UNIVERSITY OF DHAKA
Department of Management
Assignment On: Auditing
Submitted To:
Mr. Md. Mosharraf
Hossain
Professor
Department of
Management
Prepared By:
Md. Azim- ul- Islam
18150
Sec: B
Department of
Management
Submission date
10th November, 2013
1.
Differences between auditing and
investigation.
Auditing is
a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and
communicating the results to interested users. On the Other hand Investigation
is a detailed inquiry or systematic examination.
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Subject
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Auditing
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Investigation
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1.Purpose
|
An audit
is carried out for the purpose of ascertaining whether or not the balance
sheet and profit and loss account show true and fair view of the state of
company's affairs and its profit or loss
|
But an
investigation aims at establishing a fact or is carried out for some
particular purpose i.e. to know the financial position of the concern or the
earning capacity of the concern etc.
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2.Relates
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The
audit relates to checking of all books and record.
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The
investigation relates to critical checking of particular records
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3. On Behalf
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Audit is
conducted on behalf of owners only. The appointment is made by them.
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The
investigation may be conducted on behalf of owners and outsiders like
investors
|
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4.Period
|
An audit
is related to only a year or six months.
|
Investigation
may cover several years.
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5.Done by
|
The
auditor is must be a chartered accountant.
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The
investigator may or may not be a charted accountant.
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2. Objectives
of Auditing:
Basic objective of auditing is to
prove true and fairness of results presented by profit and loss account and
financial position presented by balance sheet. Its objectives are classified
into two groups. Which are
given bellow:
2.1: Primary Objectives of Audit
The main objectives of audit are known as primary objectives
of audit. They are as follows:
i. Examining the system of internal check.
ii. Checking arithmetical accuracy of books of accounts,
verifying posting, costing, balancing etc.
iii. Verifying the authenticity and validity of
transactions.
iv. Checking the proper distinction of capital and revenue
nature of transactions.
v. Confirming the existence and value of assets and
liabilities.
vi. Verifying whether all the statutory requirements are
fulfilled or not.
vii. Proving true and fairness of operating results
presented by income statement and financial position presented by balance
sheet.
2.2:
Subsidiary Objectives of Audit
These are such objectives which are set up to help in
attaining primary objectives. They are as follows:
i. Detection and prevention of errors
Errors are those mistakes which are committed due to
carelessness or negligence or lack of knowledge or without having vested
interest. Errors may be committed without or with any vested interest. So, they
are to be checked carefully. Errors are of various types. Some of them are:
·
Errors of principle
·
Errors of omission
·
Errors of commission
·
Compensating errors
ii. Detection and prevention of frauds
Frauds are those mistakes which are committed knowingly with
some vested interest on the direction of top level management. Management
commits frauds to deceive tax, to show the effectiveness of management, to get
more commission, to sell share in the market or to maintain market price of
share etc. Detection of fraud is the main job of an auditor. Such frauds are as
follows:
* Misappropriation of cash
* Misappropriation of goods
* Manipulation of accounts or falsification of accounts
without any misappropriation
iii. Under or over valuation of stock
Normally such frauds
are committed by the top level executives of the business. So, the explanation
given to the auditor also remains false. So, an auditor should detect such
frauds using skill, knowledge and facts.
iv. Other objectives
* To provide information to income tax authority.
* To satisfy the provision of company Act.
* To have moral effect
3. What is continuous auditing?
Continuous auditing enables internal audit to continually
gather from processes data that supports auditing activities
Continuous
auditing is an automatic method used to perform auditing activities, such as
control and risk assessments, on a more frequent basis. Technology plays a key
role in continuous audit activities by helping to automate the identification
of exceptions or anomalies, analyze patterns within the digits of key numeric
fields, review trends, and test controls, among other activities
Continuous audit or a detailed audit is an
audit which involves a detailed examination of books of account at regular intervals
i.e. one month or three months. The auditor visits clients at regular intervals
during the financial year and checks each and every transaction. At the end of
the year auditor checks the profit and loss account and the balance sheet. A
continuous audit is not of much use to small firm as its accounts can be
audited at the end of the financial year without much loss of time.
3.1 Components of continuous auditing:
Continuous auditing is made up of three main parts:
continuous data assurance (CDA), continuous controls monitoring (CCM), and
continuous risk monitoring and assessment (CRMA).
4. Continuous
Auditing; Advantage & Disadvantage
4.1: Advantages
of Continuous Audit:
1. Early Location of Errors and Frauds
In the Continuous Audit, the audit visits the clients after a short period. So, he is in a position to check the information completely in detail. It is helpful in checking the errors and frauds easily. If the audit is conducted after the year ended. It is not possible to find the errors or frauds easily.
2. Check on Frauds
In the Continuous Audit the errors are located earlier. So it is also helpful in the early correction of errors and frauds because it is located at the time when it can be corrected earlier.
3. Quick Rectification
Due to Continuous Audit errors are located easily and rectified at an early stage.
