Fundamentals Of Auditing

Cover
Contents
Preface
Chapter 1: Nature of Auditing
	1.1 Introduction
	1.2 Origin of the Word ‘Audit’
	1.3 Early History of Audit
	1.4 Evolution of Auditing
	1.5 Auditing Defined
	1.6 Nature of Auditing
	1.7 Essential Features of Auditing
	1.8 Why is There a Need for an Audit?
	1.9 Object of an Audit
	1.10 Errors and Frauds in Accounting
	1.11 Role of Auditors in Detecting Errors and Frauds
	1.12 Relation Between Book-Keeping, Accountancy and Auditing
	1.13 Basic Principles Governing an Audit
	1.14 Scope and Procedures of Audit
	1.15 Advantages of Auditing
	1.16 Limitations of Auditing
	1.17 Relationship Between Auditing with Other Subjects
	1.18 Qualities of an Auditor
	1.19 Auditing and Other Services
Chapter 2: Types of Audit
	2.1 Introduction
	2.2 Classification of Audit
		2.2.1 Classification of Audit on the Basis of Organisation
		2.2.2 Classification on the Basis of Function
		2.2.3 Classification on the Basis of Practical Approach
		2.2.4 Classification on the Basis of Audit Dimension
Chapter 3: Techniques and Procedures of Auditing
	3.1 Introduction
	3.2 Preparatory Steps Before Commencement of New Audit
	3.3 Audit Activities
	3.4 Audit Engagement Letter
		3.4.1 Concept
		3.4.2 Form and Content
		3.4.3 Revision of Engagement Letters
	3.5 Preparation by the Auditor
		3.5.1 Audit Planning
		3.5.2 Audit Programme
		3.5.3 Audit Note Book
		3.5.4 Audit Working Papers
		3.5.5 Audit Files
		3.5.6 Audit Manual
		3.5.7 Audit Memorandum
	3.6 Principles and Techniques of Auditing
		3.6.1 Important Audit Techniques
	3.7 Procedures Followed in Course of Audit
		3.7.1 Audit Evidence
		3.7.2 Analytical Procedures
		3.7.3 Routine Checking
		3.7.4 Test Checking
		3.7.5 Auditing in Depth
		3.7.6 Walk-Through Tests
		3.7.7 Rotational Tests
		3.7.8 Cut-Off Examination
		3.7.9 Physical Examination
		3.7.10 Statistical Sampling
		3.7.11 Surprise Checking
		3.7.12 Audit Flow Chart
		3.7.13 Test of Control
		3.7.14 Internal Control Questionnaires
		3.7.15 Audit Tests
	3.8 Representation by Management
		3.8.1 Representation by Management as Audit Evidence
		3.8.2 Documentation of Representation by Management
		3.8.3 Letter of Representation
	3.9 Delegation, Supervision and Review of Audit Work
		3.9.1 Delegation
		3.9.2 Supervision
		3.9.3 Review
		3.9.4 Control of Quality of Audit Work
	3.10 Professional Scepticism
	3.11 Audit Risk and Materiality
		3.11.1 Concept of Materiality
		3.11.2 Audit Risk
		3.11.3 Relationship Between Materiality and Audit Risk
	3.12 Final Review
	3.13 Case Studies
Chapter 4: Internal Control, Internal Check and Internal Audit
	4.1 Introduction
	4.2 Internal Control
		4.2.1 Definition
		4.2.2 Basic Elements of Internal Control
		4.2.3 Objectives of Internal Control
		4.2.4 Evaluation of Internal Control
		4.2.5 Internal Control and the Auditor
		4.2.6 Internal Control Checklist
		4.2.7 Internal Control Questionnaire
		4.2.8 Internal Control and Computerised Environment
		4.2.9 Internal Control and Corporate Governance
		4.2.10 Internal Control in Specific Areas of Business
	4.3 Internal Check
		4.3.1 Definition
		4.3.2 General Considerations in Framing a System of Internal Check
		4.3.3 Objectives of Internal Check
		4.3.4 Internal Check and the Auditor
		4.3.5 General Principles of Internal Check for a Few Transactions
	4.4 Internal Audit
		4.4.1 Definition
		4.4.2 Basic Principles of Establishing Internal Auditing in a Business Concern
		4.4.3 Scope and Objectives of Internal Audit
		4.4.4 Essential Elements of Internal Audit
		4.4.5 Area of Internal Audit
		4.4.6 Distinction Between Internal Audit and External Audit
		4.4.7 Reliance upon the Work of an Internal Auditor
		4.4.8 Evaluation of Internal Audit Function
	4.5 Auditor’s Independence
		4.5.1 Advantages of Independent Audit
