AUDITING

by

Franklin Salvi
Assistant Professor,
St. Vincent College
of Commerce,
Pune - 37
 Auditin
g
• The Word Audit is derived from the Latin word “Audire”
which means to hear.
• In Olden days, some experienced people ordinarily judges
the accounts of business people for the purpose of the correctness of accounts.
• Industrial Revolution in England in 18th century – Separation between ownership and
management
• 1880 –Institute of Chatered Accounts of England and Wales established to train people to
acquire necessary qualification and skills to be auditor
• 1892 – Lawrence Dicksee ‘Practical Manual for Auditors’ - 1st Text book of
auditing modern
• 1st Companies Act 1857 – voluntary audit , Companies Act 1913 – compulsory audit ,
Companies Act 1956 – enlarging scope of auditor
• 1949 – Chatered Accountants of India Act
Spicer & Pegler

“Audit is such an examination of the books , accounts & vouchers of a

business , as will enable the auditor to satisfy himself that the Balance Sheet

is properly drawn up, so as to give a true and fair view of the state of affairs

of the business , and whether the Profit and Loss Account gives a true and

fair of view of profit or loss for the financial period according to the best of

his information and the explanations given to him and as shown by books,

and if not, in what respect he is not satisfied”

Institute of Chartered Accountants of India

“Auditing is systematic and independent examination of data, statements,

records, operations and performance(financial or otherwise) of an enterprise
for a stated purpose. In any auditing situation, the auditor perceives and
recognizes the propositions before him for examination, collect evidences,
evaluates the same and on the basis, formulates his judgement which is
communicated through this audit report”
 Independent and
Systematic examination 01
Review of Financial and
Non Financial Data
02

Audit Object is stated in

the Audit Contract 03
Collection of evidence -within
and outside the organization 04
Formulate opinion and
present Audit Report 05
 To give an
Detection
opinion on
Primary Secondar of Errors
fairness
Objective y and
of
Objective Prevention
Financial
of Frauds
Statement
 PRIMARY OBJECTIVE
“F inancial S tatem ents of an enterprise give a true & fair view
if they , together with the related notes, are sufficiently
informative of matters that affect their use, understanding and
interpretation by those for whom they are intended and they
are prepared in accordance with accounting principles
appropriate to the circumstances of the business” - Kent et al
 Balance Sheet
and Profit and
Loss Account
as per relevant
Act

PRIMARY
OBJECTIVE
Financial Information
Statements to enable
as per the user to
GAAP No Over or draw
Under conclusion
statement
of financial
position
 S E C O NDAR Y O BJ E C TIVE
E r ro r
“an unintentional misstatement in the
financial statements including omissions”

Fraud
“An intentional act by one or more individuals, among
management, those charged with governance, employees
or third parties involving use of deception to obtain an
unjust or illegal advantage” -ICAI
 Types of Errors
Recording in Also Off- Setting Error
C lerical incorrect book, When one error
E rrors incorrect amount , compensates another
totaling mistake , error
carry forward
mistake
Errors Errors Error of
of of Duplicati
Omissio Princip on
n le

Errors of Compensati
Commissio ng Error
n

Partial Omission One transaction

Fundamental
Complete recorded more
Principles of
Omission Accounting not than once
followed
1. Omitting entries
2. Entering
Manipulation
Less
Embezzlement of
amount
of Cash Accounts
3. Teeming
and Lading
4. Fictitious
payments Omission
5. Personal of
payments Event
6. Accepting
Fraud s
Kickbacks
7. Fictitious
Accounting
names
Policies
on
Wrongly
Payroll
applied
Misappropriation
Goods of High of
Value and Goods Internal
small size Control System
Overridden
 Principles of
Auditing

Confidentialit Planning
Independenc y/ Secrecy
e 6
4 Objectivit
Competenc 2 Integrity
y
y
3 5
1
 Principles of
Auditing

Audit
Accountin Audit
Evidenc
g & Conclusi
e
Documentation Intern 1 on &
8 al Report
0
Control
7
9
 Advantages of Auditing to
Owners
Taxation
C o m plianc e
G overnm ent
Acceptance Detection
of Reliability
L oans E rrors of Accounts

&
Proper
Valuation
Frauds
Efficiency
of Assets M easurem ent
 Advantages of Auditing to
Management
Acc ount -
Internal ability
Ac curacy
Control of
System
Informat S afeguarding
Reliab - ion Assets
of
ility
Decision
Legal Making
Obligations Dispute
S ettlem ent
 Advantages of Auditing to
Others
e.g. SEBI , Stock Exchange, For granting
CRISIL For security or Investments ,
Loans & Guarantee Prospective Investors

