Internship Report

On
“Audit procedures of a Chartered
Accountant
Firm-
A Study on “Shekhar Chandra & Co.”

Submitted in partial
fulfilment of
Master of business
administration (Finance)
Year 2015-2017

SUBMITTED TO
SUBMITTED BY

1
Prof. P.MADAN SONALI
KUKRETI
(HEAD & DEAN) MBA
(BF) 3rd sem
FMS (GKV)

LETTER OF TRANSMITTAL

31 August, 2016

Pankaj madan

Head & dean

Faculty of Management Studies

Gurukul Kangari University

Subject: Submission of Internship Report

Dear Sir,

With due respect and great pleasure I am submitting my internship report

on Audit

Procedures followed by Shekhar chandra & Co, Chartered

Accountants. One and half month internship program was a great

experience to me as it provided me with wide exposure to the professional

environment. The title of my report is “Audit Procedures of a

accountant Firm – A Study on shrkhar Chandra & co. ”. My main

focus of the study is

to find out the external audit procedure which is followed by . The report is

2
prepared under your supervision and respectfully acknowledges your

guidance and help. I

will be glad to clarify any queries regarding this report.

I believe the knowledge and experience that I have gathered during my

internship period

will immensely help me in professional life.

I, therefore, hope your kind humane and consideration.

Sincerely yours.

Sonali kukreti

MBA (BF)

ACKNOWLEDGEMENT

This is a matter of great pleasure as well as great privilege and

pride for me to present this report. This project become

possible only due to full cooperation and sincerity provided by

the company and institute as well. I am indebted and thankful

to the management of SHEKHAR CHANDRA & CO. for

providing me an opportunity to work in this esteemed and

flourished organization

3
Research Report is a combine effort including this one also, so i

would like to thanks to all who have helped me in completion of

this report purposeful

Further I would like to thanks my faculty, my guide for their

valuable support and advise which helped me a lot in

completing this project purposeful.

PANKAJ RANA

EXECUTIVE SUMMARY

This report is titled “Audit Procedures of a Chartered Accountant

Firm – A Study on

Shekhar Chandra & co. ” is an outcome of MBA internship program.

This report contains the details of the audit practice followed by firm.I

have divided this report into seven sections. First section contains the

background of thestudy. Section two will depict a clean picture of a firm. In

4
section three I have organized and discussed all my knowledge that I have

gathered about auditing during my studies at the Department of

management , Gurukul kangari university. Section four will provide the

details of the overall audit procedures of Shekhar Chandra & Co.. In

section five, I have made a comparison between the Audit Procedures

followed by FIRM and Emile Woolf’s Chronological Sequences of Audit

Procedures. Section six contains the problems that I have identified to

carry out audit engagement in FIRM and some recommendations to

minimize such problems. In section seven, I have drawn an overall

conclusion.

TABLE OF CONTENTS

Title Page No

Table of Contents

5
Title page 1

Letter of Transmittal

2 Acknowledgement

Executive Summary

SECTION - 1: STUDY BACKGROUND

1-04

1.1 Introduction 09

1.2 Origin of the Report 10

1.3 Objectives of the Study 10

1.4 Scope of Study 10

1.5 Methodology of Collection of Information 11

1.6 Limitations of the Study 11

SECTION - 2: ORGANIZATION’S PROFILE

2.1 Profile of the Firm 14

6
2.2 Background 14

2.7 Achievements of Firm 15

2.9 Logistic Support 15

2.10 Area of Services 15

2.11 Analysis of Total Practice Turnover 16

SECTION -3 : LITERATURE REVIEW

3.1 Definition Of Auditing 18

3.2 Distinction Between Auditing And Accounting 20

3.3 Types Of Audit 21

3.4 FIRM Generally Accepted Auditing Standards 25

3.5 Professional Conduct 27

3.5.1 AICPA Principles Of Professional Conduct 27

3.6 Audit Risks 29

7
3.7 Audit Evidence 30

SECTION -4 : AUDIT PROCEDURES FOLLOWED BY FIRM

4.1 Engagement Procedures 32

4.2 Audit Procedures Followed By FIRM 34

4.2.1 Identify Firm’s Overall Goals 36

4.2.2 Gather & Evaluate Initial Information 39

4.2.3 Assess General Risks 42

4.2.4 Account-Specific Risk Analysis 44

4.2.4.1 At The Account Balance And Class Of Transaction 45

4.2.4.2 Audit Risks 46

4.2.4.3 Consideration of Fraud and Error 47

4.2.4.4 Inquiries of Management 48

4.2.4.5 Assessment of Inherent Risk and Control Risk

48

8
4.2.4.6 Assessment of Detection Risk

48

4.2.4.7 Documentation 48

4.2.4.8 Management Representations 49

4.2.4.9 Communication 49

4.2.5 Development Of Effective And Effi cient Audit Plan/ Work Program 49

4.2.6 Conduct Audit Testing 50

4.2.6.1 Test Of Controls 51

4.2.6.2 Substantive Tests 52

4.2.7 Evaluate And Communicate Audit Results 55

4.2.7.1 External Report/ Auditor’s Report: 55

4.2.7.2 Internal Report/ Management Letter 55

SECTION-5 COMPARISION OF SHEKHAR FIRM PROCEDURE

WITH CHRONOLOGICAL SEQUENCES

5.1 Comparison Between Baker Tilly International Audit Procedure (That Is

Followed By ACNABIN) And Chronological Sequences Of An Audit

Engagement Described By Emile Woolf: 64

9
5.2 Similarities 65

5.3 Differences 68

SECTION -6 : FINDINGS AND RECOMMENDATION

SECTION – 7 : CONCLUSION

APPENDICES

Appendix – 1 76

Appendix – 2 77

Appendix – 3 79

Appendix – 4 81

Appendix – 5 82

BIBLIOGRAPHY 83

SECTION - 1

STUDY BACKGROUND
10
INTRODUCTION:

In today’s world academic education is not adequate to enable a student

to compete with

confidence and reach his/her goal without having experience with the

outside world. In

order to have an idea and gain experiences, we, the students of Faculty of

Business

11
&Economics, Daffodil International University have to undertake two

month internship

program at any organization.

As a part of my MBA Program, the two month internship program gave me

the

opportunity to have a practical knowledge on auditing procedure. The

assignment was

how a chartered accountancy firm performs an audit and also to gain a

knowledge and

practical experience on how audit work is performed in corporations,

companies and nonprofit making organizations.

To face much more complex and challenging business world in the

challenging business

areas, practical knowledge is essential to expand our theoretical base. To

gather this

practical knowledge, we were forwarded different organization after

completing MBA

Program. As I have an intention to become a chartered accountant, I was

forwarded to

Shekhar & Chandra Co, a prominent chartered accountancy firm in

Rishikesh.

This study gave me an opportunity to observe and perform real world

knowledge about

the audit procedure, which is followed by the chartered accountancy firm.

In the

12
internship period I could relate the theoretical knowledge of auditing to

practical

exposure

1.2 Origin of the Report:

The internship program is mandatory requirement for the student who are

graduating

from the MBA program under the faculty of Business & Economics of

Gurukul Kangari University.

In the internship program I was engaged in a host firm named Shekhar

Chandra & CO. for one and half month period. I have learned how an

audit is conducted. I also learned about the audit procedures of Shekhar

Chandra firm and how the engagement is done in case of an annual audit.

As a result I have decided to write a report about the audit procedures of

Shekhar Chandra &

CO. from practical knowledge that I have observed.

1.1 OBJECTIVES OF THE STUDY:

To have an overall idea about the audit procedures of Shekhar Chandra &

CO.

13
To gain practical knowledge and experience on how Shekhar Chandra &

CO

performs an audit and how audit work is performed in corporations,

companies

and non-profit making organizations.

To identify about how to accumulate and process evidences to make an

audit

report.

1.2 SCOPE OF STUDY:

I have been assigned in shekha Chandra firm that gave me tremendous

scope to familiarize with the audit procedure of the organization. Major

parts of scope are point out below:

a) Background of the host organization and also their position.

b) Audit procedure, which is followed by the organization for performing

any audit.

c) Nature and importance of it has depicted in this study.

d) Audit methodology of the firm, which is followed by the organization for

performing any audit.

e) Audit administration of the firm, which is followed by the organization

for

performing any audit.

14
1.3 METHODOLOGY OF COLLECTION OF

INFORMATION

In order to prepare the assigned project paper I have collected necessary

information from

two types of source as follows:

1) Primary sources information.

2) Secondary sources information.

Primary sources information

1. I have collected primary information by working with different audit

team.

2. Discussing with engagement partner, audit manager, audit staff and

articled

Student

.Secondary sources information

1. I have also collected secondary information like annual audit report,

Management audit report, accounting system & audit working papers.

2. The information was obtained from various corresponding files of the

firm.

LIMITATIONS OF THE STUDY:

15
The study is conducted with an objective to make a thorough study of

external audit

procedure. I have availed many facilities and faced some obstacles during

my study.

These obstacles may be termed as limitation of the study. These

limitations are as

follows:

a) Scheduled time span was not sufficient to cover all information..

b) To some extend the exact audit procedure is not followed due to time

and other

constrains.

c) As the internship was the first practical experience, it was not possible

for me

to know all and everything of audit procedure.

16
SECTION – 2
ORGANIZATION’S
PROFILE

17
Firm’s Profile
2.1 PROFILE OF THE FIRM

Name of the Audit Firm : Shekhar Chandra & CO.

