Auditing: Principles and techniques

Cover......Page 1
Preface......Page 6
Contents......Page 8
Chapter 1: Nature of Auditing......Page 14
 1.3 Early History of Audit......Page 15
 1.4 Auditing Defined......Page 16
 1.5 Essential Features of Auditing......Page 17
 1.7 Objective of an Audit......Page 18
  1.8.1 Errors......Page 20
  1.8.2 Fraud......Page 21
  1.10.1 Book-keeping......Page 22
 1.11 Basic Principles Governing an Audit......Page 23
 1.12 Postulates of Auditng......Page 25
 1.13 Scope and Procedures of Audit......Page 26
 1.14 Changes in the Concept of Auditing......Page 27
 1.15 Social Objectives of Audit......Page 28
 1.16 Advantages of Auditing......Page 29
 1.17 Limitations of Auditing......Page 30
 1.18 Qualities of an Auditor......Page 31
 1.19 Auditing and other Services......Page 32
 Points to Ponder......Page 33
 Review Questions......Page 34
Chapter 2: Classification of Auditing......Page 36
  2.2.3 Classification on the Basis of Practical Approach......Page 37
  2.2.4 Classification on the Basis of Audit Dimension......Page 38
  2.3.1 Audit Required under Law......Page 39
  2.3.2 Audit of Other Organisations Not Covered by Any Law......Page 40
  2.4.1 External Audit......Page 41
  2.4.2 Internal Audit......Page 42
 2.5 Classification on the Basis of Practical Approach......Page 43
  2.5.1 Continuous Audit......Page 44
  2.5.2 Periodical or Final or Complete Audit......Page 46
  2.5.3 Interim Audit......Page 47
  2.5.4 Partial Audit......Page 48
  2.5.6 Standard Audit......Page 49
  2.5.7 Balance Sheet Audit......Page 50
  2.6.3 Tax Audit......Page 51
  2.6.7 Performance or Efficiency Audit......Page 52
  2.6.11 Energy Audit......Page 53
 Points to Ponder......Page 54
 Review Questions......Page 55
Chapter 3: Techniques and Procedures of Auditing......Page 56
 3.2 Preparatory Steps before Commencement of Audit......Page 57
  3.3.1 Audit Planning......Page 59
  3.3.2 Audit Programme......Page 60
  3.3.3 Audit Notebook......Page 63
  3.3.4 Audit Working Papers......Page 65
  3.3.5 Audit Files......Page 66
  3.3.6 Audit Manual......Page 67
  3.3.7 Audit Memorandum......Page 68
  3.4.1 Important Audit Techniques......Page 69
  3.5.1 Audit Evidence......Page 70
  3.5.2 Routine Checking......Page 71
  3.5.3 Test Checking......Page 72
  3.5.4 Auditing in Depth......Page 75
  3.5.5 Cut-off Examination......Page 76
  3.5.6 Statistical Sampling......Page 77
  3.5.8 Audit Flow Chart......Page 78
  3.5.9 Internal Control Questionnaires......Page 79
 Points to Ponder......Page 80
 Review Questions......Page 82
Chapter 4: Internal Control, Internal Check and Internal Audit......Page 84
  4.2.1 Definition......Page 85
  4.2.3 Objectives of Internal Control......Page 86
  4.2.4 Types of Internal Control......Page 87
  4.2.5 Evaluation of Internal Control......Page 89
  4.2.7 Internal Control in Specific Areas of Business......Page 90
  4.2.8 Internal Control Questionnaire......Page 95
  4.3.2 General Considerations in Framing a System of Internal Check......Page 97
  4.3.3 Objectives of Internal Check......Page 98
  4.3.6 Internal Check and the Auditor......Page 100
  4.3.7 General Principles of Internal Check for a Few Transactions......Page 101
  4.4.1 Definition......Page 107
  4.4.3 Scope and Objectives of Internal Audit......Page 108
  4.4.4 Functions of Internal Audit......Page 109
  4.4.5 Essential Elements of Internal Audit......Page 110
  4.4.7 Distinction between Internal Audit and External Audit......Page 112
  4.4.8 Relying Upon the Work of an Internal Auditor......Page 114