4. Special Attention
Before the finalization of accounts an auditor has a sufficient time to pay proper attention to the checking of account and detection of frauds and errors.
5. Guidance to Client
The auditor remains in touch with the business details, so he also indicates about the mistakes and gives valuable suggestions to the client to keep the accounts in proper manner.
6. Useful for Declaration of Dividend
The continuous audit is also helpful for the declaration of the dividend. As the accounts are checked throughout the year, so the audit accounts are ready for the declaration of dividend.
7. Upto Date Accounts
Accounts of the business are kept up to date by the staff because they know that auditor may visit and check the accounts at any time.
8. Chance of Over Looking Reduces
Auditor has a close contact with the details of the accounts and he has also sufficient time to check the records. So the chances of overlooking are reduced in this type of audit.
9. Quick Presentation of Accounts
Continuous audit is very useful because accounts are maintained regularly. So as the financial years end final audited accounts are presented before the shareholders.
10. Accounts Completion
Another audit benefit is the early completion of the accounts checking. The results of audit can be found out just at the end of the accounting period.
11. Moral Check
In the continuous audit the auditor make the surprise visit in the business. The clerks are not aware about the visit. So they are alert and efficient in their work. There is less chances of frauds in this type of business.
12. Convenient for Auditors
In this audit, the several visits paid by the auditor to the client's office in enable his work to proceed easily and smoothly. It also increases his confidence in his capacity to do his work efficiently and effectively.
13. Regular Staff
The regular visits performed by the auditor, make the clerks alert to maintain the accounts up to date and accurate for fear that the auditor may land up in the office any time.
14. Sufficient Time
Continuous audit provides sufficient time to the audit staff. The important and ambiguous matters may require more time to draw conclusion. There is ample time for such matters.
15. No Missing Entries
Continuous audit is also helpful in keeping the full record. In the record there are no missing entries.
16. Early Correction of Errors
The continuous audit is helpful for early correction of errors. The auditor can point out
17. Prompt Filing of Returns
The continuous audit is also helpful for the prompt filing of returns. The management can submit audited account to the registrar as soon as the end of the year.
1. Early Location of Errors and Frauds
In the Continuous Audit, the audit visits the clients after a short period. So, he is in a position to check the information completely in detail. It is helpful in checking the errors and frauds easily. If the audit is conducted after the year ended. It is not possible to find the errors or frauds easily.
2. Check on Frauds
In the Continuous Audit the errors are located earlier. So it is also helpful in the early correction of errors and frauds because it is located at the time when it can be corrected earlier.
3. Quick Rectification
Due to Continuous Audit errors are located easily and rectified at an early stage.
4. Special Attention
Before the finalization of accounts an auditor has a sufficient time to pay proper attention to the checking of account and detection of frauds and errors.
5. Guidance to Client
The auditor remains in touch with the business details, so he also indicates about the mistakes and gives valuable suggestions to the client to keep the accounts in proper manner.
6. Useful for Declaration of Dividend
The continuous audit is also helpful for the declaration of the dividend. As the accounts are checked throughout the year, so the audit accounts are ready for the declaration of dividend.
7. Upto Date Accounts
Accounts of the business are kept up to date by the staff because they know that auditor may visit and check the accounts at any time.
8. Chance of Over Looking Reduces
Auditor has a close contact with the details of the accounts and he has also sufficient time to check the records. So the chances of overlooking are reduced in this type of audit.
9. Quick Presentation of Accounts
Continuous audit is very useful because accounts are maintained regularly. So as the financial years end final audited accounts are presented before the shareholders.
10. Accounts Completion
Another audit benefit is the early completion of the accounts checking. The results of audit can be found out just at the end of the accounting period.
11. Moral Check
In the continuous audit the auditor make the surprise visit in the business. The clerks are not aware about the visit. So they are alert and efficient in their work. There is less chances of frauds in this type of business.
12. Convenient for Auditors
In this audit, the several visits paid by the auditor to the client's office in enable his work to proceed easily and smoothly. It also increases his confidence in his capacity to do his work efficiently and effectively.
13. Regular Staff
The regular visits performed by the auditor, make the clerks alert to maintain the accounts up to date and accurate for fear that the auditor may land up in the office any time.
14. Sufficient Time
Continuous audit provides sufficient time to the audit staff. The important and ambiguous matters may require more time to draw conclusion. There is ample time for such matters.
15. No Missing Entries
Continuous audit is also helpful in keeping the full record. In the record there are no missing entries.
16. Early Correction of Errors
The continuous audit is helpful for early correction of errors. The auditor can point out
17. Prompt Filing of Returns
The continuous audit is also helpful for the prompt filing of returns. The management can submit audited account to the registrar as soon as the end of the year.
18. Early Meetings
This audit is helpful for the early meeting of the shareholders. The accounts are presented for the distribution of profit.
19. Surprise Visits
The continuous audit provided chances of surprise visit to audit staff. The accounting staff becomes alert due to surprise visit. It is essential for eliminating the chances of error and frauds.
