RAMAKRISHNA MISSION VIVEKANANDA COLLEGE. (Autonomous), CHENNAI.

DEPARTMENT OF COMMERCE (EVENING COLLEGE)

AUDITING AND ASSURANCE (UCMAM11/BM11/CM11)

UNIT I
Auditing: Meaning – Definition – Nature – Scope – Objectives – Types – Limitations – Principles of
Auditing – Auditor’s Independence – Appointment of Auditors – Removal of Auditors – Qualification –
Disqualification – Rights – Duties – Liabilities.

UNIT II
Standards on Auditing and Guidance Notes: Overview – Standard Setting Process – Role of
International Auditing and Assurance Standards Board – Standards on Auditing issued by ICAI- SA
200,230,240,250,299,500 and SA 530.

UNIT III
Vouching: Meaning – Vouching of Cash and Trading Transactions – Verification and Valuation of
Assets and Liabilities – Audit on Assets and Liabilities – Internal Check – Internal Control – Elements of
Internal Control – Review and Documentation – Evaluation of Internal Control System – Internal Control
Questionnaire – Internal Control Check List – Tests of Control – Application of Concept of Materiality and
Audit risk. Concept of Internal Audit: Internal Control and Computerised Environment – Approaches to
Auditing in a Computerised Environment.

UNIT IV
Audit evidence- Audit procedures for obtaining evidence, Sources of evidence, Reliability of audit
evidence, Methods of obtaining Audit Evidence- Physical verification, Documentation, Direct
Confirmation, Re-computation, Analytical review techniques, Representation by Management, obtaining
certificate.

UNIT V
Company Audit: Audit of Share Capital – Debentures – Dividend – Provisions under the Companies
Act,2013 relating to Qualification – Disqualification – Appointment – Remuneration – Removal – Rights –
Duties – Liabilities – Reporting requirements under the Companies Act,2013.
BOOKS FOR REFERENCE
1. Practical Auditing, S. Chand – B.N. Tandon
2. Corporate Governance – Materials from ICSI
3. Principles and Practice of Auditing – Dinakar Pagare

QUESTION PAPER PATTERN

Pattern Total Questions To answer Marks per Total Marks
Question
Section A 12 10 2 20
Section B 7 5 5 25
Section C 4 2 15 30

INSTRUCTIONS TO THE QUESTION PAPER SETTER

Section-A: Minimum 2 Questions to be asked from each of the five Units
Section-B: Minimum 1 Question to be asked from each of the five Units
Section-C: Minimum 1 Question to be asked from any four Units

pg. 1
 Unit – I
Meaning of Auditing:
The word Audit is derived from Latin word “Audire” which means ‘to hear’. Auditing is the
verification of financial position as disclosed by the financial statements. It is an examination of accounts
to ascertain whether the financial statements give a true and fair view financial position and profit or loss
of the business. Auditing is the intelligent and critical test of accuracy, adequacy and dependability of
accounting data and accounting statements.

Definition of Auditing:
According to Spicer and Pegler, “An audit is an examination of books, accounts and vouchers of a
business. The object is to enable auditors to satisfy themselves that Balance Sheet is properly drawn up,
gives a true and fair view of state of affairs of business and profit and loss account gives a true and fair
view of profit and loss of financial period, according to his information and explanations given to him and
as shown by books. If not, reasons why he is not satisfied”.

Nature of Auditing:
a) Introduction, Essential Features
b) Objectives of an Audit: Errors and Frauds in Auditing: Role of Auditor in detecting errors and
frauds.
c) Relation between accounting and auditing.
d) Basic Principles Governing an Audit.
e) Concept of Ethics in Auditing and Auditor’s Independence.
f) Scope and Procedures of Auditing.
g) Changes in the Concept of Auditing.
h) Social Objectives of Auditing.
i) Benefits Derived
j) Inherent Limitations of an Audit.
k) Auditing Vs Investigation.
SCOPE OF AUDIT
The following points merit consideration in regard to scope of audit:
1. The audit should be organized to cover adequately all aspects of the enterprise relevant to the
financial statements being audited.
2. To form an opinion on the financial statements, the auditor should be reasonably satisfied as to
whether the information contained in the underlying accounting records and other source data is
reliable and sufficient as the basis for the preparation of the financial statements.
3. In forming his opinion, the auditor should also decide whether the relevant information is properly
disclosed in the financial statements subject to statutory requirements, where applicable.
4. The auditor assesses the reliability and sufficiency of the information contained in the underlying
accounting records and other source data by:
(a) Making a study and evaluation of accounting systems and internal controls and
(b) Carrying out such other tests, enquiries and other verification procedures of accounting
transactions and account balances as he considers appropriate in the particular circumstances.
5. The auditor determines whether the relevant information is properly disclosed in the financial
statements by:

pg. 2
 a) Comparing the financial statements with the underlying accounting records and other source data
to see whether they properly summarize the transactions and events recorded therein; and
(b) considering the judgments that management has made in preparing the financial statements
accordingly, the auditor assess the selection and consistent application of accounting policies, the
manner in which the information has been classified, and the adequacy of disclosure.
6. The auditor is not expected to perform duties which fall outside the scope of his competence. For
example, the professional skill required of an auditor does not include that of a technical expert for
determining physical condition of certain assets.
7. Constraints on the scope of the audit of financial statements that impair the auditor’s ability to
express an unqualified opinion on such financial statement should be set out in his report, and a
qualified opinion or disclaimer of opinion should be expressed as appropriate.

Objectives of Auditing:
The objectives of an audit may broadly be divided into:
I. Primary Objectives
II. Secondary Objectives
III. Specific Objectives

I.. Primary Objective

The Companies Act requires an auditor to state whether in his opinion, the accounts are prepared
in conformity with law and disclose the true and fair view of the state of company’s affairs or not. This is
called expression of expert opinion.
a) Whether Financial statements are prepared in conformity with law:
Balance sheet portrays the financial position of a concern as on a particular date. Profit and
loss account discloses the operating results of the period covered in the statement. While auditing,
greater reliance is to be placed on the accounting system in use. An auditor resorts to test checking
pg. 3
 to decide on the reliability of accounts. Accounts prepared in conformity with law are true to the
purpose.
b) Whether financial statements present a true and fair view:
The primary objective of an independent financial audit is to determine whether the
financial statements present a factual and impartial view of the financial position and working
results of an enterprise. The balance sheet should reveal the true and fair view of the state of
affairs of the business and the profit and loss account and a true and fair view of the profit or loss
for the financial period.

