Syllabus of Principle and Practice of Auditing

Unit 1 Introduction to Auditing

Introduction –Meaning – Definition – objectives – difference between
Accountancy and Auditing – Types of Audit – Advantages of Auditing –
Preparation before commencement of new Audit – Audit Notebook – Audit
Working Papers- Audit Programme, Recent Trends in Auditing : Nature and
Significance of Tax Audit – Cost Audit – Management audit.
Unit 2 Internal Control
Internal Control : Meaning and objectives.
Internal Check: Meaning, objectives and fundamental principles.
Internal check as regards : Wage Payments, Cash Sales, Cash purchases.
Internal audit: Meaning – advantages and disadvantages of internal audit –
Differences between Internal check and internal control.
Unit -3 Vouching
Meaning – Definition – Importance – Routine Checking and Vouching. Voucher
– Types of voucher.
Vouching of Receipts : Cash sales, Receipts from Debtors, Proceeds of sale of
investments.
Vouching of payments : Cash Purchases, payment to creditors, Deferred
Revenue Expenditure.
Unit 4 Verification and Valuation of Assets and Liabilities
Meaning and Objectives of verification and valuation – Position of an auditor
as regards the valuation of assets.
Verification and valuation of different items: Land and Buildings, Plant and
Machinery, goodwill – investments – stock in trade
Liabilities: Bills payable – Sundry creditors – Contingent Liabilities
Unit 5 Audit of Limited Companies and Others
Company auditor – Appointment – Qualification – power – duties and liabilities
– Professional Ethics of an auditor- Audit of Educational Institutions – Audit of
Insurance Companies – Audit of Co – Operative societies
Introduction to Auditing

Meaning: The word audit has been derived from Latin word Audire which
means to hear. Auditing means verification and examination of accounts. The
auditing process will began only when accounts ends.

Definition: Auditing is concerned with verification of accounting data with

determining accuracy and reliability of accounting statements and records.

Auditor: An auditor is a trained professional who is responsible to review and

verifying the accounting data of any business. The auditor may be 2 types

1) Internal auditor: These auditors appointed by company exclusively for

their company audit.
2) External auditor: These auditor independent auditor having firms, who
are hired by company subject to an audit work.

Objectives of Auditing: This can be divided in to two types.

1) Primary objectives 2)Secondary Objectives

Primary objectives: The main objective of auditing is to verify the accounts and
to report whether the Profits and Loss account and Balance sheet are properly
prepared according to the companies and they exhibit the true and fair value.

Secondary Objectives: An auditing may come across some errors and frauds
while examining the books of accounts. Some of them are as follows.

1) Prevention of Errors: These errors refer to the mistakes which are

committed unintentionally these errors are clerical errors. These errors
are clerical errors, compensating errors and error of principle.
a)Clerical Errors: This error refers to those errors which arises due to
wrong posting and carelessness. Clerical errors are mainly two types.
They are Error of omission and Error of Commission.
Error of omission: These are some types of errors which arise on audit of
transaction omitted to be record in the books of accounts. These
transactions do not affect the trial balance.
 Example: Furniture purchased for cash Rs 10000 not recorded in the
books of accounts.
Error of Omission: These are some type of error which arises due to
wrong posting to ledger accounts wrong totalling and wrong calculation
in the books of accounts.
Ex: Cash sales Rs 10000 recorded as 1000.
b) Compensating Errors: When an error is counter balanced with
another error this is known as compensating errors. These errors will not
affect the trail balance.
c) Error of principle: When transactions are not recorded according with
the fundamental principle of accounting, these errors are known as error
of principle.
Ex: Furniture purchased for 10000 debited to purchase account.
2) Prevention of Fraud: Fraud refers to the intentional misrepresentation
of accounting records for a financial gain. If these frauds are not
detected it may affect the financial condition of the organization. These
frauds are as follows.
a) Misappropriation of cash: In large business to have direct control on
receipt organizations there is a separate existence between
ownership and management. It is impossible for the owners to have
direct control on receipt and payment of cash. This is quiet common
in all the organizations. In order to prevent this fraud there should be
a strict control over the receipts and payments of cash.
b) Misappropriation of goods: The companies which are dealing with
high value of goods are doing these types of frauds. These types of
frauds are difficult to identify unless there is a proper inward and
outward register. For this purpose proper stock records have to be
maintained. The auditor can detect this type of fraud by checking the
stock records and physical verification of goods.
c) Misappropriation of Accounts: In the organization the person who in
top position can manipulate the accounts in order to achieve some
objectives. The following are some manipulating accounts.
a) Writing more expenses than the actual spent
b) Under valuation of closing stock
c) Charging excess depreciation
 d) Charging capital expenditure
e) Providing for excess doubt full debts
These frauds are very difficult to detect as they are committed by
directors, managers, financial controllers who are in the top
responsible person in the organization. In order to control these
frauds the auditor should make enquires while checking the
accounting books.