		4.5.2 Provisions for Safeguarding Independent Auditors
		4.5.3 Important Aspects of Auditor’s Independence
	4.6 Distinction Between Internal Check, Internal Audit and Internal Control
	4.7 Case Studies
Chapter 5: Vouching
	5.1 Meaning of Vouching
	5.2 Objectives of Vouching
	5.3 Importance of Vouching
	5.4 Vouching and Verification
	5.5 Vouching and Routine Checking
	5.6 Concept of Voucher
	5.7 Internal and External Evidence
	5.8 General Principles of Vouching
	5.9 Teeming and Lading: A Challenge to Vouching
	5.10 Vouching of Different Types of Transactions
Chapter 6: Verification and Valuation of Assets and Liabilities
	6.1 Introduction
	6.2 Meaning of Verification of Assets
	6.3 Meaning of Valuation of Assets
	6.4 Difference Between Verification and Valuation
	6.5 Importance of Verification of Assets
	6.6 Importance of Valuation of Assets
	6.7 General Principles for Verification of Assets
	6.8 Problems of Verification
	6.9 Problems of Valuation
	6.10 Window Dressing—A Challenge to Verification
	6.11 Verification and Valuation of Assets
	6.12 Verification and Valuation of Intangible Assets
		6.12.1 Goodwill
		6.12.2 Patent
		6.12.3 Copyright
		6.12.4 Trade Marks
	6.13 Verification and Valuation of Fixed Assets
		6.13.1 Land and Buildings
		6.13.2 Building
		6.13.3 Plant and Machinery
		6.13.4 Furniture and Fixtures
		6.13.5 Motor Vehicles
		6.13.6 Assets Acquired Under Hire Purchase System
	6.14 Audit of Depreciation
		6.14.1 Legal Necessity of a Provision for Depreciation
		6.14.2 Provision for Depreciation for Past Years
		6.14.3 Depreciation on Low Value Items
		6.14.4 Depreciation on Wasting Assets
		6.14.5 Change in the Method of Depreciation
		6.14.6 Auditor’s Duty As Regards Depreciation
	6.15 Verification and Valuation of Investments
		6.15.1 Quoted Investments
		6.15.2 Unquoted Investments
	6.16 Verification and Valuation of Current Assets
		6.16.1 Stock-in-Trade
		6.16.2 Work-in-Progress
		6.16.3 Sundry Debtors
		6.16.4 Bills Receivable
		6.16.5 Cash at Bank
		6.16.6 Cash in Hand
		6.16.7 Prepaid Expenses
	6.17 Verification and Valuation of Fictitious Assets
		6.17.1 Preliminary Expenses
		6.17.2 Discount on Issue of Shares or Debentures
	6.18 Verification and Valuation of Contingent Assets
	6.19 Verification and Valuation of Liabilities
	6.20 Verification and Valuation of Fixed or Long-Term Liabilities
		6.20.1 Debentures
		6.20.2 Secured Long-Term Loans
	6.21 Verification and Valuation of Current Liabilities
		6.21.1 Sundry Creditors
		6.21.2 Bills Payable
		6.21.3 Bank Overdraft
		6.21.4 Provision for Taxation
		6.21.5 Outstanding Liabilities for Expenses
	6.22 Verification and Valuation of Contingent Liabilities
	6.23 Case Studies
Chapter 7: Company Audit
	7.1 Introduction
	7.2 Preliminaries Before Commencement of Company Audit
	7.3 Audit of Share Capital Transactions
		7.3.1 Audit Procedure
	7.4 Audit of Debentures
		7.4.1 Audit Procedure
	7.5 Specific Provision As Regards Accounts in the Companies Act
	7.6 Special Requirements of Company Audit
	7.7 Company Auditor
		7.7.1 Appointment of Auditors
		7.7.2 Tenure of Appointment
		7.7.3 Re-Appointment of Retiring Auditor
		7.7.4 Ceiling on Number of Audits
		7.7.5 Remuneration of Auditor
		7.7.6 Qualification of an Auditor
		7.7.7 Disqualification of an Auditor
		7.7.8 Removal of Auditors
		7.7.9 Status of the Company Auditor
		7.7.10 Auditor’s Rights, Duties and Liabilities
		7.7.11 Duties of a Company Auditor
		7.7.12 Liabilities of Company Auditor
	7.8 Case Studies
Chapter 8: Divisible Profits and Dividends
	8.1 Meaning of Divisible Profit
	8.2 Meaning of Dividend
	8.3 Concept of Profit
	8.4 Profit Versus Divisible Profit
	8.5 Principal Determinants of Divisible Profit
	8.6 Provisions of the Companies Act Relating to Payment of Dividend
