Auditing and assurance explains the concepts, principles and techniques of auditing

Cover......Page 1
Contents......Page 6
Preface to the Section Edition......Page 24
Preface......Page 26
About the Author......Page 27
 1.2 Origin of the Word ‘Audit’......Page 28
 1.4 Evolution of Auditing......Page 29
 1.6 Nature of Auditing......Page 31
 1.7 Essential Features of Auditing......Page 32
 1.9 Objective of an Audit......Page 33
  1.9.1 How the Objective is Achieved......Page 35
  1.10.1 Errors......Page 36
  1.10.2 Fraud......Page 37
 1.11 Role and Responsibility of Auditors in Detecting Errors and Frauds......Page 39
  1.12.3 Auditing......Page 40
 1.13 Basic Principles Governing an Audit......Page 41
 1.14 Postulates of Auditng......Page 42
 1.15 Scope and Procedures of Audit......Page 43
 1.16 Changes in the Concept of Auditing......Page 44
 1.17 Auditor’s Independence......Page 45
 1.18 Social Objectives of Audit......Page 47
  1.19.2 From Internal Control Point of View......Page 48
 1.21 Relationship between Auditing and other Subjects......Page 49
  1.21.4 Auditing and Law......Page 50
  1.21.7 Auditing and Computer Application......Page 51
 1.22 Qualities of an Auditor......Page 52
 1.23 Auditing and Other Services......Page 53
 Points to Ponder......Page 54
 Suggested Questions......Page 56
 2.2 Classification of Audit......Page 58
  2.3.1 Audit Required under Law......Page 61
  2.3.2 Audit of other Organizations not Covered by any Law......Page 62
  2.4.2 Internal Audit......Page 63
  2.5.1 Continuous Audit......Page 66
  2.5.2 Periodical or Final or Complete Audit......Page 69
  2.5.3 Interim Audit......Page 70
  2.5.5 Occasional Audit......Page 71
  2.5.7 Balance Sheet Audit......Page 72
  2.6.2 Cost Audit......Page 73
  2.6.6 Propriety Audit......Page 74
  2.6.10 Cash Transaction Audit......Page 75
  2.6.13 Secretarial Audit......Page 76
 Suggested Questions......Page 77
 3.1 Introduction......Page 78
 3.2 Preparatory Steps before Commencement of a new Audit......Page 79
 3.3 Audit Activities......Page 80
  3.4.1 Concept......Page 81
  3.4.3 Revision of Engagement Letter......Page 82
  3.5.1 Audit Planning......Page 83
  3.5.2 Audit Programme......Page 84
  3.5.3 Audit Note Book......Page 87
  3.5.4 Audit Working Papers......Page 89
  3.5.5 Audit Files......Page 91
  3.5.7 Audit Memorandum......Page 92
  3.6.1 Important Audit Techniques......Page 93
  3.7.1 Audit Evidence......Page 94
  3.7.3 Test Checking......Page 103
  3.7.4 Auditing in Depth......Page 105
  3.7.5 Walk-through Tests......Page 106
  3.7.8 Physical Examination......Page 107
  3.7.11 Audit Flow Chart......Page 113
  3.7.13 Internal Control Questionnaires......Page 115
  3.7.14 Audit Tests......Page 116
 3.8 Representation by Management......Page 118
  3.9.3 Review......Page 120
 3.10 Professional Skepticism......Page 121
  3.11.1 Concept of Materiality......Page 122
  3.11.2 Audit Risk......Page 123
 3.12 Final Review......Page 124
  3.13.1 Concept......Page 125
  3.13.4 Methodology for Conducting Peer Review......Page 126
  3.14.1 Concept......Page 127
  3.14.2 Identification of Related Party Transactions......Page 128
 Case Studies......Page 129
 Points to Ponder......Page 130
 Suggested Questions......Page 132
  4.2.1 Definition......Page 134
  4.2.2 Basic Elements of Internal Control......Page 135
  4.2.4 Types of Internal Control......Page 136
  4.2.5 Advantages......Page 137
  4.2.7 Evaluation of Internal Control......Page 138
  4.2.8 Internal Control and the Auditor......Page 139
  4.2.11 Basic Characteristics of Internal Control Questionnaire......Page 140
  4.2.12 Typical Questions to Be Found in an Internal Control Questionnaire......Page 141
  4.2.13 Internal Control and Computerized Environment......Page 142
  4.2.15 COSO’s* Internal Control Framework......Page 144
  4.2.16 Internal Control in Specific Areas of Business......Page 146
