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Fundamentals of Auditing

Book Description

Auditing is a multi-dimensional subject. The scope of auditing is not only restricted to financial audit under the Companies Act, but has also been extended to cost accounting aspects, managerial policies, operational efficiencies and system applications and audit under Computer Information System environment. It also covers social implications of business organizations and environmental issues. Fundamentals of Auditing covers all these aspects and also describes the modern tools and techniques of auditing. It explains the principles of auditing in a simple and lucid language. Even a layman interested in knowing the basics of auditing will be able to use this book.

Table of Contents

  1. Cover
  2. Title Page
  3. Contents
  4. Preface
  5. Chapter 1. Nature of Auditing
    1. 1.1. Introduction
    2. 1.2. Origin of the Word ‘Audit’
    3. 1.3. Early History of Audit
    4. 1.4. Evolution of Auditing
    5. 1.5. Auditing Defined
    6. 1.6. Nature of Auditing
    7. 1.7. Essential Features of Auditing
    8. 1.8. Why is There a Need for an Audit?
    9. 1.9. Object of an Audit
    10. 1.10. Errors and Frauds in Accounting
    11. 1.11. Role of Auditors in Detecting Errors and Frauds
    12. 1.12. Relation Between Book-Keeping, Accountancy and Auditing
    13. 1.13. Basic Principles Governing an Audit
    14. 1.14. Scope and Procedures of Audit
    15. 1.15. Advantages of Auditing
    16. 1.16. Limitations of Auditing
    17. 1.17. Relationship Between Auditing with Other Subjects
    18. 1.18. Qualities of an Auditor
    19. 1.19. Auditing and Other Services
  6. Chapter 2. Types of Audit
    1. 2.1. Introduction
    2. 2.2. Classification of Audit
      1. 2.2.1. Classification of Audit on the Basis of Organisation
      2. 2.2.2. Classification on the Basis of Function
      3. 2.2.3. Classification on the Basis of Practical Approach
      4. 2.2.4. Classification on the Basis of Audit Dimension
  7. Chapter 3. Techniques and Procedures of Auditing
    1. 3.1. Introduction
    2. 3.2. Preparatory Steps Before Commencement of New Audit
    3. 3.3. Audit Activities
    4. 3.4. Audit Engagement Letter
      1. 3.4.1. Concept
      2. 3.4.2. Form and Content
      3. 3.4.3. Revision of Engagement Letters
    5. 3.5. Preparation by the Auditor
      1. 3.5.1. Audit Planning
      2. 3.5.2. Audit Programme
      3. 3.5.3. Audit Note Book
      4. 3.5.4. Audit Working Papers
      5. 3.5.5. Audit Files
      6. 3.5.6. Audit Manual
      7. 3.5.7. Audit Memorandum
    6. 3.6. Principles and Techniques of Auditing
      1. 3.6.1. Important Audit Techniques
    7. 3.7. Procedures Followed in Course of Audit
      1. 3.7.1. Audit Evidence
      2. 3.7.2. Analytical Procedures
      3. 3.7.3. Routine Checking
      4. 3.7.4. Test Checking
      5. 3.7.5. Auditing in Depth
      6. 3.7.6. Walk-Through Tests
      7. 3.7.7. Rotational Tests
      8. 3.7.8. Cut-Off Examination
      9. 3.7.9. Physical Examination
      10. 3.7.10. Statistical Sampling
      11. 3.7.11. Surprise Checking
      12. 3.7.12. Audit Flow Chart
      13. 3.7.13. Test of Control
      14. 3.7.14. Internal Control Questionnaires
      15. 3.7.15. Audit Tests
    8. 3.8. Representation by Management
      1. 3.8.1. Representation by Management as Audit Evidence
      2. 3.8.2. Documentation of Representation by Management
      3. 3.8.3. Letter of Representation
    9. 3.9. Delegation, Supervision and Review of Audit Work
      1. 3.9.1. Delegation
      2. 3.9.2. Supervision
      3. 3.9.3. Review
      4. 3.9.4. Control of Quality of Audit Work
    10. 3.10. Professional Scepticism
    11. 3.11. Audit Risk and Materiality
      1. 3.11.1. Concept of Materiality
      2. 3.11.2. Audit Risk
      3. 3.11.3. Relationship Between Materiality and Audit Risk
