Professional Documents
Culture Documents
ON
MASTER OF COMMERCE
ACCOUNTANCY
PART II (SEMESTER-IV)
(2016-2017)
INTERNAL ASSESSMENT
ADVANCED AUDITING
SUBMITTED BY:-
ROLL NO: - 34
VIDYAVIHAR (EAST)
1
K. J. SOMAIYA COLLEGE OF ARTS & COMMERCE
VIDYAVIHAR (EAST)
CERTIFICATE
(2016-2017).
Date: -
Place: - MUMBAI
.. ..
Internal Examiner External Examiner
.. .
Thank you,
Yours faithfully,
ROLL NO: - 34
3
ACKNOWLEDGEMENT
Last but not the least; I would like to thanks my project guide
PROF.NITIN AGARWAL for guiding and helping me throughout the
preparation of my project, right from selection of the topic till its
completion.
ROLL NO: - 34
4
INDEX
Sr Particular Pg.
No. No.
1 Introduction 6
16 Conclusion 26
17 References 27
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INTRODUCTION
As long as the business unit was small and was managed by one owner : there
was neither any need for maintaining accounts or Audit. However with the increase
in the size of the business and emergence of partnerships and Joint stock company
organizations there, was separation between ownership and management of
business unit, there arose need for maintaining detailed account of the business
transactions. Books of accounts were maintained by the employees and the owners
like partners in a partnership firm and shareholders in a Joint Stock Company, are to
be assured that these accounts are properly maintained. So, Audit of these accounts
by an independent expert in the field was found necessary. Thus the profession of
Auditors was slowly evolved.
view of the importance of the audit, it was felt necessary that there should be
some set standards for the conduct of the audit so that there is some uniformity in
the conduct of audit. Every auditor will conduct the audit In the same manner and
the reader of the audit report can presume that accounts have been properly audited
even though they are audited by anybody.
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NEED FOR AUDIT STANDARDS
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SA 200- OVERALL OBJECTIVES AND CONDUCT OF AUDIT
The auditor should maintain the confidentiality of client information and should
not disclose it to third parties unless authorised by the client or when there is
legal or professional duty to do so.
Audit process should be carried out with due professional care i.e. he should
perform his duties diligently and carefully. He should also constantly update his
skills and competence through continuing education. He should obtain
knowledge of latest developments affecting his audit work such as changes in
law, professional pronouncements, etc.
The auditor should exercise reasonable care and skill while relying on the work
of others. This is important because the responsibility of preparing the report on
the financial statements remains with the auditor even though the work is being
performed by others.
The auditor should reasonably assess the adequacy of the accounting system and
related internal controls. He should evaluate the internal control system.
The auditor should review and assess the conclusions drawn from the audit
evidence and knowledge of the entity acquired. He should assess whether
financial information complies with recognized accounting principles.
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SA 200A - OBJECTIVES & SCOPE OF THE AUDIT OF FINANCIAL
STATEMENTS
Financial statements include balance sheet. Profit and loss Account, cash flow
statement and explanatory notes on the same. In short general purpose financial
statements prepared by every business unit at the end of the year. SA 200 A became
operative from 1st April 1985. Financial statements are issued for the use of
shareholders, members, creditors, employees and the public at large.
Objectives of an Audit:
To make sure that financial statements are prepared after following all
accounting policies and practices and legal requirements.
To get convinced that the financial statements represent true and fair view of the
financial position and operating results, of the enterprise. It should be
remembered that the Auditors opinion is only on the financial statements.
Reader should not assume that it is an opinion on the successful management of
the enterprise.
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the enterprise. Thus, the auditor does not give an opinion on the propriety of
business conduct or its future prospects.
Scope of Audit:
Before starting his work, Auditor should go through the prevailing internal
control system in the organization. If he comes across any lacuna or defects in it, he
must suggest suitable changes in it.
Coverage
The auditors work should cover all material items at individual level or at
group level. He should satisfy himself that information contained in the financial
statements and other source data is reliable and sufficient for preparation of financial
statements.
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SA 210 - AGREEING THE TERMS OF AUDIT ENGAGEMENT
In the interest of both the client and the auditor, the auditor should send an
engagement letter, preferably before the commencement of the engagement. The
engagement letter documents and confirms the auditors acceptance of the
appointment, the objective and scope of the audit and the extent of the auditors
responsibilities to the client.