  4.3.2 General Considerations in Framing a System of Internal Check......Page 150
  4.3.3 Objectives of Internal Check......Page 151
  4.3.5 Shortcoming of Internal Check System......Page 152
  4.3.7 Internal Check and the Auditor......Page 153
  4.3.8 General Principles of Internal Check for a few Transactions......Page 154
  4.4.2 Basic Principles of Establishing Internal Auditing in a Business Concern......Page 161
  4.4.3 Scope and Objectives of Internal Audit......Page 162
  4.4.4 Functions of Internal Audit......Page 163
  4.4.6 Advantages......Page 164
  4.4.8 Area of Internal Audit......Page 165
  4.4.9 Distinction Between Internal Audit and External Audit......Page 166
  4.4.10 Using the Work of an Internal Auditor......Page 167
  4.4.11 Internal Audit in Case of Companies......Page 168
 4.5 Evaluation of Internal Audit Function......Page 169
 4.7 Distinction between Internal Check, Internal Audit and Internal Control......Page 170
 Case Study......Page 171
 Points to Ponder......Page 172
 Suggested Questions......Page 173
 5.2 Objectives of Vouching......Page 175
 5.4 Vouching and Verification......Page 176
 5.6 Concept of Voucher......Page 177
 5.7 Internal and External Evidence......Page 178
 5.9 Teeming and Lading: A Challenge to Vouching......Page 179
  5.10.1 Vouching of Capital Expenditure......Page 180
  5.10.2 Vouching of Investments......Page 182
  5.10.4 Vouching of Trading Transactions......Page 183
  5.10.5 Vouching of Cash Book......Page 186
 Points to Ponder......Page 196
 Suggested Questions......Page 197
 6.3 Meaning of Valuation of Assets......Page 199
 6.4 Difference between Verification and Valuation......Page 200
 6.7 General Principles for Verification of Assets......Page 201
 6.10 Window Dressing—A Challenge to Verification......Page 204
 6.11 Verification and Valuation of Assets......Page 205
  6.12.1 Goodwill......Page 206
  6.12.3 Copyright......Page 207
  6.12.4 Trademarks......Page 208
  6.13.1 Land and Buildings......Page 209
  6.13.3 Plant and Machinery......Page 210
  6.13.5 Motor Vehicles......Page 211
  6.13.6 Assets Acquired under H.P. System......Page 212
 6.14 Verification and Valuation of Investments......Page 213
  6.14.1 Quoted Investments......Page 214
  6.15.1 Stock-in-Trade......Page 215
  6.15.3 Sundry Debtors......Page 219
  6.15.4 Bills Receivables......Page 220
  6.15.5 Cash at Bank......Page 221
  6.15.7 Prepaid Expenses......Page 222
  6.16.2 Discount on Issue of Shares or Debentures......Page 223
 6.17 Verification and Valuation of Other Assets......Page 224
 6.18 Verification and Valuation of Contingent Assets......Page 225
  6.20.1 Debentures......Page 226
  6.21.1 Sundry Creditors......Page 227
  6.21.3 Bank Overdraft......Page 228
 6.22 Verification and Valuation of Contingent Liabilities......Page 229
 6.23 Auditor’s Duty regarding Subsequent Event......Page 230
 Points to Ponder......Page 231
 Suggested Questions......Page 232
 7.2 Purposes of Providing Depreciation......Page 234
 7.4 Basis of Charging Depreciation......Page 235
 7.5 Quantum of Depreciation......Page 236
 7.6 Distinction between Depreciation and Amortization......Page 237
 7.7 Different Methods of Depreciation......Page 238
 7.8 Depreciation Accounting as per as-6......Page 240
 7.10 Legal Necessity of a Provision for Depreciation......Page 243
 7.12 Change in the Method of Depreciation......Page 244
 7.13 Auditor’s Duty as Regards Depreciation......Page 245
 7.14 Impairment of Assets......Page 246
 Points to Ponder......Page 247
 Suggested Questions......Page 248
 8.3 Difference between Reserves and Provisions......Page 250
 8.4 Classification of Reserves......Page 251
  8.4.2 Capital Reserve......Page 252
  8.4.3 Capitalization of Reserve......Page 253
  8.4.5 Securities Premium Reserve......Page 254
  8.4.7 Secret Reserves......Page 255
  8.4.8 Specific Reserves......Page 258
 Points to Ponder......Page 259
 Suggested Questions......Page 260
