Define auditing. And how it is different from accounting?

DISTINCTION BETWEEN INVESTIGATION & AUDITING

State the general objects of Auditing? An investigation means an enquiry or examination with a fixed
Auditing: object e.g., detection of a suspected fraud, ascertainment of
Auditing in concerned with making an analytical and critical causes of low productivity, continuing losses, high labour
examination of the books of account, checking and verification of turnover, turnover, inadequate working capital, etc., or evaluation
evidence in support of entries appearing the books of account, of the work of running business. It may be made on behalf of
and ascertaining the authenticity of assertions in the financial owners, prospective investors or, in the case of a company, the
statements. The most important duty of an auditor is to report Central Government.
whether, is his opinion, the Profit and Loss Account represents a The points of distinction between an investigation and audit are
true and fair picture of the profit or loss, and the Balance Sheet, as follows:
a true and fair picture of the financial position of the business. Scope
OBJECTS AUDIT:-Evolution of the objects of auditing has The scope of an investigation is determined by the objects
followed the evolution of the business organization itself. In the intended to be achieved by the party on whose behalf
early period, for example, due to a small size and simple investigation is undertaken. For example, investigation into the
operations of business, audit examination was largely concerned causes of low productivity will only focus on factors such as
with detection of fraud by employees. The auditor was only availability and quality of raw material, competence, morale and
responsible to the owners(s) of the organization, and outsiders stability of tenure of workers, and so on. Investigation to evaluate
had neither any stake nor interest in the affairs of the enterprise. the work of a business will be concerned with the value of the
The Industrial Revolution led to a significant increase both in the assets, and reserves and liabilities of the business, together with
size and complexity of business operations. Increasing capita its potential and prospects.
requirements of business led to the birth of a new form of An audit examination, on the other hand, extends to all factual
organization, namely the joint stock company, marking assertions in the financial statements with a view to ascertaining
separation between ownership and management. Business their truth and fairness. In a statutory audit, the scope of audit
enterprises, acquired considerable economic significance and cannot be curtailed, though in an optional audit this can be done,
many outsiders, eg. Bankers, investors, creditors, government but in that case the auditor cannot be held liable for fraud or error
agencies s well as the public in general, came to develop great in any area which is outside the purview of his examinations.
stakes in the financial sell-being of the enterprises. Object
All these developments created a new awareness of the need for Investigation is aimed at ascertaining certain facts, such as
an independent opinion as to the fairness of the financial fraud, tax liability, value of shares, or causes of an existing
statements provided by management. The larger the enterprise situation such as low productivity, high labor turnover, inadequate
and the more remote the parties whose interests coincided with working capital, continuing losses, etc. It may also have the
it, the greater became the value of an independent opinion. The object of evaluating the worth of the business from the point of
much-desired revision in the objective of auditing followed, such view a prospective buyer, investor, etc.
that now the emphasis shifted to rendering an opinion of the truth The object of an audit is to critically examine and make a report
and fairness prepared by the management. Fraud detection, on the truth and fairness of assertions made in the financial
which was for long the primary objective of an audit, was statements as to the results of operations (profit or loss) and the
relegated to the second position. state of affairs of the business (position of assets and liabilities)
primary : 1. To examine the reliability and validity of the financial Time coverage
statements so as to render an opinion of the truth and fairness of The period covered by an investigation is determined by
the presentation in those statements. reference to its objectives. It may be as brief as a few weeks, or
Secondary: 2. Detection and prevention of errors, and fraud. extend to several years. The party on whose behalf and
Accountancy investigation is undertaken may change the period even during
1. It is concerned with collection, classification, summarization the course of investigation. However, an audit examination
and communication of financial data. generally covers the accounting year of the client, though in the
2. It measures business events in terms of profit or loss and case of a company it may comprise fifteen months.
communicates the the financial condition of the business. Approach to work
3. The accountant is an employee of the enterprise, entitled to An investigation is aimed to achieve specific objectives. The
regular salaries information required for the purpose may not be really available.
4. The accountant may or may not have any knowledge of audit In the circumstance, inquiry for the necessary evidence will have
techniques and procedures. to go beyond the books and records. This will require the
5. The accountant is not required to submit a report on the investigator to be alert and critical enough to identify the clues for
financial statements prepared by them. getting at the truth. Unlike the auditor, he need not accept any
6. The accountant, being an employee, ordinarily works on a fact or figure at its face value. He must subject it to a close
permanent basis. scrutiny. Only after careful analysis of the relevant evidence, he
Auditing can develop it to serve the interests of his client.