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Recurring audits
While reappointing the same auditor next year, if there are any changes in the
business of the concern, changes in the policies or personal or a legal requirement,
complete information about these matters, should be given to the auditor by the
management.
During the course of audit, if the terms of engagement are changed to provide
a lower level of assurance then the auditor should
1) Examine the reason for such change along with its reasonableness.
2) Consider legal or contractual implications of the change.
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SA 220 QUALITY CONTROL FOR AN AUDIT OF FINANCIAL
STATEMENTS
This standard deals with maintaining Quality in the audit work. Quality is
important in every walk of life and the Audit cannot be an exception to it. Audit
plays a very important part in any business activity and importance of quality
The Auditor means a person with final responsibility for the entire audit work
and audit report.
Audit Firm means either the partners of a firm providing audit services or a
sole practionner providing Audit services. In practice audit firms are more
common than individuals providing such services. This may be due to some
inherent advantages in the partnership firm specially in such types of
professions.
Personnel means all partners and professional staff engaged in the audit work
of the firm or in other words, the staff actually performing the job.
Assistants means personal involved audit, other than the Auditor i.e. Persons
like Articled clerks or regular employees in the audit firm.
All these persons in the group have to follow the rules of quality control to
produce quality job.
st
This standard SA220 was made effective from 1 April 1999 in its revised form.
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The objectives of quality control policies
2) The firm should have necessary skills and competence. Personnel in the firm
should be duly qualified as per legal requirements and are competent to
undertake the work of audit.
3) The Auditor should discuss about the work with all his Personnel from time to
time. As and when there is any important matter, he may also discuss the matter
with the outside experts in the field. There is nothing wrong in consulting or
discussing the matter with the outside experts. He should not a make it a
prestige issue. Quality of the work to be performed is of utmost importance.
4) While distributing the work amongst different assistants, Auditor should see
that the right job is allotted to a right person. Every person to whom a particular
job is allotted, should be properly qualified and competent to perform that job.
Each one should be allotted, as far as possible, the job of each choice, so that he
can do it sincerely and with utmost interest. Work should be a pleasure for
everyone.
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SA 230 AUDIT DOCUMENTATION
Documentation means the evidences on the basis of which the auditor draws
his final conclusions. The auditor should maintain such evidence to show that the
audit was performed in accordance with the set procedure prescribed by different
SAs (Standards On Auditing). These papers also prove that necessary legal
requirements have been properly fulfilled. These documents assist the audit team to
prepare their audit plan. As per SA 220 on quality control, supervision and review of
audit work is necessary. Documentation facilitates the work of supervision and
review of audit work. This paper also facilitates the work of audit of the auditor in
subsequent years. They are also useful for controlling the quality of the audit work
done.
In case of recurring audits, the auditor may divide the working papers into
two parts permanent file and current file.
Permanent File
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Record and evaluation of internal control reports.
Current File
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SA 240 THE AUDITORS RESPONSIBILITIES RELATING TO
FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS
However, we cannot say that the account statements prepared by the auditor
after auditing the accounts are hundred percent correct and all the errors and frauds
have been detected and set right. After all the auditor is also a human being and
there are possibilities of errors and frauds in the account statements even after they
are audited. They may be noticed subsequently. After all the auditor is not an
insurer. This standard on audit deals with the responsibility of the auditor if errors
or frauds are subsequently noticed in the statement of accounts.
Misstatements in the account statements are due to errors and frauds in the
accounts. So, let us now consider the difference between errors and frauds.
Though both falsify the accounts, there is a basic difference between the two.
Errors are committed by the employees inadvertently due to lack of knowledge of
principles of accounts or through oversight etc. but the frauds are committed by the
employees, management or other third parties connected with the concern
intentionally to make some illegal gain.
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committing frauds to obtain an illegal advantage or personal gain. Fraud
generally involves either misappropriation of assets that may be called as
employee fraud or manipulation of books of accounts that is referred to as
management fraud.
Employee Fraud Generally involves the theft of assets. Mostly cash or goods
of the firm, computer hardware, etc. Transactions are recorded in such a
manner so as to conceal theft.
Management Fraud - It involves manipulation of accounts by the upper level
management for the purpose of deliberately misrepresenting the firms
financial position or results of operation to evade taxes, to receive higher
remuneration, to show better management performance, etc. This is called
Window Dressing.