Differences between auditing and accounting

Accounting Auditing
Meaning It is concerned with recording of business It is concerned with verification of
transactions accounts prepared by the accountants
Objectives To know the financial results of the business To verify the truth and correctness of the
accounts
Scope To prepare the financial statements To check the accounts in a systematic
order
Status Accountant is the employee of the company Auditor is independent person
Benefit Accountant get salary Auditor get fees for his work
Time of work Accounting work is carried throughout the year It done at the end of the accounting year
Qualification There is a formal qualification Qualified charted accountant
Dependence Accounting is not dependent Audit is dependent
Accountability Accountant is accountable to management Auditor is accountable to shareholders

Advantages of Auditing: It is compulsory for every business organization

registered under the companies act must be audited. There are some
advantages by doing auditing. Some of them are as follows.

1) Verification of books and statements: The main advantage of auditing

is the verification of the books and financial statements of the company.
The books may include purchase register, sales register, stock register,
bank register and others. The statement includes cash flow statement,
funds flow statement and inventory statements.
2) Identifying and controlling of errors and frauds: The main advantage of
auditing is to detect errors and frauds. It is the duty of the auditors to
find out the various frauds and errors while auditing. Therefore
3) Moral check: When each employee of the company knows that the
financial transaction will be checked by the auditor than they fears to do
 the fraud. The fear of this detection act as a moral check on the
employees of the company.
4) Independent opinion: Auditing is very useful to obtain the independent
opinion of the auditor about the business condition. This auditing report
is very important for management. By this point of view owner of the
business will be able to prevent the frauds and errors in future.
5) Protect the interest of the share holders: Audit protects the interest of
shareholders in case of Joint Stock Company. By the audit shareholders
are assured that the accounts of the company are maintained properly.
6) Valuable advice: The auditor has expert knowledge about the accounts
and finance problems. So, auditor is the right person to solve the
problems and provide valuable advice.
7) Advantages to public: Audited financial statements express the real
positions of the company to the public keeping these position of a
company investors can invest the funds.
8) Useful for tax department: While paying the tax to the government all
the companies must produce audited report. Based on this tax
department.
9) Information about economic conditions: Economic conditions of various
companies can be judged by accounts audited. If the companies are
improving their economic condition they can attract more investors
towards their company.

Types of Audit: The auditing can be classified into following.

