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). (International Auditing Practices Committee) now IAASB 2.Statements on standard auditing practices - APC (1982)- now AASB , 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)(Standard Auditing Practices) 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 EVIDENCE 3. REPORTING

OF

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 nothing 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 have been omitted in the process of compilation and nothing 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 to see whether they properly summarize the transactions and events recorded therein and b. Considering the judgments that management has made in preparing the financial statementsselection & 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. 2. 3. DETECTION OF FRAUDS AND ERRORS PREVENTION OF FRAUDS AND ERRORS. SPECIFIC OPINIONS ON SPECIFIC FIRMS 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 FIs with the help of audited accounts. Purchase consideration of the liquidated company can be easily calculated based on audited accounts. Assures the shareholders and stake holders about the proper running of business and keeping of books of accounts Facilitates the concerned person at the time of valuing the amount of loss for the damaged business property. Employees will be kept under check and controlled.

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. 2. 3. 4. 5. 6. 7. 8. 9. Integrity, Objectivity and Independence Confidentiality Skills and competence Responsible for work assigned to others Documentation Planning Audit evidence Accounting system and internal control Audit conclusions and Reporting