    12. 3.12. Final Review
    13. 3.13. Case Studies
  8. Chapter 4. Internal Control, Internal Check and Internal Audit
    1. 4.1. Introduction
    2. 4.2. Internal Control
      1. 4.2.1. Definition
      2. 4.2.2. Basic Elements of Internal Control
      3. 4.2.3. Objectives of Internal Control
      4. 4.2.4. Evaluation of Internal Control
      5. 4.2.5. Internal Control and the Auditor
      6. 4.2.6. Internal Control Checklist
      7. 4.2.7. Internal Control Questionnaire
      8. 4.2.8. Internal Control and Computerised Environment
      9. 4.2.9. Internal Control and Corporate Governance
      10. 4.2.10. Internal Control in Specific Areas of Business
    3. 4.3. Internal Check
      1. 4.3.1. Definition
      2. 4.3.2. General Considerations in Framing a System of Internal Check
      3. 4.3.3. Objectives of Internal Check
      4. 4.3.4. Internal Check and the Auditor
      5. 4.3.5. General Principles of Internal Check for a Few Transactions
    4. 4.4. Internal Audit
      1. 4.4.1. Definition
      2. 4.4.2. Basic Principles of Establishing Internal Auditing in a Business Concern
      3. 4.4.3. Scope and Objectives of Internal Audit
      4. 4.4.4. Essential Elements of Internal Audit
      5. 4.4.5. Area of Internal Audit
      6. 4.4.6. Distinction Between Internal Audit and External Audit
      7. 4.4.7. Reliance upon the Work of an Internal Auditor
      8. 4.4.8. Evaluation of Internal Audit Function
    5. 4.5. Auditor's Independence
      1. 4.5.1. Advantages of Independent Audit
      2. 4.5.2. Provisions for Safeguarding Independent Auditors
      3. 4.5.3. Important Aspects of Auditor's Independence
    6. 4.6. Distinction Between Internal Check, Internal Audit and Internal Control
    7. 4.7. Case Studies
  9. Chapter 5. Vouching
    1. 5.1. Meaning of Vouching
    2. 5.2. Objectives of Vouching
    3. 5.3. Importance of Vouching
    4. 5.4. Vouching and Verification
    5. 5.5. Vouching and Routine Checking
    6. 5.6. Concept of Voucher
    7. 5.7. Internal and External Evidence
    8. 5.8. General Principles of Vouching
    9. 5.9. Teeming and Lading: A Challenge to Vouching
    10. 5.10. Vouching of Different Types of Transactions
  10. Chapter 6. Verification and Valuation of Assets and Liabilities
    1. 6.1. Introduction
    2. 6.2. Meaning of Verification of Assets
    3. 6.3. Meaning of Valuation of Assets
    4. 6.4. Difference Between Verification and Valuation
    5. 6.5. Importance of Verification of Assets
    6. 6.6. Importance of Valuation of Assets
    7. 6.7. General Principles for Verification of Assets
    8. 6.8. Problems of Verification
    9. 6.9. Problems of Valuation
    10. 6.10. Window Dressing—A Challenge to Verification
    11. 6.11. Verification and Valuation of Assets
    12. 6.12. Verification and Valuation of Intangible Assets
      1. 6.12.1. Goodwill
      2. 6.12.2. Patent
      3. 6.12.3. Copyright
      4. 6.12.4. Trade Marks
    13. 6.13. Verification and Valuation of Fixed Assets
      1. 6.13.1. Land and Buildings
      2. 6.13.2. Building
      3. 6.13.3. Plant and Machinery
      4. 6.13.4. Furniture and Fixtures
      5. 6.13.5. Motor Vehicles
      6. 6.13.6. Assets Acquired under Hire Purchase System
      7. 6.14. Audit of Depreciation
      8. 6.14.1. Legal Necessity of a Provision for Depreciation
      9. 6.14.2. Provision for Depreciation for past Years
      10. 6.14.3. Depreciation on Low Value Items
      11. 6.14.4. Depreciation on Wasting Assets
      12. 6.14.5. Change in the Method of Depreciation
      13. 6.14.6. Auditor's Duty As Regards Depreciation
    14. 6.15. Verification and Valuation of Investments
      1. 6.15.1. Quoted Investments
      2. 6.15.2. Unquoted Investments
    15. 6.16. Verification and Valuation of Current Assets
      1. 6.16.1. Stock-in-Trade
