AUDITING: Unit1

What is 'Audit'
Definition: Audit is the examination or inspection of various books of
accounts by an auditor followed by physical checking of inventory to
make sure that all departments are following documented system of
recording transactions.
Audit can be done internally by employees or heads of a particular
department and externally by an outside firm or an independent auditor.
The idea is to check and verify the accounts by an independent
authority to ensure that all books of accounts are done in a fair manner
and there is no misrepresentation or fraud that is being conducted.

All the public listed firms have to get their accounts audited by an
independent auditor before they declare their results for any quarter.

Who can perform an audit? In India, chartered accountants from ICAI or

The Institute of Chartered Accountants of India can do independent audits
of any organisation.

Fundamental Principles Governing an Audit:

SA-200 depicts the nine essential rules that administer the method of
auditing. It rattles off the roles and obligations of the evaluator or auditor
and his overall set of accepted rules while conducting an audit or review.

A] Integrity, Independence, and Objectivity:

The inspector must be candid while during the audit process; he can’t be
inclining toward the association. He should stay objective all through the
entire cycle,

the examiner can’t have any interest in the association he is inspecting,

which permits him to be autonomous and fair-minded consistently.

B] Confidentiality:
The auditor comes across a great deal of sensitive monetary data of the
association.

He can’t uncover any delicate data to any outsider except if it is a

necessity by law. What’s more, he should likewise be extremely cautious
with archives, authentications, and so forth that the association shares
with him.

C] Skill and Competence:

The examiner should be capable and prepared in the strategies of
auditing, for example, he should be qualified as an examiner.
Furthermore, as an expert, he should be aware and upgrade on the latest
changes, declarations, rules, and so forth.

In the event that is important, he can prepare to keep up to date with the
new accounting and auditing methodology. For instance, after GST
was presented, auditors needed to refresh their insight.

E] Documentation:
Much of the time, the examiner keeps a review notepad, or audit plan,
or an audit file. It is significant the auditor tracks significant reports
for his work, as it is proof of the work the evaluator has completed. Also,
the customer is leaned to these reports and records

F] Planning:
A review plan permits the inspector to arrange his work and empowers
him to be more proficient and ideal. Each review plan is distinctive as it
must be redone as indicated by the type of association, the sort of
business they lead, the extent of the review, the productivity of the inside
controls, and so forth.

G] Audit Evidence:
The auditor should gather sufficient proof to help him in his last
assessment. This assortment of such proof is finished by substantive and
consistency systems. There are two origins of this proof – inward or
internal and outer or external. Likewise, external resources of proof
are, in every case, more dependable.

H] Accounting Systems and Internal Controls:

The inspector needs to guarantee that the records of the
association are exact and address a valid and reasonable image of
the monetary status of the organisation. Likewise, the examiner should
guarantee that all material data has been recorded in the accounting
records. Testing the inside controls framework is likewise significant as it
decides something very similar.

I] Audit Conclusions and Reporting:

After the examiner gathers all proof, he should now shape his viewpoint
based on the accompanying standards:

 All applicable bookkeeping guidelines were applied consistently.

 Budget reports are consistent with all guidelines and legal prerequisites.
 All material data has been revealed.

Advantages:
 1. Accuracy Assurance: Audits ensure the accuracy and reliability of
financial statements, providing stakeholders with confidence in the
organization's financial reporting.
2. Risk Identification and Management: Audits help identify risks
and vulnerabilities within an organization's operations, enabling
management to take proactive measures to mitigate these risks.
3. Compliance Verification: Audits ensure compliance with laws,
regulations, and industry standards, helping to prevent legal
liabilities and penalties associated with non-compliance.
4. Fraud Detection: Audits can uncover fraudulent activities such as
embezzlement or financial statement fraud, serving as a deterrent
to fraudulent behavior and minimizing financial losses.
5. Enhanced Credibility: External audits conducted by independent
firms enhance the credibility and transparency of an organization's
financial reporting, fostering trust among stakeholders.

