UNIT - 1

What is Audit ?
Audit is performed to ascertain the validity and reliability of information.
Examination of books of accounts with supporting vouchers and documents in
order to detect and prevent error and fraud is the main function of auditing. The
goal of an audit is to express an opinion on the financial or non-financial areas.
Audit safeguards the financial interest of persons not associated with the
management like partners or shareholders, acts as a moral check on the
employees and prevents from committing fraud. However, due to constraints, an
audit seeks to provide only reasonable assurance that the statements are free
from material error. In case of financial audit, a set of financial statements are
said to be true and fair when they are free of material misstatements. But
recently, argument that auditing should go beyond just true and fair is gaining
momentum in view of recent frauds by high profile organizations in connivance
with the reputed audit firms.

Meaning of Auditing
Auditing implies the examination of books of accounts and related documents
of an organisation in order to correctly estimate their accuracy, completeness
and regularity. Such an examination is carried out by a competent and unbiased
person with the help of evidences, documents, information and explanations
given to him. For example, if a person goes to a doctor to have himself
examined, the doctor, only after a thorough examination of his body, gives his
report as to whether he is healthy or not, and if not, what is the ailment he is
suffering from.
In the same manner, a businessman gets his books of accounts examined by a
doctor of books of accounts (i.e. the auditor) who, after a thorough examination
of the books, gives his report as to whether or not they give a true and fair view
of the state of affairs of the business, and not then what are the errors,
deficiencies and faults in them.

Definition of Auditing by Different Authors

Speicer and Pegler :
"An audit may be said to be such an examination of the books, accounts and
vouchers of a business as will enable the auditor to satisfy 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 view of the profit or loss for the financial period according to the best of his
information and the explanations given to him, as shown by the books, and U
not, then in what respects he is not satisfied."

J.R. Batliboi :
"Auditing may be defined as an intelligent and critical scrutiny of the books of
accounts of a business, with documents and vouchers from which they are
written up, for the purpose of ascertaining whether the working result for a
particular period as shown by the Profit and Loss Account, as also the exact
financial condition of that business as reflected in the Balance Sheet are truly
determined and presented by those responsible for their compilation."

Objectives of Auditing
The original object of an audit was principally to see whether the personnel
involved in accounting had properly accounted for the receipts and payments of
cash. In other words, the object of audit was to find out whether cash had been
embezzled and if so, who embezzled it and what amount was involved. Thus, it
was only an audit of cash book. But, at present, the main object of audit is to
find out, after going through the books of accounts, whether the balance sheet
and profit and loss account are properly drawn up accordingly and whether they
represent a true and fair view of the state of the affairs of the concern. This is
possible when he verifies the accounts and the statements. While performing his
duties, the auditor has also to discover errors and frauds. There are two main
objectives of auditing, Primary and Subsidiary Objectives of Auditing.

A) Primary Objective of Auditing :

Expression of Independent Opinion on Accounts :
In auditing accounting data, the main concern is to determine whether the
recorded information appropriately reflects the economic events that occurred
during the accounting period. The dominant principle of audit is the
examination of financial information produced by an accountable party with a
View to reporting to the person to whom the information is rendered on its truth
or otherwise. The Companies Act requires that the auditor of a company has to
state in his audit report whether in his opinion the accounts disclose a "true and
fair view" of the state of company's affairs or not. In technical terms, this is
called expression of expert opinion. Therefore, the primary objective of an
independent financial audit is to determine whether the financial statements
present a factual and impartial view of the financial position and working results
of an enterprise.
The discovery of errors and frauds although appears to be the main object of
audit, it is just an incidental object. In the Companies Act, nowhere the question
of discovery of error and fraud in relation to the auditor's responsibility is
discussed although his failure to discover manipulations, whether fraudulently
or otherwise would normally render him liable for damages. When an
undertaking whose accounts are being audited is target, greater reliance is to be
placed on the accounting system in use for the detection and prevention of
errors and frauds. Thus, the auditor resorts to test-checking technique to
ascertain whether the accounting system adopted is reliable and how efficiently
it was put to use. The auditor should also disclose in his audit report the
adequacy and weaknesses, if any, of the accounting system so employed to
record business transactions.

B) Secondary/ Subsidiary Objectives of Auditing

As discussed above, an auditor has to examine the books of account and

relevant supporting documents with a view to express his opinion on the
financial state of affairs of the company. During the process of such an
examination of accounts, certain errors and frauds may be discovered. These
can be discussed under the following two heads :

1) Detection and Prevention of Errors and Mistakes :

The term 'error' in accounting refers to an unintentional misstatement of
financial statements. Errors and mistakes are of various kinds, which are
discussed now.

