AUDIT

An audit is the examination of the financial report of an organization - as presented in the annual
report - by someone independent of that organization. The financial report includes a balance
sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes
comprising a summary of significant accounting policies and other explanatory notes. The
purpose of an audit is to form a view on whether the information presented in the financial
report, taken as a whole, reflects the financial position of the organization at a given date, for
example

 Are details of what is owned and what the organization owes properly recorded in the
balance sheet?

 Are profits or losses properly assessed?

Scope Of Audit

The scope of an audit is the determination of the range of the activities and the period of records
that are to be subjected to an audit examination. The audit scope, ultimately, establishes how
deeply an audit is performed. It can range from simple to complete, including all
company documents.

Role Of Audit

Having an effective audit system is important for a company because it enables it to pursue and
attain its various corporate objectives. Business processes need various forms of internal control
to facilitate supervision and monitoring, prevent and detect irregular transactions, measure ongoing
performance, maintain adequate business records and to promote operational productivity. Internal
auditors review the design of the internal controls and informally propose improvements, and
document any material irregularities to enable further investigation by management if it is
warranted under the circumstances.

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REGULATORY FRAMEWORK

Auditors are required to comply with relevant auditing standards and standards of quality control
within audit firms, as well as ethics and other regulatory requirements.

Regulatory
Framework
of Auditing

Statutory Appointment Vacation Rights and

Requirements of Auditors of Office Duties of
of Audits Auditors

Legal Persons Removal Rights

Requirements Qualified Procedures

Professional Appointment Resignation Duties

Requirements Procedures Procedures

Structure Of Accounting

Accounting is the process of recording business activities in financial terms. Business

activities are recorded in the university's accounting system referred to as the Financials
system. Debits and credits are used to create transactions and describe account balances.

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STRUCTURE OF AN AUDIT

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What are International Accounting Standards?

International Accounting Standards (IAS) are older accounting standards which were replaced in
2001 by International Financial Reporting Standards (IFRS), issued by the International
Accounting Standards Board (IASB), an independent international standard setting body based in
London. IAS were the first international accounting standards that were issued by the International
Accounting Standards Committee (IASC), formed in 1973. The goal then, as it remains today, was
to make it easier to compare businesses around the world, increase transparency and trust in
financial reporting and foster global trade and investment. Listed companies, and sometimes
unlisted companies, are required to use the standards in their financial statements in those countries
which have adopted them.

GENERALLY ACCEPTED AUDITING STANDARDS

Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting
principles, standards, and procedures that companies and their accountants must follow when they
compile their financial statements. GAAP is a combination of authoritative standards (set by policy
boards) and the commonly accepted ways of recording and reporting accounting information.
GAAP improves the clarity of the communication of financial information.

GAAP is meant to ensure a minimum level of consistency in a company's financial statements,

which makes it easier for investors to analyze and extract useful information. GAAP also facilitates
the cross comparison of financial information across different companies.

Appointment of Auditors

After incorporation of a company in the first annual general meeting, an Auditor must be appointed
by the Board of Directors. The Auditor will typically hold term till the conclusion of 6th AGM or
5 years. The appointment of an Auditor can also be made for a period of 1 year, renewable at each
annual general meeting.

Roles & Responsibilities of Auditor

Roles and responsibilities of an auditor as prescribed by the Act:

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  Make sure that all the auditing standards are maintained and complied
 Exercise rights to access to all records in all subsidiaries, if required.
 Make sure that you have all desired information.
 Ensure you report qualifications, reservations, or adverse remark after auditing the records
 Report any fraud or disqualifications in the company records within 30 days of coming
across such information and substantial evidence.
 The auditor should not provide services such as internal audits, bookkeeping, investment
advisory or banking services and so on, to the company wherein he holds the position of
‘Auditor’ of annual financial records.
 The Act prescribes several such essential responsibilities for auditors, and thereby giving
enough liability and the role of the auditors to perform as per the rules set by the Act.

Removal of Auditor

An auditor or the auditing firm, can be removed from their office, before their expiry, by passing
a special resolution and getting an approval from the central government by submitting Form
ADT-2 (Rule 7).