Disadvantages:
1. Costly and Time-Consuming: Audits can be expensive and time-
consuming, especially for large organizations or complex operations,
requiring significant resources in terms of both finances and
personnel.
2. Disruption to Operations: Audits may disrupt normal business
operations, diverting management's attention away from core
activities and potentially impacting productivity.
3. Limited Scope: Audits may have a limited scope, focusing
primarily on financial aspects and compliance requirements,
while overlooking other important areas such as strategic risks or
operational efficiencies.
4. Potential for Conflict of Interest: In some cases, auditors may
face conflicts of interest, particularly if they have close relationships
with the audited organization or if they provide consulting services
in addition to auditing.

5. Limited Assurance: While audits provide reasonable assurance

regarding the accuracy of financial statements, they do not
guarantee complete accuracy or prevent all instances of fraud or
error.
6. Potential for Audit Failures: Despite thorough procedures, audits
may fail to detect material misstatements or fraudulent activities,
leading to audit failures and damage to the reputation of both the
auditors and the audited organization.
Accounting Auditing

Definition

Accounting is referred to as the process of Audit is the examination or inspection

recording, classifying, summarising and of various books of accounts by an auditor
interpreting the financial statements to followed by physical checking of
determine the financial position of an inventory to make sure that all
organisation departments are following documented
system of recording transactions.

Purpose

Accounting is done with the purpose of Auditing is done to verify the accuracy of
showing the position, profitability and data presented by accounting. It is done
performance of the business entity or with the purpose of revealing to what
organisation extent the true and fair view of records is
maintained in the transactions

Objective

To determine profit and loss of the To determine the correctness of all the
organisation or the financial position of an recorded transactions
organisation for a period

Mode of operation

Accounting is done on a daily basis, as It is a periodical assessment and is done

transactions happen on a daily basis for monthly, quarterly or yearly
any business

Performed by

Accounting is done by accountants Auditing is done by auditors

Sequence

Accounting starts at the end of Auditing starts at the end of accounting

bookkeeping
4 Types of errors:
1. Errors of Duplication: These errors happen when a transaction is
mistakenly recorded multiple times in the accounting records.
Such duplications can result from clerical mistakes, system
errors, or misunderstandings during data entry.
For example, if a sales invoice is accidentally recorded twice, it will
inflate the revenue figure, leading to an inaccurate representation
of the financial position of the business. Detecting and correcting
duplications is crucial to ensure that financial statements reflect the
true economic activities of the entity.
2. Errors of Commission: Errors of commission occur when an
incorrect amount or account is used in recording a
transaction. This could happen due to data entry mistakes,
misinterpretation of source documents, or confusion about
account classifications. For instance, recording a purchase invoice
at $500 instead of the correct amount of $50 would lead to an
overstatement of expenses. Similarly, attributing a transaction to
the wrong account, such as classifying a capital expense as a
revenue expense, can distort the accuracy of financial
statements. Detecting and rectifying errors of commission require
careful scrutiny of transactions and reconciliation with source
documents.
3. Compensating Errors: Compensating errors occur when two or
more mistakes offset each other, resulting in a trial balance
that still balances despite the errors. . For instance, if there is an
overstatement in one account that is offset by an equal
understatement in another account, the trial balance may still
appear balanced. While compensating errors may not immediately
disrupt the balance sheet, they can mask underlying inaccuracies in
financial reporting. Detecting compensating errors often requires a
thorough review of account balances and transaction records to
identify discrepancies.
4. Errors of Omission: Errors of omission occur when a transaction is
completely left out of the accounting records. This can happen due
to oversight, negligence, or failure to recognize the
importance of a transaction. For example, failing to record a
cash sale or a purchase transaction would result in an incomplete
representation of the entity's financial activities. Errors of omission
can distort the accuracy of financial statements, leading to
misleading conclusions about the financial performance and
position of the business. Detecting and correcting omissions require
diligent review of transaction records, source documents, and
supporting evidence to ensure comprehensive recording of all
relevant transactions.
INTERNAL AUDIT
In simpler terms, internal audit involves the examination and evaluation of an
organization's internal controls, processes, and procedures by a dedicated
team of professionals known as internal auditors. These auditors assess
various aspects of the organization, including financial systems, operational
processes, compliance with policies and regulations, and risk management
practices