1) On the basis of organization: In this there are two types
a) Statutory audit: This refers to the audit of an organization performed
under a company’s audit. Because certain business organization or
institutions the process of audit is mandatory. In this type of audit all
the accounting transactions are verified by the auditor. Some
examples are as follows.
1) Companies : According to the companies act 1956 & 2013
2) Banking companies (Banking act 1949)
3) Insurance companies (Insurance act 1938)
4) Public and charitable trust
2) Voluntary audit: Voluntary audit refers to the audit performed by
the auditors. Because owner of the organization wants to their
accounts audited, it provides the reliability of accounts and financial
results of the organization. This audit is also known as private audit.
Ex: Proprietary and partnership business.
3) On the basis of function: In this there are two types.
a) Internal audit: It is a type of audit conducted by the own staff of
organizations. In this type of audit all the accounting transactions
can be verified by the internal staff of the organization. By
performing this audit the financial statements can be verified and
presented to the management.
b) External audit: This audit is performed by the auditors of the
outside people in the business organizations. Qualified charted
accountants are appointed as external auditors of the
organization. This audit is conducted in order to fulfil the legal
requirement of the organization.
4) On the basis of audit approach: On the basis of audit approach can
be classified into
a) Time basis: This time basis further divided in to
Continues audit: This audit is also known as detailed audit. Under
this type of audit the accounts books can be examined in regular
basis. This type of audit is carried in large kind of organization.
Interim audit: It is type of audit which is conducted in between
two annual audits with a view to find out the profits of the
company. It is used for the purpose of declaring dividend to the
shareholders.
Periodical or final audit: It is a type of audit where the checking
and verification of books and accounts are conducted only at the
end of the accounting period. The auditor can check the
transactions when all the accounting transactions have been
completed.
5) Scope basis: The scope basis can be classified in to
a) Complete audit: In this complete audit, auditor visits the
companies once in a year and completes the audit work
continuously for the whole period. It is known as complete audit.
 b) Partial audit: It is a type of audit where an auditor asked to check
and verify only few books of accounts for particular work. But this
type of audit is not permitted in limited companies.
6) Objectives basis: On the basis of objective audit is classified in to
a) Balance sheet audit: This is the new method adopted by the
auditors in present time. Under this type of audit the checking and
verification of books of accounts start from the balance sheet and
verified all original books of entry and other related documents. In
this type of audit all the balance sheet accounts and the related
items are verified.
b) Occasional audit: It refers to a type of audit which is carried out
whenever clients desires. This type of audit cannot be carried in
case of joint stock companies, banking companies and insurance
companies. It can be applicable only for propriety and partnership
business.
7) On the basis of dimensions:
a) Tax audit: It refers to examining of organizations incomes and expenses
and deductions for the purpose of assessment of tax. It is compulsory in
every organization. It has to be done by the qualified charted
accountant.
b) Management of audit: It is one of the technique of management
control. It refers to the systematic examination of the activities at all
levels of management. It carries all the areas of management such as
planning, organising, directing and controlling. This type of audit helps in
improving the efficiency of the management.
c) Cost audit: Cost audit means audit of cost records. In other words it
refers to checking and verification of correctness of cost accounts, cost
techniques and methods.
d) System audit: System audit refers to an audit related with evaluation of
accounting practices which is directed to ascertain whether companies
are up to date and economical. It is very useful to modify the work
better with less cost.
e) Cash audit: It involves all the cash transactions of the organization for a
given period of time. In this type of audit the auditor will check all the
 cash receipts and payments with the proper documents. It is the oldest
concept of auditing.
f) Energy audit: It is one of the new methods in the auditing. It is an
important factor for the present day to utilize the energy resources. This
type of audit aims at evaluating whether right type of energy is used in
the organisations.
g) Property audit: It aims at verification and allocation of resources,
ascertain economic and financial aspects of the organization. This audit
depends on the preparatory decision regarding the business.
h) Social audit: This type of audit related with performance of an
organization towards fulfilment of social obligations. The purpose of this
audit is to present the how organisation is taking responsibility towards
the society.
i) Performance audit: In this type of audit the auditor verified the growth
of the organization in terms of production, sales and profit of the
organization. The main purpose of this audit to evaluate and compare
the return with the amount of capital invested in the business.