II.. Secondary Objectives:

An auditor has to examine the books of account and relevant supporting documents. During the
process, certain errors and frauds may be discovered. These can be discussed under two heads (a)
detection and prevention of errors and mistakes and (b) Detection and prevention of frauds.
Detection and Prevention of Errors and Mistakes:
Error in accounting refers to an unintentional misstatements of financial statements. Errors and
mistakes are of various kinds.
1). Clerical Errors:
Clerical errors arise because of mistakes committed by the clerical staff in ordinary course of
accounting work. These are of five types.
i) Errors of Omission:
Errors of omission occur on account of transactions not being recorded in the books of
account either wholly or partially. It is difficult to detect such errors, as they do not affect the
arrangement of trial balance. A critical scrutiny of accounts only can uncover such errors. Omission
can be either whole or partial. When a transaction is totally omitted from the books, it is “complete
omission”. For example, omission of entering purchases or sales entirely. When a transaction is
partially recorded it is known as “partial omission”. For example, salaries for only 11 months have
been accounted for and the outstanding amount of 12th month has not been provided for.
ii) Errors of Commission:
These contain incorrect additions, wrong postings and entries. Examples of this kind include
the following.
Errors in addition, carry forwards in the books of original entries or ledger.
Errors or incorrect postings such as debit amount posted to credit, wrong amounts
posted to an account, an amount posted twice, omission to post an amount from a book
of original entry to the ledger.
Errors in taking out balances of the ledger accounts.
The above errors do affect the agreement of the trial balance. Checking the arithmetical
accuracy of books of original entries and ledger and postings from the books of original entries to
the ledgers may detect such king of errors.

iii) Compensating Errors:

An error is compensated or counter balanced by another errors. The adverse effect of one
on debit side or credit side is neutralised by that of another on credit or debit side.
Compensating errors counter-balance each other. Despite errors, two sides of the trial
balance tally.
For example, a cash sale of Rs.10,000 may be recorded in the cash book as Rs.1,000, another
cash sale of Rs.1,000 may be recorded as Rs.10,000.

pg. 4
 iv) Errors of Duplication:
An entry in a book of original record is made twice and posted twice as well. They cannot
be located easily as the agreement of the trial balance is not affected. For instance, invoice sent
in duplicate entered twice in the books and posted twice in the ledger. Only thorough checking
will help detect duplication.
v) Trial Balance Errors:
Trial balance errors consist of casting errors in the trial balance, omission of a balance while
extracting balance from the books of account, or entering an amount incorrectly or on the wrong
side. These errors can be located during routine checking.

2). Errors of Principle:

Misapplication or overlooking accounting principles causes errors of principle. There are three
types of errors generally regarded as errors of principle.
i) Incorrect Allocation:
Errors arise when the distinction between revenue and capital is not strictly observed. For
example, capital expenditures charged to revenue and vice versa.
ii) Omission of outstanding assets and liabilities:
Prepayments are ignored and the amount charged from the profit and loss account and
outstanding expenses (in respect of rent, salaries, commission etc.) are ignored and not accounted
for.
iii) Incorrect Valuation of assets:
Fixed assets for example are not valued at cost less depreciation, closing stock is not valued
at cost or market price, whichever is less.
The following kinds of errors also fall in this category.
Excess or inadequate provision for depreciation.
Excess or wrong provision for bad and doubtful debts
Overvaluation or undervaluation of closing stock etc.
Errors can be detected by an intelligent vouching and a complete verification of the assets and
liabilities.

Detection and Prevention of Frauds:

Frauds are internal irregularities aimed at cheating or causing loss to another. One or more
individuals acting in collusion with one another commit frauds. It is their intentional misrepresentation
of financial information for unauthorised gains.
Characteristics of Frauds:
The Institute of Internal auditors give the characteristics of frauds.
i) Frauds are an array of irregularities and illegal acts characterised by intentional deceiving. Persons
indulging in frauds gain at the expenses of the organisation.
ii) Frauds are committed for the benefit of the organisation. People inside the organisation deceive
outside parties. For example, tax frauds, intentional concealment of material information to
impress outsiders about financial position of the company, improper valuation of assets and
liabilities, illegal contribution to political parties, etc.
iii) Frauds are committed to give benefit to an employee, an outsider or another firm at the cost of
the organisation. Examples include taking bribes, misusing inside information, embezzlement of
cash, defalcation, misappropriation, etc.
Forms of Fraud
A fraud may be in the form of misappropriations and defalcations and misrepresentation of
accounts.
pg. 5
1).. Misappropriations and defalcations:
Cash and goods are misappropriated by showing fictitious entries in records.
i) Embezzlement of Cash
Embezzlement of cash refers to falsification or misappropriation of cash. It is very common in big
business concerns as the proprietor has very little control over the receipts, and payments of cash.
Cash may be misappropriated in a number of ways as follows.
Omitting to enter the cash receipts
Entering less than what is received
Omitting to record sales and taking away the sale proceed
Teeming and lading- concealing the money received from the first customer and entering I
his account when cash is received from second one and so on.
Making fictitious entries for discounts, returns, bad debts etc.
Wages are entered for dummy workers.
Recording fictitious purchases and misappropriating the cash involved.
Suppressing credit notes received from creditors for purchase returns and discounts.
ii) Misappropriation of goods:
An employee may take away the goods of the company for is personal use. It is very
common especially when goods are not bulky and are of less value. Detection can be possible
only if proper records of stock inward and outward ae maintained. Accurate stock recording
through proper accounting for purchases and sales is essential. Periodical checking of stock can
minimise the possibility of such misappropriation.
2.. Misrepresentation of accounts:
This is fraudulent manipulation or falsification of accounts. To reveal the distorted picture, the
accounts of a firm may be falsified. By making false entries, the accounts of a firm are manipulated to
reveal the distorted picture. Usually, a very large amount is involved in this type of fraud. It is committed
by those responsible persons who are in top management, viz, directors, managers, etc. Devices adopted
for this purpose may be as follows:
Undervaluation and overvaluation of closing stock and other assets.
Overvaluation ad undervaluation of liabilities.
Creating excess or less provision for depreciation, or not at all providing for depreciation.
Charging capital expenditure to revenue and vice versa
Providing for excess or less bad debts
Writing off excess or less bad debts.