  9.2.1 First Auditor......Page 261
  9.2.2 Subsequent Auditors......Page 262
 9.3 Rotation of Auditors......Page 263
 9.4 Reappointment......Page 265
 9.7 Appointment of Auditors of Government or certain other companies......Page 266
 9.10 Ceiling on Number of Audits......Page 267
 9.11 Removal of Auditors......Page 268
 9.13 Disqualification of an Auditor......Page 269
 9.14 Status of the Company Auditor......Page 270
  9.15.1 Rights of a Company Auditor......Page 272
  9.15.2 Duties of a Company Auditor......Page 275
  9.15.3 Liabilities of a Company Auditor......Page 276
 9.16 Audit Committee......Page 280
  9.17.2 Functions of the Audit Committee......Page 283
  9.17.3 Audit Committee under Clause 49......Page 284
 9.18 Joint Auditor......Page 285
 9.19 Legal Views of Regards Auditor’s Liability......Page 286
 Some Case Studies......Page 288
 Suggested Questions......Page 290
  10.2.1 Ensuring Whether his Appointment is in Order......Page 292
  10.2.2 Inspection of Statutory Books and Documents......Page 293
 10.3 Audit of Share Capital Transactions......Page 294
  10.3.1 Audit Procedure......Page 295
  10.4.1 Audit Procedure......Page 307
 10.5 Audit of Holding Company......Page 309
 10.6 Audit of Pre-incorporation Profit......Page 312
 10.7 Specific Provisions as Regards Accounts in the Companies Act......Page 313
  10.7.1 Related Party Transactions......Page 315
 10.8 Special Requirements of Company Audit......Page 318
 10.9 Legal Views of Regards Auditor’s Liability RegardingAudit of Different Transactions......Page 319
 Points to Ponder......Page 321
 Suggested Questions......Page 322
 11.2 Meaning of Dividend......Page 324
  11.5.1 Profit After Providing for Depreciation......Page 325
  11.5.6 Transfer of Profits to Reserves......Page 326
  11.5.10 Other Determining Factors......Page 327
 11.6 Provisions of The Companies Act Relating to Payment of Dividend......Page 328
 11.8 Payment of Dividend out of Capital Profit......Page 329
 11.9 Payment of Dividend out of Capital......Page 330
 11.11 Provisions of the Articles of Association Regarding Dividend......Page 331
 11.12 Auditor’s Duty as Regards Payment of Dividend......Page 332
 11.13 Payment of Interim Dividend and the Role of Auditors......Page 333
 11.14 Legal Views as Regards Dividend......Page 334
 Points to Ponder......Page 336
 Suggested Questions......Page 337
 12.3 Value of Audit Report......Page 338
 12.5 Scope of an Audit Report......Page 339
 12.6 Signing of the Audit Report......Page 340
 12.7 Contents of Audit Report......Page 341
  12.8.1 Companies Auditors’ Report Order (CARO), 2015......Page 342
 12.9 Forms of an Audit Report......Page 347
 12.10 Basic Elements of Audit Report......Page 348
 12.13 Modified Reports......Page 349
 12.14 Types of Audit Certificate......Page 351
 12.15 Auditor’s Report and ‘True and Fair’ View......Page 352
 12.16 Specimen of a Clean Audit Report......Page 353
 12.18 Legal Views as Regards Audit Report......Page 354
 Points to Ponder......Page 355
 Suggested Questions......Page 356
 13.2 Cost Audit......Page 357
  13.2.2 Objectives......Page 358
  13.2.3 Advantages......Page 359
  13.2.6 Qualification......Page 360
  13.2.9 Cost-Audit Report......Page 361
  13.2.10 Distinction Between Financial Audit and Cost Audit......Page 362
  13.2.11 Phases or Stages of Cost Audit......Page 363
  13.2.12 Distinction Between Traditional Audit and Propriety Audit......Page 366
  13.3.2 Objectives......Page 367
  13.3.3 Importance......Page 368
  13.3.5 Steps......Page 369
  13.3.8 Appointment......Page 370
  13.3.11 Management Audit Questionnaire......Page 371
  13.3.12 Difference Between Management Audit and Cost Audit......Page 372
  13.3.13 Difference Between Management Audit and Financial Audit......Page 373
  13.4.4 Steps for Human Resource Audit......Page 374
  13.4.6 Advantages of Human Resource Audit......Page 375