A) kinds of Errors :
I) Clerical Errors :
These errors arise because of mistakes committed by the clerical staff in
ordinary course of accounting work. These are of five types :

a) Errors of Omission :
These occur on account of transactions not being recorded in the books of
account either wholly or partially. Detection of such errors is bit difficult, as
they do not affect the arrangement of trial balance. However, a searching eye
and a critical scrutiny of the accounts only can uncover such errors. For
example, scrutiny of salaries account in the general ledger may indicate that
salaries for only 11 months have been accounted for and the outstanding amount
for the 12th month has not been provided for.

b) Errors of Commission :
These consist of incorrect additions, wrong postings and entries. Some of the
examples of these are;
(i) Errors in additions carry forwards in the books of original entries or
ledgers.
(ii) Errors or incorrect postings such as debit amount posted to credit, wrong
amount posted to an account, an amount posted twice, omission to post an
amount from a book of original entry to the ledger.
(iii) Errors in taking out balances of the ledger accounts.
The above errors will affect the agreement of the trial balance. Checking the
arithmetical accuracy of books of original entries and ledger and postings from
the books of original entries to the ledgers may uncover such types of errors.

c) Compensating Errors :
These are the errors which counter-balance each other in such a manner that
there remains no difference between two sides of the trial balance. For example,
a cash sale of Rs. 1, 000 may be recorded in the cashbook, as Rs.100, whereas
another cash sale of Rs. 100 may be recorded as Rs. 1,000. These errors would
offset each other and, therefore, trial balance would still agree if these were the
only errors. Checking of the arithmetical accuracy of books of account and
postings would help detect such errors.

d) Errors of Duplication :
Errors of duplication arise when an entry in a book of original record has been
made twice, or/and due to double posting of a journal entry in ledger accounts.

e) Trial Balance Errors :

These may consist of casting errors in the trial balance, omission of a balance
while extracting balance from the books of account, or entering an amount
incorrectly or on the wrong side. These errors can be spotted during routine
checking.

II) Errors of Principle :

Errors of principle are those in which result from mis-application of or
overlooking accounting principles. By and large, there are three types of errors
generally considered to be errors of principle. These are :

a) Incorrect Allocation :
This occurs when the distinction between revenue and capital is not strictly
maintained, e.g., capital expenditures charged to revenue and vice versa.

b) Omission of outstanding assets and liabilities :

These arise when prepayments are ignored and the amount charged from the
profit and loss account and outstanding expenses in respect of rent, salaries,
commission, etc. are ignored and not accounted for.

c) Incorrect valuation of assets :

This occurs when, for example, fixed assets are not valued at cost
less depreciation; closing stock is not valued at cost or market price, and
whichever is lower. An intelligent vouching and a complete verification
(including checking of valuations) of the assets and liabilities can easily detect
such errors. Other examples of errors of principle: Apart from the foregoing
errors the following kinds of errors also fall in this category;
1) Excess or inadequate provision for depreciation
2) Excess or wrong provision for bad and doubtful debt
3) Over valuation or undervaluation of closing stock, etc.

B) Location of Errors :
To locate errors and discover the difference in the trial balance, the auditor
should take the following steps :

I) Trial Balance Checking :

 Check casts of the trial balance, lists of debtors and creditors.
 Establish the amount of difference.
 Check balances from personal and impersonal ledger into the trial
balance.
 While checking the balances, care must be taken to ensure that the
closing balances are correctly entered in the right column.

II) Short-cut Method :

  Look for an item of half that amount which might have been entered on
the wrong side.
 If the difference is divisible by nine, it may mean an error of transposition
of figures (e.g., 69 written as 96 or 86 written as 68 etc.)
 If the difference is a round figure, it is probable that the mistake has been
made in totals of trial balance or carry forward of its figures.
 If the difference is that of a large amount, it is advisable to compare the
trial balance with the previous year's, in order to ascertain whether the
figures under the different heads of account are very near to the same as
those of the previous year, and whether the balances fall on the same side
of the trial balance.
 If the difference happens to be of an amount which constantly recurs in
the books, all postings of this amount is to be checked.

III) Extensive Checking :

If all the above shortcuts do not result in locating the difference, the following
work should be done :

 Ascertain that all opening balances have been correctly brought forward
in the current year's books.
 Check casts, cross casts and carry forwards of the various books of
original entries and ledgers.
 If the ledgers were self-balancing, the work would be restricted to
checking the balances, postings and casts of only that ledger the trial
balance of which does not agree.
 The Journal and subsidiary books should be scrutinized to see that the
total debits and credits of each entry tally and there were no unticked
items.
 The postings from the various subsidiary books should then be checked
into the impersonal ledger.