i) Window Dressing:
In window dressing, accounts are prepared in such a manner to reveal a much better and sound
financial position of the business enterprise. The objectives of window dressing are;
To attract potential investors to subscribe for the shares
To avail further credit
To enhance the reputation in the market by showing more sound financial position than the
real.
To win the confidence of stakeholders.
To increase the price of shares artificially.
ii) Secret Reserves:
Accounts are prepared in such a manner that they disclose a worse financial position than
the real. The real picture of the business is concealed and a distorted one is revealed. Important
objectives behind creating secret reserves are:
To avoid or reduce income tax.

pg. 6
 To buy back shares from the open market (through reducing the price of shares by paying
less or no dividend).
To mislead the competitors by concealing the true position of company’s state pf affairs.

Types of Audit / Classification of Audit / Kinds of Audit

On the basis of Organisation

Joint Stock Companies:
Audit is compulsory for undertakings formed under the statute or laws. Under the Indian
Companies Act, 2013 joint stock companies in India have to get their accounts audited by an independent
professional accountant. Shareholders are the real owners of the company. Directors are elected from
among shareholders to supervise the overall affairs of a company. Day-to-day working is entrusted to
managerial personnel appointed for the purpose. Shareholders want the financial statements to exhibit
true and fair view of company’s state of affairs. People invest money in the shares on the basis of the
financial position and profitability of the company. Moreover, financial institutions, banks, trade
creditors, tax authorities atc., do rely on the financial statements of the company. Considering all these
factors, the companies act requires companies to undergo audit legally.
Cooperative Societies Registered Under the Cooperative Societies Act
Every cooperative society is registered with the Registrar of Cooperative Societies of the State
concerned under the Cooperative Societies Act, 1912. A cooperative society is an entity distinct from its
members. All the members contribute capital but the management of the society is entrusted to a few
members elected for this purpose. So, members are interested in the welfare of their society. To
safeguard their interest, the Registrar of Cooperative Societies appoints. The sole trader gets several
benefits from audited accounts. Auditors to audit the accounts of a society. The auditor submits a report
to the Registrar and to the society concerned for the consideration of its members.
Public Corporations
Public Corporations such as Reserve Bank of India, the Industrial Finance Corporation of India,
Industrial Credit and Investment Corporation of India, LIC, UTI, etc., are some examples of public
pg. 7
corporations operating in the country. They are the creation of law. Audit of their accounts by a qualified
auditor is a must. Powers, duties and liabilities of the auditors of public corporations are defined by the
relevant statutes.
Trusts:
Trust are created under the Indian Trust Act. They work for charitable and religious purpose. Weak
and helpless sections of the public benefit from trusts. Trustees are appointed to take care of the assets
and working of the trust. Trust operations are governed by a trust deed. Chances of fraud and
misappropriation of trust properties and funds are high. So, there is a provision for audit of trust accounts
by a qualified auditor. Audited accounts reflect a true and fair view of working of trusts.
Banks and Others:
Banks are established in the form of a joint stock company. But their purposes are unique.
Accounts maintained by them are special. Besides, banking institutions, public utility concerns such as
electricity boards, insurance companies, local authorities etc., are audited under the category of statutory
audit.
Private Audit:
The private audit is not mandatory under any statute or law. Individuals, sole trading concerns,
partnership firms and other private institutions like clubs, libraries, hospitals, schools, colleges and other
educational institutions may get their accounts audited in view of several benefits resulting from it.
Audit of Sole Traders:
Audit of accounts of sole proprietary is optional. A sole proprietary concern is owned, managed
and controlled exclusively by an individual. It is his individual decision to get his accounts audited. The
nature and scope of audit to be undertaken will depend upon the agreement entered into for this purpose.
The sole trader gets several benefits from audited accounts.
1. It assures the trader that his incomes are properly accounts for and his expenditures properly
vouched.
2. Fraud and misappropriation indulged in by employees are exposed.
3. It acts as a moral check on employees.
4. Audited accounts are reliable for Income tax purposes.
5. Audited accounts facilitate easy comparison of financial matters over years.

Audit of Partnership Firms:

The partnership act, 1932 does not require a partnership firm to audit its accounts. Still firms go
in for audits. The auditor is not appointed under any law but by an agreement between the partners and
auditor. The nature and scope of audit, auditor’s rights, duties, liabilities and audit fee are as per the
agreement.
While auditing partnership accounts, the auditor should pay attention to the following:
1. Partnership Act 1932
2. Partnership deed
3. Nature of business]
4. Names and address of all partners
5. Capital introduced by partners
6. Borrowing powers of partners
7. Profit sharing ratios
8. Interest on capital
9. Interest on drawings
10. Salary, commission, bonus and remuneration payable to partners.

pg. 8
Audit of Individuals and HUFs.
Individuals who have high volume of transactions and Hindu Undivided Families running family
business appoint accountants to prepare and maintain accounts. They may appoint auditors to verify the
accuracy of accounts. Scope of audit will depend upon the agreement entered into with the client.
Audit of individuals will help in case of any tax problems, ensure the accuracy of the accounts, keep
a moral check on employees, reveal true income from various sources and have a fair valuation of assets.
Government Audit:
Government offices, departments, undertaking registered as companies are subject to
independent financial audit. A statutory auditor appointed by the Central Government on the advice of
the Comptroller and Auditor General of India audits accounts of such concerns.
Objectives of the Government audit:
i) To ensure that the financial transactions of the concerned organisation are executed with
approvals of proper authorities, have been accurately recorded and comply with the rules of
financial propriety.
ii) To ensure that all the expenses have been incurred according to the budget sanctioned by the
appropriate authority.
iii) To see that payments have been properly classified into capital and revenue.
iv) To produce maximum results to the public with minimum input.
v) To ensure that financial operations of all government undertakings are in public interest.
vi) Finally, to make sure that public funds are not misused.