  4.5.1 Advantages of Independent Audit......Page 115
 4.6 Distinction between Internal Control and Internal Audit......Page 116
 4.7 Distinction between Internal Check, Internal Audit and Internal Control......Page 117
 Points to Ponder......Page 119
 Review Questions......Page 121
Chapter 5: Vouching......Page 122
  5.1.1 Transaction Tests......Page 123
  5.1.2 Weakness Tests......Page 124
 5.3 Objectives of Vouching......Page 125
 5.5 Vouching and Verification......Page 126
 5.6 Vouching and Routine Checking......Page 127
 5.7 Concept of Voucher......Page 128
 5.9 General Principles of Vouching......Page 129
 5.10 Teeming and Lading: A Challenge to Vouching......Page 130
  5.11.1 Vouching of Capital Expenditure......Page 131
  5.11.2 Vouching of Investments......Page 132
  5.11.3 Vouching of Borrowing from Banks......Page 133
  5.11.4 Vouching of Trading Transactions......Page 134
  5.11.5 Vouching of Cash Book......Page 136
 Points to Ponder......Page 146
 Review Questions......Page 147
Chapter 6: Verification and Valuation of Assets and Liabilities......Page 150
 6.4 Difference between Verification and Valuation......Page 151
 6.6 Importance of Valuation of Assets......Page 152
 6.7 General Principles for Verification and Valuation of Assets......Page 153
 6.9 Problems in Valuation......Page 154
 6.11 Verification and Valuation of Assets......Page 155
  6.12.1 Goodwill......Page 156
  6.12.2 Patent......Page 157
  6.12.4 Trademarks......Page 158
  6.13.1 Land and Buildings......Page 159
  6.13.2 Building......Page 160
  6.13.4 Furnitures and Fixtures......Page 161
  6.13.6 Assets Acquired under Hire Purchase System......Page 162
  6.14.1 Quoted Investments......Page 163
  6.14.2 Unquoted Investments......Page 164
  6.15.1 Stock-in-trade......Page 165
  6.15.3 Sundry Debtors......Page 167
  6.15.5 Cash at Bank......Page 168
  6.15.7 Prepaid Expenses......Page 169
  6.16.1 Preliminary Expenses......Page 170
 6.18 Verification and Valuation of Liabilities......Page 171
  6.19.1 Debentures......Page 172
  6.20.1 Sundry Creditors......Page 173
  6.20.3 Bank Overdraft......Page 174
  6.20.5 Outstanding Liabilities for Expenses......Page 175
 6.21 Verification and Valuation of Contingent Liabilities......Page 176
  6.22.3 Other Events......Page 177
 Points to Ponder......Page 178
 Review Questions......Page 179
Chapter 7: Depreciation......Page 182
 7.2 Purposes of Providing Depreciation......Page 183
 7.4 Basis of Charging Depreciation......Page 184
 7.5 Quantum of Depreciation......Page 185
 7.7 Different Methods of Depreciation......Page 187
 7.8 Depreciation Accounting as per AS-6......Page 190
 7.10 Legal Necessity of Provision for Depreciation......Page 192
 7.11 Provision for Depreciation for Past Years......Page 193
 7.14 Change in the Method of Depreciation......Page 194
 7.15 Auditor’s Duty as Regards Depreciation......Page 195
 7.16 Legal Views as Regards Depreciation......Page 196
 Points to Ponder......Page 197
 Review Questions......Page 198
Chapter 8: Reserves and Provisions......Page 199
 8.4 Classification of Reserves......Page 200
  8.4.1 Revenue Reserve......Page 201
  8.4.2 Capital Reserve......Page 202
  8.4.3 Capitalisation of Reserve......Page 203
  8.4.5 Sinking Fund......Page 204
  8.4.6 Secret Reserve......Page 205
  8.4.7 Specific Reserve......Page 208
 Review Questions......Page 210
Chapter 9: Company Audit......Page 212
 9.2 Preliminaries before Commencement of Company Audit......Page 213
  9.3.1 Audit of Shares Issued for Cash......Page 215