Features of Internal Audit:

1. Independence: While internal auditors are employed by the
organization they audit, they maintain independence and objectivity
in their assessments.
2. Scope: Internal audits cover various aspects of an organization's
operations, including financial controls, compliance with policies and
regulations, operational efficiency, and risk management.
3. Continuous Process: Internal audits are typically conducted
regularly, providing ongoing monitoring and evaluation of internal
controls and processes.
4. Internal Focus: Internal audits are focused on assessing and
improving internal operations, controls, and processes rather than
providing assurance to external stakeholders.
5. Customization: Internal audit plans and procedures are tailored to
the specific needs and risks of the organization, allowing for a more
targeted and effective assessment.

Advantages of Internal Audit:

 1. Risk Management: Internal audits help identify and assess risks
within the organization, enabling management to implement
appropriate controls and mitigation strategies.
2. Compliance Assurance: By evaluating compliance with internal
policies, procedures, and external regulations, internal audits help
ensure adherence to legal and regulatory requirements.
3. Enhanced Governance: Internal audits contribute to the overall
governance structure of the organization by providing independent
assessments of internal controls and accountability mechanisms.
4. Timely Feedback: Internal audits provide timely feedback to
management, allowing for prompt corrective actions to address
identified deficiencies and improve performance.
5. Employee Development: Internal audit activities provide
opportunities for professional development and skill enhancement
for internal audit staff, contributing to a competent and
knowledgeable workforce.

Meaning of External Audit:

External audit refers to an independent examination and evaluation of
an organization's financial statements and other relevant information by a
certified public accountant (CPA) or an external audit firm. The
primary purpose of an external audit is to provide assurance to
stakeholders, including shareholders, creditors, investors, and regulatory
authorities, regarding the accuracy and reliability of the organization's
financial reporting.

Features of External Audit:

1. Independence: External auditors are independent of the
organization being audited, ensuring objectivity and impartiality in
their assessment.
2. Scope: External audits primarily focus on the examination of
financial statements, including balance sheets, income statements,
cash flow statements, and accompanying footnotes.
3. External Focus: External audits are focused on providing
assurance to external stakeholders, such as shareholders, creditors,
and regulatory authorities.
4. Compliance: External auditors assess whether the financial
statements comply with relevant accounting standards, regulations,
and legal requirements.
5. Certification: Upon completion of the audit, external auditors
issue an audit opinion, providing their assessment of the fairness
and accuracy of the financial statements.
Auditing planning refers to the process of outlining the
approach, scope, and objectives of an audit engagement before its
commencement. It is a critical phase in the audit process where auditors
carefully plan how they will conduct the audit to ensure it is efficient,
effective, and meets the requirements of relevant standards and
regulations.

Importance of Auditing Planning:

1. Efficient Resource Allocation: Planning helps auditors allocate
resources effectively, including staff, time, and budget. By
identifying the scope and objectives of the audit beforehand,
auditors can ensure that resources are utilized efficiently,
minimizing wastage and maximizing productivity.
2. Risk Identification and Assessment: Through planning, auditors
assess the risks associated with the audit engagement, including
inherent risks, control risks, and fraud risks. This allows auditors to
tailor their audit procedures to address the most significant risks,
ensuring that audit efforts are focused on areas with the highest
potential impact on financial statement reliability.
3. Compliance with Standards and Regulations: Auditing planning
ensures that audit procedures are designed in accordance with
relevant auditing standards, regulations, and professional
guidelines. This helps maintain compliance with industry best
practices and regulatory requirements, enhancing the credibility
and reliability of the audit process and its outcomes.
4. Enhanced Audit Quality: Planning lays the groundwork for a
structured and systematic audit approach, promoting consistency
and thoroughness in audit procedures. By establishing clear audit
objectives, procedures, and timelines, auditors can conduct
comprehensive audits that provide reliable assurance on the
accuracy and fairness of financial statements.
5. Timely Identification of Issues: Through planning, auditors
anticipate potential challenges or issues that may arise during the
 audit process. This proactive approach allows auditors to address
issues promptly, minimizing disruptions and delays in the audit
timeline and ensuring timely completion of the engagement.
6.

