AND EVALUATION OF
EVIDENCE TO REPORT ON
ECONOMIC INFORMATION.”
 AUDITING
ACCORDING TO ICAI,
“ Auditing is an examination of the
records of a financial entity, whether
small or big, whether profit oriented
or not, when such examination is
conducted to express a mere opinion
thereon”.
 AUDITING
SAP 1 (Basic Principles Governing an
Audit)

An audit is the independent examination

of financial information of any entity,
whether profit oriented or not, and
irrespective of its size or legal form, when
such an examination is conducted with a
view to expressing an opinion thereon.
It contains the following features/points:

1. ECONOMIC INFORMATION
2. COLLECTION AND EVALUATION OF
EVIDENCE
3. REPORTING
The person conducting this process

1. Should perform his work with knowledge of

the use of the accounting statements

2.Should take particular care to ensure that

noting contained in the statement will
ordinarily mislead anybody.
This can be done by satisfying
1. The accounts have been drawn up with
reference to entries in the books of account
2. the entries in the books of account are
adequately supported by underlying papers
and documents and by other evidence.
3. None of the entries in the books of account
has been omitted in the process of
compilation and noting which is not in the
books of account has found place in the
statements
4. The information conveyed by the
statements is clear and unambiguous and
5. The statements of account, taken as an
integrated whole, present a true and fair
picture of the operational results and of the
assets and liabilities.
 SCOPE OF AN AUDIT
As per SAP 2

The scope of an audit of financial statements will be

determined by the auditor having regard to the terms of the
engagement, the requirement of relevant legislation and the
pronouncements of the Institute.

However, the terms of engagement cannot, restrict the

scope of an audit in relation to matters which are prescribed
by legislation or by the pronouncements of the Institute.
To form an opinion, the auditor should

1. Assess the reliability and sufficiency of the information

contained in the underlying accounting records and other
source data by

a. making a study and evaluation of accounting systems and

internal controls on which he wishes to rely and testing
those internal controls to determine the nature, extent and
timing of other auditing procedures
b. Carrying out such other test, enquiries and other
verification procedures of accounting transactions and
account balances as he considers appropriate n the
particular circumstances.
2. Determine whether the relevant information is
properly disclosed in the financial statements by
a. Comparing the financial statements with the
underlying accounting records and other source
data t see whether they properly summarize the
transactions and events recorded therein and
b. Considering the judgments that management has
made in preparing the financial statements-
selection & application of accounting policies,
classification of information etc
 OBJECTIVES OF AUDITING
Main objective
1. CONFIRMATION OF THE ACCURACY OF
ACCOUNTS AND STATEMENTS.(True and Fair View)

Incidental and secondary

1.DETECTION OF FRAUDS AND ERRORS

2. PREVENTION OF FRAUDS AND ERRORS.
3.SPECIFIC OPINIONS ON SPECIFIC FIRM’S
OBJECTIVES.
 ADVANTAGES OF AUDITING
• Ensures the correctness of accounts
• Proper compliance of the law for maintaining
books and accounts
• Detection of errors and frauds .
• Helpful to inspire the confidence to enter into
business dealings.
• It gives correct conclusions for the
management decisions.
• Loans and credit facilities can be easily obtained
from the audited accounts.
• Purchase consideration of the liquidated company
can be easily calculated based on audited
accounts.
• Assures the share holders and stake holders about
the proper conduction of business and keeping of
books of accounts
• Facilitates the needful in case of valuing the
amount of loss for the damaged business property.
• Employees will be kept under checking and
control.
 LIMITATIONS OF AUDITING
• Working Under the framework given
• Communication and mental abilities to
evaluate the evidence
• More pressure from internal and external
sources.
• Knowledge of Standard Auditing Practices
(SAP) and updates of the standards issued by
Auditing and Assurance Standard Board
(AASB)
 QUALITIES OF AN AUDITOR
• INTEGRITY
• INDEPENDENCE
• COMMUNICATION ABILITIES
• TECHNICAL COMPETENCE
• LOGICAL ABILITIES
• UPDATION OF KNOWLEDGE
 BASIC PRINCIPLES
• PRINCIPLE OF INDEPENDENCE
• PRINCIPLE OF CONFIDENTIALITY
• PRINCIPLE OF MATERIALITY.
 BASIC PRINCIPLES
1. Integrity, Objectivity and Independence
2. Confidentiality
3. Skills and competence
4. Responsible for work assigned to others
5. Documentation
6. Planning
7. Audit evidence
8. Accounting system and internal control
9. Audit conclusions and Reporting
 TECHNIQUES OF AUDITING
• VOUCHING
• VERIFICATION
• PHYSICAL EXAMINATION
• FOOTING
• SCOURING
• TESTING
• RECONCILING
• CONFIRMING etc…….