Based on Timing and Scope of Audit Procedures:

On the basis of timing and scope of audit procedures, audit may be of continuous audit, internal
audit, interim audit, final audit or periodical audit and balance sheet audit.
Continuous Audit:
In continuous audit, the auditor or his staff attends and checks the accounting data regularly at
appropriate intervals. It is also called running audit. In the words of Spicer and Pegler “a continuous audit
is one where the auditor’s staff is occupied continuously on the accounts the whole year round, or where
the auditor attends at intervals, fixed or otherwise, during the currency of the financial year and performs
an interim audit. Such audits are adopted where the work involved is considerable and have many points
in their favour, although they are subject to certain disadvantages”.
Advantages of Continuous Audit:
i) Detailed examination of accounts is possible: The auditor gets sufficient time at his disposal.
It enables him to undertake detailed and exhaustive checking of the accounting records and
related documents.
ii) Errors and frauds are detected easily and immediately: Books and records are checked and
verified immediately after the entries have been made. So, errors can be spotted and rectified
quickly, frauds can be detected early before they attain alarming proportions.
iii) Continuous audit facilitates preparation of interim accounts: Some companies follow the
practice of paying interim dividends to their members. In such cases, interim accounts can be
prepared in time to decide on payment of interim dividend.
iv) Audit work is properly planned: An auditor can plan his audit work systematically by spreading
his work evenly throughout the year. It improves efficiency in audit work.
v) It is possible for auditor to give valuable suggestions: Auditor remains in touch with the
business. So he is familiar with the technicalities and intricacies of clients business. Clients can
get valuable suggestions from the auditor.

pg. 9
 vi) It acts as a moral check on the staff of the organisation: Frequent visits of the auditor to the
business concern would compel the staff to keep the records up-to-date. They do not dare to
commit any fraud easily. It is a good moral check on any the dishonest practice.
Disadvantages of Continuous Audit:
i) There is a possibility that the client’s staff may deliberately alter the figures after an auditor
has checked them: In continuous audit, the auditor checks the books of accounts in several
visits. There may be deliberate alteration in figures after an auditor has checked them.
Without further rechecking of records, fraud and error cannot be detected.
ii) Continuous audit is comparatively more expensive: The auditor makes several visits and
performs a thorough examination involving more time, effort and money. So it is not viable for
small concerns.
iii) Continuous audit causes inconvenience to client’s staff: The auditor makes frequent visits to
the organisation. His regular checking of books of account may dislocate his client’s work and
cause inconvenience to him.
iv) There are chances of negligence on the part of auditor as well as client’s staff: Client’s staff and
auditor may develop a social relationship due to frequent visits of audit staff. This may cause
both auditor’s and client’s staff becoming negligent in performing duty.
v) Continuity of audit work may suffer: In continuous audit, work is performed in several visits.
So, the auditor may lose the thread of work and may fail to seek clarification of the queries that
arose in previous visits.
Internal Audit:
An audit is conducted within the organisation by an internal auditor appointed by the management
of an enterprise. Salaried officials of a firm known as internal auditors conduct audit throughout the year.
The aims of internal audit are to.
i) Ascertain whether all the prescribed rules, regulations, policies, procedures and principles have
been followed or not.
ii) Check whether the internal controls are adequate and effective and low well does it fir the size
of the business.
iii) Ensures that all the assets of the organisation are protected against misuse.
iv) Highlight the weak areas of the organisation and give suggestions to strengthen them.
v) Ensure that the working of the organisation is smooth, effective, efficient and economical.
In concise, internal auditing is an extension to activity of an external auditor.
Statutory Audit Internal Audit
1. Statutory audit is compulsory under the 1. Internal audit is not a statutory
law. requirement.
2. The objective is to ascertain the reliability 2. It aims to review the accounting, financial
of financial records to establish the true and other operations of the business with
and fair view of the organisation’s state of a view to improve the overall efficiency.
affairs. 3. Internal auditors are generally employees
3. It is an independent financial audit by an of the organisation.
independent auditor appointed by the 4. They need not necessarily be qualified
shareholders. chartered accountants.
4. They must be qualified chartered 5. Internal audit serves the needs of the
accountants. management of the organisation.
5. Statutory audit safeguards the interest of 6. Internal auditor reports to the
both shareholders and third parties. management of the undertaking.
6. Statutory auditor reports to shareholders.

pg. 10
Interim Audit:
Interim audit relates to an interim period and not to the full accounting year. It is conducted
between two regular audits. Its objective is to know the reliability and accuracy of financial statements of
a business for a part of the year. Directors want to know the figure of profit to pay interim dividend.
Because dividend can be paid by the company only out of its profit and profit for a particular year shall be
determined only after the completion of the year.
Advantages of Interim Audit:
i) Interim audit facilitates the final audit to be completed smoothly and speedily.
ii) Interim audit spares more time to review the systems and procedures thoroughly. So, there is
scope for indepth audit.
iii) A detailed review of internal control system is possible.
iv) Auditor’s suggestions can be incorporated quickly.
v) Errors and frauds can be identified and rectified at an initial stage and their recurrence can be
prevented.
Disadvantages of Interim Audit:
i) Alterations can be made in figures and accounts after the interim audit is over.
ii) Certain accounting statements need to be finalised before interim audit is undertaken. The
work load of the staff, therefore, increases.
Interim Audit Vs. Internal Audit

Interim Audit Internal Audit

1. Interim audit is undertaken by an 1. Internal audit is conducted by the internal
independent auditor staff of the enterprise.
2. Interim audit can be initiated at any time 2. Internal audit is part of routine work.
during the financial year.
3. Interim audit is conducted for some 3. Internal audit relates primarily to
specific or interim purpose. accounting and financial matters.