Advantages of Auditing Planning:

1. Increased Audit Effectiveness: Auditing planning ensures that
audit procedures are tailored to the specific risks and circumstances
of the engagement, maximizing the effectiveness of audit efforts
and increasing the likelihood of detecting material misstatements or
irregularities.
2. Enhanced Audit Efficiency: By outlining the audit approach,
procedures, and timelines in advance, auditors can conduct audits
more efficiently, minimizing unnecessary work and streamlining the
audit process.
3. Improved Client Satisfaction: Effective planning helps auditors
manage client expectations, deliver timely and high-quality audit
services, and build trust and confidence with clients. This can lead
to increased client satisfaction and loyalty over time.
4. Reduced Audit Costs: Planning enables auditors to identify areas
where audit efforts can be optimized, reducing the overall cost of
the audit engagement while maintaining audit quality and
compliance with standards.
5. Professional Development: Through planning, auditors have the
opportunity to develop and enhance their skills in risk assess ment,
audit methodology, and communication with stakeholders,
contributing to their professional growth and expertise.

LETTER OF ENGAGEMENT
An audit engagement letter is a written agreement that outlines the
scope of your work as an auditor, what the client is responsible for,
how long the audit is estimated to take ,details about your fees etc

It is an binding contractual agreement b/w you and each of your

clients.
  Prevents scope creep by outlining the scope of the engagement
 Provides clear expectations of fee estimates so there are no
surprises
 Increases the efficiency of the audit process
 Sets clear boundaries on what auditors are allowed to do and
what they will be held accountable for
 Outlines responsibilities of client so they’re aware of their role
 Protects both the auditor and client with a signed contract.

What is an audit program?

An audit program, also called an audit plan, is a WRITTEN plan OR A SET
OF DIRECTIONS that the auditor and his team needs to follow for the
proper execution of audit.

It specifies the procedures to be followed more efficiently. The auditor

outlines the whole procedure from beginning till the finalization of report.

The goal of an audit program is to create a framework detailed enough for

any outside auditor to understand.

The framework explains the audit's objectives, scope and timeline.

Features of an audit program include:

1. Objectives and Scope: The audit program clearly defines the
objectives of the audit engagement and the scope of work to be
performed. It outlines the goals and expectations of the audit,
including the areas to be examined and the timeframe for
completion.
2. Risk Assessment: The audit program identifies and assesses the
risks associated with the audit engagement, including inherent risks,
control risks, and fraud risks. It determines the level of risk
associated with each audit area and guides auditors in developing
appropriate audit procedures to address these risks.
3. Audit Procedures: The audit program outlines the specific
procedures and tests to be performed in each audit area. This
includes substantive procedures (such as testing of transactions and
balances) and tests of controls (to evaluate the effectiveness of
internal controls).
4. Timing and Resources: The audit program includes a schedule or
timeline for the audit engagement, indicating when each audit
 procedure will be performed and by whom. It also specifies the
resources required for the audit, including personnel, technology,
and other tools or equipment.
5. Documentation Requirements: The audit program outlines the
documentation requirements for the audit engagement, including
the types of evidence to be obtained, the format for documenting
audit findings, and the retention period for audit documentation.
6. Quality Control Procedures: The audit program includes quality
control procedures to ensure that the audit work is performed in
accordance with applicable auditing standards, regulations, and
best practices. This may include procedures for review and
supervision of audit work, as well as mechanisms for resolving
discrepancies or issues that arise during the audit process.