Preparation before commencement of new audit

1) Receiving appointment order: Generally, the auditor of company is

appointed by the shareholders in the annual general meetings.
Therefore, auditor has to receive the appointment letter before starting
the new audit.
2) Communication with existing auditor: The new auditor must
communicate with the previous auditor to know whether he has any
objection and also an official requirement as per institute charted
account act 1949.
3) Acceptance of appointment: If the auditor is satisfy with the
communication of previous auditor should confirm the acceptance by a
letter of acceptance.
4) Ascertaining the scope of audit: An auditor should know the nature of
audit. The scope of audit work should be in accordance with the
accounting rules. In other types of audit and auditor should discuss with
his clients regarding the nature of audit work.
5) Knowledge about organization: Before determining a basic approach to
audit an auditor must have knowledge about the organization. This help
in to know the nature of transaction which are recorded in the books of
accounts.
6) Knowledge about accounting system: The system of accounting by the
client should be examine by the auditor before starting the audit.
Auditor should obtain list of all books maintained by the organization for
recording its accounting transaction.
7) Complete list of principle of officer: The auditor should take complete
list of the entire principle officer with their name, details power and also
get signature in every document.
8) Observation of the previous audit report: In the company is old the
auditor should verify the report of the previous auditor. This helps to
understanding the nature of accounts, important areas which detailed
checking is required and techniques used to conduct the audit efficiency.
9) Instruction to clients: After completing all the above steps the auditor
should issue clear instruction to the clients that the accounts should be
finalized and kept ready for audit.

Audit note book: It is the book which is maintained by audit staff at the
time of audit. It contains that information which requires further
classification and explanation.

Audit working paper: Audit working papers refer to the audit papers which
record the audit evidence resulting from the audit work performed.

Objectives of audit working papers:

a) It shows complete accounting principles and accounting standards

b) These papers assists the auditor in Co-ordinating and organising the
work of audit assistance.
c) By using these papers auditor prepare the audit report
d) This can be used as a permanent record further reference
e) Audit papers contains appointment letter, list of debtors, creditors,
opening, closing balances, article of association and vouchers.
Audit programme: Audit programme is an outline of all procedures to be
followed in order to concerning the clients financial statements.

Objectives of audit programme:

a) To check the transactions systematically

b) Audit programme provides specific time which help to complete in less
time
c) To identify the mistakes and modifications
d) Audit programme shows way to perform audit work
e) Explains the rules and regulations to be followed at the time of auditing
f) Audit programme helps the auditor to complete the work within a time

Recent trends in Auditing:

a) Tax audit: Tax audit can be defined as an examination of financial

records to assist correctness of calculation taxable profits to ensure
complete with the provisions of the income tax act and also ensure
fulfilment of condition for claiming deduction under the income tax act
1962.
Purpose of Tax audit: The purpose of tax audit is to ensure that books of
accounts have been maintained in accordance with the provisions of the
income tax act. Tax audit ensure that proper records are maintained and
accounts properly result the income of the person. This audit also
ensures that the accounts are properly being presented to government.
The tax audit can save the time to the income tax department. It is easy
to income tax department to collect the tax from clients.
b) Cost audit: The term cost audit refers to the audit of cost records. The
cost auditor is appointed to check cost accounting records in order to
ascertain accuracy of costing books.
Advantages:
a) Cost audit provides reliable cost data for managerial decision
b) Cost audit helps management to regulate the production
c) Cost audit act as on effective managerial tool for the detection of
errors, frauds in the production process
 d) By using cost audit the wastage of material, labour and overheads
can be controlled.
e) Cost audit can fix the responsibility of an individual wherever waste is
found.
f) Cost audit ensures proper records are maintained in the organization.
g) Cost audit revels the true cost of production from this management
can fix the price
h) Cost audit improves the efficiency of industrial units and assists in
economic progress of the nation.
i) Cost audit helps to ascertain the cost of production and other
expenses spend by the company
j) Cost audit helps the government to take necessary measures to
improve the efficiency of sick industry units.
c) Management audit: The management audit is an act of evaluating
activities of all the departments with a view to provide suggestions to
the management to help in their work.
Advantages
a) Management audit helps to improve the profits and to develop the
organization.
b) Management audit reviews the structure and assets of the
organization.
c) Management audit verify all the departments and provides valuable
suggestions.
d) This audit provides information about strong and weak points of the
organization.
e) This audit also provides valuable suggestions to the management
which helps t maintain effective management
f) Management audit helps the management providing suggestions to
achieve the goals of organisations.
g) This helps all the members of management to make effective
discharge of their duties.
h) It helps to formulate organizations policies and fix the goals.