Interim Audit Vs Continuous Audit

Bases Interim Audit Continuous Audit
1.. Period 1. Interim audit covers only a part of 1. Whole financial year is involved.
accounting year.
2..Object 2. It is to ascertain or check the profit 2. It is to examine the accounts and
or loss for a given period. records for the whole year.
3.. Trial balance 3. Trial balance must be prepared and 3. Trial balance is prepared after the
preparation checked at the time of interim audit. completion of the accounting year
under audit.
4.. Balance Sheet 4.. Verification of assets and liabilities 4.. Assets and liabilities are verified at
items is undertaken at the time of interim the close of the financial year.
audit.
5.. Scope 5.. A detailed and extensive checking 5.. The scope of continuous audit
of books of accounts is not done. includes a detailed and extensive
checking of books of accounts.
6.. It is between final audit and
6.. Timing continuous audit during the whole of 6.. It occurs at regular intervals say
trading. weekly, fortnightly or monthly.

pg. 11
Final Audit or Periodical Audit or Annual Audit:
The final audit takes place only at the end of the financial year. The audit work commences after
all the accounts are closed and trading and profit and loss accounts and balance sheet are ready. The
auditor completes the entire work at one stretch.
Final audit is advantageous to small concerns. But in case of large concerns, it takes more time to
check accounts and submit reports. So, the final audit is not sufficient for big business.
Advantages of Final Audit:
i) Full facts relating to the accounting year under review are available for audit.
ii) Work can be completed only in one session without dislocating routine work.
iii) It is less expensive and suitable for small concerns.
iv) Chances of manipulation and alteration of figures after they have been checked are far less.
v) Work can be allocated easily according to time schedule.
Disadvantages:
i) It is unsuitable for large concerns.
ii) Indepth checking is not possible. Errors and frauds may remain undetected.
iii) Audited accounts may not be available immediately after the close of the year.
Distinction between Annual Audit and Continuous Audit:
Continuous Audit Annual Audit
1. The auditor examines the books of 1. The auditor undertaken audit only at the
accounts of a business concern at regular end of the financial year.
intervals, say, weekly, fortnightly,
quarterly or as per the requirement of the
management or scope of audit.
2. It facilitates preparation of interim 2. Annual audit has nothing to do with
accounts. preparation of interim accounts.
3. Audit work is carried out throughout year. 3. Books of accounts are made the available
Book of accounts need to be up to date to the auditor only at the year end.
every day.
4. It is suitable for large concerns where 4. It is suitable for small concerns.
numerous transactions of varied nature
take place.
5. It is very much expensive. 5. It is less expensive.
6. Easy rectification of errors is possible. 6. Auditor may not be able to check and
verify all the transactions. Some errors
and frauds may remain undetected.
Balance Sheet Audit:
Balance sheet audit originated in United States. It implies a critical review of balance sheet. Figures
as stated in the balance sheet are taken as a base and their authenticity is verified from records. The audit
commences with the detailed examination of the balance sheet and works back to the supporting
evidences and related documents.
Values of fixed assets, current assets, liabilities, reserves and provisions, surplus etc., are checked.
Profit or loss as one of the balance sheet items is also verified.
Cost Audit:
Cost audit is an audit of cost accounting records in the words of The Chartered Institute of
Management Accountants of U.K. it is the verification of cost accounts and a check on adherence to the
cost accounting plan”.

pg. 12
 Smith and Day define “the term cost audit means the detailed checking of the costing system,
techniques and accounts to verity their correctness and to ensure adherence to the objectives of cost
accountancy”.
Special Audit:
Under section 233-A of the Companies Act, 1956 the central Government may order it company
to conduct a special audit if.
i) The affairs of any company are not being managed in accordance with sound business
principles.
ii) The company is being managed in a manner prejudicial to the interest of trade, industry r
business to which it pertains
iii) The financial position of the company is such as to endanger its solvency.
Tax Audit:
Under section 44 of the Income Tax Act, 1961 every person carrying on business or profession
whose turnover exceeds the prescribed limit shall conduct a tax audit. This audit is in addition to statutory
financial audit under the Companies Act. The audit involves verification and confirmation of certain facts,
figures and information required by tax authorities. The objectives is to expedite the correct income tax
assessment of the assesse concerned.
Management Audit:
In the words of T.G.Rose, “management audit is an advice of independent specialists who have
made a study of how to reach maximum efficiency is a certain field of activity.” Management audit is the
periodic assessment of company’s managerial planning, organising, actuating and controlling, compared
with norms of successful operations. In concise, it evaluates the performance of managerial functions.
Besides diagnosing the existing problems, it suggests measures to improve performance.
Operational Audit:
Operational audit is a contemporary development. Operational audit aims at improving the overall
performance of a business enterprise by improving future business operations carried out by the
management.
Operational audit reviews any part of an organisation to:
i) Assess the performance, organisation’s operating procedures and methods for evaluating
efficiency or effectiveness.
ii) Improve the profitability of the business organisation.
iii) Give recommendations for further action.
iv) Achieve the other organisational objectives other than profitability. These include objectives
of social, environmental, human resources development and public interest nature.
Marketing Audit:
According to Philip Kotler, “a marketing audit is a comprehensive, systematic, independent and
periodic examination of a company’s or a business unit’s marketing environment, objectives, strategies
and activities with a view to determining problem areas and opportunities and recommending a plan of
action to improve the company’s marketing performance”.
Environmental Audit:
Environmental audit examines the effects of the operations of an enterprise on the environment.
In other words it assesses the nature and extend of harm to the environment posed by an industrial
process or activity, waste, substance or noise.
The Confederation of British Industry defines environmental auditing as “the systematic
examination of the interaction between any business operation and its surroundings. This includes all
emissions to air, land and water, legal constraints, the effect on the neighbouring community, landscape
and ecology, the public’s perception of the operating company in the local area”.