OBJECTIVES OF AUDIT PROGRAM

Contents
Audit Notebook Explained
An audit notebook is an official diary or register carried by
auditors and their team members when conducting audits on
companies, offices, or entities. It aims to record every
important point, factor, error, mistake, , query, doubt, and
detail for future reference.

According to the audit notebook definition, it holds

critical significance during and after the audit. The auditor
relies on it to prepare and present the final audit report to
the clients. An audit cannot be effectively conducted without
it, as its absence can seriously affect the entire process.

.
Contents
The contents of the audit notebook are –

 Corporation Name: Include the full legal name of the

company being audited.
 Enterprise Structure: Describe key personnel, their roles,
and organizational hierarchy.
 Business Details: Briefly explain the company’s
industry and nature of operations.
 Legal Documents: Specify reviewed documents, such
as memorandum of association (MOA), article of
association (AOA), deeds, agreements, and affidavits.
 Management Representation: Define what this
includes, like organizational charts or other
representations.
 Financial Accounts: Identify the types of accounts,
e.g., financial statements, ledgers, or specific account
names.
 Previous Auditor’s Notes: Detail information received
from the prior auditor (for new auditors).
 Accounting Methods: Elaborate on methods, internal
controls, laws, regulations, and hierarchy.
 Error and Fraud Records: Describe the process for
recording and reporting observed issues.
 Separate Audit Program: Explain the purpose and
use of this separate program copy.
 Query Clarifications: Specify how queries, doubts,
missing receipts, and inquiries are documented.
 Special Observations: Define “special points” and
how they are documented for the audit report.
 Critical Minutes: Detail significant information
impacting the audit process.
 Reference Notes: Specify types and expected detail in
reference notes.
 Audit Dates: Include specific initiation and completion
dates to indicate the duration

Audit Working Papers

 Audit working papers are the documents and evidence
that an auditor collects and retains with himself during the
audit.

They constitute all the audit evidence that an auditor obtains.

Also, it contains various procedures that he applies to
indicate that the audit is performed by him.

The auditor and his audit team members prepare the audit
working papers while performing the audit. Working papers
are connecting link between the client’s records and audited
financial statements.

Working papers provide entity’s historical records as well as

matters which should be taken care and given due
importance while performing future audit’s of such entity.

Audit working papers help auditor in audit planning and

collecting evidence of the audit work performed on which his
opinion is based.

Audit Evidence
An audit is a systematic independent examination of financial
statements, records, documents with an objective to express an
opinion on the financial statements of an entity whether they are
giving a true and fair view or not. Auditor expresses his opinion
(whether the financial statements of an entity are giving a true and
fair view or not) on the basis of audit evidence collected by him.

Audit evidence includes information provided in books of accounts

as well as information from other sources. For Example – Purchase
invoice and material received note prepared by the store’s
department are evidence to support the purchase.
5 METHODS OF OBTAINING AUDIT EVIDENCE:
1. Inspection: Inspection involves examining records, documents, or
tangible assets to obtain audit evidence. Auditors review financial
statements, accounting records, invoices, contracts, bank
statements, physical inventory, and other relevant documents to
verify the accuracy and completeness of financial information.
2. Observation: Observation entails directly witnessing processes,
procedures, or activities to obtain audit evidence. Auditors may
observe inventory counts, production processes, cash handling
procedures, or internal control activities to assess their
effectiveness and reliability.
3. Inquiry and Confirmation: Inquiry involves seeking information or
explanations from management, employees, or external parties to
obtain audit evidence. Auditors may conduct interviews or
discussions with management, key personnel, or third parties to
gather information about business operations, transactions, or
internal controls. Confirmation involves obtaining written or oral
responses from third parties to confirm the accuracy or validity of
information provided by the client. Auditors may send confirmation
requests to customers, vendors, financial institutions, or other
external parties to verify account balances, contract terms, or other
relevant information.
4. Computation: Computation involves performing calculations or
mathematical procedures to obtain audit evidence. Auditors may
calculate financial ratios, perform trend analysis, or reconcile
financial data to assess the reasonableness and accuracy of
financial statements.
5. Analytical Review: Analytical review involves analyzing financial
and non-financial data to identify significant trends, fluctuations, or
anomalies that may indicate potential risks or errors. Auditors
compare current financial information with prior periods, industry
benchmarks, budgeted amounts, or other relevant data to assess
the reasonableness and consistency of financial statements.
What Are Internal Controls?
Internal controls are accounting and auditing processes used in a
company's finance department that ensure the integrity of financial
reporting and regulatory compliance.

