3. Chap.1 Introduction
Audit: Audit is the examination or inspection of various books of accounts by an auditor
followed by physical checking of inventory to ensure that all departments follow a
documented system of recording transactions.
It is done to ascertain the accuracy of financial statements provided by the organization.
✓ The purpose of an audit is the expression of an opinion as to whether the
financial statements are fairly presented in conformity with appropriate
4. Auditing :
The examination of the financial records of your business to verify their
accuracy is called auditing.
Auditing is performed by a systematic review of all the business transactions,
and it looks at the financial statements, accounting books, and all the financial
transactions made during the current fiscal year. Most businesses have one
routine audit once a year.
5. Basic Principles Governing an Audit
Auditing and Assurance standards give the basic principles an auditor
has to follow while conducting an audit of the financial statements of any
organization. This Auditing and Assurance Standard was the first
standard on auditing issued by the Institute. As the name suggests, it
seeks to lay down and briefly explain the basic principles which govern
the auditor’s professional responsibilities and which should be complied
with whenever an audit is carried out. The Principles are :
6. The Principles are :
❖ Integrity, Independence and Objectivity
❖ Skill & Competence
❖ Work Performed by Others
❖ Audit Evidence
❖ Accounting Systems and Internal Controls
❖ Audit Conclusions and Reporting
7. - Relationship of auditing with other subject
Auditing is also closely related to other functional fields of business such as
finance, production, marketing, personnel, and other general areas of
business management. With the overgrowing field of auditing, the financial
services sector occupies a dominant place in our system.
❖ Auditing and Accounting
❖ Auditing and Mathematics and Statistics
❖ Auditing and Economics
❖ Auditing and Law
❖ Auditing and Computer Information System
❖ Auditing and Financial Management
❖ Auditing and Behavioural Science
8. Audit Program:
An audit program is a set of directions that the auditor and its team members need to
follow for the proper execution of the audit. An audit program is a set of directions that
the auditor and its team members need to follow for the proper execution of the audit.
Thus, programs enhance the accountability of the audit team and its members for the
work performed by them.
Contents of Audit Program :
1. A review of the system of internal checks.
2. Audit of balance sheet.
3. Audit of an income statement.
4. The details of various audit work to be performed and their classification.
5. Preparation of audit report and coordination of all the above-mentioned items.
9. Advantages and Disadvantages of the Audit Program :
1. Distribution of Work
2. Determination of Responsibility
3. Evaluation of Progress
4. Uniformity in work
5. Proof in court
6. Save Time
7. Simultaneous work in different
8. Complete checking possible
9. Facility in Control
1. Works become Mechanical
2. Lack of Initiative
3. Lack of moral influence
4. Difficult to detect fraud
5. Lack of elasticity
6. Uniformity is harmful
Vouching is concerned with examining
documentary evidence to ascertain the authenticity
of entries in books of accounts. It is an inspection
by the auditor of evidence supporting and
substantiating the transaction made in the books. It
is a technique used by the auditor to judge the truth
of entries appearing in the books of accounts.
Verification means the act of assuring the correctness of
the value of assets and liabilities in the organization. It
refers to the examination of proof of title and their
existence or confirmation of assets and liabilities on the
date of the Balance Sheet. In simple words, verification
means, ‘proving the truth or confirmation’.
Valuation is a quantitative process of determining the fair value of an
asset, investment, or firm. In general, a company can be valued on
its own on an absolute basis, or else on a relative basis compared to
other similar companies or assets. The purpose of a valuation is to
track the effectiveness of your strategic decision-making process and
provide the ability to track performance in terms of the estimated
change in value, not just in revenue.
Auditing involves the collection and evaluation of evidence to determine
and report whether information under audit complies with established
criteria (e.g. Whether the financial statement given is a true and fair view).
To ensure consistent, objective, and reliable audit services a large number
of standards have been developed over a period of time. These are known
as Generally Accepted Standards of Auditing.
To conduct an audit effectively, the auditor should have an understanding
of this standard, for this purpose he needs the study principles and
techniques of auditing and their application in various auditing situations.
The standards on auditing, review, other assurance, quality control, and
related services are aimed towards the delivery of high-quality audits
by improving the quality of practice by professional accountants and
ultimately increasing public confidence in financial reporting.