Procedure for the appointment of First Auditors

 For the appointment of first auditors, a company may adopt the following procedure.

 Any member of the company may nominate a person, to be appointed as First Auditor.

 At least 14 days’ notice should be given to the members before the scheduled date of the
meeting.

 Some companies name their first auditors in their Articles of Association. Such
appointment is invalid since provisions of Companies Act arc not complied with.

Appointment of Auditors other than First Auditors

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Appointment of auditors by Share Holders
 At each Annual General Body meeting of the company, the shareholders shall appoint
an auditor for the company.
 The auditor so appointed shall hold office until the conclusion of the subsequent annual
general body meeting.
 The company should intimate the auditor about the appointment within 7 days of such
appointment.

 The acceptance or refusal of such appointment should be intimated by the auditor to the
Registrar of Companies within 30 days of the receipt of the intimation of such appointment.

 Such acceptance / refusal should be made in a prescribed form.

 The intimation to the Registrar about the acceptance / refusal of appointment is necessary
only if the auditor / auditors are appointed in an annual general body meeting.

Appointment of auditors by Central Government

The central government may appoint an auditor in the following situations.

 When no auditor is appointed or reappointed in a annual general body meeting.

 Where a special resolution is required (discussed elsewhere in this chapter) for appointment
of auditors, and the company fails to pass such resolution at the time of appointment.

 Where the auditor is appointed in contravention to the provisions of the Companies Act.

 Where the auditor, appointed at the AGM has not accepted the appointment.

 Where the appointment of the auditors at AGM is void ab initio.

Audit planning

Audit planning is a vital area of the audit primarily conducted at the beginning of audit process to
ensure that appropriate attention is devoted to important areas, potential problems are promptly

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identified, work is completed expeditiously and work is properly coordinated. "Audit planning"
means developing a general strategy and a detailed approach for the expected nature, timing and
extent of the audit. The auditor plans to perform the audit in an efficient and timely manner.

It addresses the specifics of what, where, who, when and how:

 What are the audit objectives?

 Where will the audit be done?
 When will the audit(s) occur?
 Who are the auditors?
 How will the audit be done?

Benefits of Audit Plan

 It helps the auditor obtain sufficient appropriate evidence for the circumstances
 It helps to keep audit costs at a reasonable level.
 It helps to avoid misunderstandings with the client.
 It helps to ensure that potential problems are promptly identified
 It helps to know the scope of audit program by an Auditor.
 it helps to carry out the audit work smoothly and in a well-defined manner .

Process of Audit Planning

It includes following procedures

 Knowledge of client's business

 Development of audit strategies or overall plan (who, when and how)
 Preparation of audit programmer

Scope of ISA

This International Standard on Auditing (ISA) deals with the auditor’s responsibility to plan an
audit of financial statements. This ISA is written in the context of recurring audits. Additional
considerations in an initial audit engagement are separately identified.

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Aim of Audit Planning

Planning an audit involve establishing the overall audit strategy for the engagement and developing
an audit plan. Adequate planning benefits the audit of financial statements in several ways,
including the following:

• Helping the auditor to devote appropriate attention to important areas of the audit.
• Helping the auditor identify and resolve potential problems on a timely basis.
• Helping the auditor properly organize and manage the audit engagement so that it is performed
in an effective and efficient manner.
• Assisting in the selection of engagement team members with appropriate levels of capabilities
and competence to respond to anticipated risks, and the proper assignment of work to them
 Facilitating the direction and supervision of engagement team members and the review of
their work.
• Assisting, where applicable, in coordination of work done by auditors of components and
experts.

ISA 310 Knowledge of the Business

ISA 310 Knowledge of the Business was one of the International Standards on Auditing. It is no
longer effective with the introduction of ISA 315 'Identifying and assessing the risks of material
misstatement through understanding the entity and its environment' and ISA 330 'The auditor’s
responses to assessed risks'.

It served to expect the auditors are to have necessary knowledge of the client's business. Even
before accepting the audit job, auditor has to make sure if you have sufficient knowledge to
perform the audit professionally.

ISA 310 points out that the sources of auditors' knowledge are:

1. previous working experience with the entity and its industry.