1. It is concerned with analytical and critical examinations of the The auditor, on the other hand, only examines and reviews the
financial financial statements prepared by his client. His objective is of a
records and statements. general nature, namely, to express his opinion on the authenticity
2. It reviews the measurement and of the financial statements. In his case, the standards of
communication of financial results and condition. strictness of enquire are not as demanding as in the case of an
3. The auditor is an independent and Professional competent investigator. He is also not expected to go into the minutest detail
outsider, whose services are hired for a fee. of every aspect of his work. He accepts any fact or figure at its
4. The auditor must know the Principles and techniques of face value, unless there is something apparently suspicious
accounting. which calls for deeper examination. It is true that the current
5. The auditor is required to submit a report containing his requirements as to reporting oblige him to proceed with his work
opinion as to the truth and fairness of assertions made in the somewhat in the manner of an investigator, but he cannot be
financial statements. held liable if, in the absence of anything to the contrary, he
6. The auditor has to be appointed every year. accepts ay prima facie evidence as true and fair.
Work programme
Explain the kinds of vouchers? .
2.10.1 Kinds of' Vouchers • A voucher should, on the face of it, appear to be genuine and
A voucher may be primary or collateral. A primary voucher is an complete as regards all legal and procedural formalities For
original evidence of a transaction or entry. Thus written example, if it has originated outside, it must bear the name of the
responses to confirmation requests as to debtors or creditors' issuing organisation, whether in print or robber- stamped, and
accounts, purchase invoices or each memos for goods purchase should be signed.
or statements prepared by the bank, are examples of primary • As a voucher is examined, it should be cancelled with a special
vouchers. Collateral vouchers may be in the form of copies of rubber stamp and the entry· which it supports should be marked
sales invoices, receipts issued to debtors or resolutions passed with a· special tick This will prevent the same voucher being
at the meetings of the Board or shareholders. produced in support of another entry. But stamping of a voucher
2.10.2 Requisites or a voucher should not be confused with its being certified as correct it only
Whether voucher is primary or collateral, it must constitute an means that the auditor has inspected it.
adequate, reliable and competent proof in support of the • In case any explanation or. clarification is desired with respect
transaction or entry in a book of account to which it relates. to any voucher, the same should be noted in the Audit Note
"Adequacy" is not to be confides with the number of' vouchers Book. .
which the auditor is able to collect in support of a transaction or • Each entry should be carefully checked and a clear distinction
an entry. The important thing is the relevance and authenticity of made· between capital and revenue items of receipt and
a voucher. expenditure, lest any wrong posting should affect the Profit and
"Reliability" of a voucher is to be determine4 with reference to Loss Account and the Balance Sheet.
the mariner of preparation and maintenance of the vouchers; • Suitable adjustment entries should be made in case a voucher
e.g., whether the voucher is addressed to the firm at its normal relates to prepayment of expenses or accrual· of income.
business address, and whether it is properly dated, authorized Separate schedules should be prepared for these, as also for
and flied. "Competency" of a voucher will largely depend on the directors' fees, exceptional and nonrecurring transactions, as
place of its origin. Vouchers originating outside, such as written these would be useful at subsequent stages of audit
confirmations obtained from debtors or creditors, may be safely • A pre-receipted invoice should not be accepted as a voucher as
treated as competent evidence. But vouchers originating outside this is likely to give rise to double payment, first against credit
but held by the client, e.g., purchase invoices or purchase and' then again against a cash purchase.
bank-statements, cannot be so treated because these can be • Vouchers by way of resolutions and minutes should be
easily forged or altered. Vouchers process through an effective examined with reference to their validity in the light of scope and
internal control system can also be relied upon. For example if limitations set out in the Memorandum and Articles of
time wage, cards are prepared as per notification of the Association, Partnership Deed, etc.
personnel department, the time of daily arrival and departure of • Duplicates of vouchers, shown as missing from the records,
each worker is recorded by a machine under the Supervision of should not be accepted as a matter of routine. Reasons and
a gate-keeper, and there is a regular floor- checking by the explanation for the loss of vouchers should be sought from the
supervisor, the time wage cards may be safely relied upon. client in writing and, where possible, the auditor should make an
2.10.3 Examination of vouchers independent investigation, including correspondence with the
Vouchers constitute a valuable link between business parties from whom the missing vouchers had originated. In any
transactions and their, entries in the books of account. Hence, case, if the auditor is not satisfied with the explanation for any
each voucher should be examined with great care and caution missing voucher, he should state the same in his report
and while doing so the following points must be given particular
attention.