This audit is helpful for the early meeting of the shareholders. The accounts are presented for the distribution of profit.
19. Surprise Visits
The continuous audit provided chances of surprise visit to audit staff. The accounting staff becomes alert due to surprise visit. It is essential for eliminating the chances of error and frauds.
20. Upto Date
Record
The continuous audit is useful for keeping the up to date record. Such record is needed by management for borrowing funds, settlement of tax and dealing with labour union.
21. Even Work Load
Due to even workload, the audit staff feels the satisfaction. The books of accounts are maintained as the routine matters. And there is less chances of errors and frauds.
22. Auditor Advice
In the continuous audit the auditor can find the weakness of the business during the year and he can make the suggestion for the improvement of the business.
23. Close and Extensive Check
As the auditor visits the client's office after a month or so, but at regular intervals, a detailed close and exhaustive cheek can be possible. If the audit is to be under taken after the end of the year, such detailed checking will be difficult.
24. Technical Detail
In a continuous audit, the auditor is more in touch with the technical details and business affairs. So, the auditor can help his clients by giving him the valuable suggestions to improve business.
25. Distribution of Work
Continuous audit is also helpful in distribution of load of work on the staff. The work of audit continues the whole year. The audit staff can easily make the audit program according the time required.
The continuous audit is useful for keeping the up to date record. Such record is needed by management for borrowing funds, settlement of tax and dealing with labour union.
21. Even Work Load
Due to even workload, the audit staff feels the satisfaction. The books of accounts are maintained as the routine matters. And there is less chances of errors and frauds.
22. Auditor Advice
In the continuous audit the auditor can find the weakness of the business during the year and he can make the suggestion for the improvement of the business.
23. Close and Extensive Check
As the auditor visits the client's office after a month or so, but at regular intervals, a detailed close and exhaustive cheek can be possible. If the audit is to be under taken after the end of the year, such detailed checking will be difficult.
24. Technical Detail
In a continuous audit, the auditor is more in touch with the technical details and business affairs. So, the auditor can help his clients by giving him the valuable suggestions to improve business.
25. Distribution of Work
Continuous audit is also helpful in distribution of load of work on the staff. The work of audit continues the whole year. The audit staff can easily make the audit program according the time required.
4.2 Disadvantage of Continuous Audit:
In spite of the above-mentioned advantages of a continuous
audit, there are certain drawbacks of such and audit which are as follows:
1. Alteration of Figures
The records and figures in the books of accounts, which have already been checked by the auditor, may be altered after the audit is over. A dishonest clerk can do it do defraud the accounts.
2. Expensive
Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.
3. Inconvenience
In this audit, the auditor visits the client's office at regular intervals to check the accounts and records these frequent visits made by the auditor may dislocate the work of his client and cause convenient to him.
4. Mechanical Work
The work of audit becomes too mechanical because it remains continue throughout the year.
5. Queries Problem
If the auditor's two visits interval is long then so many queries remains outstanding.
6. Small Business
Continuous audit is not fit for small business concerns. A small business has few transactions so there is no need of audit for whole one year. The owner as manager can know facts behind books as details audit is burden.
7. Client Work
The demerit of continuous audit is that the work of the client suffers due to clash of duties and the client staff remaining busy for the whole years. When the audit work is started work of accounting staff as books are not spare.
8. Staff Initimacy
The accounting staff and audit staff work side by side for the whole year. Friendship among the employees and auditors may lead to error and frauds. The sympathetic view of audit staff may fail to show true and fair view.
9. Missing Link
In the audit the auditor has to come at regular interval to check the accounts and hence the link between the past and present work cannot be maintained. Consequently the thread of work is very likely to be lost.
10. Low Income
The continuous audit keeps the staff busy for one year. They are not able to start and complete many audits at the same time. The given to one business is much higher as compared to final audit. So it is not suitable for audit staff from financial point of view.
11. Spoon Feeding
Frequent visits by the auditor may induce the client's staff to depend upon him even for minor things.
12. Expensive
A continuous audit is an expensive form of audit in that the more frequent visits by the auditor means the higher fees of auditor.
13. Wastage of Time
This type of audit is not helpful for the auditor because in this time period they cannot conduct any other audit. So this is low-income audit for the auditor.
14. Words of Client
Another disadvantage of the audit is that the works of the client staff suffer due to the work of both positive. The books of the accounts are not free for the other party to do.
15. Type of Business Concern
This is not fir for the small type of business concern. In the small business concern, there are only few transactions. So there is no need for this concern.
16. Mechanical Work
In this type of audit, the auditor has to repeat all the products as bookkeeper does where as audit work by nature should not be under thinking and boring.
17. Extensive Notes Taking
In this type of audit possible alteration after audit can be avoided by taking note on diary regarding audit of internal control. So the continuous audit requires the compilation of bundle of notes.
18. Chances of Collusion
Frequent visits of auditor may establish some unhealthy relationship between the client's staff and auditor's staff. Thus there are chances of moral check. Upon them and there may be collusion between them.