Monitoring Employe
agencies es &
Banker Supplier Investor
Trade s s s
Union
Negotiation for For granting credit
wages hike
 Basis Accounting Auditing
Recording, Classifying and Detailed examination of financial
Objective summarizing of the business statements to enable to auditor to
transactions express his opinion

No single method or standards for

Standard Accounting principles are
Standardization examination and differs from
followed
organization to organization

Qualification Need not be a Chartered Accountant Must be Chartered Accountant

Preparation of Accounting Adds creditability to the accounting

Nature of Work
Statements statements

An accountant is a n employee of the

Nature of An Auditor is appointed the owners and
organization and appointed by the
Employment is not a n employee of the organization
management
 Ty p e s / B a s i s o f
A u d it

Ownership Periodicity Objectives Scope Employe Manner

1. Financial 1. Complete r of
1. Private 1. Continuous Checking
1. External
2. Operational 2. Partial
Audit 2. Annual 2. Internal 1. Standard
3. Cash Audit
2. Govern- 2. Balance
3. Interim 4. Management Sheet
ment
4. Occasional 5. Tax Audit 3. Post &
Audit
6. Social Audit Vouch
3. Statutory 5. Concurrent
7. Environmental
Audit
8. Proprietary
9.Performance
10.Secretarial
 Ownershi
p

Privat Governme Statuto

e nt Audit ry
Audit of Union of
Audit
India , State, As per statutory
By Sole requirements
Government
Proprietors, (compulsory by
Departments
Partnerships and law)
etc. where undertakings e.g. Joint stock
Audit is not a and Local Cos., Banks, Co-
compulsion Bodies operatives
By Comptroller , Insurance Cos.
and Auditor Etc.
General of India
appointed by
 Perio
d

Continuou Annua Interi Occasion Concurre

s Audit l m al nt
Audit Audit Audit
Examination
Audit By sole On occurrence
Also know This audit is
of Books of as Final conducted proprietorsh of transactions
Accounts at Audit and between two ip or examination
regular is annual audits ,partnerships at the earliest
Conducted at the when need e.g. For banks
intervals e.g. quarterly
end of the arises e.g, and financial
i.e or half
Financial Year claiming institutions
fortnightly , yearly
insurance, sale
monthly etc. of business
etc.
 06
05
04
Audit work
03
02 Keeps a Accounts is more
reliable as
are kept up
01 Auditor Final
Moral
Check on to date due
detailed
gets Audited examinatio
the staff to frequent
Early Technical can be visits of n of the
minimizing
detection of knowledge presented Auditor books of
the errors
errors and about soon accounts is
and frauds
frauds business after possible
due to closure of
frequent Financial
visit Year
 04
03
02 Expensive
method not
01 Frequent Staff may suitable for
Accounts visits of depend on small
can be auditor may auditors organisations
altered by disturb the and not be
dishonest work diligent in
clerks detecting
before errors
audit
 Objective
s
Financial Audit Social Audit
Independent Audit of To review the non financial
Financial statements impact of an organization
show true and fair view on the society

Cost Audit Environmental Audit

To audit the cost Impact of organizations
records , costing activities on the
techniques and methods environment (Green Audit)

Operational Audit Proprietary Audit

Review of the operations To review the impact of
/functions carried by the decisions of management ,
internal auditors to ensure they are Ethical

Management Audit Performance Audit

To review , examine and Evaluation of performances
appraise polices and as compared to
practices of Management set Standards

Tax Audit Secretarial Audit

For specified Persons to To ensure the provisions of
access correctness of various laws are complied
profit for tax Purpose when implementing
decisions
 When the auditor When the auditor
appointed is is an employee

Externa independent and

appointed by
Internal of the
organization

l
persons other than
those whose Audit appointed by the
management to
performance is to ensure accounts
Audit be evaluated are error and
fraud free

Employ
er
 I nternal
Audit
“ Internal Audit is an independent management function

which involves a continuous and critical appraisal of the

function of the entity. The objective of internal audit is to
suggest improvement to the function of the entity and add
value to and strengthen the overall performance
mechanism of the entity including strategic risk
management and internal control system ". - ICAI
Basis for comparison External / Independent Audit Internal Audit

To critically review the impact of management

To ascertain the truthfulness and fairness of
Object policies and practices and suggest improvement
financial statements
measure

The Auditor is appointed by the Owners of The Auditor is appointed by the Management of
Appointment
an organization a n organization

External Auditor is an independent Internal Auditor is a n employee of the

Status
person appointed every year organization appointed by the management

For Compulsory audit the relevant Act states

the scope of work of the external Auditor. The duties and scope of work of the
Scope of Work
The scope of work is also determined by internal Auditor is determined by the
the owners of the organization management