• Each voucher should be consecutively numbered and carefully
preserved.
• The filing of vouchers should be in the same order in which the
relevant entries appear in the books of account.
• It should be addressed to the client - organization at its normal
business address. This is necessary so as to accept it as a prima
facie evidence of the corresponding transaction being related to
the business. In case a voucher has been addressed in the
personal name of a director, partner, manager, etc., the original
invoice, goods received note, and stock register should be
carefully examined to ascertain whether the goods·· purchased
are meant for the business, or for the individual to whom the
voucher is addressed. If the latter, then relevant records should
be examined to see that the individual concerned has been
debited with the amount of the voucher and the same has been
realised from him.
It should be properly dated and correspond to the date of the
transaction to which it relates and the period under audit. ... .
• It should be authorised by an official properly empowered in
this behalf..
• The amount shown in the. Voucher should be correctly·
calculated and totaled. Special attention should be given to
checking of the amount. shown in figures only, as it is liable to be
easily altered. Where the amount is shown both in figures and
words, any difference between the two should be properly
investigated. .
• If the amount of a voucher exceeds RS.20, it should be
properly stamped
Define verification of assets and its importance with Describe the Qualities of an auditor.?
example? General qualities:
VERIFICATION OF ASSETS • Honesty and integrity. He should be honest and steadfast in his
According to the “Statement of Auditing Practices” issued by the ethical behavior. He should develop the sense of keen judgment
Institute of Chartered Accountants of India (ICAI), the auditor’s to avoid errors of omission of commission, exercise due care and
objective in regard to verification of assets generally is to satisfy skill in his work, and do nothing under pressure.
himself that – • Tactfulness. He should be firm, yet diplomatic, with his client
(a) they exist; (b) they belong to the client; and his staff. He should know “when to speak out, when to be
(c) they are in possession of the client or any person authorized silent, how to say or write that which is necessary but awkward,
by him; (d) they are not subject to undisclosed encumbrances or and courage to face up to the need for doing so..”
lien; (e) they are stated in the Balance Sheet at proper amount in • Vigilance. He should be ever alert in his work. He should be
accordance with sound accounting principles; and able to perceivve not only what has happened but also what
(f) thy are recorded in the accounts (this will include scrap and might happen, with a sense of imagination to see beneath and
waste). beyond the surface.
Accordingly, the objects of verification of assets is to form an Judgment. Exercise of judgment is a prime factor in any audit.
opinion is respect of each of the following. The auditor is constantly required to make judgment as regards
• Existence of assets as at the date of the balance sheet. The evidence, audit programme and procedures, and he should be
first step in process able to distinguish the relevant from the irrelevant, important
of verification is to see that the assets as disclosed in the points from those which are relatively unimportant.
Balance Sheet are actually in existence as on the balance sheet • Responsibility. Public confidence in the auditing profession
date. This can be done by physical inspection of all the assets or comes from high standards of performance and a high sense of
a representative sample thereof. According to the “Statement on responsibility to the public interest. In both action and behaviour,
Auditing Practices” issued by the ICAI, the auditor is not required the auditor must display a great sense of responsibility.
physically to verify the assets. He can do so by applying • Diligence. Auditing profession is said to be a zealous mistress,
appropriate substantive and compliance procedures, such as making exacting demands on the auditor’s time, energy and
examination of available documentary evidence and evaluation attention. The auditor is required to work diligently and
of internal control. The statement explicitly states that it is the methodically to accomplish his tasks as also to set an example
duty of the management of ensure that fixed assets of the before his subordinates.
enterprise are in existence and this should by physically verified • Communication. He should be able to communicate effectively,
by it at periodical intervals.•1 Ownership of assets. Evidence as both orally and in writing. Particularly in the matter of report
regards ownership of assets may be obtained by way of writing, he should be able to convey his message clearly,
documents of title, e.g., papers containing evidence of concisely and precisely.
ownership, such as contracts, certificates, etc. In case these • Common sense. The auditor must have robust common sense,
documents are held by the enterprise, the auditor should insist without which he would be a mere technician, knowing
that they be produced for audit inspection at the same time and everything about his job but lacking in ability to apply it at the
not in bits and pieces such that these may not be pledged in right time and place.