The records and figures in the books of accounts, which have already been checked by the auditor, may be altered after the audit is over. A dishonest clerk can do it do defraud the accounts.
2. Expensive
Continuous audit is more expensive as compared to other kinds of audit, because the auditor has to devote more time to this audit.
3. Inconvenience
In this audit, the auditor visits the client's office at regular intervals to check the accounts and records these frequent visits made by the auditor may dislocate the work of his client and cause convenient to him.
4. Mechanical Work
The work of audit becomes too mechanical because it remains continue throughout the year.
5. Queries Problem
If the auditor's two visits interval is long then so many queries remains outstanding.
6. Small Business
Continuous audit is not fit for small business concerns. A small business has few transactions so there is no need of audit for whole one year. The owner as manager can know facts behind books as details audit is burden.
7. Client Work
The demerit of continuous audit is that the work of the client suffers due to clash of duties and the client staff remaining busy for the whole years. When the audit work is started work of accounting staff as books are not spare.
8. Staff Initimacy
The accounting staff and audit staff work side by side for the whole year. Friendship among the employees and auditors may lead to error and frauds. The sympathetic view of audit staff may fail to show true and fair view.
9. Missing Link
In the audit the auditor has to come at regular interval to check the accounts and hence the link between the past and present work cannot be maintained. Consequently the thread of work is very likely to be lost.
10. Low Income
The continuous audit keeps the staff busy for one year. They are not able to start and complete many audits at the same time. The given to one business is much higher as compared to final audit. So it is not suitable for audit staff from financial point of view.
11. Spoon Feeding
Frequent visits by the auditor may induce the client's staff to depend upon him even for minor things.
12. Expensive
A continuous audit is an expensive form of audit in that the more frequent visits by the auditor means the higher fees of auditor.
13. Wastage of Time
This type of audit is not helpful for the auditor because in this time period they cannot conduct any other audit. So this is low-income audit for the auditor.
14. Words of Client
Another disadvantage of the audit is that the works of the client staff suffer due to the work of both positive. The books of the accounts are not free for the other party to do.
15. Type of Business Concern
This is not fir for the small type of business concern. In the small business concern, there are only few transactions. So there is no need for this concern.
16. Mechanical Work
In this type of audit, the auditor has to repeat all the products as bookkeeper does where as audit work by nature should not be under thinking and boring.
17. Extensive Notes Taking
In this type of audit possible alteration after audit can be avoided by taking note on diary regarding audit of internal control. So the continuous audit requires the compilation of bundle of notes.
18. Chances of Collusion
Frequent visits of auditor may establish some unhealthy relationship between the client's staff and auditor's staff. Thus there are chances of moral check. Upon them and there may be collusion between them.
5. Interim
auditing definition, merits & demerits:
Definition:
In normal word
Interim means half yearly. It is conducted usually between two annual
general meetings and only one time, not in intervals.
INTERIM AUDIT is an audit conducted during the fiscal year
usually as a means of minimizing the work and time involved in concluding the
audit after the fiscal year. Interim audit is the audit which is conducted between the
two annual audits for the purpose of finding the interim dividend. It may be
monthly quarterly or half yearly. When any partner or owner or director or a
businessman wants to know the reliable results during the financial year then
such type of audit may be applied.
An audit
which conducted in between the two annual audits with a view to find out
interim profits to enable the company to declare an interim dividend is known
as Interim Audit. It is a kind of audit which is conducted between the two
periodical or balance sheet audits.
5.1: Advantages of Interim Audit:
1.
Publication Of Interim Figures:-In some cases the publication f
interim figures is compulsory. So in such cases interim audit is very useful.
2. Easy
Detection of Errors:-By conducting the interim audit errors and frauds can be
easily detected in time.
3. Check
on Staff:-When the staff of the client knows that at any time during
the year accounts are checked for the interim period then they will not commit
any fraud.
4.
Completion of Final Audits:-If interim audit is countered then
final audit can be completed very soon and easily.
5.
Suggestions Implementation:-In case of interim audit auditor's
suggestions can be quickly implemented.
6.
Satisfactory Work:-Staff of the client may work with proper attention
satisfactorily along with the advice of the auditor.
7.
Convenient:-Interim audit is very convenient for the management because
they invite the audit staff when their business activity is low.
8. Interim
Dividend:-The management can easily prepare the accounts for proposed
interim dividend. Interim audit is very useful to declare this dividend.
9. Moral
Check:-All the work done by any staff members of the company is
checked by the auditor in the interim audit, so it provides the moral check.
10. Case
Of New Partner:-In a business when new partner enters, interim audit
determines correct position of assets and liabilities.
11. Death
Case:-When any partner dies then interim audit is very helpful in
determining the position of assets and liabilities.
12.
Retirement Case:-If any partner wants to leave or retire from the business
then interim audit can easily determine the correct position of its assets and
liabilities.