Detection of errors and prevention of Frauds Detection of errors and prevention of Frauds is
Errors and Frauds is a n incidental duty the primary duty is to the primary function , also to devise a n internal
express and opinion. control system to prevent their occurrence

External Auditor submits the Audit report to Internal Auditor submits the Audit report to the
Report
the owners of the organization Management of the organization

May be conducted on Annual , Interim

Periodicity It is a continuous process
or Continuous basis
 Manner of
Checking
Standa Balance Post
rd Sheet &Vouc
Audit
It embraces complete
Audit h Audit
It means verification Is where the auditor
check and analysis and valuation of checks each and
of certain items and assets , Liabilities , every transactions ,
contingent upon balances of reserves however is an
effective internal and provisions and outdated method.
checks the amount of profit Detailed
earned during the examination is
, appropriate test
year , and is suitable conducted only
checks on remaining for organizations under incidences of
items the whole work having very efficient suspicion of
being as Internal Control occurrence of frauds
per general auditing Systems
standards adequate
 Audit P ro c e s s

Plannin Audit Report

Conduct
g of
Audit
Scope Knowledge Audit P Manpowe Determine the Communication
of rogramme r truthfulness through
Audit of the Planning and fairness Audit Report
client

Audit Evidence Examination Audit Coordination Documentation

Contro
l

Audit Work
Assistants Performed
by others
An Auditor must be clear about what he is required to perform under the
audit. An ambiguity about the coverage of audit may result unnecessary work
or neglection of work , misunderstanding on the position of the auditor may
lead litigation.
The scope of Audit is determined from :

01
Terms Specified in the letter of
appointment by the client

02 Acts Governing the audit

General Expectation under

such appointment
03
 Auditors’s Role : Consultant
, Accountant or Auditor

Audit aims : matters to

audit , opinions to express,
1 certifications
2
Duties of client during audit,
Engagement 3 Limitations of the audit &
Letter Duration of Audit
4
5 Law applicable ,
announcements of
professional bodies , request
of clients
Auditor’s Remuneration ,
reimbursements of
expenses
Knowledge of the
Client’s
Business

Nature of the Business

01
Accounting System , 0
policies methods etc.
2
Internal Control
Systems of the

03
business
Audit Programme
“An Audit Programme is a detailed plan of the auditing work to
be performed, specifying the procedures to be followed in the
verification of each item in the financial statements and giving
the estimated time required" - Prof. Meigs

“An Audit Programme is an outline of all procedures to be

followed in order to arrive at an opinion concerning the client’s
financial statements " - Prof. Steller
 Charge of Negligence

Fixing Responsibilities Uniformity

Work Distribution
Completion of work

Progress of work
Final Review
 Complexity of the Audit to
be conducted

Number of Audit Assistants

based on Audit
1 Programme
2
Check the available number
3 of Audit Assistants and their
qualifications and skills
4
5
Appoint new audit assistants
as per the requirement

Allocate work based on

efficiency of the
assistants
 06
05
04
Copy of
03
02 Audited Names of Partnership
deed ,
persons to
01 List of Names of
Final
Accounts be Memorandu
Names and various approached m of
of previous
List of all specimen authority, for doubts Association,
year if
books signatures along with and Articles of
change of
maintained in authority their duties clarification association
auditor
in the office signed by a , powers , s etc.
responsi-
responsible bilities
official
 Inquiry and confirmation

Observatio Computation
n

Inspection Analytical Review

Complianc
e test of
Internal
Control
Systems
Examination
Auditing in Depth “It implies examination of the system applied within
a business, entailing the tracing of certain transactions from their
origin to their conclusion, investigating at each stage the records created
and their appropriate authorization" - Taylor and Perry

Test Check “Testing and Test Checking means to select

and examine a representative sample from a large
number of similar items" - Prof. Meig
 Every Accounting Clerks work must be
checked

Important
Large number of books/transactions must
transactions during be completely checked
specific months should be
checked

Test checking
Entries of every type methodology must
to be checked be changed at each
audit
 04
03 03
02 02 Does not
01 Focus 01 Not Reduce
Error No
Reduces on Standard suitable Responsi
Save s
Cost Relevant method for - bility
and
s details Frauds to small of
Time choose a concern the
may be
Sample s Au
over -
dit
looked
or
 Audit Notebook
It is a systematic record
maintained by the audit
assistants of queries made
and replies received which
may be in form of a register
or loose sheets
 Errors & Frauds
detected Important Accounting
provisions of MA, Method
Technical details AA or
adopted
of clients business Partnership deed

Points to be
included in
Audit Report
Matter to be Missing
discussed with Voucher
senior or s
Totals/Balances of
auditor
certain books ,
Queries made & BRS
information received
Proof Records
of Audit
&
Audit Report
Referenc
work e
 Rigidity