  9.3.2 Audit of Shares Issued for Consideration other than Cash......Page 217
  9.3.4 Shares Issued at a Premium......Page 219
  9.3.6 Calls in Advance......Page 220
  9.3.7 Forfeiture of Shares......Page 221
  9.3.9 Issue of Right Shares......Page 222
  9.3.10 Buying Back of Equity Shares......Page 223
  9.3.11 Employees Stock Option Scheme (ESOPS)......Page 224
  9.3.12 Issue and Redemption of Preference Shares......Page 225
  9.3.12 Alteration of Share Capital......Page 226
  9.3.13 Reduction of Share Capital......Page 227
 9.4 Audit of Debentures......Page 228
  9.4.2 Redemption of Debentures......Page 229
  9.4.4 Re-issue of Redeemed Debentures......Page 230
  9.5.1 Legal Requirements Regarding Accounts of Holding Companies......Page 231
  9.5.2 Consolidation of Accounts......Page 233
 9.6 Audit of Pre-incorporation Profit......Page 234
 9.7 Specific Provisions for Accounts in the Companies Act......Page 235
 9.8 Payment of Interest Out of Capital......Page 236
  9.9.1 Verification of the Constitution and Power......Page 237
  9.9.2 Knowledge About Authority Structure of the Company......Page 238
  9.10.1 Appointment of Auditors......Page 239
  9.10.3 Re-appointment of Retiring Auditor......Page 241
  9.10.5 Remuneration of Auditor......Page 242
  9.10.7 Disqualification of an Auditor......Page 243
  9.10.8 Removal of Auditors......Page 244
  9.10.9 Status of the Company Auditor......Page 245
  9.10.10 Auditor's Rights, Duties and Liabilities......Page 247
 9.12 Branch Auditor......Page 255
 9.13 Joint Auditor......Page 256
 9.14 Legal Views on Auditor’s Liability......Page 257
 Points to Ponder......Page 261
 Review Questions......Page 263
 Annexure......Page 265
Chapter 10: Divisible Profits and Dividends......Page 280
 10.3 Concept of Profit......Page 281
 10.5 Principal Determinants of Divisible Profit......Page 282
 10.6 Companies Act Relating to Payment of Dividend......Page 285
 10.7 Companies Act Regarding Unpaid and Unclaimed Dividend......Page 286
 10.8 Payment of Dividend Out of Capital Profit......Page 287
 10.9 Payment of Dividend Out of Capital......Page 288
 10.11 Articles of Association Regarding Dividend......Page 289
 10.12 Auditor’s Duty as Regards Payment of Dividend......Page 290
 10.13 Payment of Interim Dividend and the Role of Auditors......Page 291
 10.14 Legal Views as Regards Dividend......Page 292
 Points to Ponder......Page 294
 Review Questions......Page 295
Chapter 11: Audit Report and Certificate......Page 297
 11.3 Value of Audit Report......Page 298
 11.4 Essentials of Good Audit Report......Page 299
 11.5 Scope of Audit Report......Page 300
 11.7 Contents of Audit Report......Page 301
 11.8 Companies (Auditor’s Report) Order, 2003......Page 302
 11.9 Forms of Audit Report......Page 306
 11.11 Types of Auditor’s Report......Page 307
 11.12 Qualified Audit Report......Page 308
 11.13 Types of Audit Certificate......Page 310
 11.14 Auditor’s Report and ‘True and Fair View’......Page 311
 11.16 Specimen of Qualified Audit Report......Page 314
 11.17 Legal Views as Regards Audit Report......Page 315
 Points to Ponder......Page 316
 Review Questions......Page 317
Chapter 12: Audit of Banks......Page 319
 12.2 An Overview of Banking Institutions in India......Page 320
 12.3 Legislation Relevant to Audit of Banks......Page 322
  12.3.1 Legal Provisions Relating to Accounts......Page 323
 12.4 Approach to Bank Audit......Page 325
  12.5.1 Preliminary Work......Page 326
  12.5.4 Preparation and Submission of Audit Report......Page 327
 12.6 Audit Procedures......Page 328