13. Price
Fixing:-Goods and services prices are fixed by the management and
cost is calculated by adding the profit. The selling price is fixed and for
this purpose interim audit is desirable.
14.
Encourages Investment:-Due to interim audit investor rely more on the company
performance. He purchases and sells the shares keeping in view the audit
report.
5.2: Disadvantages of Interim Audit:
1.
Disturbance:-Regular accounting work of the interim audit disturbs the
office work of the client. It is a disadvantage of this audit.
2. Burden
of Work:-Audit staff will have also to prepare the audit notes when
they will finish the interim audit. So the burden of work increases in this
way.
3.
Changing In Figures:-A dishonest official may change the figures of accounts
which is already audited by the auditor. So there are also chances of fraud in
such type of audit. It is a disadvantage.
4. More
Expensive:-This type audit only increases the expenses of business
because it is not compulsory by law.
5. Not
Useful For Third Party:-It has no use for third party because this audit is used
only to improve the efficiency and effectiveness of the accounting system.
6. Interim
auditing Vs. Continuous auditing
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Subject
|
Interim auditing
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Continuous auditing
|
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1. Fee
|
The fee
of interim audit is low.
|
The fee
of continuous audit is high.
|
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2. Legal Position
|
The
interim audit is not compulsory by law.
|
Continuous
audit is compulsory by law.
|
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3. Objectives
|
Interim
audit checks and determines the profit or loss for the particular period.
|
Continuous
audit shows the true and fair view of the financial statement.
|
|
4. Scale Of Business
|
Interim
audit is conducted for the both large scale and small scale business.
|
Continuous
audit is conducted only for large scale business.
|
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5. Scope
|
In
interim audit there is no detailed checking of accounts.
|
In
continuous audit there is a detailed checking of accounting records.
|
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6. Verification
|
Verification
of assets and liabilities are done when interim audit is conducted
|
In
continuous audit it is done when balance sheet is prepared.
|
|
7. Period Of Audit
|
Interim
audit period is upto the particular date.
|
Continuous
audit period is for one whole year.
|
7.
Definition of Balance Sheet Auditing
An audit is an inspection of a company's accounting records,
usually done by an independent certified public accountant.
A
balance sheet approach to an audit consists of checking for the correct
recording of the existence, ownership and value of a company's assets and
liabilities. With the balance sheet approach, the assumption is made, that if
all the balance sheet accounts are tested and verified, then the company's
profit/loss statement will not be significantly misstated. Usually, this type
of audit focuses heavily on the reporting of a company's financial
transactions, such as cash and other assets and the receipt and disbursement of
funds (accounts receivable and accounts payable).
Balance sheet audit means limited audit in which all the balance sheet
accounts are verified and tests imposed only on those profits and loss items
that are directly related to the assets and liabilities such as repairs and
maintenance , provision for description,bad debts etc.
8. Procedures
to Conduct Balance Sheet Auditing
•
The auditor should examine the minute book of the concern,
especially those items which have a bearing on the accounts.
•
He should examine and compare the profit and loss account
with that of the previous year to see whether there is any material different
between the two.
•
He should compare the increase (or) because in the expenses
between the two periods with the turnover, making necessary adjustments
regarding allowances, sales tax (or) any other variations during the period
under reviews.
•
He should investigate into the cause of any variation in the
gross profit and pay attention to the valuation on closing stock.
•
He should see whether there has been any change in the rate
of depreciation charge during the current year and if so, what is its effect on
the revenue account.
•
He should investigate into the items of non-recurring
nature, e.g., profit made (or) loss suffered on the sale of a fixed asset.
•
He should pay attention to any substantial change in the
fixed assets as compared to the previous year especially regarding the
valuation of assets.
•
Similarly any variation in the current assets as compared to
previous year should be inquired into.
•
If there is any material alteration in the pre-payments and
the accruals, he should pay attention to such a variation.
•
He should pay attention to other items of the balance sheet
for any substantial change from the normal figure.
•
He should verify the assets held and liabilities owing.
•
He should ascertain whether any capital commitment exits and
whether there is any item on which a subsequent loss may arise and whether any
provision has been made therefor.
9. Qualities of an Auditor:
i. Professionally Competent:-
It is a
basic quality of an auditor. He must have a complete and thorough knowledge of
the accountancy. To understand the accounting details he can apply his
knowledge and skill. It is only possible if he has a sound background in
accountancy and he is professionally competent.
ii. Honest:-
It is also
very important quality of an auditor. Justice Hindley says "An auditor
must be honest. He must not certify what he does not believe to be true and he
must take a reasonable care and skill before he believes that what he certifies
is true.
iii. Auditing:-
An
auditor's knowledge of auditing must be up to date. He must know the techniques
of auditing. He must have the knowledge of other subjects relating to auditing.
iv. Knowledge of Taxation Law:-
Various
types of taxes are imposed by the government on the business. For example in
some countries Income tax, sales tax, gift tax is imposed. So if auditor has
not a considerable knowledge about the taxation. He cannot perform his services
properly.