  13.5.2 Need and Objectives......Page 376
  13.5.3 Scope of Audit......Page 377
  13.6.2 Objectives......Page 378
  13.6.4 Problems of Conducting Forecast Audit......Page 379
  13.7.1 Concept of Social Responsibility......Page 380
  13.7.3 Concept of Social Audit......Page 381
  13.7.5 Importance......Page 382
  13.8.1 Definition......Page 383
  13.8.5 Penalty for Non-compliance......Page 384
  13.9.2 Role of VAT Auditor......Page 385
  13.9.4 Approach to VAT Audit......Page 386
  13.10.1 Definition......Page 387
  13.10.4 Application......Page 388
  13.10.5 Techniques......Page 389
  13.10.8 Forensic Accounting in India......Page 390
  13.11.2 Objectives......Page 391
  13.11.3 Approach......Page 392
  13.11.5 Environmental Audit Practice in India......Page 394
  13.11.6 International Scenario......Page 395
 Points to Ponder......Page 396
 Suggested Questions......Page 397
  14.2.1 General Matters......Page 399
  14.2.3 Payments and Expenses......Page 400
  14.3.1 General Matters......Page 401
  14.3.4 Assets and Liabilities......Page 402
  14.4.2 Receipts......Page 403
  14.4.6 Special Accounts......Page 404
  14.5.1 General......Page 405
  14.5.4 Assets and Liabilities......Page 406
  14.6.1 General......Page 407
  14.6.4 Assets and Liabilities......Page 408
 14.7 Hotels......Page 409
  14.8.2 Receipts......Page 411
 14.9 Libraries......Page 412
  14.9.3 Payments and Expenses......Page 413
  14.10.1 General Matters......Page 414
  14.10.4 Assets and Liabilities......Page 415
  14.11.1 Evaluation of Internal Control System......Page 416
  14.11.3 Vouching and Verification......Page 417
  14.12.2 Receipts......Page 418
  14.12.5 Financial Statements......Page 419
  14.13.2 When the Audit Relates to Weekly or Monthly Journals......Page 420
  14.14.1 Concept......Page 421
  14.14.2 Need of the Hour......Page 422
  14.15.1 Concept of Non-governmental Organizations......Page 423
  14.15.7 Audit Approach......Page 424
 14.16 Audit of Non-Banking Financial Companies......Page 426
  14.17.1 Audit of Hire Purchase Transactions......Page 428
  14.17.2 Audit of Lease Transactions......Page 429
 Points to Ponder......Page 431
 Suggested Questions......Page 432
 15.2 Audit of PSUs......Page 434
  15.2.1 Some Special Features of PSUs......Page 435
  15.2.3 Distinction between Audit of PSUs and Audit of Private Sector Undertakings......Page 436
  15.3.1 Objectives......Page 439
  15.3.2 Difference between Government Audit and Commercial Audit......Page 440
 15.4 Comptroller and Auditor General of India......Page 441
 Points to Ponder......Page 443
 Suggested Questions......Page 444
 16.1 Introduction......Page 445
 16.3 Computer Installation Review......Page 446
  16.3.2 Controls to Ensure the Continuing Existence of EDP Facilities......Page 447
  16.3.3 Safeguarding of the Client’s Records......Page 448
  16.3.4 Control Over the Data Passing Through the EDP Department......Page 450
  16.3.5 Controls Over the Operation of the Computer......Page 451
  16.3.6 Control Over the Resources, Assets and Liabilities of the EDP Department......Page 452
  16.4.2 Evaluating the System......Page 453
  16.4.3 Designing the Audit Programme......Page 454
  16.5.1 Auditing Around the Computer......Page 455
 16.6 Special techniques for auditing in an EDP environment......Page 456
  16.6.3 Considerations in the Use of CAATs......Page 457
 Case Studies......Page 458
 Points to Ponder......Page 459
 Suggested Questions......Page 460
 17.2 Concept......Page 461
 17.5 Objectives and Importance......Page 462
 17.7 Convergence of SAs......Page 463
  17.8.1 Elements of a System of Quality Control......Page 467
  17.8.3 Issue for Independence......Page 470
  17.9.1 Standard on Auditing-200 (SA-200): Overall Objectivesof an Independent Auditor and the Conduct of an Audit in Accordance with SAs......Page 471
  17.9.2 Standard on Auditing-210 (SA-210): Agreeing the Terms of Audit Engagements......Page 473