Loss of Shields inefficient staff

Initiativ
e

Mechanical Not useful for small

Work Concerns
 Audit Working Papers
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1 Examples of Audit Working Papers :

2. Aid in conducting and supervising
audit

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Details of Investments , fixed assets etc. seyres.teThims is
succeeding
3. Schedule of debtors & Creditors . r
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6. Abstracts of minute book etc.
7. Correspondence with outsiders
8. Certificate of Stock Valuation
 Audit Working Papers

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2.
Arrangement
Systematic & Chronological
the auditor ,
client if requested

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5. Good Quality
6. Blank Space for Auditor to make notes
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 Updating and/or making changes to Audit programme

Meetings with audit

Provide training and assistants at periodic
guidance to assistants intervals

Seeking
Audit work to be
assistance from
performed as per
experts from other
for Audit
fields and
Programme
verification of their
competence
 Coordinatio
n Audit and Internal Audit the auditor has
Under Joint Audit , Branch
to reply on the work done by other auditors. A joint Audit requires
proper division of work among all auditors. Incase of branch audit
the statutory auditor relies on the work of the branch auditor. The
auditor must also evaluate the internal control system before
considering the Internal Audit Report
 Documentatio
This involves reductionn
in writing audit matters , proper
preparation and upkeep of audit notes , working papers ,
classification of information so as to enable the auditor to express
his opinion and use as a n evidence of Audit work done
Audit report is a written letter from the auditor containing their
opinion on the company's financial statements.

The audit report contains two parts :

1. Statements of facts from the financial statements based on the
audit work done by the auditor

2. Auditor’s opinion on the accounts audited

The Auditor presents his report to the owners of the organization

under audit
“Internal Control is best regarded as the whole system of
controls, financial and otherwise established by the management
in the conduct of a business including internal check, internal
audit and other forms of control" - Spicer and Pegler

“The m easu res an organization em ploys to ensu re that

opportunities for fraud or misfeance are minimized "
Oxford Dictionary
 Features of Internal
Control
To remove Internal Check &
inefficiencie Accounting and
Internal Audit Administrative
s
Areas

Includes Efficiency
Set up by Safeguardi
Control Include and
Management ng
Procedure s Orderliness
Assets
s

Financial & Unauthorized use

Non Financial Limiting access
adequate insurance ,
timely upkeep etc.
 Limitations of Internal
Control

Possibilit Manageme
y of Manipulation nt
Huma
Collusio s by Discretion
n
n Management at
Error
inception
 “ Internal Check is provided by segregating duties in s u c h a way that no
one person can initiate, authorize , conduct, and record a transaction from
start to finish without his work coming under the surveillance of atleast
one other person" - Michale J . Patt

“ A system of allocation of responsibility, division of work and method of

recording transactions where by he work of a n employee or group of
employees is checked continuously by correlating it with the work of
others. An essential feature is that no one employee or group of employees
ha s exclusive control over any transaction or group of transactions " - ICAI
 Division of Work
1
Separation of Recording
and Custody 2
J o b Rotation 3
Authority Levels 4

Accounting Controls 5
 Increases efficiency
1 of work

Fixation of
2 responsibilities in
case of errors
No one person having
3 overall charge prevents
manipulation

Information generate is
4 more reliable due to
cross check

Sound Internal Check

5 systems makes
test checking possible

Job Rotation enables all

6 employees to learn all

 It is expensive as
0 division of work
1 requires more staff

Employees work is cross

checked making them
0
careless 2
0 Reduces the work load of the
Auditor not does reduce the
3 liability
 Internal Control Internal Check Internal Audit
It consists of various control It is an Independent function of
It is an arrangement where the
procedures adopted by an management involving a
work of one person is checked
organization in Financial and continuous and critical appraisal
by another person
Non Financial areas of the functions of the entity

It calls for appointment of

Covers accounting
It is applied to the accounting areas experts and professionals having
and non –accounting
accounting knowledge
areas

It includes Internal Check It is a part of Internal It is a part of Internal

and Internal Audit control systems control systems

Its objective is to bring

Its objective is to minimize It objective is to detect errors
about efficiency and
the chances of errors and and frauds
orderliness in operations
frauds
Safeguards for application of
Test Test
01
Checking
Representative Checking
“a means to select and examine
& Random a representative sample from a
02
Complete
Examination
large number of similar items”
- Meigs
03
Complet
e
Coverage

04 Study
the
Process
05
Extent
Examples of Voucher
Vouche
01 A receipt or r
Documentary evidence in support of
any business transaction is called as a
counterfoil Voucher. It may be a receipt, invoice,
bill, cash memo, bank pay-in-slip,
02
Agreement or
Contract counterfoil of a cheque,
03 correspondences, agreements,
resolutions passed in the meeting etc.
Resolutions Voucher gives information about the
and nature and source of the transaction,
Minutes Book its value and authority. It
substantiates the entries in the book of
04 accounts and confirms the
Invoices genuineness of the transaction

05
 Types of Voucher
Primary Vouchers
It is the original evidence i. e. the original docu m ents e. g.
cash memos , rent receipts etc.