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SA 300 PLANNING AN AUDIT OF FINANCIAL STATEMENTS
Objectives of planning:
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SA 500 AUDIT EVIDENCE
Reliability of evidence:
External evidence is more reliable than internal evidence. Reliability of
internal evidence depends upon the strength of related internal control
system.
Evidence obtained by the auditor himself through physical examination,
observation, inspection, etc is more reliable than that obtained from the entity.
Documentary evidence is more reliable then oral representations.
2) Inquiry regarding litigation and claims : Litigation and claims against the
business may have material effect on the financial statements. So, the Auditor should
collect sufficient and reliable evidence about the cases pending in different courts,
either filed by or against the firm and their financial implications. When litigation or
claims have been identified by the management or when the auditor believes they
may exist, and are likely to be material, the auditor may seek direct communication
with the entitys lawyers and such other professionals.
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SA 505 EXTERNAL CONFIRMATIONS
Written confirmation from the third party is more reliable evidence as they
are not related to the unit. Such a method will reduce the risk of the Auditor. A letter
is sent to the third party and he is requested to send his confirmation when such
information is received by the Auditor, he evaluates it on the basis of his
professional scepticism and past experience in the field of audit. This method is
normally used in the following cases:-
Stock held by others like goods in the hands of the consignee or goods in the
custody of the seller who has not yet delivered them. etc.
Title deeds of properties with the third parties. The client may keep the title
deeds of properties in a bank locker for safe custody or he may borrow money
from a third party by depositing such title deeds with him.
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SA 510 INITIAL AUDIT ENGAGEMENTS OPENEING BALANCE
Opening balance means the balance which existed in the beginning of the
period; it is the same which was the closing balance in the immediately previous
period.
The auditor will need to consider whether the accounting policies followed in
the preceding year, were appropriate and that those policies are consistently
followed in the current period. If there is a change in the accounting policy, the
auditor should ensure that they are adequately disclosed.
If the auditor finds that there are any misstatements in the prior period financial
statements which are likely to affect, this years financial statements, he should
perform additional audit procedures, and determine their exact impact on this years
financial statements. If he finds that, similar misstatements are there in this years
financial statements also he should communicate them to the management and get
the statements duly corrected.
If the auditor fails to collect sufficient audit evidence regarding opening balances
he may give qualified opinion or add a disclaimer to this effect.
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SA 520 ANALYTICAL REVIEW PROCEDURES
Different methods may be used here. Sometimes very simple methods may be
used but where necessary even advanced statistical techniques may also be
employed: such study may be made for the whole unit or its components like
different divisions departments etc.
The auditor selects the suitable method based on his past experience. After all
this is a professional judgement.
1. Trend analysis: Here financial information of the firm may be compared with
the information of the previous years.
4. Inter firm analysis : Key financial ratios of the entity are compared with other
Firms of the same size in the industry or with the average of the industry as a
whole.
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SA 610 USING THE WORK OF INTERNAL AUDITORS
The main objective of the internal audit function varies from organization to
organization. Following are the general objectives of internal audit:
1) To review and report on the internal control system. This is normally done by
the internal audit department. Such a review is necessary to detect the errors
and frauds and safeguarding of assets of the enterprise
2) The management sets the standards to measure an entitys economical and
efficient use of resources and the internal auditor is responsible for:
i) Assessing whether the standards are understood and are being met
ii) Identifying deviations and their causes and corrective actions taken
iii) Identifying conditions such as under utilisation of facilities, non-
productive work, procedures which are not cost justified and
corrective action taken.
3) To review management information system i.e. identification, measurement,
classification and reporting of financial and operating information.
4) The internal auditor has a responsibility to examine and verify physical
existence and condition of assets of the entity.
The external auditor is solely responsible for his audit report. However much of
the work done by the internal auditor may be useful to him in determining the
nature, timing and extent of his auditing procedures.
The external auditor should evaluate the internal audit function. If based on
such evaluation, the auditor concludes he can rely on the internal audit his
procedures will be less extensive than otherwise required.
The report of the external auditor is his sole responsibility. That responsibility is
not by any means reduced because of his reliance on the internal auditors work.
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CONCLUSION
view of the importance of the audit, it was felt necessary that there should be
some set standards for the conduct of the audit so that there is some uniformity in
the conduct of audit
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REFERENCES
www.wikipedia.org
www.caclubindia.com
www.investopedia.com
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