2. site visit including client's premises and plant facilities.
3. the client's minutes of meetings and other legal and non-legal documents.
4. the entity's directors and other personnel.

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 5. the internal auditors and audit committee of the entity.
6. the lawyers, surveyors and other experts who provided services to the entity.
7. the previous auditors and audit working papers.
8. the previous financial reports, budgets, internal control reports and interim financial
reports.
9. the client's business partners including customers, suppliers and bankers.
10. economists, news reporters, regulators, and so on.

Audit risk
‘The risk that the auditor expresses an inappropriate audit opinion when the financial statements
are materially misstated. Audit risk is a function of material misstatement and detection risk.’

ISA 315 deals with the auditor’s responsibility to identify and assess the risks of material
misstatement in the financial statements through an understanding of the entity and its
environment, including the entity’s internal controls and risk assessment process. The first version
of ISA 315 was originally published in 2003 after a joint audit risk project had been carried out
between the IAASB, and the United States Auditing Standards Board. Changes in the audit risk
standards have arguably been the single biggest change in auditing standards in recent years, so
the significance of ISA 315, and the topic of audit risk, should not be underestimated by auditing
students.

Audit Materiality

Audit Materiality is one of the International Standards on Auditing. It serves to expect the auditor
is to establish an acceptable materiality level in design the audit plan.

Materiality:

The amount by which the Financial Statements must change in order to change the decisions made
by users of the Financial Statements.

The ISA does, however, highlight some key words and phrases in relation to materiality in the
context of an audit which include:

 misstatements (including omissions) which could influence decisions of users of the

financial statements;

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  judgement (there is not a single right answer) based on surrounding circumstances
including the size and nature of the misstatement; and
 that those decisions are based on the users’ common needs as a group.

Audit Evidence And Documentation

Audit evidence is all the information used by the auditor in arriving at the conclusions on which
the audit opinion is based and includes the information contained in the accounting records
underlying the financial statements and other information

Audit evidence is information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based

 It includes both information contained in the accounting records underlying the

financial statements and other information.
 Comprises both information that supports and corroborates management’s assertions,
and any information that contradicts such assertions
 Oral Vs Documented evidence
 Direct evidence (obtained by the auditor) Vs indirect
 Copied Vs original
 Independent confirmation Vs Other forms
 Management expert – competencies, objectivity, test assertions on his work
 Information obtained from the entity – completeness, accuracy, relevance Procedures
to obtain audit evidence
 Risk Assessment Procedures
 Test of Controls
 Compliance Test
 Substantive Tests Purpose of Audit Evidence
 Audit evidence is necessary to support the auditor’s opinion and report.
 Reasonable assurance is obtained when the auditor has obtained sufficient appropriate
audit evidence to reduce audit risk to an acceptable level

Audit Sampling

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Auditors use sampling mainly because they are not seeking absolute certainty (they are looking
for reasonable assurance), examining all data may still not provide absolute certainty (e.g.,
consider the completeness assertion), and finally, due to cost-benefit reasons. The argument
regarding the completeness assertion is important because even if we audit everything, we don’t
know if we actually are auditing everything, because there may be transactions that are missing
from the general ledger.

Sampling Risk and Non-Sampling Risk

Auditors always try their best to pick a sample that is representative of the population. However,
it is not always possible due to bad luck or pure errors in judgment. Let us clearly understand the
difference between sampling risk and non-sampling risk.

Statistical vs. Non-Statistical Sampling

When auditors use sampling, auditors can choose one of two methods: the statistical approach or
the judgmental (non-statistical) approach. The statistical approach uses computer-based
technology to come up with sample size numbers and randomly select items from the population.
The judgmental approach, on the other hand, employs the auditor’s judgment and experience to
come up with a sample size.

Sampling Methodologies

There are numerous kinds of sampling methodologies, two of which are variable sampling and
attribute sampling.

Variable sampling is typically used for substantive procedures, such as when performing tests of
details of balances, while attribute sampling is typically used for tests of internal controls.

Attribute sampling is used to estimate the proportion of items in a population that contain a
specified attribute of interest.

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