      2. 6.16.2. Work-in-Progress
      3. 6.16.3. Sundry Debtors
      4. 6.16.4. Bills Receivable
      5. 6.16.5. Cash at Bank
      6. 6.16.6. Cash in Hand
      7. 6.16.7. Prepaid Expenses
    16. 6.17. Verification and Valuation of Fictitious Assets
      1. 6.17.1. Preliminary Expenses
      2. 6.17.2. Discount on Issue of Shares or Debentures
    17. 6.18. Verification and Valuation of Contingent Assets
    18. 6.19. Verification and Valuation of Liabilities
    19. 6.20. Verification and Valuation of Fixed or Long-Term Liabilities
      1. 6.20.1. Debentures
      2. 6.20.2. Secured Long-Term Loans
    20. 6.21. Verification and Valuation of Current Liabilities
      1. 6.21.1. Sundry Creditors
      2. 6.21.2. Bills Payable
      3. 6.21.3. Bank Overdraft
      4. 6.21.4. Provision for Taxation
      5. 6.21.5. Outstanding Liabilities for Expenses
    21. 6.22. Verification and Valuation of Contingent Liabilities
    22. 6.23. Case Studies
  11. Chapter 7. Company Audit
    1. 7.1. Introduction
    2. 7.2. Preliminaries Before Commencement of Company Audit
    3. 7.3. Audit of Share Capital Transactions
      1. 7.3.1. Audit Procedure
    4. 7.4. Audit of Debentures
      1. 7.4.1. Audit Procedure
    5. 7.5. Specific Provision As Regards Accounts in the Companies Act
    6. 7.6. Special Requirements of Company Audit
    7. 7.7. Company Auditor
      1. 7.7.1. Appointment of Auditors
      2. 7.7.2. Tenure of Appointment
      3. 7.7.3. Re-Appointment of Retiring Auditor
      4. 7.7.4. Ceiling on Number of Audits
      5. 7.7.5. Remuneration of Auditor
      6. 7.7.6. Qualification of an Auditor
      7. 7.7.7. Disqualification of an Auditor
      8. 7.7.8. Removal of Auditors
      9. 7.7.9. Status of the Company Auditor
      10. 7.7.10. Auditor's Rights, Duties and Liabilities
      11. 7.7.11. Duties of a Company Auditor
      12. 7.7.12. Liabilities of Company Auditor
    8. 7.8. Case Studies
  12. Chapter 8. Divisible Profits and Dividends
    1. 8.1. Meaning of Divisible Profit
    2. 8.2. Meaning of Dividend
    3. 8.3. Concept of Profit
    4. 8.4. Profit versus Divisible Profit
    5. 8.5. Principal Determinants of Divisible Profit
    6. 8.6. Provisions of the Companies Act Relating to Payment of Dividend
    7. 8.7. Provisions of the Companies Act regarding Unpaid and Unclaimed Dividend
    8. 8.8. Payment of Dividend Out of Capital Profit
    9. 8.9. Payment of Dividend Out of Capital
    10. 8.10. General Guidelines for Distribution of Dividend
    11. 8.11. Auditor's Duty As Regards Payment of Dividend
    12. 8.12. Payment of Interim Dividend and the Role of Auditors
  13. Chapter 9. Audit Report and Certificate
    1. 9.1. Definition of Report
    2. 9.2. Definition of Audit Report
    3. 9.3. Value of Audit Report
    4. 9.4. Essentials of Good Audit Report
    5. 9.5. Scope of Audit Report
    6. 9.6. Signing of the Audit Report
    7. 9.7. Contents of Audit Report
    8. 9.8. Forms of Audit Report
    9. 9.9. Basic Elements of Audit Report
    10. 9.10. Audit Report and Audit Certificate
    11. 9.11. Types of Auditor's Report
    12. 9.12. Modified Reports
      1. 9.12.1. Matters that Do not Affect the Auditor's Opinion
      2. 9.12.2. Matters that Do Affect the Auditor's Opinion
    13. 9.13. Types of Audit Certificate
    14. 9.14. Auditor's Report and ‘True and Fair' View
    15. 9.15. Specimen of Clean Audit Report
    16. 9.16. Specimen of Qualified Audit Report
  14. Chapter 10. Audit of Banks
    1. 10.1. Introduction
    2. 10.2. Legislation Relevant to Audit of Banks
      1. 10.2.1. Legal Provisions Relating to Accounts
      2. 10.2.2. Legal Provisions Relating to Audit
    3. 10.3. Approach to Bank Audit
    4. 10.4. Stage in Audit of Banks
      1. 10.4.1. Preliminary Work
      2. 10.4.2. Evaluation of Internal Control System