Internal controls help companies to comply with laws and regulations, and
prevent fraud.

They also can help improve operational efficiency by ensuring that

budgets are adhered to, policies are followed, capital shortages are
identified, and accurate reports are generated for leadership.

Objectives

1. To encourage adherence to policies: The system of internal

control is introduced to provide reasonable assurance that the
various plans, policies and procedures laid down by the
entity are being followed.
2. To avoid frauds and errors: The main objective of any
control system is to detect and prevent frauds and errors by
keeping an inherent check.
3. To promote operational efficiency: The internal controls
within an organization are meant to prevent unnecessary
duplication of efforts, protect against waste and discourage
any inefficient use of resources of the organization.
4. To safeguard assets and records: The other important
objective of internal control system is to safeguard the assets
and records from unauthorized access, use and disposition.
5. To provide accurate and reliable data: The internal control
system ensures that all the transactions are recorded in the
correct amount, in the appropriate account and in the
accounting period to which they relate.
6. To assist in timely preparation of Financial
Information: Information is of no use if it is not provided in
 time. Internal control system facilitates timely preparation of
financial statements .

Internal Check
Internal check is used as tool for executing
internal control. It is the arrangement of duties of staff
in such a manner that the work of one person is
automatically checked by another which minimizes the
chances of errors and frauds.

Main Objectives
Internal check in an organization serves the following purposes:

1. It helps in arranging the duties in such a way that work of

one person is automatically checked by another or work of
one person is complementary to another and there is no
duplication of work.
2. The work is divided in such a way that no transaction is
left unrecorded.
3. It ensures the reliability and accuracy of information
provided by accounting system.
4. It reduces the chances of errors and frauds as there is
automatic checking.
5. It helps in fixation of responsibility as there is a clear
division of work.
6. It helps in increasing the efficiency of accounting staff as
the work is divided among individuals according to their
capacity and qualification.
 INTERNAL AUDIT:
Internal audits evaluate a company’s internal controls, including its
corporate governance and accounting processes. These types of audits
ensure compliance with laws and regulations and help to maintain accurate
and timely financial reporting and data collection. Internal auditors are hired
by companies who work on behalf of their management teams. These audits
also provide management with the tools necessary to attain operational
efficiency by identifying problems and correcting lapses before they are
discovered in an external audit.

Internal Audit Reports: The 5 C's

Internal audit reports are often known for adhering to the 5 C's reporting
requirement. A complete, sufficient internal audit often ends with a
summary report that communicates answers to the following questions:
 1. Criteria: This refers to the established standards, regulations,
policies, or procedures against which the auditing process is being
conducted. Criteria set the benchmark against which the
performance or compliance of the subject being audited is
evaluated. Criteria can be internal (such as company policies) or
external (such as industry regulations or standards).
2. Condition: The condition represents the current state or situation
observed during the audit. It describes the actual performance or
compliance level of the audited subject in relation to the established
criteria. Conditions can be categorized as satisfactory,
unsatisfactory, compliant, or non-compliant, depending on whether
they meet the established criteria.
3. Cause: This refers to the root cause or underlying reason for
any deviations or discrepancies identified during the audit.
Identifying the cause is crucial for understanding why certain
conditions exist and for developing effective corrective actions to
address them. Causes can stem from various factors such as
inadequate procedures, insufficient training, resource constraints, or
systemic issues within the organization.
4. Consequence: The consequence outlines the potential impact
or implications of the identified conditions and their causes.
This could include financial losses, operational inefficiencies,
regulatory non-compliance, reputational damage, or other adverse
effects on the organization. Understanding the consequences helps
prioritize corrective actions and allocate resources effectively.
5. Corrective Action: This is the final step in the audit process and
involves developing and implementing measures to address
the identified issues or deficiencies. Corrective actions aim to
eliminate the root causes of non-compliance or poor performance
and prevent recurrence of similar problems in the future. These
actions may include process improvements, policy revisions, staff
training, resource allocation, or other remedial measures tailored to
the specific circumstances uncovered during the audit.