pg. 13
Social Audit:
Social Audit attempts to assess the social performance of an enterprise. It aims at the protection
of the interests of consumers, employees and all those who are affected by the decisions of the company.
It is a way of measuring the extent to which the organisation remains committed to the society.
The scope of social audit is vast to include so many areas of social interest. Examples: fair trade
practices, wages, prices and profit policies, maintenance of good employer- employee relationship, health,
safety and welfare of workers, improving quality of products, reducing cost of production, conservation
of scare materials, energy use, pollution control, harnessing of natural resources, import substitutes,
reclamation of new lands, encouraging arts, sports, and community living, production, R&D. etc.
Human Resource Audit:
A human resource audit reviews an organisation’s practice concerning human resource. It
examines the technical and practical dimensions of HR functions and creates a comprehensive system to
add value to the organisation.
Benefits of HR audit:
HR audit helps an organisation to
i) Ascertain the HR programmes that are helpful in accomplishing organisation objectives.
ii) Know how well the HR department is delivering those programmes entrusted to it.
iii) Benchmark HR work to ensure continuous improvement.
iv) Promote and foster change and creativity.
v) Draw the attention of HR staff to pertinent issues.
vi) Bring HR closer to the line functions of the organisation.
Energy Audit:
Energy Audit implies a critical of utility energy data for all fuels including electricity, natural gas,
fuel oil and any other delivered fuels. It involves a comprehensive analysis of the implications of
alternative energy efficiency measures. The management of energy consuming systems should be
scientific. It can lead to significant cost and energy savings, increased comfort, lower maintenance costs,
extended equipment life. Energy audit is a must for successful energy management.
Scope of Energy Audit:
i) Identifying energy system
ii) Evaluating the condition of the systems
iii) Analysing the impact of improvement to those systems
iv) Writing energy audit report.
Advantages of an Audit:
Importance of auditing can be judged from the fact that even those organisations which are not
covered by Companies Act, get their financial statements audited. It has become a necessity for every
commercial and even non-commercial organisation. People are interested to know the true facts about
their business which are helpful to them for future planning and improvements in operations.
Advantages of an Audit

For Owners of for the for the for the Government for Others
Business & Management Creditors Bodies
Shareholders
i) For the Businessmen and Shareholders:
a) In case of sold trader, he can depend on the audited accounts. He can value his business on
the basis of audited accounts for the purpose of sale of business or for admitting a new
partner.
pg. 14
 b) Dispute over the correctness of profits can be avoided. In case of partnership firm, audited
accounts will be useful in valuing goodwill and business on admission and retirement of a
partners.
c) Shareholders, who do not know about day-to-day administration of the company, can judge
the performance of management from audited accounts.
d) Shareholders can value their shares on the basis of audited financial statements.

ii) For the Management:

a) It helps the management is detecting and preventing errors and frauds.
b) It keeps the accountants and staff vigilant while preparing books and records as they know
in advance that all the accounts are to be audited.
c) Claims due to fire, theft and accident can be estimated form audited accounts.
d) Management gets advice on financial affair from the auditors who have expert’s
knowledge.
e) Because the audited accounts are uniformly prepared over the year, comparison of such
statement becomes easier.

iii) For the Creditors:

a) Long-term and short-term creditors can depend on audited statements while taking
decision to grant credit to business houses.

iv) For the Government Bodies:

a) Taxation authorities depend on audited statements in assessing the income-tax, sales-
tax and wealth-tax liability of the business.
b) Audited accounts can be produced in the Court to provide an evidence.
c) Audited accounts are useful for the government while granting subsidies etc.
v) For Others:
a) It can be used by insurance companies to settle the claims arising on account of loss by fire.
b) Ion case of amalgamation and absorption, the purchasing company can calculate purchase
consideration on the basis of audited accounts.
c) It safeguards the interests of the workers because audited accounts useful for setting trade
disputes for higher wages or bonus.
Limitations of Audit:
The audit of accounts suffers from several limitations also. Some of the limitations are as follows:
1. The audit may not give complete picture. If the accounts are prepared with bad intentions and for
that fraud is committed, auditor may not be able to fully unearth them.
2. Sometimes the auditor has to depend on explanations, clarifications and information from staff
and client. He may or may not get correct or complete information.
3. Under law, shareholders appoint an auditor, but in fact directors appoint him. Under such situation
he may not be an independent auditor.
4. Auditor has to seek opinion of experts on certain matters on which he may not have expert’s
knowledge. The auditor has to depend upon such reports which may not be always correct.
5. The auditing may not serve its purpose unless the auditors are independent and bold. Lack of these
qualities may force him to give clean report even though certain discrepancies existed.
6. Auditing is considered as a mechanical work. Auditors may not frame audit programme from the
viewpoint of particular situation.
7. Auditing is a post-mortem examination. What is the use of such examination when events have
already happened?
8. It is very difficult to verify certain items. i.e. stock-in-trade.
9. Success of audit depends on the sincerity with which auditor has performed his duties.
pg. 15
PRINCIPLES OF AUDITING
The basic principles which govern the professional responsibilities of auditor which should be
complied with whenever an audit is conducted. Various principles are explained as follows:
1. Integrity, objectivity and independence: The auditor should be honest and sincere towards his
work. He must maintain objectively without any basic or prejudice. He must have impartial
attitude, free from any interest while conducting an audit.
2. Confidentiality: The information acquired during an audit should be kept confidential. It shall not
be disclosed to third party without permission from client or when he is legally or professional
bound to do so.
3. Skill and Competence: Audit work shall be conducted by the persons who have adequate training,
experience and competence in auditing. They also need to be aware continuously of developments
in accounting, auditing and statutory rules and regulations as amended from time to time.
4. Work performed by others: The auditor remains responsible for expressing his opinion on
financial information when he delegates audit work to assistants or used the work done by other
auditors. He is permitted to rely on work done by others provided he exercise due skills and care
and was appointed by the company, he must make reference thereof in his report.
5. Documentation: The auditor must prepare and preserve all the documents while conducting an
audit. These may be used as evidence that audit was conducted as per the basic principles.
6. Planning: To conduct the audit in time and efficiently the auditor should plan his work. The audit
plan should cover:
a) Client’s accounting system, policies and internal control system.
b) To what extent Internal Control System can be relied upon.
c) Determining the audit procedure to be used.
d) Coordinating the audit work.
7. Audit Evidence: The auditor should obtain sufficient appropriate evidence before conducting an
audit. It should be obtained by substantive and compliance procedure. Substantive procedure will
provide evidence of completeness, accuracy and validity of data produced by accounting system
whereas compliance procedure will indicate whether internal control system is used as stated.
8. Accounting system and internal control: Management is responsible for maintain an adequate
accounting system and incorporating internal controls as per the requirement of business. On the
basis of accounting system and internal controls used in the business, the auditor will determine
the nature, timing and the extent of audit procedures to be applied.
9. Audit Conclusion and Reporting: The auditor should express his opinion on financial statements
on the basis of his review and assessment of audit evidence and knowledge of business. It involves
overall conclusion as to whether:
a) Financial information has been prepared using acceptable accounting policies, which have
been applied consistently.
b) Financial information complies with relevant regulation and statutory requirements.
c) There is adequate disclosures of all material matters relevant to the proper presentation of
financial information, subject to statutory requirements, where applicable.