      3. 10.4.3. Preparation of Audit Program for Substantive Testing and Its Execution
      4. 10.4.4. Preparation and Submission of Audit Report
    5. 10.5. Advances
      1. 10.5.1. Legal Provisions regarding Advances
      2. 10.5.2. Prudential Norms of RBI Relating to Advances
    6. 10.6. Income Recognition
    7. 10.7. Bank Audit Report
      1. 10.7.1. Long Form Audit Report
  15. Chapter 11. Audit of Insurance Companies
    1. 11.1. Audit of Companies Carrying on Life Insurance Business
      1. 11.1.1. Important Statutory Provisions for Audit
    2. 11.2. Audit of Companies Carrying on General Insurance Business
      1. 11.2.1. Important Statutory Provisions for Audit
    3. 11.3. Applicability of Accounting Standards
    4. 11.4. Books and Registers to be Maintained
      1. 11.4.1. Registers
      2. 11.4.2. Books of Accounts
      3. 11.4.3. Submission of Reports and Returns
    5. 11.5. Audit of Accounts
      1. 11.5.1. Qualification of an Auditor
      2. 11.5.2. Appointment of Auditor
      3. 11.5.3. Remuneration of Auditor
      4. 11.5.4. Powers of an Auditor
      5. 11.5.5. Auditor's Report
      6. 11.5.6. Other Important Provisions Relating to Audit
      7. 11.5.7. Audit at Branch/Divisional office Level and at Head Office Level
    6. 11.6. Preparation for the Audit
    7. 11.7. Internal Controls
      1. 11.7.1. Segregation and Rotation of Duties
      2. 11.7.2. Authorisation of Transactions
      3. 11.7.3. Maintenance of Adequate Records and Documents
      4. 11.7.4. Accountability for and Safeguarding of Assets
  16. Chapter 12. New Areas of Auditing
    1. 12.1. Introduction
    2. 12.2. Cost Audit
      1. 12.2.1. Definition
      2. 12.2.2. Objectives
      3. 12.2.3. Advantages
      4. 12.2.4. Disadvantages
      5. 12.2.5. Appointment
      6. 12.2.6. Qualification
      7. 12.2.7. Disqualification
      8. 12.2.8. Cost Audit Report
      9. 12.2.9. Distinction Between Financial Audit and Cost Audit
      10. 12.2.10. Ceiling on Number of Audits
    3. 12.3. Management Audit
      1. 12.3.1. Definition
      2. 12.3.2. Objectives
      3. 12.3.3. Importance
      4. 12.3.4. Scope
      5. 12.3.5. Steps
      6. 12.3.6. Advantages
      7. 12.3.7. Disadvantages
      8. 12.3.8. Appointment
      9. 12.3.9. Qualities of Management Auditors
      10. 12.3.10. Management Auditor's Report
      11. 12.3.11. Difference Between Management Audit and Cost Audit
      12. 12.3.12. Difference Between Management Audit and Financial Audit
    4. 12.4. Human Resource Audit
      1. 12.4.1. Concept of Human Resource
      2. 12.4.2. Concept of Human Resource Accounting
      3. 12.4.3. Concept of Human Asset Audit
      4. 12.4.4. Steps for Human Resource Audit
      5. 12.4.5. Problems of Human Resource Audit
      6. 12.4.6. Advantages of Human Resource Audit
    5. 12.5. Social Audit
      1. 12.5.1. Concept of Social Responsibility
      2. 12.5.2. Concept of Social Accounting
      3. 12.5.3. Concept of Social Audit
      4. 12.5.4. Objectives of Social Audit
      5. 12.5.5. Importance
      6. 12.5.6. Social Audit in India
    6. 12.6. Tax Audit
      1. 12.6.1. Definition
      2. 12.6.2. Types of Tax Audit
      3. 12.6.3. Tax Auditor
      4. 12.6.4. Compulsory Tax Audit under Section 44AB
      5. 12.6.5. Penalty for Non-Compliance
      6. 12.6.6. Tax Audit Report
    7. 12.7. Vat Audit
      1. 12.7.1. Concept of VAT Audit
      2. 12.7.2. Role of VAT Auditor
      3. 12.7.3. Preparation for VAT Audit
      4. 12.7.4. Approach to VAT Audit
      5. 12.7.5. Audit Report under VAT
    8. 12.8. Green (Environmental) Audit
      1. 12.8.1. Definition
      2. 12.8.2. Objectives
      3. 12.8.3. Stages of Environmental Audit
      4. 12.8.4. Environmental Audit Practice in India
    9. 12.9. Corporate Governance through Audit Committees
      1. 12.9.1. Introduction