Chartered Accountants

Date of Establishment : 15th February, 1992

Address of the firm,

Adarsh Market, Tilak Road

Rishikesh – 249201, Uttarakhand

Phone: 91-135-2433513

Fax #: 91-135-2435513

E-Mail: [email protected]

Web site: www.cashekhar.com

2.2 BACKGROUND:

Founded in 1992, SHEKHAR CHANDRA & CO. started with two partners. The name are

Chandra shekhar Sharma and abhinav chaurashiya

18
At present the partnership comprises four founder partners and six new partners.

Registration of Firm:

SHEKHAR CHANDRA & CO. Chartered Accountants Firm is registered under the

Institute of

Chartered Accountants of India in the year 1992..

The firm has one offi ce in the city with four different Divisions to manage its day to day

activities. The divisions are:

♦Auditing,

♦Income Tax, and

♦Consultancy Services.

2.7 ACHIEVEMENT OF FIRMS:

It is one of the oldest firm of the Rishikesh

2.9 LOGISTIC SUPPORT:

List of important industries in which the firm has experience

1. Banks,

2. Micro-Finance Institution (MFI),

3. Non-Government Organization (NGO),

4. Donor funded projects

At present SHEKHAR CHANDRA & CO. have 120+ audit clients. As one of the top firms in

Rishikesh. It also done auditing work of more cities ans states .

SHEKHAR CHANDRA & CO. have audit clients of all type, e.g. public, private, governmental,

profit/nonprofit organizations.

2.10 SERVICES OFFERED COVER THE FOLLOWING AREAS:

19
� Management consultation/development

� Statutory audit

� Accountancy

� Taxation

� Accountancy and management training

� System development

� Data processing with computer

� Privatization consultancy (Include pre-privatization review, restructuring,

valuation in particular and privatization assistance in general)

� Other accounting ancillary services including investigation, internal and

management audit.

� Micro- finance consulting.

�Organizational consulting services

� Share/ business/ asset valuation.

2.11 ANALYSIS OF TOTAL PRACTICE TURNOVER:

Audit 40%

Accounts preparation (including data processing and book-keeping) 5%

Tax 20%

Financial Advisory Services 20%

Management Advisory Services 15%

Total 100%

20
SECTION -3
LITERATURE REVIEW

21
3.1 DEFINITION OF AUDITING:

Arens and Loebbecke, 1998 defines Auditing as:

“Auditing is the process by which a competent, independent person

accumulates and

evaluates evidence about quantifiable information related to a specific

economic entity

for the purpose of determining and reporting on the degree of

correspondence between

the quantifiable information and established criteria.”

This definition includes several key words and phrases. To understand the

definition,

different terms are discussed below:

 Competent, Independent Person:

22
The auditor must be qualified to understand the criteria used and competent to know the

types and amount of evidence to accumulate to reach the proper conclusion after the

evidence has been examined.

The auditor must also have an independent mental attitude. It does little good to have a

competent person who is biased performing the evidence accumulation when unbiased

information and objective thinking are needed for the judgments and decisions to be

made. Independence cannot be absolute by any means, but it must be a goal that is

worked toward; and it can be achieved to a certain degree.

 Accumulating and Evaluating Evidence:

Evidence is defined as any information used by the auditor to determine

whether the

quantifiable information being audited is stated in accordance with the

established

criteria.

Evidence takes many different forms, including oral testimony of the

auditee (client),

written communication with outsiders, and observation by the auditor. It is

important to

23
obtain sufficient quality and volume of evidence to satisfy the audit

objectives. The

process of determining the amount of evidence necessary and evaluating

whether the

quantifiable information corresponds to the established criteria is a critical

task for every

auditor.

Quantifiable Information and Established Criteria:

To do an audit, there must be information in a verifiable form and some

standards

(criteria) by which the auditor can evaluate the information.

Quantifiable information can and does take many forms. It is possible to

audit such thing

as a company’s financial statements, the amount of time it takes an

employee to complete

an assigned task, the total cost of a government construction contract,

and an individual’s

tax return.

The criteria for evaluating quantitative information can also vary

considerably. For

example, in auditing a vendor’s invoice for the acquisition of raw

materials, it is possible

to determine whether materials of the quantity and stated description

were actually

24
received, whether the proper raw material was acquired considering the

production needs

of the company, or whether the price charged for the goods was

reasonable. The criteria

used depend upon the objectives of the audit.

Economic Entity:

Whenever an audit is conducted, the scope of the auditor’s responsibility

must be made

clear. The primary method involves defining the economic entity and the

time period.

In most instances the economic entity is also a legal entity, such as a

corporation, unit of

government, partnership, or proprietorship. In some cases, however, the

entity is defined

as a division, a department, or even an individual.

The time period for conducting an audit is typically one year, but there is

also audits for a

month, a quarter, several years, and in some cases the lifetime of an

entity.

Reporting:

The final stage in the audit process is the audit report – the

communication of the findings

25
to users. Reports differ in nature, but in all cases they must inform readers

of the degree

of correspondence between quantifiable information and established

criteria.

3.2 DISTINCTION BETWEEN AUDITING AND

ACCOUNTING:

Many financial statements users and members of the general public

confuse auditing with

accounting. The confusion results because most auditing is concerned

with accounting

information, and many auditors have considerable expertise in accounting

matters.

Although auditing and accounting are related, they are distinct from each

other.

Accoun
ting

Recording of
transactions
and
preparation of
financial
GAAP (the link)

Evaluation of
financial
statements
Auditing

26
 Accounting and Auditing Contrast
(Larry F. Konarth, “Auditing: A Risk Analysis Approach”)

Accounting involves collecting, summarizing, reporting, and interpreting

financial data.

Accounting is the process of recording, classifying, and summarizing

economic events in

a logical manner for the purpose of providing financial information for

decision making.

The function of accounting, to an entity and a society as a whole, is to

provide certain

types of quantitative information that management and others can use to

make decisions.

To provide relevant information, accountants must have a thorough understanding of the

principles and rules that provides the basis for preparing the accounting information. In

addition, accountants must develop a system to make sure that the entity’s economic

events are properly recorded on a timely basis and at a reasonable cost.

Auditing, by contrast, utilizes the theory of evidence – in much the same way as does the

legal profession – to verify the overall reasonableness (fairness) of the financial

statements presented. In auditing accounting data, the concern is with determining

27
whether recorded information properly reflects the economic events that occurred during

the accounting period. Since the accounting rules are the criteria for evaluating whether

the accounting information is properly recorded, any auditor involved with these data

must also thoroughly understand the rules. In the context of the audit of financial

statements, these are generally accepted accounting principles (GAAP).

3.3 TYPES OF AUDIT:

There are various types of audit. Such as:

a. Operational Audit

b. Compliance Audit

c. Audit of Financial Statements

d. Internal Audit

e. Interim Audit

f. Performance Audit

g. Governmental Audit

a) Operational Audit:

Operational Audit refers to the study of business operations for the

purpose of making

recommendations about the economic and efficient use of resources,

effective

28
achievement of business objectives and compliance with company

policies.

At the completion of an operational audit, recommendations to

management for

improving operations are normally expected. The goal of operational audit

is to help

managers to discharge their management responsibilities and improve

profitability.

b) Compliance Audit:

Management often wants to know whether its organizational policies are

being complied

with or whether external mandates are being met.

The purpose of a compliance audit is to determine whether the auditee is

following

specific procedures or rules set down by some higher authority.

Results of compliance audits are generally reported to someone within the

organizational

unit being audited rather than to a broad spectrum of users. Management,

as opposed to

outside users, is the primary group concern with the extent of compliance

with certain

prescribed procedures and regulations. Hence a significant portion of work

of this type is

done by auditors employed by the organizational units themselves.

29
Compliance audit involves:

1. Examining transactions and detailed records, and

2. Identifying weaknesses.

a) Audit of Financial Statements:

Financial statements audits are conducted to determine whether financial

statements are

presented fairly in accordance with generally accepted accounting

principles (GAAP).

However, public sector financial audits also determine whether financial

statements are

presented in accordance with applicable laws and regulations.

An audit of financial statements is conducted to determine whether the

overall financial

statements – the quantifiable information being verified – are stated in

accordance with

specific criteria. The financial statements most commonly included are the

statement of

financial position, income statement and statement of cash flow, including

accompanying

footnotes.

The assumption underlying an audit of financial statements is that they

will be used by

different groups for different purposes. Therefore, it is more efficient to

have one auditor

30
perform an audit and draw conclusion that can be relied upon by all users

than to have

each user perform his or her own audit.

b) Internal Audit:

Internal audit is an independent appraisal function established within an

organization to

examine and evaluate its activities as a service to the organization. The

objective of

internal auditing is to assist members of the organization in the effective

discharge of

their responsibilities. To this end, internal audit furnishes them with

analyses, appraisals,

recommendations, counsel, and information concerning the activities

reviewed.

Internal audit is practiced by auditors employed by an organization, such

as a bank,

hospital, city government, or industrial company. The Institute of Internal

Auditors is the

international organization that governs the standards, continuing

education, and generals

rules of conduct for internal auditors as a profession.

c)Interim Audit:

31
Interim audit refers to the procedures applied prior to the client’s year

end, primarily for

the purpose of lowering the assessed risk level. The interim audit phase

consists of resting

the client’s internal accounting controls and performing substantive tests

of transactions.