  12.7.1 Legal Provisions Regarding Advances......Page 329
  12.7.2 Prudential Norms of RBI Relating to Advances......Page 330
  12.8.2 Income from Non-performing Assets......Page 332
  12.9.1 Long Form Audit Report (LFAR)......Page 333
 Points to Ponder......Page 341
 Review Questions......Page 342
 Annexure......Page 344
Chapter 13: Audit of Insurance Companies......Page 368
 13.2 Audit of Companies Carrying on General Insurance Business......Page 369
 13.3 Applicability of Accounting Standards......Page 370
  13.4.2 Books of Accounts......Page 371
 13.6 Audit of Accounts......Page 372
  13.6.2 Audit at Branch/Divisional Office Leveland at Head Office Level......Page 375
 13.7 Preparation for the Audit......Page 377
  13.8.2 Authorisation of Transactions......Page 378
  13.8.4 Accountability for and Safeguarding of Assets......Page 379
 Points to Ponder......Page 380
 Review Questions......Page 381
 Annexure......Page 382
Chapter 14: Investigation......Page 400
 14.3 Objectives or Purposes of Investigation......Page 401
 14.6 Working Methods......Page 403
 14.7 Duties of an Investigator......Page 404
 14.10 Difference between Investigation and Auditing......Page 406
 14.11 Types of Investigations......Page 407
  14.11.1 Investigation on behalf of a Person or Company Wanting to Purchase a Running Business......Page 408
  14.11.2 Investigation on Behalf of a Person who Wants to be the Partner in a Partnership Firm......Page 409
  14.11.3 Investigation on Behalf of a Person who Wants to Lend Money to a Business or is Interested to Know Its Financial Position......Page 411
  14.11.4 Investigation on Behalf of the Owner/Share Holder of the Business Suspecting a Fraud......Page 412
  14.11.5 Investigation to Find Out the Possible Reasons of Shortfall in Working Capital of a Company......Page 414
  14.11.6 Investigation on Behalf of Tax-authority for Assessing Actual Tax Liability......Page 416
  14.11.7 Investigation on Behalf of Prospective Share Holder Who Wishes to Make a Valuation of Shares of a Limited Company......Page 417
  14.11.8 Investigation on Behalf of Government into the Affairs of a Sick Company......Page 418
  14.11.9 Investigation under the Indian Companies Act, i.e. the Statutory Investigation......Page 420
 14.12 Legal Views as Regards Investigation......Page 422
 Points to Ponder......Page 423
 Review Questions......Page 424
Chapter 15: New Areas of Auditing......Page 426
 15.2 Cost Audit......Page 427
  15.2.1 Financial Audit and Cost Audit......Page 431
  15.2.3 Phases or Stages of Cost Audit......Page 432
   (a) Efficiency or Performance Audit......Page 433
   (b) Propriety Audit......Page 435
 15.3 Management Audit......Page 437
 15.4 Human Resource Audit......Page 444
 15.5 Operational Audit......Page 446
 15.6 Forecast Audit......Page 447
 15.7 Social Audit......Page 450
 15.8 Tax Audit......Page 453
 15.9 Forensic Audit......Page 455
 15.10 Environmental (Green) Audit......Page 457
 15.11 Audit Committee......Page 461
  15.11.2 Requirements of Listing Agreement......Page 462
 15.12 Accounting Standards......Page 464
 15.13 Auditing and Assurance Standards......Page 465
 Points to Ponder......Page 467
 Review Questions......Page 469
Chapter 16: Professional Ethics and Misconduct......Page 470
 16.4 Schedules to the Chartered Accountants Act, 1949 Relating to Professional Misconduct......Page 471
  16.4.1 The First Schedule......Page 472
  16.4.2 The Second Schedule......Page 478
 16.5 Enquiry into Charges of Misconduct of Chartered Accountants......Page 480