      2. 12.9.2. Area of Work
      3. 12.9.3. Relevant Provisions regarding Audit Committee
      4. 12.9.4. Functions of the Audit Committee
      5. 12.9.5. Audit Committee under Clause 49
    10. 12.10. Accounting Standards
      1. 12.10.1. Concept
      2. 12.10.2. Objectives/Importance
      3. 12.10.3. Accounting Standards and the Auditor
    11. 12.11. Auditing and Assurance Standards
      1. 12.11.1. Background
      2. 12.11.2. Concept
      3. 12.11.3. Scope
      4. 12.11.4. Objectives and Importance
      5. 12.11.5. Procedures for Issuing Standards
      6. 12.11.6. AAS and the Auditor
  17. Chapter 13. Special Audit
    1. 13.1. Introduction
    2. 13.2. Audit of Charitable Society
      1. 13.2.1. General Matters
      2. 13.2.2. Receipts
      3. 13.2.3. Payments and Expenses
      4. 13.2.4. Assets and Liabilities
      5. 13.2.5. Income Tax
      6. 13.2.6. Financial Statement
    3. 13.3. Audit of Clubs
      1. 13.3.1. General
      2. 13.3.2. Receipts
      3. 13.3.3. Payments and Expenses
      4. 13.3.4. Assets and Liabilities
      5. 13.3.5. Income Tax
      6. 13.3.6. Special Accounts
      7. 13.3.7. Financial Statements
    4. 13.4. Audit of Co-Operative Societies
      1. 13.4.1. General
      2. 13.4.2. Receipts
      3. 13.4.3. Payments and Expenses
      4. 13.4.4. Assets and Liabilities
      5. 13.4.5. Income Tax
      6. 13.4.6. Financial Statement
    5. 13.5. Audit of Educational Institution
      1. 13.5.1. General
      2. 13.5.2. Receipts
      3. 13.5.3. Payments and Expenses
      4. 13.5.4. Assets and Liabilities
      5. 13.5.5. Income Tax
      6. 13.5.6. Financial Statements
    6. 13.6. Audit of Hotels
    7. 13.7. Audit of Hospitals
      1. 13.7.1. General Matters
      2. 13.7.2. Receipts
      3. 13.7.3. Payments and Expenses
      4. 13.7.4. Assets and Liabilities
      5. 13.7.5. Income Tax
      6. 13.7.6. Financial Statement
    8. 13.8. Audit of Hire Purchase and Leasing Companies
      1. 13.8.1. Introduction
      2. 13.8.2. Audit of Hire Purchase Transactions
      3. 13.8.3. Auditor's Duty
      4. 13.8.4. Audit of Lease Transactions
      5. 13.8.5. Auditor's Duty
  18. Chapter 14. Audit of the Accounts of Governments and Public Sector Undertakings
    1. 14.1. Introduction
    2. 14.2. Audit of Public Sector Undertakings
      1. 14.2.1. Some Special Features of Public Sector Undertakings
      2. 14.2.2. Distinction Between Audit of Public Sector Undertakings and Audit of Private Sector Undertakings
      3. 14.2.3. Audit of Departmental Commercial Undertakings
      4. 14.2.4. Audit of Statutory Corporations
      5. 14.2.5. Audit of Government Companies
    3. 14.3. Government Audit
      1. 14.3.1. Objectives
      2. 14.3.2. Distinction Between Government Audit and Commercial Audit
    4. 14.4. Comptroller and Auditor General of India
  19. Chapter 15. Audit in CIS Environment
    1. 15.1. Introduction
    2. 15.2. General Approach to an EDP-Based Audit
      1. 15.2.1. Organisational Review
      2. 15.2.2. System Review
    3. 15.3. Computer Installation Review
      1. 15.3.1. Safeguarding of the Client's Records
      2. 15.3.2. Control over the Data Passing through the EDP Department
      3. 15.3.3. Controls over the Operation of the Computer
      4. 15.3.4. Control over the Resources, Assets and Liabilities of the EDP Department
    4. 15.4. Computer System Review
    5. 15.5. Approaches to EDP Auditing
      1. 15.5.1. Auditing Around the Computer
      2. 15.5.2. Auditing through the Computer
    6. 15.6. Special Techniques for Auditing in an EDP Environment
      1. 15.6.1. What are CAATs?
      2. 15.6.2. Need for CAATs
      3. 15.6.3. Considerations in the Use of CAATs
      4. 15.6.4. Types of CAATs
  20. Annexure A. Important Case Decisions
  21. Annexure B. Objective Type Questions
  22. Copyright