Interim audit procedures performed several weeks or months before the

balance sheet

date.

In recent years, certain changes in the information processing

environment have begun to

alter the traditional approach to the interim audit. Instead of testing the

internal control

procedures during a single interim time period, auditors are applying

these tests, along

with tests of selected transactions, at frequent intervals throughout the

year. This

sometimes referred to as Continuous Audit. This type of audit is especially

applicable to

those clients with sophisticated computer based accounting applications.

d) Performance Audit:

Performance audits address the economy, efficiency, and program results

of a reporting

32
unit. Economy and efficiency audits are performed to determine whether

management’s

objectives are being achieved and to identify opportunities and develop

recommendations

for improvements. Program audit includes determining (1) the extent to

which the desired

results or benefits established by the legislature or other organizing body

are being

achieved, (2) the effectiveness of organizations, programs, activities, or

functions, and (3)

whether the entity has complied with laws and regulations applicable to

the program.

e) Governmental Audit:

Governmental audit may be defined as testing and reporting on

conformity with laws and

regulations relating to recipients of federal financial assistance.

Governmental audit refers

to the independent auditor’s responsibility for determining compliance

with laws and

regulations when engaged in audits of state and local governmental units,

as well as other

not-for-profit entities, that are the recipients of federal finance assistance.

33
Governmental auditors are employed by various state, local, and federal

agencies. The

work performed by these auditors’ ranges from a internal audits of a

specific agency to

audits of other governmental units to audits of reports furnished to the

government by

outside organizations.

3.4 AICPA GENERALLY ACCEPTED AUDITING

STANDARDS:

Auditing standards are general guidelines to aid auditors in fulfilling their

professional

responsibilities in the audit of historical financial statements. They include

consideration

of professional qualities such as competence and independence, reporting

requirements,

and evidence.

The broadest guidelines available are the ten Generally Accepted Auditing

Standards

(GAAS). These standards were developed by the AICPA in 1947, they have,

with

minimal changes, remained the same. These standards are not sufficiently

specific to

34
provide any meaningful guide to practitioners, but they do represent a

framework upon

which the AICPA can provide interpretations.

The ten Generally Accepted Auditing Standards are as follows:

General Standards

1. The audit is to be performed by a person or persons having adequate

technical

training and proficiency as an auditor.

2. In all matters relating to the assignment, independence in mental

attitude is to be

maintained by the auditor or auditors.

3. Due professional care is to be exercised in the performance of the audit

and the

preparation of the report.

Field Work Standards

1. The work is to be adequately planned, and assistants, if any, are to be

properly

supervised.

2. A sufficient Understanding of the internal control structure is to be

obtained to

plan the audit and to determine the nature, timing, and extent of tests to

be

performed.

35
3. Sufficient competent evidential matter is to be obtained through

inspection,

observations, inquiries, and confirmations to afford a reasonable basis for

an

opinion regarding the financial statements under audit.

Reporting Standards

1. The report shall state whether the financial statements are presented in

accordance

with generally accepted accounting principles (GAAP).

2. The report shall identify those circumstances in which such principles

have not

been consistently observed in the current period in relation to the

preceding

period.

3. Informative disclosures in the financial statements are to be regarded

as

reasonably adequate unless otherwise stated in the report.

4. The report shall either contain an expression of opinion regarding the

financial

statements, taken as a whole, or an assertion to the effect that an opinion

cannot be

expressed. When an overall opinion cannot be expressed, the reasons

therefore

should be stated. In all cases where an auditor’s name is associated with financial

36
 statements, the report should contain a clear-cut indication of the character of the

auditor’s work, if any, and the degree of responsibility the auditor is taking.

3.5 PROFESSIONAL CONDUCT:

The AICPA Code of Professional Conduct (the Code) consists of four

components. The

principles provide the ethical concepts on which the Rules of Conduct are

based as well

as the standards for meeting the public trust. The principles provide the

broadest

framework for professional conduct and should be the highest guide for

professional

action. Auditors should always look first to the principles for professional

guidance. The

rules are only guides to help accomplish the broad principles of the

profession.

AICPA Code of Professional Conduct

Concepts Ideal standards of ethical conduct stated in

Concepts
philosophical terms.
They are not enforceable.

Minimum standards of ethical conduct stated as

Rules of Specific rules
Conduct They are enforced

Interpretations of rules of conduct by the AICPA

Interpretations Division of Professional Ethics. They
are not

37
 enforceable, but a practitioner must justify departure.

Published explanations and answers to questions about

Ethical Rulings the rules of conduct submitted to the AICPA by
practitioners and others interested in ethical
requirements. They are not enforceable, but a
practitioner must justify departure

.
3.5.1 AICPA Principles of Professional Conduct:

The principles provide the ethical concepts on which the Rules of Conduct

are based as

well as the standards for meeting the public trust. The principles provide

the broadest

framework for professional conduct and should be the highest guide for

professional

action. Auditors should always look first to the principles for professional

guidance. The

principles are as follows:

Responsibilities:

In carrying out their responsibilities as professionals, members should

exercise sensitive

professional and moral judgments in all their activities.

Public Interest:

Members should accept the obligation to act in a way that will serve the

public interest,

honor the public trust, and demonstrate commitment to professionalism.

Integrity:

38
To maintain and broaden public confidence, members should perform all

professional

responsibilities with the highest sense of integrity.

Objectivity and independence:

A member should maintain objectivity and be free of conflicts in

discharging professional

responsibilities. A member in public practice should be independent in fact

and

appearance when providing auditing and other attestation services.

Due care:

A member should observe the profession’s technical and ethical

standards, strive

continually to improve competence and the quality of services, and

discharge professional

responsibility to the best of the member’s ability.

Scope and nature of services:

A member in public practice should observe the principles of the Code of

Professional

Conduct in determining the scope and nature of services to be provided.

3.6 AUDIT RISKS:

The auditor should obtain an understanding of the accounting and internal

control systems

sufficient to plan the audit and develop an effective audit approach. The

auditor should

39
use professional judgment to assess audit risk and to design audit

procedures to ensure it

is reduced to an acceptably low level.

Audit risk is defined as “the risk that the auditor may unknowingly fail

to appropriately

modify his/her opinion on financial statements that are materially

misstated”. So audit

risk is the risk that the auditor gives an inappropriate audit opinion when

the financial

statements are materially misstated. Audit risk has three components:

“Inherent risk” is the susceptibility of an account balance or class of

transactions

misstatement that could be material, individually or when aggregated

with

misstatements in other balances or classes, assuming that there were no

related

internal controls.

• “Control risk” is the risk that a misstatement that could occur in an

account

balance or class of transactions and that could be material individually or

when

40
aggregated with misstatements in other balances or classes, will not be

prevented

or detected and corrected on a timely basis by the accounting and internal

control

systems.

•“Detection risk” is the risk that an auditor’s substantive procedures

will not

detect a misstatement that exists in an account balance or class of

transactions that

could be material, individually or when aggregated with misstatements in

other

balances or classes.

3.7 Audit Evidence:

Audit evidence consists of those facts and inferences that influence the

auditor’s mind

with respect to financial presentation.

The collective purpose of all audit procedures is to gather sufficient

competent evidence

to form an opinion on the fairness of the financial statements taken as a

whole.

Characteristics of Audit Evidence:

41
It is important that the auditor appreciate the different characteristics of

audit evidence

and the reliance that can be placed on each type. Audit evidence can be

characterized as:

1. Generated and held by the client.

2. Received from outside parties and held by the client.

3. Received directly by the auditor by independent means or from

independent

or quasi-independent parties.

SECTION - 4
42
AUDIT PROCEDURE FOLLOWED
BY CA FIRM
(SHEKHAR CHANDRA & CO.)

4.1 ENGAGEMENT PROCEDURES

Before discussing the Audit Procedures followed by firm, I try to focus on

the

engagement procedures through which firm is engaged/ recruited by the

client to

perform the audit. Firm faces three kinds of situations in engagement

process:

Engagement with new client.

Engagement with existing client.

43
Directly appointed by the client.

Before starting the audit work, some letters are exchanged between the

firm and

clients.

In case of new client:

4 (four) letters are exchanged between ACNABIN and client including

acceptance letter

of appointment at the time of involving with the new client. Following

stages are

followed by both firm and client:

STAGE – 1: Client requires for technical and financial

proposal from the

firm

Client generally gives circular with the newspaper or directly wants proposal

for audit

from the audit firm. In case of direct offer they request to the audit firm to

submit a

quotation for the cost of conducting audit of the client. They also mention the

specific

date to confirm the decision taken by the audit firm and completion date for

audits. The

client firm mentions here the key areas of the audit in the form of

attachment. It assures

that if CA audits client’s firm, they will supply the formal terms of

reference/audit

44
mandates to govern the conduct of audit.

STAGE – 2: The technical and financial proposal is sent

by CA firm to the client

After reviewing the client letter or paper’s circular, audit firm drafts a

proposal letter to

the client. The proposal letter contains technical and financial proposal for

carrying out

the subject of audit. Firm estimates its personnel costs after considering

the

mandates to be utilized and using the minimum hourly rate of fees as

prescribed by The

Instituted of Chartered Accountants of India (ICAI). The firm also mentions

that

as it is an estimate, the cost may vary with variation in number of

mandates estimated to

be utilized for the job.