 Points to Ponder......Page 481
 Review Questions......Page 482
Chapter 17: Special Audit......Page 483
  17.2.1 General Matters......Page 484
  17.2.3 Payments and Expenses......Page 485
  17.3.1 General Matters......Page 486
  17.3.3 Payments and Expenses......Page 487
  17.4.1 General......Page 488
  17.4.3 Payments and Expenses......Page 489
 17.5 Audit of Co-operative Societies......Page 490
  17.5.2 Receipts......Page 491
  17.5.4 Assets and Liabilities......Page 492
  17.6.1 General......Page 493
  17.6.3 Payments and Expenses......Page 494
 17.7 Audit of Hotels......Page 495
  17.8.2 Receipts......Page 498
  17.8.4 Assets and Liabilities......Page 499
  17.9.2 Receipts......Page 500
  17.9.4 Assets and Liabilities......Page 501
  17.10.1 General Matters......Page 502
  17.10.4 Assets and Liabilities......Page 503
  17.11.1 Evaluation of Internal Control System......Page 504
  17.11.3 Vouching and Verification......Page 505
  17.12.1 General Matters......Page 506
  17.12.3 Payments and Expenses......Page 507
 17.13 Audit of Publishing Concerns......Page 508
  17.13.2 Audit of Weekly or Monthly Journals......Page 509
 Points to Ponder......Page 510
 Review Questions......Page 512
Chapter 18: Audit of Sole-proprietorship and Partnership Firm......Page 513
 18.2 Audit of Sole-proprietorship Business......Page 514
  18.2.2 Steps to be Taken before Commencement of New Audit in a Sole-proprietorship Business......Page 515
 18.3 Audit of Partnership Firm......Page 516
  18.3.1 Appointment of Auditor for Partnership Firm......Page 517
  18.3.2 Steps to be Taken before Commencement of New Audit in a Partnership Firm......Page 518
 18.4 Salient Features of Audit of Accounts of Sole-proprietorship and Partnership Firm......Page 519
 18.5 Rights, Duties and Liabilities of Auditor of a Sole-proprietorship or Partnership Firm......Page 520
 18.6 Position of Auditor of a Soleproprietorship or Partnership Firm......Page 521
 18.7 Reports on Accounts of Individual or Partnership Firm......Page 522
 18.8 Comparison of Company Audit with the Audit of Sole-proprietorship and Partnership Firm......Page 523
 18.9 Legal Views as Regards Audit of Individual and Firm......Page 525
 Points to Ponder......Page 526
 Review Questions......Page 527
Chapter 19: Audit of the Accounts of Government and Public Sector Undertakings......Page 529
  19.2.1 Some Special Features of Public Sector Undertakings......Page 530
 19.3 Distinction between Audit of Public Sector Undertakings and Audit of Private Sector Undertakings......Page 531
  19.3.1 Audit of Departmental Commercial Undertakings......Page 532
  19.3.3 Audit of Government Companies......Page 533
 19.4 Government Audit......Page 535
 19.5 Distinction between Government Audit and Commercial Audit......Page 536
 19.6 Comptroller and Auditor General of India......Page 537
 Points to Ponder......Page 539
 Review Questions......Page 540
Chapter 20: Auditing in an EDP Environment......Page 542
 20.3 Computer Installation Review......Page 543
 20.4 Computer System Review......Page 550
  20.4.1 Transaction and Weakness Test......Page 551
  20.5.1 Auditing Around the Computer......Page 552
  20.5.2 Auditing through the Computer......Page 553
 20.6 Special Techniques for Auditing in an EDP Environment......Page 554
 Points to Ponder......Page 556
 Review Questions......Page 557
 Annexure A: Important Case Decisions......Page 558
 Annexure B: Objective Type Questions......Page 574
 Annexure C: Model Questions and Answers......Page 586
Index......Page 626