Principles of Auditing

Unit 1
Meaning
Auditing refers to the independent examination and evaluation of financial
statements, records, operations, and systems of an organization to ensure that they are
accurate, reliable, and compliant with relevant laws, regulations, and accounting standards.
The primary objective of auditing is to provide assurance to stakeholders (such as
shareholders, investors, and regulatory bodies) that the financial statements present a true
and fair view of the organization's financial position and performance.

Origin of Auditing
The practice of auditing dates back to ancient times, with roots in ancient Egypt and
Greece. In ancient Egypt, scribes and auditors were employed to ensure that resources and
taxes were accounted for accurately. However, the modern concept of auditing, as we
understand it today, evolved significantly during the industrial revolution in the 18th and 19th
centuries. The expansion of businesses, especially joint-stock companies, made it necessary
for external verification of financial statements and business transactions.

The first formal use of auditing emerged in England with the development of joint-
stock companies, which needed external auditors to verify the accuracy of financial records to
safeguard shareholders' investments. The UK Companies Act of 1844 required independent
auditors to examine and certify the financial statements of companies. This framework
provided the foundation for the modern practice of auditing.

Definition of Auditing
"Auditing is an independent examination of, and expression of opinion on, the
financial statements of an enterprise by an appointed auditor, in order to ensure that the
financial records present a true and fair view of the financial performance and position of the
enterprise, and are in compliance with applicable legal and regulatory requirements."

Objectives of Auditing
The primary objectives of auditing are:

1. Verification of Financial Statements:

The core objective is to verify the accuracy and completeness of the financial statements,
ensuring they reflect the true and fair view of the organization’s financial position and
performance.

2. Compliance with Laws and Regulations:

Audits ensure that the organization complies with relevant laws, regulations, and standards,
including tax laws, corporate governance norms, and industry-specific regulations.

3. Assessment of Internal Controls:

Auditors assess the internal control systems of the organization to evaluate whether they are
effective in preventing fraud, errors, and inefficiencies.

4. Providing Assurance to Stakeholders:

Auditing provides confidence to stakeholders (e.g., investors, creditors, and regulators) that
the financial statements are reliable and that management is acting in the best interests of the
stakeholders.

5. Detection of Fraud and Errors:

Audits help in identifying material errors or fraudulent activities that may have affected the
financial records of the organization.

6. Enhancing Credibility:

Auditing enhances the credibility of financial information, which helps in decision-making by

shareholders, investors, and other stakeholders.

Types of Audits
Auditing can be classified into several types based on various factors such as the scope,
objective, and nature of the audit. The most common types of audits include:

A. External Audit:

An external audit is conducted by independent auditors who are not employees of the
organization being audited. External auditors provide an unbiased opinion on the financial
statements. This type of audit is typically performed on public companies to ensure
transparency and accountability to shareholders and regulatory bodies.

B. Internal Audit:

Internal auditing is performed by employees within the organization to assess the internal
controls, risk management processes, and overall efficiency of operations. Internal auditors
report to the management and the board of directors, helping them identify areas for
improvement.

C. Forensic Audit:

A forensic audit is a specialized audit designed to detect and investigate potential fraud,
corruption, or financial misconduct. Forensic auditors use investigative techniques to uncover
hidden or manipulated financial records.

D. Government Audit:
Government audits are conducted by government agencies or regulators to examine the
financial records of public institutions, government departments, and publicly funded
programs. The objective is to ensure proper use of taxpayer funds and adherence to
governmental policies and procedures.

E. Tax Audit:

A tax audit is performed to ensure that an organization complies with tax laws and
regulations. The focus of this audit is on verifying the accuracy of the organization's tax
returns and identifying any potential tax liabilities.

F. Operational Audit:

An operational audit evaluates the efficiency and effectiveness of an organization’s

operations. It focuses on how well an organization is utilizing its resources to achieve its
objectives and make improvements where necessary.

G. Compliance Audit:

A compliance audit ensures that an organization adheres to external laws, regulations, and
policies, as well as internal standards and procedures. The audit assesses whether the entity
has followed the prescribed regulations, such as environmental laws or financial reporting
standards.

Advantages of Auditing
The process of auditing offers several benefits, both for organizations and their
stakeholders. Some of the key advantages include:

1. Improved Accuracy and Transparency:

Auditing ensures that financial statements are accurate and transparent, which builds trust
among investors, creditors, and other stakeholders.

2. Fraud Detection and Prevention:

Auditing helps in identifying discrepancies, errors, and fraud, which can help an organization
take corrective actions to prevent further financial irregularities.

3. Increased Credibility:

A clean audit report boosts the organization’s credibility and enhances its reputation with
investors, customers, suppliers, and regulatory bodies.