STAGE – 3: Acceptance by the client on the basis of

proposal of firm– A

letter of contract

After receiving proposal letters from various audit firms, client then selects

the one which

45
is favorable to them, and it appoints the audit firm for audit purpose. From

the technical

and financial proposal of the CA firm the client company understands the

nature of the

audit (such as independent, external) to assess the organization’s internal

control system

in administering the audited matter.

STAGE – 4: A letter is sent by CA firm to the client confirming to

work with the

client – Confirmation Letter

After receiving the acceptance letter from the client, CA firm provides

confirmation

letter describing the firm’s willingness to work with the client.

In case of last year’s client

Three letters are exchanged between the CA firm and client:

i. Willingness letter for reappointment: In this letter ACNABIN wants to

audit this year. It can request to increase audit fee or change some other

conditions.

ii. Client sends appointment letter.

iii. CA firm accept this appointment.

In case of directly appointed by the client

If the client is interested to work with CA firm, then it directly sends an

appointment

letter to the firm which includes all terms and conditions. If all terms and

conditions are

46
favorable to the CA firm then it accepts the appointment and sends a

letter to the client

as an auditor.

4.2 AUDIT PROCEDURES FOLLOWED BY CA FIRM

The primary goal of firm at the time of involving in any audit engagement is

to provide the opinion on Financial Statements in accordance with Indian

Standards on Auditing (ISA) as

well as International Standards on Auditing (ISA). Firm also seeks to provide

auditing and business consultancy services that are innovative, efficient and

most

importantly responsive to their client’s business needs.

There are seven steps involved in the procedures that come one after

another. Steps are as

follows:

 Identity Overall Goals

 Gather & Evaluate Initial Information
 Assess General Risks
 Assess Account-Specific Risks
 Develop Effective and Efficient Audit Plan/Work Program
 Conduct Audit Testing
 Evaluate and Communicate Audit Results
 AUDIT PROCESS

IDENTITY OVERALL GOALS

Efficiency Opinion on financial statements

Errors Irregularities Going Concern Client Value

GATHER & EVALUATE INITIAL INFORMATION

� Understand the business � Identify client expectation

47
� Consider internal control structure � Consider materiality
 ASSESS ACCOUNT-SPECIFIC RISKS

Identify accounts and transactions to be � Select mitigating controls upon which

addressed reliance will be placed

Identify types of financial statement � Develop procedures to test mitigating

misstatement controls

� Identify risk indicators � Assess remaining risk to be

addressed
by substantive tests.

DEVELOP EFFECTIVE AND EFFICIENT AUDIT PLAN/WORK PROGRAM

� Test of controls � Substantive test

CONDUCT AUDIT TESTING

� Test of controls � Substantive test

4.2.1 IDENTIFY FIRM’S OVERALL GOALS

The goal of ACNABIN in conducting an audit is to express an opinion as to

whether the

financial statements are prepared and presented fairly in accordance with

Generally

48
Accepted Accounting Principles (GAAP). The Firm’s policies on Generally

Accepted

Accounting Principles are contained in Accounting Standards. The audit

team considers

these standards in formulating an opinion. In forming an opinion, the audit

team also

addresses responsibilities for:

♦ Errors

♦ Irregularities and other matters

♦ Efficiency

♦ Client value

 Errors

Errors are unintentional misstatements or omissions of accounts of

disclosures in

financial statements and may involve:

a) mistakes in gathering or processing accounting data from which

financial

statements are prepared.

b) incorrect accounting estimates arising from oversight or

misinterpretation of facts

and;

c) mistakes in the application of accounting principles relating to amount,

classification, manner of presentation or disclosure.

49
The audit team is required to design the audit to provide reasonable

assurance of detection

of material errors. The In-charge of an audit team is responsible to ensure

that the

following matters are considered at the time of audit:

� Existence or occurrence. Assets or liabilities of the entity exist at a

given

date and recorded transactions have occurred during a given period.

� Completeness. All transactions and accounts that should be

presented in the

financial statements are so included.

� Accuracy. Transactions and account balances are accurately recorded.

� Valuation. Assets are stated at realizable value, and liabilities are

stated at

expected settlement amounts.

� Rights and obligation. Assets are the rights of the entity and

liabilities are the

obligations of the entity at a given date.

50
� Presentations and disclosure Particular components of the

financial

statements are properly classified, described and disclosed.

� Irregularities and other matters

Irregularities are intentional misstatements or omission of amounts or

disclosures in

financial statements, including fraudulent financial reporting and

misappropriation of

assets. So there is always a risk that material irregularities may occur and

not be detected.

This risk is increased by the possibility of management’s override of

internal controls,

collusion, forgery, or unrecorded transactions. Thus, while the audit team

is required to

design the audit to provide reasonable assurance of detection of material

misstatements

regarding irregularities, the following matters must be considered by the

In-charge of the

audit team:

• Detection of Material Irregularities

• Detection of Material Misstatements resulting from illegal acts having a

direct

effect on the Financial Statements.

• Alertness for the Unsupported Transactions.

51
� Efficiency

The audit team should design audit procedures that accomplish the

overall goals

discussed above in the most efficient manner. Performing an efficient

audit involves:

� Performing front-end risk assessment and planning with adequate

partner and

manager involvement.

� Designing the combination of audit procedures based on the risk

assessment

that will efficiently reduce the risk of undetected material misstatements

to an

appropriately low level.

� Assigning work to adequately trained and supervised persons with

appropriate

experience and skill levels.

Client Value

It has long been a tradition of our firm to provide enhanced value to

clients as an integral

part of our audits. This strategy has allowed us to differentiate our

approach from that of

52
other firms. Delivering added value as an integral part of an audit and

effectively

communicating the added value information to top management,

directors etc. is a key

factor in building and maintaining a sound client relationship.

Most clients and most of our personnel would agree that we achieve

differentiation from

other firms and communicate the value of ACNABIN audit by consistently

stressing the

following:

� Sound working relationship

� Understanding our client’s business.

4.2.2 GATHER & EVALUATE INITIAL INFORMATION

After involving with the client, our first task is to collect and evaluate the

relevant and

necessary information related to the client’s business for the purpose of:

♦ Understanding the client’s business

♦ Considering the internal control structure

♦ Identifying client expectation

♦ Considering materiality.

� Understand the client’s business

53
Before involving in an audit, the auditor should understand the client

business properly.

Proper planning and designing of an audit is dependent on proper

understanding of

client’s business. So after appointing by a client, we, the members of an

audit team use

various sources to gain an understanding of client business. Differences

sources which

provide us client’s business information are as follows:

− Annual report

− Minutes

− Internal Reports

− Previous year’s audit Work Papers

− Discussion with client.

� Consider internal control structure

Every business has some kind of accounting system by which transactions

are processed,

and records of those transactions maintained. That 'system' should

incorporate control

features and is normally referred to as the system of 'Internal Control'.

The existence of a reliable system of internal control can be a great help

to the auditor,

because the objectives of the system should be:

54
a) ensuring that the records are complete, accurate and properly

authorized;

b) detecting errors and fraud.

After involving with a client, we try to understand the internal control

structure of the

client business as much as possible because understanding of client’s

internal control

structure helps us to determine the extent of our audit tasks.

So our first task in relation to the client's system of internal control is to

ascertain record

and evaluate it. Then we can use this knowledge of the client's system to

plan his audit

tests.

We consider the activities of internal auditing and their effect, if any, on

external

audit procedures. So we try to:

• Understand and Assess Internal Auditing

As external auditors, we should obtain a sufficient understanding of

internal audit

activities of the client that assists us in planning the audit and developing

an effective

audit approach. During the course of planning the audit, we should

perform a preliminary

55
assessment of the internal audit function when it appears that internal

auditing is relevant

to the external audit of the financial statements in specific audit areas.

• Evaluate and Test the Work of Internal Auditing

To use specific work of internal auditing, we evaluate and test the work of

internal

auditing to confirm its adequacy for the external auditing purposes.

The evaluation of specific work of internal auditing involves consideration

of the

adequacy of the scope of work and related programs and whether the

preliminary

assessment of the internal auditing remains appropriate. This evaluation

may include

consideration of whether:

♦ The work is performed by persons having adequate technical training

and

proficiency as internal auditors and the work of assistants is properly

supervised,

reviewed and documented;

♦ Sufficient appropriate audit evidence is obtained to afford a reasonable

basis for

56
the conclusions reached;

♦ Conclusions reached are appropriate in the circumstances and any

reports

prepared are consistent with the results of the work performed; and

♦ Any exceptions or unusual matters disclosed by internal auditing are

properly

resolved.

The external auditor would record conclusions regarding the specific

internal auditing

work that has been evaluated and tested.

Appendix-1 contains a form that shekhar Chandra & co. used to evaluate

structure of the client.

 Identify client expectation

As external auditor, firm should identify the client’s expectation and

design and

perform the audit to meet the client expectation.

Consider materiality

Information is material if its omission or misstatement could influence the

economic

decisions of users taken on the basis of the financial statements.

Materiality depends on

the size of the item or error judged in the particular circumstances of its

omission or

misstatement.

57
In designing the audit plan, we establish an acceptable materiality level so

as to detect

quantitatively material misstatements. However, both the amount

(quantity) and nature

(quality) of misstatements need to be considered.

Materiality should be considered by the auditor when:

a. Determining the nature, timing and extent of audit procedures; and

b. Evaluating the effect of misstatements.