	8.7 Provisions of the Companies Act Regarding Unpaid and Unclaimed Dividend
	8.8 Payment of Dividend Out of Capital Profit
	8.9 Payment of Dividend Out of Capital
	8.10 General Guidelines for Distribution of Dividend
	8.11 Auditor’s Duty As Regards Payment of Dividend
	8.12 Payment of Interim Dividend and the Role of Auditors
Chapter 9: Audit Report and Certificate
	9.1 Definition of Report
	9.2 Definition of Audit Report
	9.3 Value of Audit Report
	9.4 Essentials of Good Audit Report
	9.5 Scope of Audit Report
	9.6 Signing of the Audit Report
	9.7 Contents of Audit Report
	9.8 Forms of Audit Report
	9.9 Basic Elements of Audit Report
	9.10 Audit Report and Audit Certificate
	9.11 Types of Auditor’s Report
	9.12 Modified Reports
		9.12.1 Matters That Do Not Affect the Auditor’s Opinion
		9.12.2 Matters That Do Affect the Auditor’s Opinion
	9.13 Types of Audit Certificate
	9.14 Auditor’s Report and ‘True and Fair’ View
	9.15 Specimen of Clean Audit Report
	9.16 Specimen of Qualified Audit Report
Chapter 10: Audit of Banks
	10.1 Introduction
	10.2 Legislation Relevant to Audit of Banks
		10.2.1 Legal Provisions Relating to Accounts
		10.2.2 Legal Provisions Relating to Audit
	10.3 Approach to Bank Audit
	10.4 Stage in Audit of Banks
		10.4.1 Preliminary Work
		10.4.2 Evaluation of Internal Control System
		10.4.3 Preparation of Audit Program for Substantive Testing and Its Execution
		10.4.4 Preparation and Submission of Audit Report
	10.5 Advances
		10.5.1 Legal Provisions Regarding Advances
		10.5.2 Prudential Norms of RBI Relating to Advances
	10.6 Income Recognition
	10.7 Bank Audit Report
		10.7.1 Long Form Audit Report
Chapter 11: Audit of Insurance Companies
	11.1 Audit of Companies Carrying on Life Insurance Business
		11.1.1 Important Statutory Provisions for Audit
	11.2 Audit of Companies Carrying on General Insurance Business
		11.2.1 Important Statutory Provisions for Audit
	11.3 Applicability of Accounting Standards
	11.4 Books and Registers to Be Maintained
		11.4.1 Registers
		11.4.2 Books of Accounts
		11.4.3 Submission of Reports and Returns
	11.5 Audit of Accounts
		11.5.1 Qualification of an Auditor
		11.5.2 Appointment of Auditor
		11.5.3 Remuneration of Auditor
		11.5.4 Powers of an Auditor
		11.5.5 Auditor’s Report
		11.5.6 Other Important Provisions Relating to Audit
		11.5.7 Audit at Branch/Divisional office Level and at Head Office Level
	11.6 Preparation for the Audit
	11.7 Internal Controls
		11.7.1 Segregation and Rotation of Duties
		11.7.2 Authorisation of Transactions
		11.7.3 Maintenance of Adequate Records and Documents
		11.7.4 Accountability for and Safeguarding of Assets
Chapter 12: New Areas of Auditing
	12.1 Introduction
	12.2 Cost Audit
		12.2.1 Definition
		12.2.2 Objectives
		12.2.3 Advantages
		12.2.4 Disadvantages
		12.2.5 Appointment
		12.2.6 Qualification
		12.2.7 Disqualification
		12.2.8 Cost Audit Report
		12.2.9 Distinction Between Financial Audit and Cost Audit
		12.2.10 Ceiling on Number of Audits
	12.3 Management Audit
		12.3.1 Definition
		12.3.2 Objectives
		12.3.3 Importance
		12.3.4 Scope
		12.3.5 Steps
		12.3.6 Advantages
		12.3.7 Disadvantages
		12.3.8 Appointment
		12.3.9 Qualities of Management Auditors
		12.3.10 Management Auditor’s Report
		12.3.11 Difference Between Management Audit and Cost Audit
		12.3.12 Difference Between Management Audit and Financial Audit
	12.4 Human Resource Audit
		12.4.1 Concept of Human Resource
		12.4.2 Concept of Human Resource Accounting
		12.4.3 Concept of Human Asset Audit
		12.4.4 Steps for Human Resource Audit
		12.4.5 Problems of Human Resource Audit
		12.4.6 Advantages of Human Resource Audit
	12.5 Social Audit
		12.5.1 Concept of Social Responsibility
		12.5.2 Concept of Social Accounting
		12.5.3 Concept of Social Audit
		12.5.4 Objectives of Social Audit