4. Legal Compliance:

Auditors ensure that the organization complies with applicable laws and regulations, reducing
the risk of legal penalties and fines.

5. Improved Internal Controls:

Through the auditing process, weaknesses in the organization’s internal control systems can
be identified, enabling management to improve them.

6. Enhanced Decision-Making:

Audited financial statements provide reliable data, which aids in strategic planning and
decision-making by management, investors, and other stakeholders.

Limitations of Auditing
While auditing provides many benefits, it is not without its limitations. Some of the
key limitations of auditing include:

i. Incomplete Assurance:

Auditors provide a reasonable assurance, not absolute certainty, that the financial
statements are free from material misstatement. They cannot guarantee the detection of all
errors or fraud.

ii. Cost:

Auditing can be expensive, especially for smaller organizations. The costs of hiring auditors
and conducting the audit may be burdensome, particularly for businesses with limited
resources.

iii. Limited Scope:

Audits typically focus on financial statements and certain aspects of the organization’s
operations. Auditors may not evaluate every detail of the business, and some areas may be
overlooked.

iv. Dependence on Management:

Auditors rely on the information provided by the organization's management. If management

is dishonest or hides information, the audit may not uncover the full scope of inaccuracies or
fraud.

v. Time-Consuming:

Auditing can be a lengthy process, especially for large organizations with complex
operations. This can delay the availability of financial information.
Qualities of an Auditor
An effective auditor must possess certain qualities to perform their role efficiently and
ethically. These qualities include:

 Integrity:

Auditors must maintain high ethical standards, ensuring their work is unbiased and objective.
Integrity is crucial for building trust with stakeholders.

 Independence:

Auditors must be independent of the organization they are auditing. This ensures they can
provide an impartial opinion on the financial statements without external pressure.

 Professional Competence:

Auditors must have the necessary technical knowledge, expertise, and skills to understand
complex financial transactions and assess the accuracy of financial statements.

 Attention to Detail:

Auditors must have a keen eye for detail, as financial discrepancies and errors often manifest
in small details.

 Communication Skills:

Auditors must be able to communicate their findings clearly, both in writing (e.g., audit
reports) and verbally (e.g., during discussions with clients or stakeholders).

 Critical Thinking:

Auditors need to be able to think critically and evaluate the financial records, systems, and
controls of the organization in a methodical and logical manner.

Audit Programs
An audit program is a detailed plan that outlines the procedures and steps the auditor
will follow during the audit process. It serves as a roadmap for the audit and ensures that all
relevant areas are covered. The audit program typically includes:

 Planning the Audit:

The auditor outlines the scope of the audit, identifies key areas to focus on, and gathers
necessary information about the company’s operations, industry, and financial records.

 Risk Assessment:

The auditor assesses the risks of material misstatement in the financial statements and
identifies areas where additional scrutiny is required.
  Fieldwork:

During this phase, the auditor collects evidence, tests transactions and controls, and assesses
the accuracy of the financial statements.

 Audit Testing:

The auditor performs various tests (e.g., substantive tests, control tests) to verify the accuracy
of the financial records and assess compliance with regulations.

 Reporting:

The auditor summarizes their findings and provides an opinion on the financial statements in
the audit report. This report is shared with management and external stakeholders.
 UNIT 2
INTERNAL CONTROL

Definition
Internal control refers to policies and procedures implemented by an organization to
safeguard assets, ensure accurate financial records, and enhance operational efficiency.

Objectives:
 Prevent errors and fraud.
 Ensure compliance with laws and policies.
 Promote accountability and efficiency.

Key Features:
 Clear delegation of authority.
 Segregation of duties to minimize risks.
 Regular review of internal procedures.

Example: Limiting access to inventory and using passwords for financial systems.

INTERNAL CHECK
Definition

A system of arranging duties so that no single individual can process a transaction

completely without the involvement of another.

Purpose:
To ensure continuous, automatic verification of work.

Characteristics:

 Continuous and routine in nature.

 Division of work among employees.
 Acts as a preventive control against errors and fraud.

Example: One employee records transactions while another checks them.

 Unit 2
Internal control refers to the processes, policies, and procedures put in place
by an organization to ensure the reliability of financial reporting, compliance
with laws and regulations, operational effectiveness and efficiency, and the
safeguarding of assets. Internal control systems are designed to help
organizations achieve their objectives while minimizing the risk of errors,
fraud, and inefficiencies.

In the context of auditing, internal control plays a crucial role in determining

how an auditor assesses the risk of material misstatement in the financial
statements and the overall reliability of the organization’s financial reporting.
Auditors evaluate internal control systems to gather evidence, assess risks, and
design audit procedures.