  17.9.3 Standard on Auditing-220 (SA-220): Quality Controlfor an Audit of Financial Statements......Page 477
  17.9.4 Standard on Auditing-230 (SA-230): Audit Documentation......Page 481
  17.9.5 Standard on Auditing-240 (SA-240): The Auditor’s ResponsibilitiesRelating to Fraud in an Audit of Financial Statements......Page 483
  17.9.6 Standard on Auditing-250 (SA-250): The Auditor’s Responsibilities Relating to Laws and Regulations in an Audit of Financial Statements......Page 490
  17.9.7 Standard on Auditing-260 (SA-260): Communication with those Charged with Governance......Page 494
  17.9.8 Standard on Auditing-265 (SA-265): Communicating Deficiencies in Internal Control to Those Charged with Governance and the Management......Page 497
  17.9.9 Standard on Auditing-299 (SA-299): Responsibility of Joint Auditors......Page 498
  17.9.10 Standard on Auditing-300 (SA-300): Planning an Audit of Financial Statements......Page 500
  17.9.11 Standard on Auditing-315 (SA-315): Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment......Page 505
  17.9.12 Standard on Auditing-320 (SA-320): Materiality in Planning and Performance of an Audit......Page 510
  17.9.13 Standard on Auditing-330 (SA-330): The Auditor’s Responses to Assessed Risks......Page 512
  17.9.14 Standard on Auditing-402 (SA-402): Audit Consideration Relating to an Entity Using a Service Organization......Page 516
  17.9.15 Standard on Auditing-450 (SA-450): Evaluation of Misstatements Identified During the Audit......Page 520
  17.9.16 Standard on Auditing-500 (SA-500): Audit Evidence......Page 522
  17.9.17 Standard on Auditing-501 (SA-501): Audit Evidence—Specific Consideration for Selected Items......Page 523
  17.9.18 Standard on Auditing-505 (SA-505): External Confirmation......Page 526
  17.9.19 Standard on Auditing-510 (SA-510): Initial Audit Engagements—Opening Balances......Page 530
  17.9.20 Standard on Auditing-520 (SA-520): Analytical Procedures......Page 532
  17.9.21 Standard on Auditing-530 (SA-530): Audit Sampling......Page 533
  17.9.22 Standard on Auditing-540 (SA-540): Auditing Accounting Estimates Including Fair Value Accounting Estimates and Related Disclosures......Page 534
  17.9.23 Standard on Auditing-550 (SA-550): Related Parties......Page 537
  17.9.24 Standard on Auditing-560 (SA-560): Subsequent Event......Page 542
  17.9.25 Standard on Auditing-570 (SA-570): Going Concern......Page 545
  17.9.26 Standard on Auditing-580 (SA-580): Written Representations......Page 550
  17.9.27 Standard on Auditing-600 (SA-600): Using the Work of Another Auditor......Page 553
  17.9.28 Standard on Auditing-610 (SA-610): Using the Work of Internal Auditors......Page 556
  17.9.29 Standard on Auditing-620 (SA-620): Using the Work of an Auditor’s Expert......Page 558
  17.9.30 Standard on Auditing-700 (SA-700): Forming an Opinion and Reporting on Financial Statements......Page 560
  17.9.31 Standard on Auditing-705 (SA-705): Modifications to the Opinion in the Independent Auditor’s Report......Page 564
  17.9.32 Standard on Auditing-706 (SA-706): Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report......Page 568
  17.9.33 Standard on Auditing-710 (SA-710): Comparative Information—Corresponding Figures and Comparative Financial Statements......Page 570
  17.9.34 Standard on Auditing-720 (SA-720): The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements......Page 572
  17.9.35 Standard on Auditing-800 (SA-800): Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks......Page 574
  17.9.36 Standard on Auditing-805 (SA-805): Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement......Page 575
  17.9.37 Standard on Auditing-810 (SA-810): Engagements to Report on Summary Financial Statements......Page 577
Annexure A: Important Terms Used in the Standardson Auditing......Page 584
Annexure B: Important Case Decisions......Page 598
Index......Page 610