		12.5.5 Importance
		12.5.6 Social Audit in India
	12.6 Tax Audit
		12.6.1 Definition
		12.6.2 Types of Tax Audit
		12.6.3 Tax Auditor
		12.6.4 Compulsory Tax Audit Under Section 44AB
		12.6.5 Penalty for Non-Compliance
		12.6.6 Tax Audit Report
	12.7 Vat Audit
		12.7.1 Concept of VAT Audit
		12.7.2 Role of VAT Auditor
		12.7.3 Preparation for VAT Audit
		12.7.4 Approach to VAT Audit
		12.7.5 Audit Report Under VAT
	12.8 Green (Environmental) Audit
		12.8.1 Definition
		12.8.2 Objectives
		12.8.3 Stages of Environmental Audit
		12.8.4 Environmental Audit Practice in India
	12.9 Corporate Governance Through Audit Committees
		12.9.1 Introduction
		12.9.2 Area of Work
		12.9.3 Relevant Provisions Regarding Audit Committee
		12.9.4 Functions of the Audit Committee
		12.9.5 Audit Committee Under Clause 49
	12.10 Accounting Standards
		12.10.1 Concept
		12.10.2 Objectives/Importance
		12.10.3 Accounting Standards and the Auditor
	12.11 Auditing and Assurance Standards
		12.11.1 Background
		12.11.2 Concept
		12.11.3 Scope
		12.11.4 Objectives and Importance
		12.11.5 Procedures for Issuing Standards
		12.11.6 AAS and the Auditor
Chapter 13: Special Audit
	13.1 Introduction
	13.2 Audit of Charitable Society
		13.2.1 General Matters
		13.2.2 Receipts
		13.2.3 Payments and Expenses
		13.2.4 Assets and Liabilities
		13.2.5 Income Tax
		13.2.6 Financial Statement
	13.3 Audit of Clubs
		13.3.1 General
		13.3.2 Receipts
		13.3.3 Payments and Expenses
		13.3.4 Assets and Liabilities
		13.3.5 Income Tax
		13.3.6 Special Accounts
		13.3.7 Financial Statements
	13.4 Audit of Co-Operative Societies
		13.4.1 General
		13.4.2 Receipts
		13.4.3 Payments and Expenses
		13.4.4 Assets and Liabilities
		13.4.5 Income Tax
		13.4.6 Financial Statement
	13.5 Audit of Educational Institution
		13.5.1 General
		13.5.2 Receipts
		13.5.3 Payments and Expenses
		13.5.4 Assets and Liabilities
		13.5.5 Income Tax
		13.5.6 Financial Statements
	13.6 Audit of Hotels
	13.7 Audit of Hospitals
		13.7.1 General Matters
		13.7.2 Receipts
		13.7.3 Payments and Expenses
		13.7.4 Assets and Liabilities
		13.7.5 Income Tax
		13.7.6 Financial Statement
	13.8 Audit of Hire Purchase and Leasing Companies
		13.8.1 Introduction
		13.8.2 Audit of Hire Purchase Transactions
		13.8.3 Auditor’s Duty
		13.8.4 Audit of Lease Transactions
		13.8.5 Auditor’s Duty
Chapter 14: Audit of the Accounts of Governments and Public Sector Undertakings
	14.1 Introduction
	14.2 Audit of Public Sector Undertakings
		14.2.1 Some Special Features of Public Sector Undertakings
		14.2.2 Distinction Between Audit of Public Sector Undertakings and Audit of Private Sector Undertakings
		14.2.3 Audit of Departmental Commercial Undertakings
		14.2.4 Audit of Statutory Corporations
		14.2.5 Audit of Government Companies
	14.3 Government Audit
		14.3.1 Objectives
		14.3.2 Distinction Between Government Audit and Commercial Audit
	14.4 Comptroller and Auditor General of India
Chapter 15: Audit in CIS Environment
	15.1 Introduction
	15.2 General Approach to an EDP-Based Audit
		15.2.1 Organisational Review
		15.2.2 System Review
	15.3 Computer Installation Review
		15.3.1 Safeguarding of the Client’s Records
		15.3.2 Control over the Data Passing Through the EDP Department
		15.3.3 Controls over the Operation of the Computer
		15.3.4 Control over the Resources, Assets and Liabilities of the EDP Department
	15.4 Computer System Review
	15.5 Approaches to EDP Auditing
		15.5.1 Auditing Around the Computer
		15.5.2 Auditing Through the Computer
	15.6 Special Techniques for Auditing in an EDP Environment
		15.6.1 What Are CAATs?
		15.6.2 Need for CAATs
		15.6.3 Considerations in the Use of CAATs
		15.6.4 Types of CAATs
Annexure A: Important Case Decisions
Annexure B: Objective Type Questions
Index