respect of liabilities unknown to the auditor. Where the Professional expertise:
documents of title are held by third parties, the auditor should • Knowledge of accounting. He should know the conceptual
obtain a certificate directly from them or arrange to inspect the framework of accounting, various systems of accounting, and its
documents himself. In the case of assets without any documents functions in a business – oriented society. He should also keep
of title, such as plant, machinery, furniture, debtors, himself abreast of the changes and developments in the field of
stock-in-trade, work-in-progress, the auditor should design the accounting. He should be familiar with the accounting principles
verification procedure based on the efficacy of the internal as regard determination of periodic income, recognition of
control system of the enterprise.Possession of assets, whether revenue and capital items of income and expenditure, inventory
actual or constructive. The auditor should ascertain that the valuation, depreciation, equity measurement, and content and
assets are in the possession of the client. There are three presentation of financial statements.
requisites of possession. First, there must be actual or potential He is also required to be fully conversant with the Accounting
physical control. Secondly, physical control should be Standards (AS) issued by the Institute of Chartered Accountants
accompanied by intention to entrust possession. Thirdly, such of India and to ensure that the mandatory standards are followed
intention should be visible or evidenced by external signs. in the preparation and presentation of financial statements of the
Possession may be real, constructive or symbolic. If any asset is client.
in possession of any other person, it should be seen that this has • Knowledge of cost accounting. He should be fairly acquainted
been duly authorized by the client.• 1 Proper valuation of assets. with the concepts of cost accounting such as direct and indirect
The auditor should ascertain whether all the assets are valued in costs, cost allocation, allocation of overheads, standard costing,
accordance with the generally accepted accounting principles as cost and budgetary control, etc. He should also recognize the
determined by law, pronouncements issued by the Institute of importance of cost accounting to decision making and planning,
Chartered Accountants of India (ICAI) and the International such as, make or buy decisions, product mix, inventory control
Federation of Accountants (IFAC), and prevailing practices. The etc.
policies as regards valuation should be consistently followed and • Knowledge of accounts of business under audit. He should be
the effect of any change in the valuation policy should be fully adequately familiar with the system and techniques of
explained.•2 Proper presentation. All material assets should be accounting in the business under audit.
properly disclosed and described in the financial statements as
required by law and the professional pronouncements of the ICAI
and the IFAC. It may be that while an asset is properly disclosed
in the Balance Sheet at the correct amount, the manner of its
description may be misleading as, for example, loan to a small
finance company being described as balance with bankers, such
that anyone reading the financial statements will not have the
faintest idea of the potential risk of a bad debt.
Define audit report. Explain its contents? Describe the various steps in evaluation of internal control
Object of audit report system.
The audit report is fundamental to any audit. The· purpose of The following methods may be used to determine the adequacy
audit procedures carried out by the auditor during the course of of the internal control:
an audit is to enable him to report to the persons who have (a)Narrative record, (b)Questionnaire and (C)Flow chart.
appointed him, whether in his opinion the representations in the Narrative record: It contains a complete written description of
financial statements ate true and fair. Thus, there are two basic the internal control 'system of the enterprise as actually found in
aspects of an audit: first, to establish the facts and, secondly, to operation by the auditor The method of keeping a narrative
report material facts without any fear or favour. The auditor can record may be usefully employed in a small business where the
beheld liable for his failure to carry out satisfactory audit internal control system may generally be weak. According to
procedures. He can also be held liable for his failure to report Cashing and Owners; it allows flexibility and can be adapted to
facts in a clear and unbiased manner. any type of enterprise. The type and extent of narrative record
In the case of a company, for example, the shareholders cannot will vary according to the requirements and individual judgment
by themselves inspect the books of account on the basis Of of each auditor. For example, if one auditor requires a
which the financial statements of the company are prepared. description of difficult it features of internal control relating to
Many of the shareholders are even otherwise not competent to broad functions such as sales, purchases cash payments, etc.,
detect irregularities in the books of account. Therefore, they and another may show preference for comments only on the
appoint an auditor who is professionally competent and under a discovery of the defects in internal control.
legal obligation to report to them on the truth. and fairness of the· Questionnaire. Internal control questionnaire is an important and
assertions made in the financial statements. The auditor is thus effective method for appraising the intern.a1 control system. For
duty-bound to safeguard the interests of the shareholders this, reason, it is also quite common. The questionnaire contains
against an irregular activities of the management in dealing with a set of questions the answers to which provide a valuable
the assets of the company. To this end, he is required - (a) to find insight into the functioning of the' internal control system within
out whether the management of the company has maintained the enterprise.
