To understand this tutorial, you need to be familiar with the basics of accounting at workplace.

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2 Abut the Tutrial The main bjective f auditing is t ensure the financial reliability f any rganizatin. Independent pinin and judgment frm the bjectives f auditing. Auditing als helps t ensure that the bks f accunts are kept accrding t the rules stipulated in the Cmpanies Act and whether the bks f accunts shw a true and fair view f the state f affairs f the cmpany r nt. Audience This tutrial has been prepared fr all thse readers wh wish t have a quick verview f hw auditing wrks and helps rganizatins in diverse fields. Prerequisites T understand this tutrial, yu need t be familiar with the basics f accunting at wrkplace. Cpyright & Disclaimer Cpyright 2017 by Tutrials Pint (I) Pvt. Ltd. All the cntent and graphics published in this e-bk are the prperty f Tutrials Pint (I) Pvt. Ltd. The user f this e-bk is prhibited t reuse, retain, cpy, distribute r republish any cntents r a part f cntents f this e-bk in any manner withut written cnsent f the publisher. We strive t update the cntents f ur website and tutrials as timely and as precisely as pssible, hwever, the cntents may cntain inaccuracies r errrs. Tutrials Pint (I) Pvt. Ltd. prvides n guarantee regarding the accuracy, timeliness r cmpleteness f ur website r its cntents including this tutrial. If yu discver any errrs n ur website r in this tutrial, please ntify us at cntact@tutrialspint.cm i

3 Table f Cntents Abut the Tutrial... i Audience... i Prerequisites... i Cpyright & Disclaimer... i Table f Cntents... ii AUDITING INTRODUCTION... 1 AUDITING DETECTION AND PREVENTION OF FRAUD... 5 Misapprpriatin f Cash... 5 Misapprpriatin f Gds... 5 Manipulatin f Accunts... 6 Manner f Manipulatin f Accunts... 6 AUDITING DETECTION & PREVENTION OF ERRORS... 7 Errr f Principle... 7 Errrs f Omissin... 7 Errrs f Duplicatin... 8 Errrs f Cmmissin... 8 Cmpensating Errrs... 8 Preventin f Errrs and Fraud... 8 AUDITING BASIC PRINCIPLES AUDITING ADVANTAGES AUDITING LIMITATIONS ii

4 AUDITING CLASSIFICATIONS Audit f Individuals Audit f Sle-Trader s Bks f Accunts Audit f Partnership Firm Gvernment Audit Statutry Audit Cst Audit Tax Audit Balance Sheet Audit Cntinuus Audit Annual Audit Partial Audit Internal Audit Management Audit Pst & Vuch Audit Audit in Depth Interim Audit AUDITING PREPARATION BEFORE AN AUDIT AUDITING AUDIT PLANNING AUDITING AUDIT PROGRAM AUDITING EXAMPLES OF AUDIT PROGRAM AUDITING MODIFICATION OF AUDIT PROGRAM Classificatin f Wrking Papers AUDITING METHODS OF AUDIT AUDITING DUTIES OF AUDIT STAFF iii

5 AUDITING AUDIT EVIDENCE Prcedures T Cllect Audit Evidences Frmatin f an Opinin AUDITING TYPES OF EVIDENCE AUDITING AUDIT TECHNIQUES AUDITING INTERNAL CONTROL Purpse f Internal Cntrl Characteristics f Internal Cntrl Limitatins f Internal Cntrl Scpe f Internal Cntrl Internal Cntrl and Auditr Review f Internal Cntrl System AUDITING INTERNAL CHECK Principles f Internal Check Advantages f Internal Check Disadvantages f Internal Check AUDITING INTERNAL CHECK AND AUDITOR AUDITING INTERNAL AUDIT Statutry Requirement AUDITING AUDIT SAMPLING What is Audit Sampling? What is Statistical Sampling? Imprtant Pints Frm SA AUDITING VOUCHING iv