The framework outlines five essential components of internal control:

1. Control Environment:
- The control environment sets the tone for the organization, influencing the
overall attitude toward internal control and ethical behavior. It includes the
integrity, ethical values, and competence of the organization’s people.
- Key elements include:
- Management's philosophy and operating style.
- Organizational structure and assignment of authority and responsibility.
- Human resources policies and practices.

2. Risk Assessment:
- Risk assessment involves identifying and analyzing relevant risks to
achieving the organization’s objectives, considering both external and internal
factors that could affect the business.
 - This process helps management to understand potential threats to its
financial reporting, operations, and compliance and take steps to mitigate
these risks.

3. Control Activities:
- Control activities are the policies and procedures that help ensure that
management’s directives are carried out. These activities are designed to
prevent or detect errors and fraud.
- Common control activities include:
- Segregation of duties (e.g., different people handle different aspects of a
transaction).
- Authorization and approval processes.
- Physical controls (e.g., locks, safes).
- Reconciliation of accounts.
4. Information and Communication:
- Information systems must provide timely, accurate, and relevant data for
effective decision-making and to ensure the proper functioning of other
internal control components.
- Effective communication ensures that information flows both internally and
externally in a way that promotes efficient and coordinated action.

5. Monitoring Activities:
- Monitoring involves regularly assessing the quality of the internal control
system over time. It ensures that the internal control system is functioning as
intended and allows for adjustments when necessary.
- Monitoring can be performed through ongoing activities or separate
evaluations, such as internal audits.
Internal check and internal audit
What is an internal check?
An internal check can be described as a systematic arrangement of operations
within an office, warehouse, factory, store, etc. In this system, the tasks of one
employee undergo automatic scrutiny by another employee. This arrangement
aims to reduce the risks associated with errors and fraud. The design is such
that committing fraud requires collusion between employees.
An internal check is implemented in a firm to ensure that no single individual is
allowed to oversee and manage every aspect of financial transactions. It is
integral to the internal control system. Consequently, tasks are
compartmentalized, and each segment is given to a different worker. This
structure ensures that one employee’s work is subject to the examination of
another, reducing the likelihood of errors and fraudulent activities.

What is an internal audit?

An internal audit is a systematic and ongoing evaluative activity conducted
within a company. In this process, a group of auditors reviews accounting and
financial operations, providing both constructive and protective services to the
company’s management. The primary objectives of internal audit are to
ensure:
1. Accurate and appropriate recording of business transactions.
2. Systematic maintenance of account books in accordance with relevant
provisions.
3. Prevention of misappropriation of business property and manipulation
of accounts.
An internal audit serves as a control mechanism, aiming to appraise and
measure the efficacy of other control measures. This involves the verification
of company operations by a specially appointed staff for this purpose.
The main goal of an internal audit is to assist management in efficiently
fulfilling their responsibilities by offering recommendations, logical analysis,
and suggestions related to the examined operations.

Key Differences Between Internal Audit and Internal Check

1. Nature and Purpose


 Internal check is a system within the organization where one staff

member’s work is checked by another to minimize errors or fraud.
 Internal Audit is an internal examination of the organization’s
account books conducted by a dedicated audit team.
2. Design and Control


 Internal check logically divides work to prevent absolute control

by any one person.
 Internal Audit involves a separate group of auditors cross-verifying
employees’ work.
3. Starting Point


 Internal check starts when a transaction is entered.

 Internal audit begins after the transaction is documented in the
books.
4. Focus of Examination


 Internal check verifies clerical and accounting accuracy.

 Internal audit checks the scope and efficacy of management
control.
5. Executors


 Internal check is conducted by existing employees.

 Internal audit is carried out by a specially appointed group of
auditors.
6. Cost Implications


 Internal check involves no additional cost as it is performed by

existing employees.
  Internal audit is relatively expensive as it requires a dedicated
team.
7. Error and Fraud Handling


 Internal check prevents frauds and errors.

 Internal audit detects frauds and errors.
8. Function


 Internal check involves the arrangement and design of work.