proper books of The auditor may prepare a standard questionnaire to use with
Report v Certificate suitable modifications in the case of all audit engagements, or he
A certificate means a written statement made by a person having may prepare fresh one for each audit engagement. The Institute
authority to make it. It may be used as proof or evidence of the of Chartered Accountants of India has published an Internal
thing to which it relates. A high degree of exactitude and Control Questionnaire for the use of auditors. This can be duly
precision is the basic ingredient of a certificate which, therefore, modified to suit individual requirements.
assumes the character of a guarantee to the effect that the The questions should be so designed that an answer can be
matters certified are indeed what they appear to be. provided by a mere ticking of the appropriate word, "yes", "No" or
An audit report is not a certificate. It only contains the opinion of 'Not Applicable," though there is space for comments or
the auditor as regards the representations made in financial explanation in regard each answer. The auditor can himself
statements and matters relevant thereto. It does not certify - that complete the
the financial statements really or necessarily present what they questionnaire as he progresses with his observation, testing and
claim to present Event otherwise, the auditor does not, indeed evaluation of the internal control. However, in the case of certain
cannot, provide a guarantee that the facts and matters questions, answers can only be provided by officials of the
represented in the financial statements are wholly and truly what enterprise. Questionnaires are generally favored in the case of
they are represented to be. audit of large enterprises because they save considerable time
No doubt, the auditor may give a certificate on matters such as for the 3llditor by eliminating the need for preparing a programme
the value of imports and exports, return of deposits, bonus for each engagement. Yet another advantage is that since the
computation, etc. But this is only because it is possible to arrive questionnaire contains questions in regard to all aspects of
at fairly precise conclusion with respect to them. internal control, there is little chance of any omission of important
Contents of audit report review procedures.
The auditing standard as regards audit report applies to all • Flow charting: A flow chart is a graphic presentation of any
reports in which the auditor is required to express his opinion on system. It uses symbols to indicate the relationships between
financial statements intended to ' give a true and fair view of the different parts of the system and operations of each part and the
state bf affairs, profit or loss, etc.' But it does not override the system as a whole.
statutory provisions regarding any other matters to be included in A flow chart for the purpose of study and evaluation of the
the report in the case of any specified class of enterprises. internal control system helps to depict the flow of. Business
Accordingly, the report should identify the persons to whom it is transactions of different types, the documents raised in the
addressed and the financial statements to which it relates. process and how these are treat. A flow chart is an effective
Secondly, the auditor should refer expressly in his report to the visual medium for proper study and eval'uat1on of the internal
following: control. It. enables the auditor to know ~e strengths and
(a) whether the financial statements have been audited in weaknesses of the internal control system and what audit tests
accordance with generally accepted auditing standards and and procedures will b~ ,necessary to arrive at an opinion as
practices; regards the fairness of the representations made in the financial
(b) whether in his opinion the financial statements give a true statements.Drawing of a new chart
and fair view of the state of affairs, profit or loss and, where There are many approaches to the drawing of a flow chart,
applicable, source and application of funds; and including that which is used by computer programmers.
(c) any matters prescribed to be included inhis report according However, since the purpose of a flowchart in the case of an audit
to the relevant law or other requirements. examination is to study and evaluate the efficacy of the internal
control system, simplified flow chart should be enough.
Accordingly, the internal control system is depicted with the help
of symbols, figures and code references with the minimum
amount of narrative explanation. There can be many symbols to
indicate the flow of transactions but some of them have acquired
wide acceptability. The movement of symbolized documents and
information can be shown horizontally or vertically. The vertical
Define audit report. Explain its contents? Describe the various steps in evaluation of internal control
Object of audit report system.
The audit report is fundamental to any audit. The· purpose of The following methods may be used to determine the adequacy
audit procedures carried out by the auditor during the course of of the internal control:
an audit is to enable him to report to the persons who have (a)Narrative record, (b)Questionnaire and (C)Flow chart.
appointed him, whether in his opinion the representations in the Narrative record: It contains a complete written description of
financial statements ate true and fair. Thus, there are two basic the internal control 'system of the enterprise as actually found in
aspects of an audit: first, to establish the facts and, secondly, to operation by the auditor The method of keeping a narrative
report material facts without any fear or favour. The auditor can record may be usefully employed in a small business where the
beheld liable for his failure to carry out satisfactory audit internal control system may generally be weak. According to
procedures. He can also be held liable for his failure to report Cashing and Owners; it allows flexibility and can be adapted to
facts in a clear and unbiased manner. any type of enterprise. The type and extent of narrative record
In the case of a company, for example, the shareholders cannot will vary according to the requirements and individual judgment
by themselves inspect the books of account on the basis Of of each auditor. For example, if one auditor requires a
which the financial statements of the company are prepared. description of difficult it features of internal control relating to
Many of the shareholders are even otherwise not competent to broad functions such as sales, purchases cash payments, etc.,
detect irregularities in the books of account. Therefore, they and another may show preference for comments only on the
appoint an auditor who is professionally competent and under a discovery of the defects in internal control.