6 AUDITING MECHANIZED ACCOUNTING AUDITING TRADING TRANSACTIONS Vuching f Purchase Bk Vuching f Purchase Return Bk Vuching f Gds sent n Cnsignment Basis Vuching f Credit Sale Vuching f Sales Return Gds Sld n Sale r Return Basis Gds Sld n Hire Purchase System Frward Sale Sale f Scrap Vuching f Jurnal Bk Other Imprtant Aspects AUDITING VOUCHING OF CASH TRANSACTIONS Vuching f Cash Receipts (Debit Side f Cash Bk) Vuching f Cash Payments (Credit Side f Cash Bk) Internal Cntrl System fr Cash Transactins AUDITING VOUCHING OF LEDGER Persnal Ledger Accunts Impersnal Ledger Accunts Outstanding Assets Deferred Revenue Expenditure Outstanding Liabilities AUDITING VERIFICATION Objectives f Verificatin Vuching and Verificatin v

7 Verificatin f Liabilities Cnfirmatin and Verificatin Valuatin f Assets and Liabilities Cmpnents f Valuatin Basis f Valuatin Vuching, Verificatin and Valuatin Verificatin and Valuatin f Cpyright Verificatin and Valuatin f Fixed Assets Verificatin and Valuatin f Current Assets Verificatin and Valuatin f Fictitius Assets Verificatin and Valuatin f Liabilities AUDITING DEPRECIATION, RESERVES & PROVISION What is Depreciatin? Reasn f Depreciatin Depreciatin Methds What is Prvisin? What are Reserves? AUDITING CAPITAL AND REVENUE Capital Expenditure Revenue Expenditure Hw t Allcate Revenue r Capital? Revenue Expenses Which are Treated as Capital Expenditure Deferred Revenue Expenditure Auditr s Duty regarding Deferred Revenue Expenditure Capital and Revenue Prfit Capital and Revenue Receipts Capital and Revenue Lsses vi

8 AUDITING AUDIT OF HOSPITALS Maintenance f Accunts f Hspitals Preliminary Audit f Hspitals Audit f Expenses f Hspitals Audit f Assets and Liabilities f Hspitals Audit f Incme f Hspitals AUDITING AUDIT OF EDUCATIONAL INSTITUTIONS Maintenance f Accunts f Educatinal Institutins Preliminary Audit f Educatinal Institutins Internal Cntrl System Audit f Assets and Liabilities Audit f Incme f Educatinal Institutins Audit f Expenses f Educatinal Institutins AUDITING AUDIT OF CHARITABLE INSTITUTIONS AUDITING AUDIT OF CLUBS & THEATRE Audit f Clubs Audit f Incme and Expenditure f Club Audit f Cinemas and Theatre Audit f Expenses f Cinemas and Theatre AUDITING AUDIT OF SOLE PROPRIETARY CONCERN AUDITING AUDIT OF PARTNERSHIP FIRMS AUDITING AUDIT OF DOCTORS AUDITING AUDIT OF ELECTRICITY SUPPLY COMPANY AUDITING AUDIT OF SHIPPING COMPANY vii

9 AUDITING AUDIT OF CO-OPERATIVE SOCIETIES Audit f C-perative Sciety Bks, Accunts and Other Recrds f the Sciety Special Features f C-Operative Audit Restrictin n C-perative Sciety AUDITING AUDIT OF HOTELS Audit f Htels Pints f Sale AUDITING MANAGEMENT AUDIT Audit Reprt Criticism f Management Audit AUDITING TAX AUDIT viii