Quantifying Materiality

A common rule of thumb for materiality is 5 to 10 percent of pretax

income. Items less

than 5 percent are considered immaterial, whereas items that are more

than 10 percent are

material. For items between 5 and 10 percent, judgment is applied

The blank materiality calculation worksheet attached in Appendix -2 can

be used in

different audit work of Shekhar Chandra firm.

4.2.3 ASSESS GENERAL RISKS

During audit planning and risk assessment, we obtain initial audit

evidence in order to:

1. effectively assess the inherent risk of potential financial statement

misstatements,

2. identify indicators of possible going concern problems, and

58
3. identify account specific risk and design an overall audit approach to

provide

reasonable assurance of detecting material misstatements.

The assessment of risk is accomplished using a “top-down” approach. The

audit team

focuses initially on high level information. The nature and extent of

documentation will

vary significantly based on an entity’s size, complexity, ownership

characteristics, and

level of risk.

Key Factors

Significant background information and business, economic and industry

conditions that

provide an indication of the level of risk for an engagement are mentioned

in items 1-15

listed below:

1. Understanding client business: Can be obtained from various sources,

e.g. annual

report, minutes, internal reports, previous year audit work papers,

discussion with

client;

2. Management’s style, outlook;

3. Significant Current Events and Reporting Issues;

4. Results of Financial Performance Review;

5. Industry Conditions and Issues;

59
6. Management Control Environment;

7. Accounting System – Policy, Procedure & Manual;

8. Materiality Consideration;

9. Limitations of the engagement, if any, e.g. documents lost, post dated

appointment,

no inventory, no cash count was done;

10. Processing Methods- The processing methods used by the entity for

significant

accounting applications;

11. EDP control: The audit team should obtain, analyze and conclude on

the

appropriate control of EDP hardware, software, data management, and

access;

input and output verification;

12. Audit Inherent Risks: Audit areas likely to cause problems or require

unusual

attention, e.g.

a) Financial Statements items likely to require adjustments;

b) Conditions likely to require modification of audit tests, such as related

party

transaction, going concern problem or possible fraud;

13. Reports: The kinds of reports to be issued, such as

a. Filings with regulatory agencies- NGO Bureau;

b. Special Reports- FD4, For USAIDS- OMB A-133, A-128;

c. Compliance with contractual provision: USAID terms and conditions;

60
14. Overall audit approach;

15. Coordination and timing;

The significant risks identified in the process should be summarized in the

General Risk

Analysis Memorandum that is given in Appendix-3.

4.2.4 ACCOUNT-SPECIFIC RISK ANALYSIS

Specific Risk Analysis (SRA) builds on information obtained during General

Risk

Assessment (GRA) and is completed after consideration of the evaluation

of the

internal control system. SRA is done to design the nature, and extent of

substantive tests on account level. SRA includes three functions-

1. Assess Account Specific Risks:

i. Identify accounts to be addressed

ii. Describe the potential risks/ frauds per GRA -Inherent Risk

iii. Describe the potential risks as per SRA assessment -Inherent Risk

iv. Determine whether the I/C for those accounts are adequate-

Control Risk (EICS)

v. Determine whether to perform test of control or not (EICS)

2. Assess the risk of potential fraud

3. Develop Audit Plan

i. Select substantive audit procedures- Detection Risk

ii. Develop work programs

iii. Perform engagement administration

61
4.2.4.1 At the Account Balance and Class of

Transaction

For the account balance and class of transaction level risk assessment the

following major account heads should be considered:

a. Cash

b. Bank

c. Inventory

d. Fixed Assets

e. Accounts Receivables

f. Accounts Payables

g. Revenue

h. Expense

i. Payroll

j. Net Assets, Retained Earnings, or Fund balances

k. Other Assets

l. Other Liabilities

m. Investment

n. Loan.

We generally assess the risks at account balance level in view of the

following items:

� Financial statement accounts likely to the susceptible to misstatement

� The complexity of underlying transactions and other events which might

require

using the work of an expert.

62
� The degree of judgment involved in determining account balances.

� Susceptibility of assets to loss or misappropriation.

� The completion of unusual and complex transactions, particularly at or

near period

end.

4.2.4.2 Audit Risks

In determining the nature, timing and extent of substantive procedures

required to reduce

audit risk to an acceptably how level, we, the auditor consider the

assessed levels of

inherent and control risks. In this regard we consider:

(a) The nature of substantive procedures,

(b) The timing of substantive procedures, and

(c) The extent of substantive procedure.

Illustration of the Interrelationship of the Components

of Audit Risk

The following table show how the acceptable level of detection risk may

vary based on

assessments of inherent and control risks

Auditor’s assessment of
control risk is

HIGH MEDIUM LOW

HIGH LOWEST LOWER MEDIUM

Auditor’s assessment
of inherent risk MEDIUM LOWER MEDIUM HIGHER

LOW 63 MEDIUM HIGHER HIGHEST

The shaded areas in this table relate to detection risk.

4.2.4.3 Consideration of Fraud and Error

We have a professional responsibility for materially misstated financial

statements

resulting from errors and irregularities. As auditors, we must provide

reasonable

assurance that such materials errors and irregularities are detected.

In planning the audit, the in charge of an audit team discusses with other

members of the

audit team the susceptibility of the entity to material misstatements in the

financial

statements resulting from fraud or error.

The potential for financial statement fraud exists on every engagement. To

address the

risk of potential fraud we must:

* Assess the risk of potential fraud

* Design our audit procedures to respond to identified risks

* We must consider varying the nature, timing and extent of our work in

areas with the

most potential for manipulation

* We need to perform our audit with appropriate professional skepticisms

and due

64
processional care.

There are many different ways in which financial statements can be

intentionally

misstated. We generally consider the following four types:

* Generating and recognizing revenues where none exists

* Inappropriate acceleration of revenue recognition

* Transactions with related parties valued either below or in excess of

equivalent

transactions with unrelated parties.

* Understatement of and shifting of costs and expenses.

4.2.4.4 Inquiries of Management

When planning the audit, we make inquiries of management:

(a) To obtain an understanding of:

i. Management’s assessment of the risk that the financial statements may

be

materially misstated as a result of fraud; and

ii. Management has put the accounting and internal control systems in

place to

address such risk;

(b) To obtain knowledge of management’s understanding regarding the

accounting and

internal control system in place to prevent and detect error;

(c) To determine whether management is aware of any known fraud that

has affected the

entity or suspected fraud that the entity is investigating; and

65
(d) To determine whether management has discovered any material

errors.

4.2.4.5 Assessment of Inherent Risk and Control

Risk

When assessing inherent risk and control risk, we generally consider how

the financial

statements might be materially misstated as a result of fraud or error. In

considering the

risk of material misstatement resulting from fraud, the auditor should

consider whether

fraud risk factors indicate the possibility of either fraudulent financial

reporting or

misappropriation of assets.

4.2.4.6 Assessment of Detection Risk

Based on the assessment of inherent and control risks, we design

substantive procedures

to reduce the detection risk to an acceptably low level. In designing the

substantive

procedures, we address the fraud risk factors that have been identified as

being present.

4.2.4.7 Documentation

If during the performance of the audit, fraud risk factors are identified that

cause the

66
auditor to believe that additional audit procedures are necessary, the

auditor should

document the presence of such risk factors and the auditor’s response to

them.

4.2.4.8 Management Representations

The auditor should obtain written representations from management that:

a. It acknowledges its responsibility for the implementation and operations

of

accounting and internal control systems that are designed to prevent and

detect fraud

and error.

b. It has disclosed to the auditor the results of its assessment of the risk

that the financial

statements may be materially misstated as a result of fraud.

4.2.4.9 Communication

When the auditor identifies a misstatement resulting from fraud, or a

suspected fraud, or

error, then auditor’s responsibility is to communicate that to

management, those charged

with governance and, in some circumstances, to regulatory and

enforcement authorities.

4.2.5 DEVELOPMENT OF EFFECTIVE AND

EFFICIENT AUDIT PLAN/ WORK PROGRAM

67
Work program is a list of procedures that are needed to be performed to

conduct the audit.

The program may also contain the audit objectives for each area and

should have

sufficient detail to serve as a set of instructions to the assistants involved

in the audit, and

as a means to control the proper execution of the work.

In the firm, we use work programs for different types of account head.

Work programs

were developed for different types of business and for different types of

account heads.

Usually an audit program contains

� Client procedures and background information.

� Audit objectives.

� Audit procedures.

� Performance and results of work.

� Conclusions.

Work programs help the auditors to ensure the quality of the audit tasks

as it provides

necessary guidelines about how to carry out their audit tasks and how to

analyze all the

account heads in a proper way. So when a new student is registered as

articled student in

68
Shekhar Chandra & Co. firm , it is the responsibility of

managers/supervisors to introduce him/her with different types of work

programs.

As the audit proceeds, the in-charge may change, modify or develop a

new work program

due to changes in the following:

o Client accounting procedures

o Client internal controls

o Unexpected results in the testing.

All procedures included in the work program must be completed and any

revisions in the

program, made during testing, must be adequately explained and

approved by the senior

or manager.

At the completion of the work program the auditor

o Uses a red pencil to show where the work is documented in the work

paper reference column.

o Uses a black pencil to write initials in the “By” column.

This process is called “Signing off on the work program”.