The International Auditing and Assurance Standards Board (IAASB) is
an independent standard-setting body that serves the public interest by
setting high-quality international standards for auditing, quality control,
review, other assurance, and related services, and by facilitating the
convergence of international and national standards
16. Role of International Auditing and Assurance Standard Board
1. Codification of Auditing Practices
2. Ensure effective auditing practices
3. Guidance to the auditors
4. Uniform presentation of accounts
5. Prevention of Accounting standard
17. Auditing and Assurance Standard Board in India
The International Federation of Accounts ( IFAC) came into existence in 1977 and constituted
International Auditing Practices Committee(IAPC) to formulate International Auditing Guidelines.
These guidelines were later on converted into International Standards on Auditing (ISA).
The Institute of Chartered Accounts of India(ICAI) was set up in 1949 to regulate the profession of
chartered accountancy in India. Since its establishment, the institute has taken numerous steps. One
of the steps is the establishment of the Auditing Practice Committee on 17 September 1982.
The Auditing Practice Committee is renamed the Auditing and Assurance Standard Board (AASB)
to issue auditing standards.
Auditing and Assurance Standard refers to general Guidelines given by professional bodies for
conducting audits. It also indicates Principle and Techniques which is followed by auditors.
18. Role of Auditing and Assurance Standard Board in India
1. To review the existing and emerging auditing
2. Formulate engagement standard
3. Review existing auditing standards and statement
4. Guidance notes
5. Review the guidance notes
6. Formulate general clarifications
7. Formulate and issue technical guides,practice manual
20. Internal Control
Internal Control defined in accounting and auditing is a process for assuring the
achievement of an organization’s objectives in operational effectiveness and
efficiency reliable financial reporting and compliance with laws, regulations, and
It also refers to the various methods and procedures adopted for the control of
the production, distribution, and whole system (financial and non-financial),
internal check, and internal audits of the enterprises.
21. Significance of Internal Control
➢ Identification of Defects
➢ Time Saving
➢ Lesser Risk of Omission
➢ Provision for a training facility
➢ Reduction in the quantum of work
➢ Optimum use
➢ Maintenance of Accounts
22. Evaluation of Internal Control
Evaluation of Internal Control is fundamental to the audit. The internal
control system can be studied and evaluated in four stages :
❑ Obtain an understanding of Internal Control
❑ Preliminary Assessment of Control Risk’
❑ Perform Tests of Control
❑ Final Assessment of Control Risk
23. Techniques of Internal Control System
1. Narrative Record
b)Preparation of Questionnaire
3. Flow Chart – a)Meaning
b)Drawing of flow chart
c) Symbol – a)Directional Flow
b)Document or Report
d)Storage of Document
e) Explanatory Note
According to the Companies Act, it is mandatory for all the companies registered in India to
maintain books of accounts and get them audited by a Chartered Accountant in practice every year
after the closing of each financial year. For the Audit of Private Limited Companies, the audited
report along with the financial statements and annual return is required to be filed with the
Registrar of Companies of the state where such companies are registered.
A limited company is a type of business structure where the company has a legal identity of its
own, separate from its owners (shareholders) and its managers (directors). A limited company (LC)
is a general form of incorporation that limits the amount of liability undertaken by the company's
The auditor's role is to assess the annual reports of the company and make sure they are correct and
reliable. The auditor's role is not to manage the accounts. The limited company must appoint an
29. Preliminaries to the audit of limited company
A) Ensure that his appointment is in order -1.Appointment as the first Auditor
2. Appointment in place of retiring auditor
3. Appointment to fill a casual Vacancy
B)Inspection of Document – 1. Memorandum of Association
2. Articles of Association
4. Statutory Books
5. Minute Books
C)Certificate required to be taken
D)Copies of the Resolution to be taken
E)Statement of computations required to be obtained
F)Audit engagement letters
30. Audit of Share Issued for cash
Audit of Shares issued for Cash
Shares issued for cash can be done in three stages as: (a) Application Stage,
where applications were received along with application money; (b)
Allotment Stage, where allotment takes place and allotment money is
received subject to the receipt of minimum subscription; (c) Calls stage,
where calls are made on shares and the amount due is received.
a) The auditor should check the original share application. He should check the entries in the Application
and Allotment Book.
b) He should vouch for the application money received with the Application and Allotment Book and the
corresponding entries in the cash book. He should ensure that the application money received was deposited in a
scheduled bank until the certificate of commencement of business is obtained. He should verify whether the
application money received is not less than 5% of the nominal value of shares issued.
c) He should vouch for the money refunded to unsuccessful applicants with an Application and Allotment
Book, copies of letters of regret, and bank book.
d) He should check the total columns of the Application and Allotment Book and see that proper journal
entries have been passed in the books.