10 AUDITING INTRODUCTION Auditing The rigin f auditing can be traced t Italy. Arund the year 1494, Luca Pacil intrduced the duble entry system f bkkeeping and described the duties and respnsibilities f an Auditr. Auditing in India has been described in different ways: Auditing is a systematic and independent examinatin f data, statements, recrds, peratins and perfrmances (financial r therwise) f an enterprise fr a stated purpse. In any auditing situatin, the Auditr perceives and recgnizes the prpsitins befre him fr examinatin, cllects evidence, evaluates the same and n this basis, frmulates his judgment which is cmmunicated thrugh his audit reprt. Anther definitin ges as such: - The Institute f Chartered Accuntant f India Auditing is an intelligent and critical scrutiny f bks f accunts f a business with the dcuments and vuchers frm which they have been written up, fr the purpse f ascertaining whether the wrking results f a particular perid as shwn by Prfit and Lss Accunt and als the financial psitin as reflected in the Balance-sheet are truly and fairly determined and presented by thse respnsible fr their cmpilatin. - J. R. Batlibi Auditing in India Let us nw understand the grwth f auditing in India. The Indian Cmpanies Act, 1913, prescribed fr the first time the qualificatins f an Auditr. The Gvernment f Bmbay was the first t cnduct related curses f study such as the Gvernment Diplma in Accuntancy (GDA). The Auditr s Certificate Rule was passed in 1932 t maintain unifrm standard in Accuntancy and Auditing. The Chartered Accuntant Act was enacted by the Parliament f India in The Act regulates that a persn can be authrized t audit nly when he qualifies in the examinatins cnducted by The Institute f Chartered Accuntants f India. Fllwing are a few ther pints related t Auditing in India: Members f Institute f Cst and Wrks Accuntant f India are authrized t cnduct cst audit accrding t Sectin 233-B f the Cmpanies Act, Cmpanies Act 1931 was replaced by Cmpanies Act An Auditr can be appinted nly by a special reslutin as per sectin 224 The Cmpanies (amendment) Act,

11 Bkkeeping A Bkkeeper recrds day-t-day transactin in the bks f accunts in a systematic manner. Bkkeeping includes: Jurnalizing Psting t ledger Ttaling and balancing f ledger accunts Accuntancy The jb f Accuntancy begins where bkkeeping ends and includes the fllwing; Rectificatin f errrs Preparatin f Trial Balance Preparatin f financial statements (Trading and Prfit & Lss accunt and Balance- Sheet, etc.) Auditing Preparatin f accunts is nt the duty f an Auditr. Auditing begins, where accuntancy ends. Auditr is nly cncerned fr checking and verificatin f recrds. Auditr is a qualified persn appinted fr the purpse f certificatin f wrk dne by thers. Investigatin An investigatin may be dne with a specific purpse. It is usually cnducted t knw the financial psitin f a business, extent f fraud and misapprpriatin and the earning capacity f any business unit, etc. The time duratin fr investigatin may als extend beynd ne year. Investigatin may nt be necessarily dne by a qualified Chartered Accuntant. Qualities f an Auditr An Auditr must have the fllwing qualificatins and qualities: He shuld be a qualified Chartered Accuntant r he shuld be a qualified member f The Institute f Cst & Wrks Accuntants f India t d cst audit. He must have adequate skills and qualities t cnduct his wrk efficiently. 10

12 An Auditr must be hnest, impartial and unbiased. He shuld als be hardwrking, have adequate cmmn sense, capacity t hear arguments f thers, systematic and methdical. An Auditr shuld ask fr clarificatin n matter n which he is unable t understand the infrmatin prvided t him. His audit reprt shuld be crrect and clear. In case where any suspicius situatin arises, he shuld assume that he is dealing with dishnest and fraudulent peples. He must have thrugh knwledge f accunting principles and practices. He must have the knwhw f all the dmestic and internatinal curt case decisins. He must have thrugh knwledge f financial management, industrial management and business rganizatins. He must have up-t-date knwledge f the Mercantile law and the Cmpanies Act. Scpe f Auditing In cmparisn with earlier days, where the main bjective f auditing was t detect fraud, we nw have enhanced ways t determine a true and fair view f financial statements. In recent times, almst every cuntry f the wrld has intrduced varius legislatins and framed rules and regulatin f auditing. In India als legislatins related t Tax Audit, Cst Audit, Management Audit and peratin Audit, etc. are cming up. The main purpse f auditing is t certify the crrectness f financial statements and t detect errrs and frauds. Techniques f Auditing Fllwing are the cmmn techniques f auditing: Checking f psting and casting. Physical verificatin f assets. Verificatin and examinatin f transactins with available evidences. Scrutiny f the bks f accunts. Checking f varius calculatins. Checking f carried frward balances in next year. Checking f Bank recnciliatin statements. Auditr can get infrmatin frm inside and utside surces f rganizatin. 11