v. Computer Expert:-
The
auditor must be able to operate the computer. Today the business organizations
are using computers. If auditor does not know to use computer, he cannot work
efficiently.
vi. Knowledge Of management System:-
The
auditor must have the knowledge of management information system. It helps him
to understand the internal set up of the business concern and its operation.
vii. Preparation of Budget:-
The
auditor must know that how the organization prepares the budget. If he does not
know then it will be not possible for him to audit the various heads of the
budget.
viii. Intelligent:-
It is also
important quality of an auditor that he should be intelligent. He must be able
to understand the technical details of any business.
ix. Qualification:-
For a
professional auditor it is necessary that he should be charted accountant. According
to companies ordinance it is essential qualification for auditor.
x. Tactful:-
In a
particular situation auditor should deal tactfully. He should ask the questions
in such a manner that it does not show about his ignorance or weakness.
xi. Maintain Secrecy:-
The
auditors’ nature of work is confidential. He should maintain secrecy from
others about the affairs of his client.
10. What do
u mean by vouching and voucher?
‘Voucher’ is the
original documentary evidence in support of any payment or receipt of money by
the business. It would be with the help of the voucher that the accuracy of
entry can be checked. Voucher alone can tell us about the nature and sources of
the transaction, its value and authority. It substantiates the book entries and
confirms their reality. Such evidence may be primary and collateral. Certain
Vouchers provide primary evidence while others constitute collateral evidence.
The following may be a few of the examples of vouchers for
certain transactions:
1) Cash Received – Counterfoils of Receipts issued,
Contracts, Minutes, Correspondence, Confirmation of balances by Debtors etc.,
2) Cash Paid – Original receipts from Payees, Invoice Bills,
Demand Notes, Wages Books, Salaries Books, Contracts, Correspondence,
Confirmation by Creditors etc.
3) Purchases – Invoices, Books, Copies of Orders,
Correspondence etc.
4) Sales – Copies of Invoices, Orders Record, Goods Outward
Book, Correspondence etc.
Similarly, evidence can be had with regard to transactions
like Purchases and Sales Returns, Bills Receivable and Payable and Journal
Entries.
All vouchers relating to business transactions should be
carefully preserved and properly filed.
10.1: Vouching
Vouching is the
essence of auditing and is also the most important duty of an auditor. Examination
of the vouchers is called ‘vouching’. The term vouching means a careful
examination of the original documentary evidence, such as invoices, receipts,
statements, correspondence, minutes, contracts, etc., with a view to prove the
accuracy of the entries in the books of account and to ascertain as far as
possible that no transactions have been omitted from books. ‘Vouching’ implies
the substantiation of the entries in the books by reference to any documentary
or other evidence of an authoritative nature offered in support of the
transactions. It is a method of verifying the accuracy and the authenticity of
the entries recorded in the books. To vouch a statement is to confirm it by
evidence. Vouching helps an auditor in establishing the truth of entries in the
books of account and completeness of the record.
11. Procedure
in regarding to vouching the debit side of the cash book
a.
Checking of internal system: With reference to cash payments,
auditor should analyze the internal check system and keep in view the weak
points while auditing.
b.
Inspection of wages and salaries: The auditor should inspect the
certified wages sheet and also test a few items for his satisfaction. He should
also compare the contract and the appointment orders with the salaries.
c. Petty
cash checking: Auditor should examine the petty cash in hand and verify
the balance of petty cash with cashbook.
d.
Checking of payable bills: The auditor should examine these bills with the returned
bill. If these are paid through bank then passbook should be checked.
e.
Checking of revenue and expenditure: The auditor should prove that
proper allocation has been made between capital, revenue and expenditure.
f.
Creditors payments: Auditor should also verify or examine the record and
documentary evidence about the payments made to the creditors.
12. Duty of
an auditor in connection with credit
purchase:
There is a good internal check system regarding the
purchases, the auditor should now proceed to vouch the purchase book.
•
Whether the invoice is in the name of his client, as
sometimes invoices have been produced for goods which have never purchased for
the business (or) goods might have been purchased by an official of the company
for his personal use while the payment is made through the company.
•
Who is authorized to place orders for goods? Only a
responsible officer should be allowed to do so.
•
The date of the invoice should relate to the period under
review. This is done to prevent the production of old invoices for which the
payment had already been made.
•
Whether the clerk, who has checked the invoice with the
order book to see that those goods have been sent for which the order was
placed and that the rates and quantities are correct, has signed the invoice.
He should also see that only those goods which are dealt with by the client
have been purchased.
•
The auditor should also see that the goods mentioned in the
goods mentioned in the invoice are not capital goods. If they are capital
goods, they should not be carried to the purchase book but should be carried to
the fixed asset account.
•
He should, as a ‘test check’, compare some invoice with the
goods inward book (or) the gatekeeper’s inward book in order to see that the
goods have been actually received. This would prevent the inclusion of
fictitious invoices (or) the duplicates as ‘original’ ones.