pg. 16
APPOINTMENT OF COMPANIES AUDITORS:

1.. Appointment of First Auditor of a Company other than Government Company: Sec. 139(6).
The first Auditor of a company other than Government Company, shall be appointed by Board of
Directors within 30days of registration of company. If the Board fails to appoint first auditor, it shall inform
the members of company, who shall appoint auditor within 90 days at extra ordinary general meeting
who shall hold office till the conclusion of first annual general meeting.
2.. Appointment of First Auditor in Case of Government Company: Sec.139(7)
It shall be appointed by Comptroller and Audit-General within sixty days of registration of
company. In case of its failure to appoint first auditor, then Board of Directors shall appoint the auditor
within next thirty days. The company shall inform the member, if the Board fails to appoint first auditor
who shall appoint the auditor within sixty days at extra ordinary general meeting, holding office till
conclusion of first annual general meeting.
3..(i). Appointment of Subsequent Auditor in Case of Non-Government Company: Sec, 139(1).
a) A Company shall appoint an individual or a firm as an auditor at the first annual general meeting
and each subsequent sixth annual general meeting.
b) Such auditor shall hold office till conclusion of sixth annual general meeting.
c) The manner and procedure of selection of auditor by the members at such meeting may be as
prescribed.
d) Such appointment shall be placed before members at each annual general meeting for ratification.
pg. 17
 e) Before such appointment of auditor a written consent to appointment and a certificate from him
that it is in accordance with conditions as may be prescribed, shall be obtained from the auditor.
f) The certificate shall indicate that auditor satisfies eligibility and qualification criteria under sec.141.
g) The company shall inform the auditor of his appointment and send notice to registrar within fifteen
days of such meeting regarding the appointment of auditor.
….(ii)..Period for which appointment is to be made: Sec. 139(2).
a) An individual can be appointed of a term not more than five years.
b) An audit firm can be appointed for a consecutive term not more than two terms of five years.
c) An individual or a firm which has completed its term shall not be eligible for reappointment as
auditor in the same company for five years from the completion of term.
…(iii)..Rotation of Partner of Auditor Firm or Conduct of Audit by more than one auditor: Sec.139(3).
The members of the company may resolve the rotation of partner and his team after certain
interval or audit to be conducted by more than one auditor. The Central Government may prescribe rules
regarding the manner in which companies shall rotate the auditors.
4.. Appointment of Subsequent Auditors in Case of Government Companies; Sec,139(5).
In case of Government company or any other company owned or controlled by the Central
Government or any State Government, the Comptroller and Auditor General of India shall appoint an
auditor duly qualified under this Act within a period of 180 days from the commencement of financial
year, who shall hold the office till the conclusion of annual general meeting.
5.. Casual Vacancy of an Auditor: Sec.139 (8).
a) The casual vacancy of auditor, except in case of Government Company, shall be filled by Board of
Directors within thirty days but if it arises as a result of resignation of the auditor it shall be
approved by the company at general meeting convened within three months of recommendation
of Board. Such auditor shall hold office till conclusion of next annual general meeting.
b) Casual vacancy in case of Government Company shall be filled by Comptroller and Auditor General
with thirty days if he fails to fill the vacancy, the Board shall fill the vacancy within next thirty days.
c) Casual vacancy by resignation: Sec.140(2): In case the auditor has resigned from the company, he
shall file a statement in the prescribed form within 30 days from the date of resignation with the
company and the registrar and in case of government company he shall also file such statement
with C & AG specifying the reasons and facts regarding his resignation. If he fails in this regard, he
shall be punishable with fine not less than fifty thousand rupees which may be extended to five
lakh rupees.
6.. Reappointment of Retiring Auditor: Sec.139(9).
Such auditor can be reappointed at annual general meeting if:
a) He is not disqualified for reappointment.
b) He has not given notice to company of his unwillingness.
c) A special resolution has not been passed at annual general meeting appointing some other
person or providing expressly that he shall not be reappointed.
All the above is subject to the provision of Sec.139(1).
7.. Where no Auditor is Appointed or Reappointed at Annual General Meeting: Sec.139(10).
The existing auditor shall continue to be the auditor of company.
8.. Recommendations of Audit Committee: Sec 139 (11).
If Auditor Committee under Sec. 177, is constituted, all appointments of auditor shall be made
after considering recommendations of such committee.

pg. 18
REMOVAL, RESIGNATION OF AUDITOR ETC.
1) The auditor appointed under section 139 may be removed from his office before the expiry of his
term only by a special resolution of the company after obtaining the previous approval of the
Central Government in that in the prescribed manner:
Provided that before taking any action under this sub-section, the auditor concerned shall be given
a reasonable opportunity of being heard.
2) The auditor who resigned from the company shall file within a period of thirty days from the date
of resignation, a statement in the prescribed from with the company and Registrar, and in case of
companies referred to in sub-section(5) of Section 139, the auditor shall also file such statement
with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may
be relevant with regard to hi8s resignation.
3) If the auditor does not comply with sub-section(2), he or it shall be punishable with fine which
shall not be less than fifty thousand rupees but which may extend to five lakh rupees.
4) (i) Special notice shall be required for a resolution at an annual general meeting appointing as
auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall
not be re-appointed, except where the retiring auditor has completed a consecutive tenure of five
years or, as the case may, ten years, as provided under sub-section(2) of section 139.
(ii) On receipt of notice of such resolution, the company shall forthwith send a copy thereof to the
retiring auditor.
(iii) Where notice is given of such a resolution and the retiring auditor makes with respect thereto
representation in writing to the company (not exceeding a reasonable length) and requests its
notification to members of the company, the company shall, unless the representation is received
by it too late for it to do so,.
a) In any notice of the resolution given to members of the company, state the fact of the
representation having been made: and
b) Send a copy of the representation to every member of the company to whom notice of the
meeting is sent, whether before or after the receipt of the representation by the company,
and if a copy of the representation is not sent as aforesaid because it was received too late
or because of the company’s default, the auditor may (without prejudice to his right to be
heard orally) require that the representation shall be read out at the meeting.