 Internal audit focuses on examining and evaluating work.
9. Timing


 Internal check is performed at the same time as the work,

catching mistakes early on.
 Internal audit takes place after the transactions are recorded.
10.Reporting


 Internal check reports are daily transaction summaries provided to

supervisors.
 Internal audit reports are submitted to the management by
auditors.
Internal check objectives
1. Prevention of Error or Fraud: To prevent errors or fraud within the
organization.
2. Minimization of Misappropriation: To reduce goods or cash being
misappropriated by staff members.
3. Reliable Accounting System: To make sure that the firm’s accounting
system offers complete, reliable, up-to-date, and correct information for
each business transaction.
 4. Early Detection and Correction: To identify fraud or errors early on and
promptly correct them.
5. Protection of Resources: To protect the firm’s resources against
carelessness, theft, and inefficiency.
6. Comprehensive Delegation: To assign work in a manner that ensures no
business segment remains unrecorded or unchecked.
7. Timely Detection through Independent Checking: To identify frauds and
errors when they occur, via independent checking.
Internal audit objectives
1. Verification of Accounting Records: To substantiate the authenticity and
accuracy of the accounting records provided to the management.
2. Compliance with Accounting Policies: To ensure compliance with
standard accounting practices and policies.
3. Early Detection of Errors and Frauds: To enable the early detection of
errors and frauds within the organization.
4. Analysis of Internal Check System: To analyze the internal check system
at regular intervals, recommending improvements and conducting
special investigations for management.
5. Verification of Liabilities: To confirm that liabilities have been sustained
for legitimate and valid activities.
6. Authorization and Compliance: To ensure that transactions are
performed by authorized personnel and under the appropriate
authority.
Internal check advantages
1. Appropriate division of work
2. Error and fraud prevention
3. Boosts efficiency
4. Convenience for auditor
5. Account accuracy
6. Increased profits
Internal audit advantages
1. Fraud and error detection
2. Quick presentation of reports and accounts
3. Management advisory services
4. Proper coordination and control

Audit Notebook:
Definition and Purpose

An audit notebook is a document or tool used by auditors to record their

observations, findings, and procedures during the course of an audit. It serves
as a comprehensive record of the auditor's work, providing details of the audit
process, evidence obtained, and conclusions drawn. The audit notebook is
typically used to ensure that the audit is conducted in accordance with
auditing standards and that all necessary steps are properly documented.

An audit notebook is essential for both the auditor's reference during the audit
and for providing evidence of the audit work performed, especially when
reviewing and finalizing the audit. It can also be used in case of future review
or inquiries, such as those by regulatory bodies or external stakeholders.

Key Purposes of an Audit Notebook:

1. Documentation of Audit Procedures: It helps auditors document the steps

taken during the audit process, including planning, risk assessment, testing,
and conclusions.

2. Evidence of Audit Work: The notebook provides a detailed record of the

auditor's work and evidence collected, ensuring that all procedures are
properly executed and that the findings can be traced back to the evidence.
3. Communication: It serves as a tool to communicate the progress of the audit
to other team members or to supervisors. It can include memos or notes
related to issues encountered, questions raised, or areas that need further
investigation.

4. Compliance and Quality Control: It helps auditors ensure compliance with

auditing standards and internal audit procedures. It acts as a quality control
tool to verify that the audit is thorough and consistent with professional
standards.

5. Review and Supervision: The audit notebook can be reviewed by senior

auditors or managers to ensure that the audit is progressing as planned and
that key areas are being addressed.

6. Legal and Regulatory Purposes: The audit notebook can be used as evidence
in case of disputes, legal proceedings, or regulatory investigations. It ensures
that the auditor's work is well-documented and defensible.

Contents of an Audit Notebook

An audit notebook typically includes the following sections or types of

information:

1. Audit Planning
- Objective and Scope of the Audit: A brief statement of the audit’s objectives
and the scope of the work to be performed.
- Audit Team: Names of the audit team members and their respective roles
and responsibilities.
- Audit Program: A detailed list of audit procedures and tests to be performed,
based on the audit plan.
- Risk Assessment: Identification of significant risks, including areas with high
potential for material misstatement or fraud.
 - Timeline: The estimated timeline for completing various stages of the audit.

2. Audit Evidence and Procedures

- Procedures Performed: Detailed descriptions of the audit procedures
performed, including sampling methods, tests of controls, and substantive
tests.
- Evidence Collected: Notes on the evidence obtained during the audit, such
as documents, invoices, contracts, or electronic data. This can also include the
auditor’s evaluation of the quality of evidence.
- Work Papers: References to specific working papers that support the audit
findings (e.g., bank reconciliations, financial statements, etc.).

3. Findings and Observations

- Audit Findings: Observations regarding the client's financial records, internal
controls, and compliance with accounting standards. Any discrepancies, errors,
or irregularities discovered during the audit are recorded.
- Control Weaknesses: Any weaknesses in internal controls identified during
the audit, with a description of their potential impact on financial reporting.
- Issues Requiring Further Attention: Notes on issues that require further
investigation or clarification, including unresolved queries, discrepancies, or
concerns raised during the audit.
- Recommendations: Suggestions for improving internal controls, financial
reporting practices, or operational processes, if applicable.