•
The auditor should check the casts and cross casts of the
purchases book.
•
He should see whether trade discount has been debited from the
invoice before making the entry in the purchases book. Expenses as freight,
custom duty, control duty, etc., which have been incurred in connection with
the purchase, should be debited to the purchases account.
•
He should compare the goods inward book and the stock sheets
with the purchases book to ensure that all goods taken into stock have been
entered in the purchases book. In order to inflate profit, the management
sometimes include the goods in the closing stock while no entry in made in the
purchases book. In this connection he should pay particular attention to the
purchases made at the close of the year to see that they are included both in
the purchases book as well as in the stock book. Otherwise he will be held
responsible to pay damages as was decided in the case of smith vs. offers and
others. In case the goods have not been received bot the invoice only has been
received, no entry should be passed through any book. Similary if the goods
have been received but the invoice has not been received, goods should not be
included in the stock book. In short, if an entry is made, it should be made
both in the purchases book as well as in the stock bank.
•
The auditor should stamp the invoices (or) cancel it after
he has compared ti with the entries in the purchases book to prevent its being
produced again.
•
Sometimes the officials of the company purchase goods
through the company in order to take advantage of the trade discount. In such a
case, the account of the official should be debited and goods account credited.
If this is not done, it would mean the company pays for the goods purchased by
the officials.
•
While examining the invoices, if the auditor comes across
invoices marked ‘copy’ (or) ‘duplicate’, he should satisfy himself that they
were obtained in respect of any those invoices which have been actually lost
(or) mislaid and that they have not already been entered anywhere else in the
purchases book.
•
In order to be sure that all the invoices are included, the
auditor should ask his client to write to all the creditors to send their
statement of account direct to the auditor who will compare them with ledger
accounts.
•
If an invoice runs into several pages, the auditor should
see that the grand total is corrent.
13. Internal check as regards sales:
The whole
system of credit sales should be kept under proper control and supervision.
There should be a separate Sales Department for the purpose. The Sales
Department should have charge of receiving orders, supplying goods to
customers, preparing invoices and maintaining accounts of goods supplied.
The Sales
Department should function as a composite of some sub-departments. The
procedure of its working may be like this:
(1) All
orders received should be entered in the Orders Received Book and properly
numbered. The original order or its copy should then be sent to the Dispatch
Department.
(2) The
Dispatch Department should take steps to pack the goods as per the order. It
should prepare a statement showing the goods packed.
(3) The
statement so prepared by the Dispatch Department should be sent to the Counting
House where the list of goods should be checked and rates, etc. entered in it.
The invoice will then be prepared in triplicate by means of carbon papers.
(4) Two
copies may be sent to the customers who will then return one of them after
signing it in token of having received the goods. Thus, it will serve the
purpose of delivery note. The third copy will be retained for further
reference.
(5) The
Accounts Department should prepare documents like Railway Receipt, Bill of
Lading, etc.
(6) All
goods supplied on order should be entered in the Goods Outward Book which
should be checked at frequent intervals with the Orders Received Book.
(7) The
Invoice Book should also be compared with the Goods Outward Book and the Orders
Received Book.
(8) The
Sales Book should be written up with the help of the copies of invoices.
14. Problems in Valuation of Assets
Valuating
the asset is the important factor in decision making. Valuation is the one that
investor primarily focuses during investment. Valuation is essential before
investment the investment made without valuation will yield huge losses.
Some of the problems faced while valuating the
asset are,
•
The values of the asset are highly volatile. It is difficult
to identify the cost. The asset prices are subjected to demand supply
variation. It is difficult to predict the demand in most of the cases. Demand
is highly volatile based on the market condition and economic conditions.
•
The tax and other cost related to the asset are variable. It
keeps changing with the government policies. Investor while estimating the cost
cannot predict these changes. It is important to include these cost while the
estimation of value of the asset. These costs have a huge impact in the price
of the asset. The complex factor in this is that the taxes vary with asset as
well. The tax won’t be same for different assets. It won’t be same for
different area as well, for ex the tax paid to an asset at one part won’t be
the same in other part.
•
The risks involved in an asset are usually difficult to
calculate. The risk is a huge factor in asset valuation estimation. The assets
that have a huge yielding capacity may have a huge risk associated with it. If
the investor goes by the yielding capacity alone then he might end up making
huge loss as well, whereas the asset with less risk and lesser yielding
capacity may yield more than the riskier one. The problem with risk evaluation
is difficult to estimate the risk and the level to which it can impact the yield.
•
Market risk and other such inestimable risk are difficult to
be included in the asset valuation. These risks however cannot be ignored as
these risks are immediate and have a huge impact on the yielding as well.
15.
Differences between internal audit and statutory audit:
Following are the main points of
difference between internal audit and statutory audit:
1. Appointment: The management of the
organization makes the appointment of an internal auditor. The statutory
auditor is appointed by different authorities. First statutory auditors are
appointed by the shareholders in the annual general meeting.