5) Without prejudice to any action under the provisions of this Act or any other law for the time being
in force, the Tribunal either self or an application made to it by the Central Government or by
person concerned, of it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company
or its directors or officers, it may, by order, direct the company to change its auditors.

ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS (Sec 141)

Qualification of an Auditor
a) A person shall be eligible for appointment as an auditor of a company only if he is a chartered
accountant:
Provided that a firm whereof majority of partners practicing in Indian are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a company.
b) Where a firm including a limited liability partnership is appointed as an auditor of a company,
only the partners who are chartered accountants shall be authorized to act and sign on behalf of
the firm.
Disqualification of an Auditor:
a) A body corporate other than a limited liability partnership registered under the Limited Liability
Partnership Act, 2008 (6 of 2009).
b) An officer of Employee of the company:
pg. 19
 c) A person who is a partner, or who is in the employment, of an officer or employee of the
company:
d) A person who, or his relative or partner-
(i) Is holding any security of or interest in the company or its subsidiary, or of its holding
company:
Providing that the relative may hold security or interest in the company of face value not
exceeding one thousand rupees or such sum as may be prescribed:
(ii) Is indebted to the company, or its subsidiary, or its holding or associate company or a
subsidiary or such holding company in excess of such amount as may be prescribed; or
(iii) Has given a guarantee or provided any security in connection with the indebtedness of
any third person to the company, or its subsidiary, or its holding or associate company or
a subsidiary of such holding company, for such amount as may be prescribed:
e) A person or a firm who, whether directly or indirectly, has business relationship with the
company, or subsidiary of such holding company or associate company of such nature as may be
prescribed.
f) A person who relative is director or is in the employment of the company as director or key
managerial personnel.
g) A person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment as its
auditor, if such persons or partners or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty companies.
h) A person who has been convicted by a court of an offence involving fraud and a period of ten
years has not elapsed from the date of such conviction.
i) Any person whose subsidiary or associate company or any other form of entity, is engaged as on
the date of appointment in consulting and specialized services as provided in sections 144.
POWERS AND DUTIES OF AUDITORS AND AUDITING STANDARDS:

pg. 20
POWERS:
1..Right to Access:
Every auditor of a company shall have right to access book of accounts and vouchers of the company.
The auditor can obtain from the officers of the company such information and expiation as he may
consider necessary for performance of his duties.
The list of matters for which auditor shall seek information and expiation includes issues related to:
a) Proper security for loans and advances
b) Transactions by book entries
c) Sale of assets in securities in loss
d) Loans and advances made shown as deposits
e) Personal expenses charged to revenue account
f) Cash received for share allotted for cash.
The auditor of holding company has same rights.
2..Auditor to Sign Audit Reports:
The auditor of the company shall sign the auditor’s report or sign or certify any other document of
the company and financial transactions which have any adverse effect on the functioning of the company
mentioned in the auditor’s report. The auditor’s report shall be read before the company in general
meeting and shall be open to inspection by any member of the company.
3.. Auditor to Attend General Meeting:
Under Section 146, the company must send all notices and communications to the auditor
relating to any general meeting.
The auditor shall attend the meeting either through himself or through his representative, who
shall be an auditor.
The auditor in general meeting must be given reasonable opportunity to speak on any part of the
business which concerns him as the auditor.
Under section 101, notice of general meeting must be given before 21 days to the auditor in such
a manner as may be prescribed.
Every notice of a meeting shall specify the place, date, day and hour of the meeting. It shall also
contain a statement of the business to be transacted at such meeting.
4.. Right to Remuneration:
The remuneration of the auditor of a company shall be fixed in its general meeting or in such
manner as may be determined therein.
It must include the expenses, if any, incurred by the auditor in connection with the audit of the
company and any facility extended to him. But it does not include any remuneration paid to him for any
other service rendered by him at the request of the company.
5.. Consent of the Auditor:
Under section 26, the company must mention in their prospectus the name, address and consent
of the auditors of the company.

DUTIES:
1.. Audit report to the Members of the Company:
The auditor shall make a report to the members of the company on accounts and financial
statements examined by him. The report shall state:
a) Whether he has sought and obtained all the necessary information and explanations.
b) Whether proper books of accounts have been kept,
c) Whether the company’s balance sheet and profit and loss account are in agreement with books of
accounts and returns.

pg. 21
2.. Audit Report of the Government Company:
The auditor of the government company will be appointed by the Comptroller and Auditor-General
of India. Such auditor shall act to the directions given by them. He must submit a report to them on
accounts and financial statements of the company examined by him and also the actions taken in this
regard.
The comptroller and Audit-General of India within sixty days of receipt of the report have right to
conduct a supplementary audit and comment on or supplement such audit report. The Comptroller and
Audit-General of India may cause test audit to be conducted of the accounts of such company.
3.. Liable to Pay Damages:
The depository and members of the company have right to file an application before the tribunal
if they are of the opinion that the management or conduct of the affairs of the company are being
conducted in a manner prejudicial to the interest of the company.
4.. Branch Audit:
Where a company has a branch office, the accounts of that office shall be audited either by the
auditor appointed for the company or by any other person qualified for appointment as an auditor of the
company.
The branch auditor shall prepare a report on the accounts of the branch examined by him. He shall
then send that report to the auditor of the company who shall deal with it in his report in such manner as
he considers necessary.
5.. Auditing Standards:
Every auditor shall comply with the auditing standards. The Central Government shall notify
standards in consultation with National Financial reporting authority. The Government shall also notify
that auditor’s report shall include a statement on such matters as notified.
6.. Fraud Reporting:
If an auditor of a company suspects that an offence involving fraud is being committed by officers
or employees of the company, he shall immediately report the matter to the Central Government in such
manner as may be prescribed.
7.. Winding Up:
Under sec 305, at the time of voluntary winding up of a company it is a mandatory requirement
that the auditor should attach a copy of the audits of the company prepared by him.

pg. 22