Collateral/ Secondary
Vouchers
These are the copies of the original vouchers and
support the original voucher e.g. carbon copies of
cash memos , counterfoils of pay- in- slip etc.
 Vouching
“Vouching Is a technical term which refers to the inspection
by the auditor of documentary evidence supporting and
substantiating a transaction ” – Ronal A. Irish

“” the exam ination of all docu m entary evidence , which

is available to support the authenticity
of the transactions entered in the client’s record’’
– Spicer and Pegler
 Objectives of
Vouching

W To ensure all
hether To verify if vouchers relate
Verification
related Transactions to the related
of financial year
to recorded on
authenticity
busines the basis of
and authority
s vouchers
 Entry based with
1 documentary evidence

Transaction entered
2 in the right place

Distinction
3 between Capital
& Revenue
Transaction is
4 authorized

Checking Trail
5 if necessary
Transaction
6
recorded
is related to
 Verification
“The verification of asset implies an inquiry into the value
ownership and title, existence and possession, the presence
of any charge on the assets ” – Spicer & Pegler

“” A process by which the auditor substitutes the

accuracy of the right hand side of the balance sheet
and must be considered as having three
distinct objects
a) the verification of the existence of the assets
b) the valuation of the assets
c) the authority of their acquisition ’’
– Jose p h Lancaster
 01
Existence

02
Ownership

Possessio 03
n
Disclosur 04
e
Valuation 05
 01
Existence

02
Completenes
s
Valuation 03

Disclosur 04
e
 Valuatio
Valuation
n
implies the process of confirming that
the assets are shown in the balance sheet at fair
value and is done as per the Generally Accepted
Accounting Principles.

The valuation methods of assets depend upon the

nature of assets
 Audit Report
A report is a statement of collected and considered facts, so
drawn up as to give clear and concise information to
persons who are not already in possession of full facts of
subject matter of the report. - J o s e p h Lancaster

An auditor is appointed to examine any situation and is

required to give his opinion regarding the assertions made
by management etc. after examining the records and
report to his clients in writing with regards to his
findings.
The report thus presented by the auditor is known
Section 227(2) of the Companies Act requires the auditor to give his
report to the members of the company on :

01 02
Account examined Every Balance sheet and
by him Profit &
loss A/c laid before a general
meeting his tenure

03
Every document that is ‘part of’ or ‘annexed to ’
such Balance Sheet and Profit and Loss
A/c e.g. list of investments and particulars required by
section 372(9)
 AUDITOR’S REPORT

01 02
Statement of Auditor’s
Facts Opinion
 Example
Import & Export Certificate
Audit Certificate Bonus Computation
Certificate Deposit Return
Certificate
Important points to consider when preparing
a certificate
It is a certificate issued under 1. Limitations of the examination should be
the signature of the auditor clearly stated
which implies that the 2. Indicate specific record covered
auditor gurantees the 3. Fundamental assumptions of
truthfulness of the matters certification
Information and explanation obtained
stated therein. 4.

5. Title of the certificate

Responsibility 6.

7.
Should be self contained
Should be addressed to specific person.
authority etc.
The auditor’s responsibility is
8. Figures of audited statements should be
primary and absolute towards mentioned when necessary
the facts mentioned in the
certificate
 Audit Report Audit Certificate
● It is a formal statement made
after enquiry, examination and ● It is a written confirmation
review and contains an opinion
on the accuracy of facts
● It is an opinion and stated therein
provides reasonable
assurance
● It gives a gurantee of
● Has a wider scope
accuracy
● There is a prescribed
standardized format ● Scope is limited
● Responsibility of misstatements
does not imply to the auditor if
● No prescribed format
reasonable care and
professional skills with
sufficient evidence are used for
conduct of audit
● Auditor’s responsibility if
absolute
 Elements of an Audit Report
Titl Financial Statements Audited
Addressee e