4.2.6 CONDUCT AUDIT TESTING

After completing work program, the audit team conducts two types of

tests which we

mentioned in our earlier discussion. Two tests are:

o Test of Controls

o Substantive Test

69
4.2.6.1 Test Of Controls:

Based on the GRA, SRA and evaluation of internal control system, we

decide whether to

perform test of control.

The audit team should test any internal controls upon which reliance is

placed to reduce

the likelihood of misstatements in the financial statements and the

reduced substantive

test has been decided.

For the effectiveness and efficiency of audit work, we conduct Test of

Control at least in

the following three major accounting areas, which in turn will cover most

of the account

level tests in any client.

Type of Test Account

level test covered

1) Cash Receipts Test Cash, Bank, Sales, Revenue, Receivables

Cash, Bank, Inventory, Purchase, Fixed

2) Cash Disbursement Test Assets, Payables, Expenses..

3) Payroll Test Payroll expenses, cash, bank.

Control Outlines

70
Items included in the three tests of control forms can be modified to

include additional

items, to delete some non- applicable items and also to customize the test

for each and

every different type of client specific procedures. Following groups of

Internal controls

may be considered while developing the forms for internal control tests.

• Authorization controls are prevention-oriented. That is, they are

designed to

prevent misstatements from occurring as a result of unauthorized or

improperly

authorized transactions.

• Transaction processing controls are also prevention-oriented.

They are designed

to prevent misstatements from occurring during the processing of

transactions and

generally consist of a hierarchy of related controls.

• Substantiation and evaluation controls are detection-

oriented (i.e., they are

designed to detect misstatements that have occurred during processing

and ensure

that they are corrected). They ordinarily address account balances or

groups of

transactions rather than individual transactions.

71
• Physical safeguard controls are prevention-oriented and consist

of segregation of

duties and other techniques to limit access to assets, records, forms, and

processing areas and procedures.

4.2.6.2 Substantive Tests

Substantive tests are procedures performed to detect misstatements in

financial statement

balances. We perform the following two types of Substantive Tests:

• Analytical procedures

• Detail Tests

• Analytical Procedures

“Analytical procedures” means the analysis of significant ratios

and trends including the resulting investigation of fluctuations and

relationships that are inconsistent with other

relevant information or deviate from predicted amounts. Analytical

Procedures are the testing of financial information by evaluating actual vs.

expected relationships among financial and non-financial data, e.g.

utilities, rent, payroll.

Analytical procedures may be used as a substantive test of balances and

for a final review

of year end financial statements.

The auditor should apply analytical procedures at the planning and overall

review stages

of the audit. Analytical procedures may also be applied at other stages.

72
Analytical procedures include the consideration of comparisons of the

entity’s financial

information with, for example:

• Comparable information for prior periods.

• Anticipated results of the entity, such as budgets or forecasts, or

expectations of he

auditor, such as an estimation of depreciation.

• Similar industry information, such as a comparison of the entity’s ratio of

sales to

accounts receivable with industry averages or with other entities of

comparable size in

the same industry. Analytical procedures also include consideration of

relationships:

• Among elements of financial information that would be expected to

conform to a

predictable pattern based on the entity’s experience, such as gross

margin percentages.

• Between financial information and relevant non-financial information,

such as payroll

costs to number of employees.We generally apply analytical procedures at

or near the end of the audit when forming an overall conclusion as to

whether the financial statements as a whole are consistent with the

auditor’s knowledge of the business.

When analytical procedures identify significant fluctuations or

relationships that are

73
inconsistent with other relevant information or that deviate from predicted

amounts, we

then investigate and obtain adequate explanations and appropriate

corroborative evidence.

• Detail Tests

Detailed tests may include the following:

a) Confirmation of third parties- Bank, A/P, A/R

b) Observation of asset - Inventory count, FA, Cash Count, Payroll cheque

distribution

c) Tests of reconciliation- bank reconciliation, inter-co reconciliation

d) Analysis of account

e) Vouching

f) Exception tests

g) Cut off tests

h) Inquire

i) Valuation tests

j) Reading of FS

k) Reading of minute of meeting of stockholder, directors and committee.

Confirmations

The audit team should determine whether the use of external

confirmations is necessary

74
to obtain sufficient appropriate audit evidence to support certain financial

statement

assertions. In making this determination, we consider materiality, the

assessed level of

inherent and control risk, and how the evidence from other planned audit

procedures will

reduce audit risk to an acceptably low level for the applicable financial

statement

assertions. In some situations, audit evidence from external sources is

more reliable than audit evidence generated internally, and that written

audit evidence is more reliable than audit

evidence in oral form. Accordingly, audit evidence in the form of written

responses to

confirmation requests received directly by the auditor from third parties

who are not

related to the entity being audited, when considered individually or

cumulatively with

audit evidence from other procedures, may assist in reducing audit risk for

the related

assertions to an acceptably low level.

Examples of accounts receivables, accounts payables and bank balance

confirmation form

that are used by firm to confirm the client’s balance of various accounts

receivables, accounts payables and bank are given in Appendix-4.

75
4.2.7 EVALUATE AND COMMUNICATE AUDIT

RESULTS

At the last stage of audit, the audit team communicates the result of the

audit to the

management and the stakeholders of the company. The audit team issues

two types of

reports:

♦ External Report which is commonly known as the “Auditor’s

report”

♦ Internal Report which is known as “Management Letter”.

We therefore have three areas to deal with:

---the unqualified audit report;

---qualifications in audit reports;

---the management letter (also known as letter of weakness or letter of

comment).

4.2.7.1 External Report/ Auditor’s report:

♦ Basic Elements

The auditor’s report includes the following basic elements, ordinarily in

the following

layout:

a. Title;

b. Addressee;

c. Opening or introductory paragraph

i. Identification of the financial statements audited;

76
ii. A statement of the responsibility of the entity’s management and the

responsibility of the auditor;

d. Scope paragraph (describing the nature of an audit)

i. A reference to the ISA

ii. A description of the work the auditor performed;

e. Opinion paragraph containing

i. A reference to the financial reporting framework used to prepare the

financial statements: and

ii. An expression of opinion on the financial statements;

f. Date of the report;

g. Auditor’s address; and

h. Auditor’s signature.

Modified Reports

In addition to unqualified or qualified, we sometimes provide modified

audit report. An

auditor’s report is considered to be modified in the following situations:

i. Matters That Do Not Affect the Auditor’s Opinion

a) emphasis of matter

ii. Matters That Do Affect the Auditor’s Opinion

a) qualified opinion,

b) disclaimer of opinion, or

c) adverse opinion.

Matters That Do Not Affect the Auditor’s Opinion

77
In certain circumstances, an auditor’s report may be modified by adding

an emphasis of

matter paragraph to highlight:

i. a material matter regarding a going concern problem.

ii. a significant uncertainty (other than a going concern problem

The addition of such an emphasis of matter paragraph does not affect the

auditor’s

opinion. The paragraph would preferably be included after the opinion

paragraph and

would ordinarily refer to the fact that the auditor’s opinion is not qualified

in this respect.

The addition of a paragraph emphasizing a going concern problem or

significant

uncertainty is ordinarily adequate to meet the auditor’s reporting

responsibilities

regarding such matters. However, in extreme cases, such as situations

involving multiple

uncertainties that are significant to the financial statements, the auditor

may consider it

appropriate to express a disclaimer of opinion instead of adding an

emphasis of matter

paragraph.

Matters That Do Affect the Auditor’s Opinion

(Qualifications in audit reports)

The nature of the circumstances giving rise to a qualification of opinion will

78
into one of two categories:

a. where there is an uncertainty which prevents the auditor from forming an

opinion on a matter (uncertainty); or

b. where the auditor is able to form an opinion on a matter but this conflicts

the view given by the financial statements (disagreement).

The forms of qualification which should be used in different circumstances are

below:-

Nature of circumstances Material So Material, Fundamental

Uncertainty Disagreement ‘Except for’

opinion

Disclaimer of opinion

Adverse opinion

• In a ‘Except for’ opinion the auditor effectively disclaims an opinion on a

matter which is not considered fundamental or auditor expressed an adverse

on a particular mater which is not considered fundamental.

• In a disclaimer of opinion the auditor states that he is unable to form an

whether the financial statements give a true and fair view.

• In an adverse opinion the auditor states that in his opinion the financial

not give a true and fair view.

List of Examples

Forms of qualified audit report

Form

Circumstances, Examples

(i) Uncertainty – material but not

fundamental;

79
1. Except for –scope No stock

count at a branch

2. Except for – scope

Acceptance of management

assurances (small business)

3. Except for – inherent uncertainty Going

concern

4. Except for – inherent uncertainty Major

litigation

(ii) Fundamental

5. Disclaimer – scope Accounting

breakdown

6. Disclaimer – scope Inability to

substantiate cash

transactions

7. Disclaimer – inherent uncertainty Valuation of

long-term

Construction contracts

(iii) Disagreement – material but not

fundamental;

8. Except – disagreement as to facts No provision

for doubtful debt.

80
9. Except – non-compliance with legislation Company

omitted information on

overseas

associated companies and

at date of

issue of financial

statements

has not obtained

Department to

Trade agreement.

(iv) Disagreement – Fundamental;

10. Adverse – departure from Indian Long-term

contracts carried at cost

Accounting Standards (IAS) with no

provision made for losses in

accordance

1.1 Adverse – disagreement as to facts Goodwill no

longer justified at

balance sheet amount.

