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Auditing
y Need for audit y Objective of the audit y Regulatory requirements for audit by Companies Act
Shareholders
Information asymmetry and conflict of interest lead to information risk for the Shareholders
Directors
Auditor
Directors hires auditor to report on the fairness of manager financial statements. Risk information asymmetry of principle reduce.
Objective of Audit
The objective of the audit is to express an opinion on the financial statements whether or not the financial statements present fairly. 1) Unqualified Report Clean Report 2) Qualified Report 3) Disclaimer Report
Regulatory Requirement
Section XX of companies act: The balance-sheet and the profit and loss account shall be audited by the auditor of the company, in the manner hereinafter provided, and the auditors report shall be attached thereto. Section XX of companies act: Every auditor of a holding company appointed shall also report on consolidated financial statements and exercise all such powers and duties as are vested in him. Section XX of Companies Act: Every company shall at each annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting.
TYPES OF AUDITS
y Financial statements audits y Compliance audits y Operational audits y Forensic audits y IT audits
MATERIALITY
An aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying the financial statements, on
AUDIT RISK
Audit risk is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated.
EVIDENCE
y Evidential matter supporting the financial statements consists of the underlying accounting records. y It should be relevant and Reliable y Relevance refers to whether the evidence relates to the specific audit objective being tested. y Reliability refers to the whether or not a particular type of evidence can be relied upon to signal the true state of the assertion or audit objective.
examines only a subset of the data (transactions) available in the client s records.
y As a result, the auditor uses his/her knowledge about
auditor is required to express his opinion as to whether the assets and liabilities represent a true position.
y In specific terms to ensure truth and fairness, an auditor has to see:
y that the assets and liabilities are neither undervalued or overvalued; y the charge on assets, if any, is disclosed; y accounting policies have been followed consistently; y all unusual, exceptional, non recurring items have been disclosed
Cash Sales
y i) Examine the system of internal control to ascertain any
loopholes therein. y (ii) Ensure that the date of cash memos tally with the entry in the cash account. y (iii) Verify that prices of goods sold have been correctly recorded and check the calculation. y (iv) Verify the entry in the goods outward book with the sales account.
Rent Received
y (i) Check copies of rent receipt issued to the tenant with
should be traced with reference to copies of rental bills. collected by such agent.
y (iii) Scrutinize the account of collecting agent when the rent is y (iv) Vouch the entries for rent received in advance and ensure
y (v) Investigate into abnormal rent outstanding. y (vi) Reconcile the outstanding rent and see that proper provision
is made if unrecoverable
Sale of Scrap
y (i) Review the internal control as regards disposal of scrap. y (ii) Check whether the organization is maintaining reasonable record
y (iii) Analyze the raw material used, production and generation pattern
of scrap and compare the same with figures of earlier year. with previous year.
y (iv) Check the rates at which scrap has been sold and compare the rate y (v) Vouch sales, with invoices raised, advertisement for tender, rate
scrap and good units and they are not mixed up and sold as scrap.
BANK statement tally. In case of difference between the two amounts, reconciliation statement prepared by the client should account for reasons.
y Examine whether borrowings from the bank have been duly
authorized.
y Examine the loan agreement and ensure that the terms
examine whether end use of the funds have been accordingly made.
Inventory
y Physical Verification of stock as on end of the y y y y y
accounting period. Track internal control for purchases of stock. Valuation at year end lower of cost or MV. Check ageing analysis for stock to verify expired items Track internal control for sales of stock Scrap items should be separately stored
accounting period. y Ensure the profit on sale of assets has been recorded an extra ordinary item and not as regular sale. y Ensure Capital expenses had been duly capitalized.