OBJECTIVES OF INTERNAL AUDIT

1. Proper Control
One of the main objectives of an internal audit is to keep proper control over all
the activities of an organization. The management needs assurance of the
authenticity of the financial records and the efficiency of the operations of the
firm. An internal audit helps establish both.

2. Perfect Accounting System

An internal audit keeps a very close check on the accounting system of an

organization. It checks everything from the vouchers, to the authority of
transactions to mathematical accuracy. Chances of mistakes or frauds are greatly
reduced.

3. Review of Business

The purpose of an internal audit is to keep a check on the financial and

operational aspects of a business. So as the current financial year is ongoing,
internal audit can point out the mistakes, weak points, and strengths of the
business. This will allow an ongoing review, instead of waiting till the year-end.

4. Asset Protection

In the process of internal audit, there is always a valuation and verification of an

asset. There is also a physical verification of the ownership and possession of the
asset.

And in case of special transactions like sale, purchase or revaluation of the asset,
the authorization of this is also audited in an internal audit. So the assets enjoy
complete protection.

5. Keeps a Check on Errors

In a financial audit, the auditor will be able to determine if any mistakes were
made in the financial records. But this only happens at the end of the financial
year.

And the mistakes are corrected thereafter. But in case of an internal audit, the
mistakes are spotted as soon as they are made, and corrected immediately.
6. Detection of Fraud

In case the company has an internal audit in place, the detection of fraud becomes
much easier. This is because there is a year-round check on the employees.

In fact, an employee is less likely to attempt fraud in the presence of an internal

auditor. .

IMPORTANCE OF INTERNAL AUDIT:

1. Increase productivity: Internal audit is an objective assurance
and consulting activity designed for add value and improve
business operation. Internal audit can help an organization
accomplish its strategic objectives by bringing a systematic,
discipline approach to evaluating and improving the effectiveness
of risk management, control and governance process. By
continuously monitoring and reviewing the organization
processes, internal auditor can identify the control
recommendation to improve the efficiency and effectiveness of
these processes and they also help to an organization to
dependent on processes rather than on people.
2. Evaluate Risk and protect the assets: A regular internal audit
assess a company control and help to uncover evidence of frauds,
help to identify any gaps in the environment and allow for a
remediation plan to take place. Internal audit program will help to
an organization to track and document any changes that have
been made to environment and ensure the mitigation of any found
risks.
3. Quality Control: Internal auditor help the organization how well
system and process are designed and keep the company goals on
track and also provide the consulting on how to improve those
system and processes if and when necessary.
4. Independent and unbiased insight: Internal audit provides
unbiased view into how effective internal controls of your
business. If an organization has limited resources and they are
unable to setup an independent audit team, they could cross-train
employees to audit each other’s departments.
 5. Good Corporate Governance: Internal audits evaluate a
company’s internal controls, including its corporate governance
and accounting processes. They ensure compliance with laws and
regulations, accurate and timely financial reporting and data
collection. They also help maintain operational efficiency by
identifying problems and correcting lapses before they are
discovered in an external audit.

PROCESS:
1. TO COMMUNICATE THE SCOPE OF AUDIT TO THE APPROPRIATE
MANAGEMENT.
2. TO DEVELOP A UNDERSTANDING OF BUSINESS
3. TO CHECK THE KEY RISK FACTORS FACING THE BUSINESS WITH
THE SCOPE OF AUDIT.
4. TO IDENTIFY THE CONTROL PROCEDURE OF THE RISK.
5. TO DEVELOP AND EXECUTE RISK BASED SAMPLING
6. REPORT THE PROBLEM THAT HAS BEEN IDENTIFIED AND IDENTIFY
THE ACTION TAKEN.
FOLLOW UP OF THE FINDINGS AT APPROPRIATE INTERVALS.