(v) Disagreement – Fundamental;

13. Adverse – departure from IAS. Long-term contracts

carried at cost

with no provision made for

losses in

81
 accordance

14. Adverse – disagreement as to facts Goodwill no

longer justified at

balance sheet amount.

4.2.7.2 Internal Report/ Management letter

As a value added service to the client ACNABIN & Co. gives a Management

Letter to its

audit clients. The main purpose of the letter of management is to draw the

attention of

management to areas of weakness requiring rectification. It is also

possible for the auditor

to suggest areas where economies or improved efficiency are possible.

Such a letter is, of

course, no substitute for a qualification in the audit report. It will usually

deal with

matters not serious enough to justify an audit qualification.

Purposes of Management Letter:

i. The principal purpose of a report to management is to enable the

auditor to give

his comments on the accounting records, systems and controls that he

has

examined during the course of his audit. Significant areas of weakness in

systems

82
and controls that might lead to material errors should be highlighted and

brought

to management's attention.

ii. As a secondary purpose, a letter to management may also be used to

provide

management with other constructive advice. The auditor might, for

example, be

able to suggest areas where economies could be made or where resources

could be

used more efficiently.

iii. A letter to management is also a useful means of communicating

matters that have

come to the auditor's attention during the audit that might have an

impact on

future audits.

Contents:

Generally the following matters, arising out of the audit, will be included in

a letter to

management:

a) weaknesses in the structure of accounting systems and internal

controls;

b) deficiencies in the operation of accounting systems and internal

controls;

c) unsuitable accounting policies and practices;

d) Non-compliance with accounting standards or legislation.

83
Management response

The auditor should request a reply to all the points raised, indicating what

action

management intends to take as a result of the comments made in the

management letter. It

should be made clear in the report that the auditor expects at least an

acknowledgement of

the letter or, where he considers it appropriate, the directors' discussion of

the letter to be

recorded in the board minutes.

Basic Elements of the Management Letter

The management letter includes the following basic elements, ordinarily in

the following

layout:

a) Addressee;

b) Transmittal Letter

c) Title;

d) Background Information

e) Scope of Work, e.g.

i. Compliance;

ii. Authorization;

iii. Accuracy;

iv. Monitoring;

84
v. Safeguarding

f) Findings: Each finding consists of four different sections, as under:

vi. Fact (What it is)

vii. Effect (What harm was caused by not complying with the criteria)

viii. Recommendation (That corrects the cause and the condition as

applicable)

ix. Management Response

g. Date of the report;

h. Auditor’s address; and.

SECTION -5
COMPARISON OF
SHEKHAR CHANDRA’S
AUDITPROCEDURE WITH
CHRONOGICAL
SEQUENCES
85
5.1 COMPARISON BETWEEN BAKER TILLY
INTERNATIONAL AUDIT PROCEDURE (THAT IS
FOLLOWED BY ACNABIN) AND CHRONOLOGICAL
SEQUENCES OF AN AUDIT ENGAGEMENT DESCRIBED BY
EMILE WOOLF:

The main purpose of all audit engagement is more or less same – to

provide the audit

report to the interested parties on the result of the audit investigation. To

achieve this

objective, the auditor:

 Collects necessary and relevant information regarding the client’s

business to

understand the overall business.

 Examines client’s financial statements to determine whether they

are prepared

in accordance with GAAP and whether they give a true and fair view of the

86
client’s business.

 Provides audit report through which he expresses his opinion.

The audit procedures followed by the auditor to conduct an audit largely

dependent on the

size, nature, type, complexity and circumstances of the client’s business.

Emile Woolf in his book “Auditing Today” describes an extensive audit

procedure which

covers more or less all the steps followed by the auditor. Although his

audit procedure

contains eight stages, but there are basically three main functions:

1. Gather information on background and operational systems of client’s

business.

2. Consider and evaluate the internal control and overall security structure

of the

client’s business to determine the strengths and weaknesses of

operational system

and what the consequences of weaknesses in major operational areas are.

3. Prepare own (or check client’s) detailed year-end financial statements

(P & L

A/C, Balance Sheet), form an opinion on the basis of the examination of

financial

statements and express the opinion to the interested parties in the form of

audit

report.

87
Now I try to identify the similarities or differences, if any between Emile

Woolf’s

“Chronological Sequences of an Audit Procedure” and Baker Tilly

International “Audit

Procedure” which is followed by Shekhar Chandra & Co.

5.2 Similarities

a) Firm’s Overall Goal:

Baker Tilly International’s Audit Procedure focuses on some factors that

need to be

considered to achieve firm’s overall goal that is to express an opinion on

financial

statements. The auditor should concern with:

− Errors

− Irregularities

− Going Concern

− Efficiency

− Client Value.

Emile Woolf’s Chronological Sequence of Audit Procedure does not

explicitly focus on

such factors. But at the time of designing the nature, timing, and extent of

the substantive

tests, all these factors must be considered by the auditor.

88
b) Gather Information:

Auditor gathers and evaluates the background and operational system

information of the

client’s business to obtain an overall knowledge and understanding of the

client’s

business and operations. This is common for both the procedures.

c) Consider Internal Control System:

The control system which is established by the management of an

organization in order to

carry out the business of the organization in an orderly and efficient

manner is known as

the “Internal Control Systems”.

The existence of a reliable internal control system can be a great help to

the auditor. It

helps the auditor to:

i. Identify the strengths and weaknesses in major operational areas.

ii. Determine whether the transactions are properly authorized and

classified..

iii. Determine whether the records are complete and accurate.

iv. Detect error and frauds.

Both the audit procedures give importance on the proper understanding

and evaluation of

the internal control system by the external auditor.

d) Prepare and Execute Audit Program:

89
Audit Program is a list of procedures that are needed to be performed to

conduct the

audit. The program may also contain the audit objectives for each area.

The purposes of audit program are:

i. To establish an orderly and planned approach to an audit

ii. To record an overview of the client’s accounting procedures and the

audit

procedures to be performed

iii. To control how the audit plan works during testing.

e) General Risk Assessment:

General Risk Assessment is primarily an Inherent Risk assessment that is

the

susceptibility of the financial statements to material error, assuming no

internal controls.

GRA is performed to assess risk at the financial statement level. The

auditor should

attempt to predict where errors are most and least likely in the financial

statements

segments. This information affects the total amount of evidence the

auditor is required to

accumulate. At the time of assessing general risk, the auditor should

consider several

major factors:

� Nature of the client’s business

90
� Integrity of management

� Client motivation

� Results of previous audits

� Related parties

� Dollar amount of account balances

� Initial versus repeat engagement

� Susceptibility of defalcation etc.

Both the procedures focus on the assessment of risk at the financial

statement level that is

the assessment of general risk.

f) Account Specific Risk

Account Specific Risk is analyzed to design the nature and extent of

substantive tests on

account level which is the process of obtaining evidence in support of

transactions and

balances. Analysis of Account Specific Risk builds on information obtained

during

General Risk Assessment (GRA) and is completed after consideration of

the evaluation of

the internal control system.

For the account balance and class of transaction level risk assessment the

following major

account heads should be considered:

a. Cash

91
b. Bank

c. Inventory

d. Fixed Assets

e. Accounts Receivables

f. Accounts Payables

g. Revenue

h. Expense

i. Payroll

j. Loan

k. Investment etc.

g) Form and Express an Opinion:

At the last stage of an audit engagement, the auditor forms an opinion on

whether the

financial statements were prepared in accordance with GAAP and other

prescribed

policies established by the top management of the organization and

expresses his opinion

to the interested parties through audit report.

5.3 Differences

a) Engagement Procedure:

Emile Woolf’s Audit Procedure describes thoroughly how to involve with a

new client.

92
Auditor needs to achieve ethical clearance from the previous auditor

before involving in

any audit engagement.

Baker Tilly International’s Audit Procedure does not provide any

instruction/ suggestion

on how to engage with a client (new or existing client). ACNABIN follows

some

engagement procedure to engage with a new or existing client but its

audit procedure does

not include anything about such engagement.

b) Management Letter:

In case of Chronological Sequence of Audit Procedure by Emile Woolf, the

auditor

provides only audit report to the interested parties who make their

economic decision on

the basis of such report.

In Baker Tilly International’s Audit Procedure, auditor provides not only

audit report to

the interested parties but also management letter to the management of

the organization.

The principal purpose of a report to management is to enable the auditor

to give his

93
comments on the accounting records, systems and controls that he has

examined during

the course of his audit. Management letter helps the management to

focus on:

� Significant areas of weakness in systems and controls that might lead to

material errors.

� Areas where economies could be made or where resources could be

used more

efficiently.

� Matters that have come to the auditor's attention during the audit that

might

have an impact on future audits.

94
SECTION -6
Finding &
recommendation

95
 FINDING NO. 1

Involving in an audit engagement without having proper

knowledge of client’s business.

Fact:

In most cases, when the firm gets a new client, partner/partners select

one of the

managers as the supervisor of the audit team. Then supervisor selects

some of the

students as the members of the audit team for such audit engagement

and the most senior

student is selected as the in charge of the team. Sometimes supervisor

does not give all

the members of the team an overall idea of the client, nature of its

business, its operation

etc. Only in charge is informed about the client and in charge also does

not discuss the

details of the client’s business and its nature before going to the client.

Effect:

a. As the members do not know anything about the client, client’s

business, they

have to give much time to understand client’s business and then they can

start

their audit tasks. So the audit tasks take much time.