4. Communication with Management

- Meetings with Management: Notes from discussions with the client’s
management team, including any concerns raised, decisions made, and any
significant management representations.
- Management Responses: Documentation of management’s responses to
audit findings, including corrective actions or disagreements with the findings.
 - Audit Adjustments: A record of any audit adjustments proposed by the
auditor and whether the client agrees to make these adjustments in the
financial statements.

5. Audit Conclusions
- Conclusions on Financial Statements: A summary of the auditor’s
conclusions regarding the accuracy and fairness of the client’s financial
statements.
- Opinion: If applicable, a draft of the audit opinion (e.g., unqualified,
qualified, adverse, or disclaimer of opinion).

Benefits of an Audit Notebook

- Documentation of Audit Work: It provides a record of the audit procedures,

evidence, and conclusions that can be referenced later or reviewed by others.
- Legal Protection: An audit notebook can serve as evidence in case of legal
disputes, regulatory investigations, or inquiries by external stakeholders.
- Quality Control: It ensures that audits are performed systematically and
consistently, and that the auditor is following professional standards and
guidelines.
- Efficient Audit Process: A well-maintained audit notebook helps auditors stay
organized and track the progress of the audit, ensuring nothing is overlooked.
- Communication Tool: It serves as a tool for communicating findings and
observations to other members of the audit team, management, or the audit
committee.
Working papers
Working papers (also known as audit working papers or audit documentation)
are the records, documents, and evidence that auditors compile and maintain
during the audit process. They serve as a detailed record of the audit
procedures performed, the evidence obtained, and the conclusions drawn.
Working papers are essential for supporting the auditor’s opinion on the
financial statements and for providing a clear and organized trail of the audit
process.
In essence, working papers are the foundation of an audit, providing the
necessary documentation that auditors need to substantiate their findings,
judgments, and conclusions. They also serve as evidence in case of regulatory
reviews, peer reviews, or legal inquiries into the audit work.

Purpose and Importance of Working Papers

1. Support for the Auditor's Opinion: The working papers provide the
documentation necessary to support the auditor's opinion on the financial
statements. They show how the auditor gathered evidence, tested controls,
and arrived at conclusions.
2. Evidence of Compliance with Auditing Standards: Working papers
demonstrate that the auditor has followed the auditing standards and
procedures. They serve as proof that the audit was conducted in accordance
with established guidelines (such as GAAS - Generally Accepted Auditing
Standards, or ISA - International Standards on Auditing).

3. Internal Control Evaluation: Working papers include documentation on the

assessment of internal controls and their effectiveness. This helps auditors
determine the level of reliance that can be placed on the client’s internal
controls.

4. Facilitate Review and Supervision: Supervisors and managers can use the
working papers to review the audit process and findings. Working papers help
ensure that the audit has been conducted thoroughly and that all key areas
have been addressed.

5. Legal and Regulatory Evidence: In case of disputes, regulatory scrutiny, or

legal challenges, working papers provide the necessary documentation to
defend the audit process and conclusions.
6. Audit Efficiency: Working papers help the audit team stay organized,
ensuring that the audit is completed efficiently and systematically. They also
allow future auditors to understand the approach taken in previous audits,
which can improve consistency.
- If necessary, they may also include recommendations for improving internal
controls or business practices.

7. Correspondence and Communications:

- This section may include correspondence with the client, such as
management letters, representations from management, and communication
regarding audit issues or concerns.

8. Signatures and Approval:

- The working papers should include the signatures of the auditors who
performed the work, as well as the dates of completion and review. This helps
ensure accountability and allows for the review of the audit process by
supervisors.

Types of Working Papers

Working papers can be categorized into several types, depending on their

content and purpose. Some common types include:

1. Lead Schedules:
- These are summary schedules that provide an overview of key financial
statement balances (e.g., cash, accounts receivable, accounts payable). They
link to the underlying detailed working papers and help the auditor organize
and summarize the audit evidence.

2. Supporting Schedules:
 - Detailed documentation supporting the figures in the financial statements,
such as calculations of depreciation, inventory counts, or accounts receivable
aging reports. These schedules provide evidence for the auditor’s conclusions.
3. Test of Controls:
- Working papers documenting the auditor's tests of the client’s internal
controls. This may include evaluating how controls over cash handling,
authorization of transactions, or safeguarding assets are designed and
operating in practice.

4. Substantive Testing:
- Documentation of substantive procedures performed to test the accuracy
and completeness of the financial statements. This could include procedures
such as examining transaction details, confirming balances with third parties,
or recalculating figures.

5. Journal Entries and Adjustments:

- Documentation of any journal entries or adjustments made by the auditor
or management during the audit process. This includes correcting entries,
reclassifications, and adjustments made to align the financial statements with
generally accepted accounting principles (GAAP).