31. B) ALLOTMENT STAGE
a) The auditor should see that allotment begins only after the receipt of the minimum subscription.
b) He should examine the Directors’ Minute Book to see that all the allotments have been approved by the
c) He should compare the copies of Letters of Allotment and Letters of Regret with entries made in the
Application and Allotment Book.
d) He should check the amount received on the allotment, by comparing the Application and Allotment Book
with Cash Book.
e) He should check the postings in the Share Register of the amount received on application and allotment.
f) He should see the relevant RBI and FEMA requirements, in case of allotment to non-residents.
g) He should see that the appropriate journal entry debiting Share Allotment and crediting Share Capital
Account has been duly made.
C). CALL STAGE
a) The auditor should examine the board of directors’ resolution in the Directors’ Minute Book for making
b) He should verify the amount received with the counterfoil of receipts.
c) He should compare the total amount due on calls with the amount collected and entered in the cash book.
He should trace out the figures of call-in-arrears by comparing the ‘Schedule of Calls in Arrears’ with the
Application and Allotment Book and check the accuracy of the amount.
d) He should see that the appropriate journal entry debiting Calls Account and crediting Share Capital Account
has been duly made.
32. Audit of Debenture and Other Transactions
A debenture is a written acknowledgment under the seal of a company, of debt due. It also contains provisions for
the payment of interest and repayment of capital.
Audit Procedure for issue of debenture:
a) The auditor should examine Articles of Association to verify that the company has power to borrow funds
through the issue of debentures.
b) The auditor should examine that relevant resolutions are passed by the directors and the shareholders and
guidelines of SEBI
c) The auditor should verify that an application is made to one or more recognized stock exchanges before the
of debentures to the public for subscription by the issue of a prospectus.
d) The auditor should examine the powers of directors and whether there is any restriction under Section 293.
e) The auditor should examine the entries in the counterfoils of debentures issued with the debenture register
33. Steps of Auditing of Issue of Debenture
1. Verification Prospects
2. Checking of names and addresses
3. Verification of allotment
4. Vouching of the amount
5. Verification of debenture register and general ledger
6. Verification of register of mortgages
7. Ensuring compliance with SEBI
34. Audit Report
The audit report is generally accompanied by the company’s annual report. The audit report is
required by banks, financial institutions, investors, creditors, and regulators. When the auditor
issues a clean report, it means that the company’s financial statements have been found to be
fully compliant with accounting standards.
The auditor's report is a document containing the auditor's opinion on whether a company's
financial statements comply with GAAP and are free from material misstatement. The audit
report is important because banks, creditors, and regulators require an audit of a company's
35. Contents of Audit Report
✓ Description and scope of audit work
✓ Opinion of paragraph
✓ Auditors Address
✓ Date of the report
36. -Audit report with special reference to CARO 2003
The central bank has issued CARO (Company Auditor Report Order) under section 227
(4A) of the companies act 1956. It has come into effect from 1st July 2003.IT will apply
to the chit fund company, Nidhi Company, a Manufacturing company, or mutual benefit
company, a finance company, an Investment company, and a trading company. CARO
specifies matters for inclusion in auditor’s reports.
The auditor's report (CARO 2020) shall include a statement on the following matters,
namely: Details of tangible and intangible assets. Details of inventory and working
capital. Details of investments, any guarantee or, security or advances or loans given.
Compliance in respect of a loan to directors
37. Matters included in Auditors report as per CARO 2003
A) Fixed Asset -1.Proper Record
2. Physical Verification
3. Sale of a substantial part of fixed asset
B) Inventories – 1. Physical Verification
2. Adequacy of a physical verification procedure
3. Proper Record
4. Rectification of material discrepancies
C)Loans to /from Directors and Interested Parties -1.Names and amount involved
2. Terms and conditions of loans
F)Maintenance of cost records
H)Application for term loan