Internal audit under companies act 2013

section 138
 (1) Such class or classes of companies as may be prescribed shall be required to
appoint an internal auditor, who shall either be a chartered accountant or a cost
accountant, or such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the company.

(2) The Central Government may, by rules, prescribe the manner and the
intervals in which the internal audit shall be conducted and reported to the Board.

Vouching :
Vouching is a fundamental auditing technique used to test the
accuracy and completeness of an organization’s financial
transactions.

Vouching is defined as the verification of entries in the books

of accounts by examination of documentary evidence or
vouchers such as invoices, debit and credit notes,
statements ,receipts, payments etc

IMPORTANCE OF VOUCHING:

OBJECTIVES:

1. To examine the accounting transactions and matching with the

evidence.
2. To judge the accuracy,adequacy and credibility of the
document.
3. To examine the authenticity of transactions recorded.
4. To ensure no transaction remains unrecorded.
Verification means "proving the truth" or "confirmation".
Verification is an auditing process in which auditor satisfy himself with
the actual existence of assets and liabilities appearing in the Statement
of Financial position.
Verification is usually conducted through examination of existence,
ownership, title, possession, proper valuation and presence of any
charge of lien over assets.
Verification in an audit process can be done offsite or onsite.

Objectives
Objectives of Verification are:
1. To show correct valuation of assets and liabilities.
2. To find out the ownership and title of the assets
3. To find out whether assets were in existence
4. To detect frauds and errors, if any.
5. To verify the arithmetic accuracy of the accounts
6. To ensure that the assets have been recorded properly
7. To know whether the assets are mentioned above is used in the
company

Verification of assets

Verification of assets means checking the right side of the balance sheet. This
means when the auditor examines the right-hand side of the balance sheet
then it is considered as verification of assets. Verification of assets is done to
examine the total assets which the company has. Let’s make it more clearly
with an example.

A company buys a machine of ₹ 50000 and now the rate of that machinery is
₹ 20000. So to examine, was the cost of that machinery ₹ 50000 or
something else. For this verification of assets used. There are three
objectives for the verification of assets. And those three verifications are as
follows:-

1. Verification of the existence of assets

2. Valuation of assets 3. Authority of their existence

Verification of liabilities
Verification of liabilities implies an inquiry where the following things have
been checked:-

• When verification of liabilities occur then the check that, is all the liabilities
are recorded in the balance sheet or not. Because sometimes it occurs that
some of the records haven’t been entered in the liabilities section of the
balance sheet.

• As the liabilities should be related to business, so they check that is the

liabilities recorded in the balance sheet is related to business or not. It is very
important because if the liabilities will not be related to business and will
enter in the liabilities section of the balance sheet then it will cause a big
problem for the company.

• While doing verification of liabilities it is also checked that is that liabilities

are fully authorised or not

• They check that in liabilities the value is correctly mentioned or not.

Because the value won’t be correctly mentioned then it will cause loss of the
company.

Valuation
Valuation means finding out correct value of the assets on a particular date.
It is an act of determining the value of assets and critical examination of these
values on the basis of Generally accepted accounting standard.
Valuation of assets is to be made by the authorized officer and the duty of
auditor is to see whether they have been properly valued or not.
For ensuring the proper valuation, auditor should obtain the certificates of
professionals, approved values and other competent persons.
Valuation is the primary duty of company officials.
Without valuation, verification of assets is not possible.
GOODWILL: INTANGIBLE ASSET.
 You cannot verify the value of goodwill.
 Calculate the goodwill under various methods as suitable for
investors.

 The difference should not exceed the difference of purchase
consideration and net tangible assets acquired.
 Goodwill will appear in the balance sheet at a lesser amount
than it actually is.
 If there is a problem it is necessary to writeoff goodwill.