6. Audit Conclusion and Opinion:

- A summary of the audit conclusions, including the auditor’s opinion on the
financial statements. This section ties together the audit findings and provides
the basis for the audit opinion (unqualified, qualified, adverse, or disclaimer).
Audit working papers are often maintained in digital or paper formats. In
modern auditing, most working papers are maintained electronically for ease
of access, sharing, and storage. Common formats include:

- Spreadsheets: Excel or other spreadsheet software is often used for

organizing financial data, calculations, and supporting schedules.
- Word Documents: Used for detailed notes, explanations, and audit findings.
- PDF Files: Used for scanned copies of documents such as bank statements,
contracts, or invoices that support audit evidence.
- Audit Software: Many firms use specialized audit software to maintain
working papers, track progress, and organize audit documentation.

Best Practices for Audit Working Papers

1. Clarity and Organization: Working papers should be well-organized and easy

to follow, with clear references to the specific audit objectives, procedures,
and evidence.
2. Sufficiency of Evidence: Ensure that the working papers contain sufficient
evidence to support the auditor’s opinion, including detailed documentation of
procedures performed and conclusions reached.
3. Consistency: Follow consistent formats and standards to ensure that all
relevant information is documented systematically and can be easily reviewed.
4. Timeliness: Complete working papers promptly to ensure that the audit
process is well-documented and up-to-date.
5. Confidentiality: Ensure that working papers are kept confidential, as they
contain sensitive financial information about the client.
 AUDIT OF A JOINT STOCK COMPANY (4TH UNIT )

Meaning:

An audit of a joint stock company refers to the systematic examination and verification of
the company's financial statements, records, and operations to ensure their accuracy,
reliability, and compliance with laws and regulations.

Definition:

"Audit of a joint stock company means the examination of the financial statements,
records, and operations of the company by an independent auditor to ensure that the financial
statements present a true and fair view of the company's financial position and performance,
and that the company has complied with all applicable laws and regulations." (Source:
Companies Act, 2013)

Qualification:

Meaning:

A qualification is a condition or circumstance that limits or restricts an auditor's ability

to express an unqualified opinion on a company's financial statements.

Definition:

A qualification is a limitation or restriction on the scope of the audit or a reservation or

exception to the auditor's opinion." (Source: Institute of Chartered Accountants of India)

Disqualification:

Meaning:

A disqualification is a reason or circumstance that makes a person ineligible or

unsuitable to be appointed as an auditor of a company.

Definition:

"A disqualification is a condition or circumstance that renders a person ineligible or

unsuitable to be appointed as an auditor of a company." (Source: Companies Act, 2013)

TYPES OF AUDITS

1. Statutory Audit: Conducted as per the Companies Act, 2013, to ensure compliance with
legal requirements.

2. Internal Audit: Conducted by the company's internal audit department to evaluate internal
controls and operational efficiency.

3. Tax Audit: Conducted to ensure compliance with tax laws and regulations.
AUDIT PROCESS

1. Planning: Auditor plans the audit, including identifying risks and determining the scope of
the audit.

2. Risk Assessment: Auditor assesses the company's risk profile, including financial,
operational, and compliance risks.

3. Fieldwork: Auditor conducts fieldwork, including examining financial records,

interviewing employees, and observing operations.

4. Testing: Auditor tests transactions, balances, and disclosures to ensure accuracy and
reliability.

5. Reporting: Auditor prepares the audit report, including findings, conclusions, and
recommendations.

QUALIFICATIONS OF AN AUDITOR

To be eligible for appointment as an auditor of a company, a person must possess the

following qualifications:

1. Chartered Accountant (CA): A member of the Institute of Chartered Accountants of

India (ICAI).

2. Cost Accountant (CMA): A member of the Institute of Cost Accountants of India

(ICMAI).

3. Company Secretary (CS): A member of the Institute of Company Secretaries of India

(ICSI), with a certificate of practice.

4. Post-Graduate Diploma in Management (PGDM): From a recognized institution, with a

specialization in finance or accounting.

5. Experience: At least 5 years of experience in auditing or accounting.

DISQUALIFICATIONS OF AN AUDITOR

A person shall be disqualified for appointment as an auditor of a company if:

1. Not a Chartered Accountant (CA): Or not a member of the Institute of Chartered

Accountants of India (ICAI).

2. Undischarged Insolvent: A person who is an undischarged insolvent.

3. Convicted by Court: A person who has been convicted by a court for an offense
involving fraud or dishonesty.
4. Removed or Resigned: A person who has been removed or resigned from the office of
auditor of the company or any other body corporate.