Scope
Paragrap
h

Opinion

Signature of the
Auditor
Unqualified / Cl
ean Report 1
Qualifie
d
Report
2
Disclaimer o
f opinion
3
Advers
e
Report
4
 Unqualified / Clean 3. Financial statements give a true &
Audit Report Fair view
It is issued when the auditor
is satisfied in all material aspects 4. The disclosure of information in
with regards to the matter under the accounts are as per the
audit requirement of the relevant Act.
A) Standard Unqualified Report
B) Report with emphasis on matter
1. Financial statements are
prepared The Auditor may attach a note to
in accordance GAAP the financial statements ,
emphasizing on matters connected
to the statements.
2. The Final Accounts are in
This does not change the nature of
the report but highlights certain
agreement with the books of
details which are significant
accounts
Qualified Audit Report Scope limitation : When an auditor
It is issued when the auditor is not is not to gather sufficient evidence to
satisfied with matters concerning : support a financial assertion in the
1. Proper and consistent application financial statements there is scope
of accounting policies and limitation. The auditor should, either
convention qualify or disclaim a opinion
2. Adherence to disclosure, truth and
fairness of information Disagreement with
3. Compliance to provisions of
the Management
due :
statutes
1. Departure from
The report can be qualified due
to
GAAP

4. Scope limitation 2. Adequacy of

disclosure
5. Disagreement with
management The auditor may decide to issue a
Qualified Report or
an Adverse Report
Disclaimer of
The auditor issues disclaimer of
opinion if the subject matter is
material and the auditor is

Opinion
unable to obtain sufficient
appropriate evidence to express
an opinion on it.

Auditor refrains from

expressing an Opinion
 Adverse report is issued when

Adverse
the auditor is of an opinion that
the effect of disagreement with
the management is material and
pervasive to the financial

Report
statement.

The Auditor states that

the financial statements
do not give a True and
Fair View
 Qualificatio
(1)A person shall be eligible for
n as an auditor of a company
appointment
only if he is a chartered accountant
asper the Chartered Accountant Act

Compan 1949 and having a Certificate of

Practice

y (2) A Partnership firm whereof majority of

partners practising in India are
qualified for appointment as aforesaid
Auditor may be appointed by its firm name to
be auditor of a company.

(3) 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 authorised to act
and sign on behalf of the firm.
 Company (d) a person who, or his relative or
Auditor
Disqualifications partner :
The following persons shall not be
eligible for appointment as an (i) is holding any security of or
auditor of a company : interest in the company or its
subsidiary, or of its holding or
(a) a body corporate other associate company or a subsidiary of
than a limited liability such holding company: Provided that
partnership registered under the relative may hold security or
the Limited Liability interest in the company of face value
Partnership Act, 2008; not exceeding Rs. 1000 or such sum
as may be prescribed
(b) an officer or employee
of the company (ii) is indebted to the company, or its
subsidiary, or its holding or
(c) a person who is a partner, or associate or a subsidiary of such
who is in the employment, of an holding company, in excess of such
officer or employee of the amount as may be prescribed or
company
 Company
(g) a person who is in full time employment
Auditor
Disqualifications elsewhere or a person or a partner of a firm
(iii) has given a guarantee or provided any holding appointment as its auditor, if such
persons or partner is at the date of such
security in connection with the indebtedness
appointment or reappointment holding
of any third person to the company, or it appointment as auditor of more than 20
subsidiary, or its holding or associate companies
company or a subsidiary of such holding
prescribed (h) a person who has been convicted by a court
of an offence involving fraud and a period of
(e)a person or a firm who, whether directly or ten years has not elapsed from the date of
indirectly, has business relationship with the such conviction
company, or its subsidiary, or its holding or
associate company or subsidiary of such (i) any person whose subsidiary or associate
holding company or associate company of such company or any other form of entity, is
nature as may be prescribed engaged as on the date of appointment in
consulting and specialised services as
(f) a person whose relative is a director or is in provided in section 144
the employment of the company as a director or
key managerial personnel
1 Directors

2 Shareholders

Central Gov
3 ernment

C omptroller and
4 Auditor General
 Office term from date
of appointment till
the 1st
AGM

Appointed by a
valid
Resolution
Name and details of the
First Auditor to be
Mentioned in the Articles First
of Association Audit
or

Appointed within
01
one month from the
date of Incorporation 02
03
04
A casual vacancy can be filled
by the directors only provided
it is not caused due to prior
resignation
The term of office for such
an appointment is till the
conclusion of next AGM

CASUAL
VACANC
Y
 Appointment by Share holders
First Auditor
If the directors fail to appoint the first Director shareholders shall appoint
the auditor in a general meeting by passing a resolution

Subsequent Auditor
At the 1st AGM the shareholders appoint a subsequent auditors in each AGM
held thereafter by passing an ordinary or special resoution.