96
b. Because of members’ lacking in knowledge about the client’s business,

they

sometimes fail to deal with the client and they have to depend on their in

charge

for doing any audit task.

FINDING NO. 2

Work programs are not followed properly.

Fact:

Work programs contain step by step instructions to carry out the audit

work. In

Shekhar Chandra , we have separate work programs for different sectors

of business. Work

programs are also developed for different account heads to make our

audit tasks easier.

But in most of the cases, work programs are not followed properly. In

some cases, we just

touch each account head but do not go to the deep of the head to save

our time.

Effect:

a. Because of avoiding work programs, we are not able to

obtain proper idea about

each account head.

97
b. We may sometimes miss some important issues to be

discussed.

FINDING NO. 3

Lack of supervision.

Fact:

According to the audit standards, all the audit tasks must be supervised

properly.

Appropriate supervision ensures the quality of the audit engagement. But

practically, this

does not happen in firm. In most of the cases, in charge distributes

different

account heads to different students and gives them some idea about such

heads. But later,

in charge does not supervise his juniors’ works properly.

Effect: Juniors may do something wrong or may collect some

unnecessary documents, may failto collect necessary/ required documents

and that cannot be checked and corrected

because of lack of supervision. As a result, when the partner/partners

check the working

paper files, junior students have to face some problems.

FINDING NO. 4

Limited time to complete an audit engagement.

98
Fact:

We have to carry out and complete our audit tasks within a limited time

period.

Sometimes, Client creates pressure to complete the audit and provide the

audit report

within very limited time as it he/she has to submit the audit report and

audited financial

statements to the Stock Exchange or Registrar of Joint Stock Companies

(in case of

private limited companies) within a fixed date. Sometimes, engagement

partner of such

engagement also creates pressure to complete audit work as early as

possible.

Effect:

Because of time limitation, we complete the audit engagement and

provide the audit

report very quickly. So, it is not possible to ensure the quality of the audit

work.

Sometimes some account heads may be untouched.

FINDING NO. 5

Difficulties in obtaining required audit evidences.

Fact:

99
Auditing standard suggests that sufficient and competent audit evidences

must be

collected and must be analyzed properly. Because of time limitation, it is

not possible to

test all the transactions. We identify some transactions having significant

amounts or we

feel significant, and test them and provide our opinion on the basis of

such transactions.

So, we try to collect all the evidences related to those transactions. But in

some cases,

management of clients are not interested or do not want to provide all the

necessary or

required documents because of their lack of knowledge about audit or

they want to hide

some illegal or wrong works done by them. Sometimes, we have to wait

2/3 days to get

our required documents. Sometimes, client lost the documents that are

helpful for our

tasks.

Effect:

If the client fails to provide the required and necessary documents, it is

difficult for us to

give or issue an appropriate audit opinion and provide the appropriate

audit report.

100
Recommendations
1. Before going to the client, supervisor or in charge should give some brief

the client’s business to all the members of the audit team.

2. Work programs must be properly introduced to the juniors/ new students

followed as much as possible in each audit engagement.

3 In charge of an audit team must be ordered and properly instructed to

work of his juniors.

4. An audit team should be given appropriate time (neither much nor less)

the entire audit work properly.

5. Higher authority of the client must order or instruct the management to

Auditors the required documents

SECTION 7
101
CONCLUSION

CONCLUSION

Baker Tilly International’s Audit Procedure describes the step by step

instructions of a

financial statement audit. This procedure is sufficient for CA FIRM . If all

these steps are

102
followed properly, it is possible to ensure a proper conduct of financial

statement audit.

But as I stated above, in some cases the auditors of Shekhar Chandra firm

violates some audit

standards and not carry out their audit tasks properly. As a result, the

quality of audit

work cannot be ensured all the time. But if all theses problems can be

removed,

Shekhar Chandra & Co. will be able to maintain its present status and

improve its position to

the client. So all the partners and the articled students of Shekhar

Chandra & Co. must be conscious about this matter.

103
 Shekhar Chandra & Co.
Appendix–1
Chartered Accountants

Client…………………………………

Audit Year End………………………

1.Organization: ManagementInternal Control Evaluation

Comments/ Descriptions
has established and used
clearly specified delegation of
authority and responsibility

2. Segregation of duties: The

custodian function, recording
function and authorization
function has been done by
three different individuals

3. Physical: Safeguard of
assets with a policy, procedure
and its practice has been
ensured.

4. Authorization and
approval: Transaction
authorization & approval by a
specified authority.

5. Arithmetical and
accounting: Whether the
checking of arithmetical
accuracy, reconciliation,
correct recording has been
ensured.

6. Personnel: Qualification,
training, skill & competency of
personnel are adequate.

7. Supervision: Day to day

supervision, review, approval
of records, reconciliation,
transactions by responsible
officials.

8. Management: Budgetary
control and internal audit were
properly implemented and 104
practiced.
 Overall conclusion:

Signature Date

Shekhar Chandra &co.

Appendix-2

Chartered Accountants

Initials

Date

Done by ________ ____

Reviewed by________

Materiality Worksheet
Client Name…………………………….
Balance Sheet Date………………………..

1. Unaudited total assets at balance sheet date _____

2. Unaudited total revenues at balance sheet date _____

3. Select the larger of line 1 or line 2 _____

4. Select a multiplier if audit risk is normal, or, if better than

_____
normal, select .01

5. Multiply line 3 by line 4 _____

6. Unaudited pretax income (or equivalent if not a for-profit _____

entity)_

7. Select a multiplier if audit risk is normal, or, if better than _____

normal, select.1

8. Multiply line 6 by line 7 _____

105
 ACNABIN & Co.
Appendix-3
Chartered Accountants

Client……………………………………..

Audit Year End………………………

Client Profile & General Risk Assessment Memo

Planning/ GRA Item Effectiveness Confirmed Comments/

through the Remarks
steps

Understanding Client Business:

Management’s Style, Outlook:

Significant Current Events and

Reporting Issues:

Results of Financial
Performance Review:

Significant or unusual variation,

changes from prior years or
from industry standards.

Industry Conditions and Issues:

Management Control
Environment:

Accounting System:-
-Policy
-Procedures
-Manual
Whether maintained, updated
and followed

Materiality Consideration:
Conclusion as per worksheet
Attached

Limitations of the Engagement, 106

 _________
Signature
_______
Date

Planning/ GRA Item Effectiveness Confirmed

Comments/Remarks
through the
steps

Accounting Processing Method

EDP control : EDP hardware,

software, data management,
whether adequate

Audit Risks: Audit areas likely

to cause problems or require
unusual attention- going
concern, related party transaction

Reports: The kinds of Reporting

Environment

Conclusion: Overall Audit

approach:
1) Strong IC/ Test of IC System/
Limited Substantive Tests
-----------------
2) Poor or non-existent IC / Signature

Minimal Test of IC System/ -----------------

Extensive Substantive Tests Date

Coordination and Timing:

107
 Client Letter Head Appendix-4

Customer Name..............................

Address........................................

Sub: Accounts Receivable Confirmation

Dear Sir/ Madam,

In connection with the audit of our financial statements, please confirm

directly to our

Auditors Shekhar Chandra & Co., Chartered Accountants, Adarsh Market,

Tilak Road, Rishikesh the amount of your indebtedness to us which

according to our records as of (date) amounted to . -RS-----

-.If the amount shown is in agreement with your records. Please check “A”

below.If the amount is not in agreement with your records, please check

and complete “B”

below.

After checking the appropriate response, please sign and date your reply

and mail it

directly to our auditors in the enclosed envelope. DO NOT SEND ANY

PAYMENTS to

our auditors.

Very truly yours,

108
[Client’s Authorized Signature]

A-------------- The balance above agrees with my records.

B--------------- my records show a balance of .--------------

The difference may be due to the following

[Signed

------------
[Date]

Client Letter Head

Name of client’s seller………….

Address……………..

Sub: Accounts Payable Confirmation

Dear Sir/ Madam,

In connection with the audit of our financial statements, please confirm

directly to our

auditors ACNABIN & Co., Chartered Accountants, Adarsh Nagar,tilak road

Rishikesh 249201 the amount of our liability to you as of (date). Please

attach a statement of our account due. If no balance is due, please attach

a statement of our account showing payments made.

Please mail your reply directly to (name of auditors). A stamped,

addressed envelope is

enclosed for your convenience.

Very truly yours,

Client’s Authorized Signature ---------------------------

109
 Our records indicate that a balance of Tk. ----------------was from (name of

client) at

(date).

Date: --------------------- Signature: -------------------------

Title: ---------------------------------

Work account work description finding/conclusion related to finding

reported to section title paper of conclusion
Ref. Audit
Finding
Conclusion Appendix-5
ACNABIN & Co.
Cotroll compliance transaction material fudame-
audit manage- Chartered Accountants
System to law & & -ntal
report -ment
Audit Findings & Conclusion Summary
Regulation balance
letter
Client………… validity by.....................
Prepared

Audit Year/period End....................... Reviewed

by.....................

110
 BIBLIOGRAPHY

� Audit Manual, Shekhar Chandra & Co., Chartered Accountants

� Arens A. A. and Loebbecke J.K. (1980, Auditing: An Integrated Approach,

First Edition, Prentice Hall International inc., New York.

� Woolf E . Auditing Today, Latest Edition, Prentice Hall International Inc, New

York.

� international Accounting Standards(BAS)

� www.google.com

111