5. Not Independent: A person who is not independent of the company, its directors, or key
managerial personnel.

6. Engaged in Business: A person who is engaged in any business or profession which is

incompatible with the duties of an auditor.

7. Relative of Director/Key Managerial Personnel: A person who is a relative of any

director or key managerial personnel of the company.

Modes of Appointment of Company Auditor

1. First Auditor: Appointed by the Board of Directors within 30 days of incorporation.

2. Subsequent Auditor: Appointed by the shareholders at the Annual General Meeting

(AGM).

3. Casual Vacancy: Filled by the Board of Directors or shareholders, depending on the

circumstances.

4. Re-appointment: Auditor can be re-appointed for a maximum of 5 consecutive years.

RIGHTS AND DUTIES OF COMPANY AUDITORS

Rights:

1. Access to company records and documents.

2. Attendance at meetings and right to receive notices and communications.

3. Right to seek information and explanations from company officers and employees.

Duties:

1. Conduct audit in accordance with auditing standards and statutory requirements.

2. Report to shareholders on the financial statements and auditor's opinion.

3. Comply with auditing standards and regulatory requirements.

4. Maintain independence and objectivity.

Liabilities of Company Auditors

1. Civil Liability: For negligence, misfeasance, or breach of duty.

2. Criminal Liability: For offenses such as fraud, false statements, or failure to report fraud.

3. Professional Liability: For breach of professional standards and ethics.

Share Capital and Share Transfer Audit

1. Share Capital Audit: Verification of share capital, including authorized, issued, and paid-
up capital.

2. Share Transfer Audit: Verification of share transfers, including documentation and

compliance with regulatory requirements.

AUDIT REPORT

1. Contents: Includes auditor's opinion, basis for opinion, and any qualifications or
reservations.

2. Types:

Unqualified Opinion:Auditor expresses a clean opinion on the financial statements.

Qualified Opinion: Auditor expresses a qualified opinion due to limitations or uncertainties.

Adverse Opinion: Auditor expresses an adverse opinion due to significant departures from
accounting standards.

Disclaimer of Opinion: Auditor disclaims an opinion due to inability to obtain sufficient

evidence.
 UNIT 5

INVESTIGATION:

Definition

1. Investigation: An investigation is a systematic and thorough examination of a company's

affairs to gather evidence and establish facts.

Objectives

1. To Gather Evidence: To collect and analyze evidence related to the investigation.

2. To Establish Facts: To establish the facts surrounding the investigation.

3. To Identify Irregularities: To identify any irregularities or wrongdoing.

4. To Determine Liability: To determine liability for any wrongdoing or irregularities.

Types of Investigations

1. Internal Investigation: Conducted by the company itself to investigate internal matters.

2. External Investigation: Conducted by external agencies, such as government agencies or

regulatory bodies.

3. Forensic Investigation: A specialized investigation that involves the use of forensic

accounting and auditing techniques.

Investigation Process

1. Planning: Define the scope and objectives of the investigation.

2. Data Collection: Gather evidence and data related to the investigation.

3. Analysis: Analyze the evidence and data collected.

4. Reporting: Prepare a report detailing the findings of the investigation.

5. Follow-up: Take corrective action based on the findings of the investigation.

Investigation Techniques

1. Interviews: Conduct interviews with employees, management, and other relevant parties.

2. Document Review: Review company documents, records, and files.

3. Data Analysis: Analyze financial data and other relevant data.

4. Surveillance: Conduct surveillance to gather evidence.

Importance of Investigation

1. Prevents Fraud: Investigation helps to prevent fraud and wrongdoing.

2. Promotes Accountability: Investigation promotes accountability and transparency.

3. Protects Stakeholders: Investigation protects the interests of stakeholders, including

shareholders and employees.

OBJECTIVES OF INVESTIGATION:

Primary Objectives

1. To Gather Evidence: To collect and analyze evidence related to the investigation.

2. To Establish Facts: To establish the facts surrounding the investigation.

3. To Identify Irregularities: To identify any irregularities or wrongdoing.

4. To Determine Liability: To determine liability for any wrongdoing or irregularities.

Secondary Objectives

1. To Prevent Future Occurrences: To identify the root cause of the problem and recommend
measures to prevent future occurrences.

2. To Protect Stakeholders: To protect the interests of stakeholders, including shareholders,

employees, and customers.

3. To Promote Accountability: To promote accountability and transparency within the

organization.

4. To Improve Internal Controls: To identify weaknesses in internal controls and recommend

measures to improve them.

Specific Objectives

1. To Investigate Fraud: To investigate allegations of fraud, embezzlement, or other financial

irregularities.

2. To Investigate Non-Compliance: To investigate allegations of non-compliance with laws,

regulations, or internal policies.