Every subsequent auditor shall hold offce till the next AGM .
After appointment the company will send a letter of intimation to the auditor who
has to covey his acceptance or non acceptance within 80 days to the Registrar of
Companies.
Casual Vacancy
If casual vacany is caused due to resignation shareholders should
appoint another auditor in a general meeting.
Special Resolution is required in case of companies wherein
atleast 25% of the Suscribed Capital is held by

A public financial institution , government company , Central

Government or any State Government company

Any other financail institution established by the State Act

in which not less than 51% of Share Capital is held by State
Government

A nationalised bank or an insurance company carring

on general insurance business
 Appointment by Central Government
If a Company fails or refuses to appoint an auditor , the
central government can appoint the auditor

The company must give a notice to the government within 7 days

of the AGM.

The government then appoints an auditor from the panel of

names suggested by the applicant company

Appointment by Comptroller and Auditor

General
For government companies and companies having substantial public
interest
 If he is not qualified
1 for reaapointment

Ordinarily an auditor He has given the notice

appointed by any authority is
2
for his
unwillingness
to be compulsorily
Resolution is passed
reappointed by passing a 3 to
resolution at the annual appoint someone else
Company has expressed
general meeting. However, the
retiring auditor shall not be
4 that he shall not be
appointed

reappointed when
Auditor has taken
5 more audits then
permitted
Resolution of appointing
6 another person incase of
retiring auditor
 Ceiling on the number of
audits
1. In case of individuals , As per companies Act 2013 maximum
limit is 20 excluding One person company ,Small company,
Dormant Company, Private Company having paid up capital
less than 100 crores. In this limit of 20 we will consider only
public company plus Private Company having paid up capital
more than 100 crore. as per ICAI guidelines a chartered
accountant can take maximum 30 audit including Private
Company. In this limit of 30 we will consider One person
Company, Small company, Dormant Company, Private Company
having paid up less than 100 crores.
 R ight to Right to
Right to ask visit sign the Right to
for branch Auditor's receive
Right to information offices Report rem unera Right to
receive and tion exercise
notice for explanation lien on
Right to meetings
. the Right to
Access and books of seek legal
the books attend ac c ounts and
of them technical
Accounts advice
 Duties under the Companies Act

To make special enquiries and investigations in connection with the following

matters (Sec. 227 (IA) ).

1. whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are not
prejudicial to the interest of the company of its members;

2. whether transactions of the company which are represented merely by book entries are
not prejudical to the interests of the company;
3. where the company is not an investment company within the meaning of Section 372 or
a banking company, whether so much of the assets of the company as consist of shares,
debentures and other securities have been sold at a price less than that at which they
were purchased by the company ;
 Duties under the Companies Act

4. whether loans and advances made by the company have been shown as deposits ;

5. Whether personal expenses have been charged to revenue accounts ;

6. whether it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the account
books and the balance sheet is correct, regular and not misleading.
 Duties under the Companies Act
To make report to the shareholders. (Section 227 (2, 3 & 4) ).
The auditor of the company is duty bound to make report to the members
of the company on the accounts examined by him and on every balance
sheet, every profit and loss account laid before the company in the general
meeting during his tenure of office
The Audit Report must expressly state the following besides other necessary
things ;
1. whether in his opinion and to the best of his information and according to the
explanations given to him the accounts give the information required by the Act and
in the manner so required.
2. Whether the balance sheet gives true and fair view of the company’s affairs as at the
end of the financial year and the profit and loss account gives a true and fair view of the
profit and loss of its financial year;
 Duties under the Companies Act

3. whether he has obtained all the information and explanations required by

him for the purposes of his audit;

3. whether, in his opinion, proper books of account as required bylaw have

been kept by the company, and proper returns for the purposes of his audit
have been received from the branches not visited by him

3. whether the company’s balance-sheet and profit and loss account dealt
with by the report are in agreement with the books of account and returns.
1. Duty to include in the report the matters as directed by the Central
government.
Section 227 (4A) empowers the Central Government to require
by order, that the auditor’s report will include a statement on such
matters as may be specified therein. Before making any such order the
Central Government may consult the Institute of Chartered
Accountants of India in regard to the classes of description or
companies and other ancillary matters proposed to be specified therein.
1. Duty to sign the audit report. (Section 229).
2. Duty to give a report upon the Prospectus (Section 56 (1) ).
3. Duty to certify the Statutory Report. (Section 165 (4) ).
4. Duty to declare the solvency of the Directors, (Section 488 (2) (b)),

5. Duty to give a report upon the Profit and Loss Account and the Balance

Sheet enclosed with the Declaration of Solvency. (Section 488 (2) (b)).