2. Qualification: Qualifications of the
statutory auditor are prescribed in the companies act, 1956. Essentially a
person should be a practicing chartered accountant to be appointed as a
statutory auditor. There is no fixed qualification for the position of an
internal auditor.
3. Objects: The main object of the statutory
audit is to form an opinion on the financial statement of the organization
auditor has to state that whether the financial statements are showing the true
and fair view of the affairs of the organization or not. The main object of the
internal audit is to detect and prevent the errors and frauds.
4. Scope: The scope of the statutory
audit is fixed by the company’s act 1956. it cannot be changed by mutual
consent between the auditor and the management of the audited business unit.
The scope of the internal audit is fixed by the mutual consent of the auditor
and the management of the unit under audit.
5. Remuneration: Remuneration of the
statutory auditor is fixed by the appointing authority, I e in case of first
auditors, the auditors the directors fix the Remuneration in case of the
subsequent auditors the company in its general meeting fixes the remuneration.
In case of internal auditor the management who appoints him fixes his
Remuneration.
6. Report: The statutory auditor
submits his report to the shareholder of the company in its general meeting.
The internal auditor submits his report to the management of the company who is
also his appointing authority.
7. Removal: The procedure of removal
of the statutory auditor is very complex. Only the company in the general
meeting can remove the auditor. It also has to take the permission of the
central government. The management of the entity can remove internal auditor.
a) Title:
The
title indicates the nature of report. The title should be like-‘auditor’s
report’ (or) ‘branch auditor’s report’. The title distinguishes this report
from other reports like director’s report of an accountant report on
compilation of the account etc.
b) Addressee:
The
auditor’s report should address the person to whom it is meant to be forwarded.
The requirements of the engagement (or) the relevant statute may determine the
person to whom the report should be submitted. Generally the report is
submitted to the person who appoints the auditor.
c) Opening or Introductory Paragraph:
The
introductory should identify.
i. The financial statements with respect to which audit opinion is given-financial
statements are identified by title, period covered, the entity which it
relates etc.
ii.
The clear marking of the responsibility between management and auditor- the
report should state that the financial statements are the responsibility of the
management; the auditor’s responsibility is limited to expression of opinion
thereon. The preparation of the financial statements involves making of
significant accounting estimates, determination of appropriate accounting
principle and methods used in preparation of financial statements. These
determination will have to be made appropriately by the management having
regard to the reporting frame work of financial statements, as chosen by (or)
is required to be complied with, by the management.
d) Scope paragraph:
The
scope paragraph specifies the work performed by auditor. The scope of audit
work is governed by the terms of engagement, statutory provisions and the
pronouncements of the institute. The scope of the audit as affected by the
statute (or) the pronouncements of the ICAI, cannot be modified (or) whittled
down by the terms of engagement, agreement (or) any arrangement between auditor
and auditee. The auditor should specify in the scope paragraph that auditing
has been conducted in accordance with the established auditing standards. This
is both an expression of auditing procedures carried out as well as an
expression of assurance to the readers that the auditing conducted could be
taken to be one in accordance with what AAS have mandated auditors to do in
audit situations.
The
scope paragraph should indicate that auditor had planned and performed the
audit to obtain reasonable assurance whether financial statements are free from
material misstatement. Specifically the scope paragraph describes the audit as
including.
i.
Examining on a test basis, evidence
to support the account, disclosures in financial statements.
ii.
Assessing accounting principles used
in the preparation on financial statements.
iii.
Assessing the significant estimates
made by management in preparation of financial statements.
iv.
Evaluating the overall financial
statement presentation.
The
report, besides describing what an audit is, should mention that the audit has
provided reasonable basis for expression of opinion.
e) Opinion paragraph:
The
opinion paragraph of the report should indicate the financial reporting
framework used to prepare the financial statements and state the auditor’s
opinion as to whether the financial statements give a true and fair view in
accordance with that financial reporting framework and comply with the
statutory disclosure requirements. In addition to the opinion on true and fair
view of the financial statements, the auditor may be required to express
opinion on specific matters required by statute. In such cases, besides,
expressing opinion on the truth and fairness of financial statements, the
auditor should specify his opinion on such additional matters as well. For e.g.
the companies Act, 1956 requires auditor in terms of section 227 (2) to express
whether in his opinion the said accounts give information as required by the Act.
f) Date of the report:
The
date of report indicates the date on which the auditor signs his report. It
indicates that the auditor has considered the effect on the financial
statements and also on his reports of events occurred upto that date. Again
this date should not precede the date on which the financial statements were
approved by the management. Because, the auditor’s responsibility is to express
opinion on the financial statements as prepared by the management.
g) Place of report:
The
town in which the audit report is signed should be indicated.
h) Auditors signature: The
report should be signed by the auditor in his personal name. where the firms is
auditors of the entity, the signature should be in the personal name of the
partner signing as well as in the firm name. the membership number of the
individual signing the report should invariably be mentioned.
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