3. To Investigate Employee Misconduct: To investigate allegations of employee misconduct,

including harassment, discrimination, or other forms of wrongdoing.

4. To Investigate System Failures: To investigate system failures, including IT system

failures or other operational failures.
AUDIT OF COMPUTERISED ACCOUNTS

Definition

1. Audit of Computerized Accounts: An audit of computerized accounts involves examining

and verifying the accuracy and completeness of financial data stored in a computer system.

Objectives

1. To Ensure Accuracy and Completeness: To ensure that financial data is accurate and
complete.

2. To Ensure System Security: To ensure that the computer system is secure and protected
against unauthorized access.

3. To Identify Errors or Irregularities: To identify any errors or irregularities in the financial

data.

Types of Computerized Accounting Systems

1. Online Accounting Systems: Online accounting systems are cloud-based and allow users to
access financial data from anywhere.

2. Offline Accounting Systems: Offline accounting systems are installed on a local computer
and do not require internet access.

3. Hybrid Accounting Systems: Hybrid accounting systems combine online and offline
features.

Audit Techniques

1. Test Data Method: The test data method involves creating test data to verify the accuracy
of financial data.

2. Integrated Test Facility (ITF): ITF involves embedding test transactions in the accounting
system to verify the accuracy of financial data.

3. System Auditing: System auditing involves examining the computer system's controls and
security features.

Audit Risks

1. System Failure: System failure can result in loss of financial data.

2. Unauthorized Access: Unauthorized access can result in manipulation of financial data.

3. Data Corruption: Data corruption can result in inaccurate financial data.

Audit Procedures

1. Review System Documentation: Review system documentation to understand the

accounting system's controls and security features.

2. Test System Controls: Test system controls to ensure that they are operating effectively.

3. Verify Financial Data: Verify financial data to ensure that it is accurate and complete.

Benefits of Auditing Computerized Accounts

1. Improved Accuracy: Auditing computerized accounts can improve the accuracy of

financial data.

2. Enhanced Security: Auditing computerized accounts can enhance the security of financial
data.

3. Increased Efficiency: Auditing computerized accounts can increase the efficiency of the
accounting process.

Electronic auditing, also known as e-auditing, is a type of audit that uses electronic
records to complete part or all of the audit process. This approach follows similar procedures
as traditional auditing but utilizes electronic means to remotely perform the audit ¹.

E-auditing involves auditing in a computerized environment, where computers are

extensively used in an enterprise for processing significant financial information. The
primary objective of e-auditing is to determine whether computer systems safeguard assets,
maintain data integrity, achieve organizational goals effectively, and consume resources
efficiently ².

Benefits of Electronic Auditing:

Speed: Electronic auditing enables faster recording of transactions and preparation of books
and accounts.

Accuracy: The chances of arithmetical errors and human errors are reduced to a minimum.

Economy: Electronic auditing can be done with minimum staff and cost.

Better Records: Records prepared by machines are neat, clean, and more legible.

Greater Information: Electronic auditing provides various types of information and statistical
data regarding business operations ².

Limitations of Electronic Auditing:

- Suitability: Electronic auditing may not be suitable for small business forms.

- Error Detection: It can be difficult to detect errors and frauds.

- Storage Problems: Electronic auditing requires adequate storage facilities.

- Computer Frauds and Viruses: Electronic auditing is vulnerable to computer frauds and
viruses ².

Investigation under the provisions of companies act berifly

Types of Investigations

1. Investigation by Registrar: The Registrar of Companies can investigate the affairs of a

company to determine whether there have been any breaches of the Act.

2. Investigation by Serious Fraud Investigation Office (SFIO): The SFIO can investigate the
affairs of a company to determine whether there have been any serious frauds.

3. Investigation by Inspector: The Central Government can appoint an inspector to investigate

the affairs of a company to determine whether there have been any breaches of the Act.

Grounds for Investigation

1. Non-compliance with the Act: Failure to comply with the provisions of the Companies
Act.

2. Mismanagement: Mismanagement of the company's affairs.

3. Fraud: Any fraudulent activity by the company or its officers.

4. Public Interest: Investigation may be ordered in the public interest.

Powers of Investigators

1. Power to Inspect Books and Records: Investigators have the power to inspect the
company's books and records.

2. Power to Question Officers and Employees: Investigators have the power to question the
company's officers and employees.

3. Power to Seize Documents: Investigators have the power to seize documents and records.

Consequences of Investigation

1. Penalties: The company and its officers may be liable for penalties for non-compliance
with the Act.

2. Prosecution: The company and its officers may be prosecuted for any fraudulent activity.

3. Winding Up: The company may be wound up if the investigation reveals serious
irregularities.