legal obligation to report to them on the truth. and fairness of the· Questionnaire. Internal control questionnaire is an important and
assertions made in the financial statements. The auditor is thus effective method for appraising the intern.a1 control system. For
duty-bound to safeguard the interests of the shareholders this, reason, it is also quite common. The questionnaire contains
against an irregular activities of the management in dealing with a set of questions the answers to which provide a valuable
the assets of the company. To this end, he is required - (a) to find insight into the functioning of the' internal control system within
out whether the management of the company has maintained the enterprise.
proper books of The auditor may prepare a standard questionnaire to use with
Report v Certificate suitable modifications in the case of all audit engagements, or he
A certificate means a written statement made by a person having may prepare fresh one for each audit engagement. The Institute
authority to make it. It may be used as proof or evidence of the of Chartered Accountants of India has published an Internal
thing to which it relates. A high degree of exactitude and Control Questionnaire for the use of auditors. This can be duly
precision is the basic ingredient of a certificate which, therefore, modified to suit individual requirements.
assumes the character of a guarantee to the effect that the The questions should be so designed that an answer can be
matters certified are indeed what they appear to be. provided by a mere ticking of the appropriate word, "yes", "No" or
An audit report is not a certificate. It only contains the opinion of 'Not Applicable," though there is space for comments or
the auditor as regards the representations made in financial explanation in regard each answer. The auditor can himself
statements and matters relevant thereto. It does not certify - that complete the
the financial statements really or necessarily present what they questionnaire as he progresses with his observation, testing and
claim to present Event otherwise, the auditor does not, indeed evaluation of the internal control. However, in the case of certain
cannot, provide a guarantee that the facts and matters questions, answers can only be provided by officials of the
represented in the financial statements are wholly and truly what enterprise. Questionnaires are generally favored in the case of
they are represented to be. audit of large enterprises because they save considerable time
No doubt, the auditor may give a certificate on matters such as for the 3llditor by eliminating the need for preparing a programme
the value of imports and exports, return of deposits, bonus for each engagement. Yet another advantage is that since the
computation, etc. But this is only because it is possible to arrive questionnaire contains questions in regard to all aspects of
at fairly precise conclusion with respect to them. internal control, there is little chance of any omission of important
Contents of audit report review procedures.
The auditing standard as regards audit report applies to all • Flow charting: A flow chart is a graphic presentation of any
reports in which the auditor is required to express his opinion on system. It uses symbols to indicate the relationships between
financial statements intended to ' give a true and fair view of the different parts of the system and operations of each part and the
state bf affairs, profit or loss, etc.' But it does not override the system as a whole.
statutory provisions regarding any other matters to be included in A flow chart for the purpose of study and evaluation of the
the report in the case of any specified class of enterprises. internal control system helps to depict the flow of. Business
Accordingly, the report should identify the persons to whom it is transactions of different types, the documents raised in the
addressed and the financial statements to which it relates. process and how these are treat. A flow chart is an effective
Secondly, the auditor should refer expressly in his report to the visual medium for proper study and eval'uat1on of the internal
following: control. It. enables the auditor to know ~e strengths and
(a) whether the financial statements have been audited in weaknesses of the internal control system and what audit tests
accordance with generally accepted auditing standards and and procedures will b~ ,necessary to arrive at an opinion as
practices; regards the fairness of the representations made in the financial
(b) whether in his opinion the financial statements give a true statements.Drawing of a new chart
and fair view of the state of affairs, profit or loss and, where There are many approaches to the drawing of a flow chart,
applicable, source and application of funds; and including that which is used by computer programmers.
(c) any matters prescribed to be included inhis report according However, since the purpose of a flowchart in the case of an audit
to the relevant law or other requirements. examination is to study and evaluate the efficacy of the internal
control system, simplified flow chart should be enough.
Accordingly, the internal control system is depicted with the help
of symbols, figures and code references with the minimum
amount of narrative explanation. There can be many symbols to
indicate the flow of transactions but some of them have acquired
wide acceptability. The movement of symbolized documents and
information can be shown horizontally or vertically. The vertical