6. Duty to assist the Investigators (Section 240 (v) (b)).

7. Duty to assist the Advocate General.

 Duties according to Legal Decisions
1. Duty to inform the members and shareholders about the contravention
of the provisions of the company Law.
2. Duty to enroll himself with the Institute of Chartered Accountants of India
and to obtain a certificate to practice from it.
3. Duty to acquaint himself with the provisions of the company law and also
enquire from his predecessor about it in writing.
4. Duty not to canvass for and also approach and press any member of the
company for his appointment as an auditor of the company.
5. Duty to enquire about the true and fair state of affairs of the company and
submit his proper report.
6. Duty to verify himself cash in hand and not to be negligent in his work.
 Duties according to Legal Decisions

6. Duty to see the Debenture Trust Deed and verify whether the
debentures issued by the company are according to the terms
laid down in the trust Deed.
7. Duty to verify the investments.
8. Duty to perform his task with ability, care and skill.
9. Duty to verify the inventories and the ledger accounts.
10. Duty to personally inspect all securities and see that they
are in the safe custody of the Secretary of the Company.
 Liabilities of an auditor
The liabilities of an auditor can be classified as

Civil Liability In all 3 cases the auditor can

be held liable for one or more
Criminal causes as follows
Liability
1. Liability for Negligence
Liability towards third
Parties 2. Liability for Misfeasance
under the Statutes—
Companies Act and Indian
Penal Code.
 Liabilities of an auditor
Civil Liability
Liability for Negligence:
Under the law of Agency the auditor is liable for negligence and in such a case
has to pay damages to the aggrieved party or parties. If the company suffers a loss on
account of the acts of the auditor, he has to make good this loss. The auditor shall not
be held liable for negligence, if the company does not suffer any loss. He shall also not
be held liable for the loss suffered by the company without his negligence

Liabilities for Misfeasance :

The term ‘misfeasance* implies a breach of trust or duty. Where the auditor
performs his duties negligently and the company suffers a loss on this account, the
auditor is held liable for Misfeasance and he has to indemnify the company for such
loss
 Liabilities of an auditor
Criminal Liability

Under the

Companies Act Under the

Indian Penal Code

 Liabilities of an auditor
Criminal Liability

He is criminally liable for the following acts :

1. For authorising the issue of a false prospectus.
2. For fraudulently inducing persons to invest money by purchasing shares or debentures
of the company.
3. For making a fraudulent report required under section 227
4. For falsification of books.
5. For delinquency i.e. making a false statement willfully
6. For rendering false statements either in the balance sheet or any other document or
destroying
7. For mutilating any voucher or document
 Liabilities of an auditor
Criminal Liability
Criminal offences include the following acts, for which he is
punishable with fine or imprisonment or both—
1. Willfully submitting a false report
2. Concealment of frauds in the account books
3. Destroying the vouchers and documents concerning account books
4. damaging the property of the company
5. Abetting in the falsification of the account
6. Certifying willfully the false accounts
7. Making a false statement knowingly to be false
8. Accepting bribe during the course of discharging his duties as an auditor.
 Liabilities of an auditor
Liability to third parties
Auditor is not liable to third party or parties as a general rule. He is
liable to his employer only. However, if the third parties are able to
prove the following points he shall be liable towards them too—
1. that the statement was untrue in fact
2. that the person making it knew that it was untrue or was recklessly can
consciously ignorant whether it was true or not
3. that the statement was made with the intention that the third party
should act upon it
4. that the third party did act on the faith of the statement in the
prospectus.
Audit of Computerised System ( E DP
Auditing )
“ The process of collecting and evaluating evidence to

determ ine whether a com puter system safeguards assets,

maintains data integrity achieves organizational goals
effectively and consumers resources efficiently”. - Weber
Basis for comparison Manual Accounts Computerised Accounts

Every transaction originates from a Many transactions are fed directly into
Basis of entry
documentary evidence the system

Price calculation , discounts interest

All calculations done by computer ,
Data Processing etc. are done manually , hence easier
hence difficult to understand
to understand

Storage Ata stored in books , files , cards etc. All data stored on storage devices

The audit trail c an be easily traced ,

The audit trail may not be easily visible
Audit Trail right from authorization to final
in computers
entry
 Manipulations
Absence of
Vouchers
7 1
Coding Problems
Problems 6 Encountered 2 Audit Trail
in an
EDP
Environment
5 3
Input
vs 4
Output C omputer
Computer Virus
Frauds
 S torage
Organisation &
C on trol operational
Control
7 1
C ontrol
over 6 General 2
Systems
Editing EDP Developm ent
Control
5 3
Control Over
4
Functioning
Control Equipment
Operator
 Controls in EDP Environment
Application Controls
Input Controls 1. Input is complete
2. Input should be authorized
3. Equipment should have
mechanism

Control over Designing built in data processing

Processing mechanism with proper authorization