13 Auditing Fundamentals 12

14 AUDITING DETECTION AND PREVENTION OF FRAUD The main bjective f auditing is t ensure the financial reliability f any rganizatin; detectin f fraud is just an incidental bject. Independent pinin and judgment frm the bjectives f auditing. The jb f an Auditr is t ensure that the bks f accunts are kept accrding t the rules stipulated in the Cmpanies Act; an Auditr als needs t ensure whether the bks f accunts shw a true and fair view f the state f affairs f the cmpany r nt. The fllwing are the three distinct types f fraud: Misapprpriatin f Cash Misapprpriatin f Gds Manipulatin f Accunts Misapprpriatin f Cash Misapprpriatin f cash is the easiest way f fraud especially in large business huses where there is limited r n cmmunicatin between the wner f an rganizatin and the cashier. Fllwing are sme f the ways thrugh which embezzlement r misapprpriatin can be dne: Theft f cash receipts and petty cash and shwing fictitius payment t wrkers, creditrs, purchases, etc. Shwing false payments r excess payments in cash bk. By using the Teeming and Lading methd, the mney received frm any custmer can be pcketed and the mney received frm anther custmer can be shwn as mney received frm the frmer. Cash sale can be shwn as credit sale. Strict internal cntrl system shuld be fllwed in receipts and payments f cash s that the wrk dne by ne persn shuld be autmatically checked by anther persn. Misapprpriatin f Gds Misapprpriatin f gds can be dne in the fllwing ways: Gds may be stlen by emplyees r with the help f emplyees. By issuing false credit ntes t custmer n accunt f gds return. 13

15 Detectin f misapprpriatin f gds is mre difficult rather than detecting misapprpriatin f mney, especially where management is nt much vigilant and sund system f bk-keeping, internal cntrl and adequate system f securities are nt available. T keep cntrl n the physical verificatin f gds, recnciliatin f physical stck with bks and careful checking f sale and purchase is must. Manipulatin f Accunts Tw types f manipulatin f accunts are mainly dne by tp management t mislead sme parties fr sme specific purpse. Shwing higher prfits: Fllwing are the reasns behind shwing higher prfit than actual: T btain credit r t enhance existing credit frm financial institutins and als t shw credit wrthies t suppliers f the cmpany. T maintain cnfidence f sharehlders. T hike the market price f shares f the cmpany and enable the sale f thse at higher price, it may be dne by declaring higher dividends n shares. T get mre cmmissin where cmmissin is calculated n the basis f prfit earned. T declare dividend at higher rate. Shwing lw prfits: Fllwing are the reasns behind shwing lwer prfit than actual: T avid r t reduce Direct Taxes f the cmpany (Incme Tax, Wealth Tax). T purchase shares at lwer price. T give wrng impressin t the ther cmpetitrs f the business. Manner f Manipulatin f Accunts Manipulatin f accunts may be dne in the fllwing ways: Windw dressing is a manipulatin r miss-representatin f financial data in such a way that it seems better than what it actually is. Sme f the methd f windw dressing is given as hereunder Over valuatin f clsing stck Under valuatin f Liabilities r Over-valuatin f assets. Purchases and expenses f current year may be deferred t next financial year. 14

16 Charging revenue expenses as capital expenditure Sale and ther incmes f preceding year may be shwn as incme r sale f the current year. Secret reserves f previus years may be used in the current financial year t inflate the prfit r secret reserves may be created t suppress the prfit f the current financial year. Stck may be under r vervalued. Incme and sales may be suppressed r inflated. Expenses and purchases may be suppressed r inflated. 15

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