2) Detection and Prevention of Frauds :

The term fraud' may be defined as internal irregularities aimed at cheating or
causing loss to another. Frauds are often committed by two or more persons,
acting in collusion with one another. The auditor's responsibility for uncovering
frauds deserves special mention. A fraud may take the following forms :

A) Misappropriations and Defalcations :

I) Embezzlement of Cash :
Embezzlement of cash refers to falsification or misappropriation of cash, which
is very common especially in case of big business concern, as the proprietor has
very little control over the receipts and payments of cash. Cash may be
misappropriated in a number of ways as follows :
a) By omitting to enter receipts.
b) By entering fictitious payment :
i) Under-casting the receipt side of cashbook by entering fewer amounts than
what has been actually received
ii) Overcasting the payment side of the cashbook by entering excess amount.
In order to detect such fraud of misappropriation of cash, the auditor should
check the cashbook with original records, counter foils of receipt book, bills
register, salesmen's report, invoices, wage sheets, salary book, vouchers, etc. In
a big business enterprise strict control should be exercised over the receipts and
payments of cash. Such control can be exercised through a system, devised
specifically for the purpose, known as internal check system.

II) Misappropriation of goods :

Further, fraud may also be committed through misappropriation of goods. It is
very difficult to detect misappropriation of goods, which is very common
especially when goods are not bulky and are of higher value, such detention can
be possible only if proper records of stock inward and outward are maintained.
Only accurate stock recording through proper accounting for purchases and
sales and periodical checking of stock can minimize the possibility of such
misappropriation.

B) Misrepresentation of Accounts :
Misrepresentation of accounts refers to Fraudulent Manipulation or Falsification
of Accounts. With a view to conceal the true picture and to reveal the distorted
picture, the accounts of a firm may be falsified or manipulated by making false
entries. This type of fraud usually involves very large amount and cannot be
detected easily by the auditors because it is usually committed by those
responsible persons who are in top management, viz., directors, managers, etc.
Accounts can bee falsified or manipulated by various means. Some of the tools
or devices adopted for this purpose may be mentioned as under :
 Undervaluation and overvaluation of closing stock and other assets.
 Overvaluation and undervaluation of liabilities.
 Creating excess or less provision for depreciation or not providing for
depreciation.
  Charging capital expenditure to revenue and vice versa.
 Providing for excess or less doubtful debts.
 Writing off excess or less bad debt.
Basically there are two different objects behind the manipulation of accounts
done through the above-mentioned devices. Firstly, showing more profit than
the actual ones so as to earn more commission on profits when payable on the
basis of performance and to win the confidence of shareholders by claiming that
the firm is able to generate high profit under their leadership.
Secondly, showing less profit than the actual ones so as to mislead income tax
authorities and to buy-back shares in the open market at lower price besides
cheating shareholders by declaring less dividend and to conceal the true position
of state of affairs of the business. It must be noted that by adopting the above-
mentioned devices, accounts would either reveal much better financial position
or disclose worse financial position than actual ones. The former is technically
known as Window Dressing and latter is referred to as Secret Reserves. A brief
description of both is given as follows :

a) Window Dressing :
When accounts are prepared in such a manner that they seem to indicate a much
better and sound financial position of the business enterprise, it is known as
window dressing'. The principal objectives behind window dressing are as
follows :
 To attract potential investors to subscribe for the shares in order to
procure further capital.
 To obtain further credit.
 To enjoy better reputation in the market by showing more sound financial
position than in actual term.
 To win the confidence of shareholders.
 To raise the price of shares (i.e., artificially) in the market by paying
higher dividend
b) Secret Reserves :
When accounts are prepared in such a manner that they seem to disclose worse
financial position of the company than actual ones,t is known as "Secret
Reserves"? Thus the real picture of the business is concealed and a distorted
picture is revealed. The main objectives behind showing less profit than actual
ones are :
 To avoid or reduce income tax liability.
 To buy back shares from the open market through reducing the price of
shares by paying less or no dividend.
  To conceal the true position of company's state of affairs from the
competitors.
On the basis of above discussion, it can be concluded that auditing has the
principal objective of seeing whether or not the financial statements exhibit a
true and fair view of state of affairs of a firm's business and reporting
accordingly, Detection of errors and frauds and making recommendations so as
to prevent their re-occurrence is incidental and secondary objective of auditing
but by no means less significant as compared to the former.

C) Specific Objectives of Auditing

From the analysis of various definitions given by the distinguished authorities

on the subject and latest developments in the field of auditing. it should be clear
that the term audit should not be confined to financial audit alone. The area of
operation of audit is quite wide and such other areas like review of cost,
operations, efficiency, management, and tax liability, etc. fall under the purview
of audit. Accordingly, there will be specific objectives in respect of each type of
such specified audit. For example, in cost audit this is concerned with
verification of cost records and examination of cost accounting procedures, the
object of audit is to verify the truth, accuracy and fairness of costing data and to
serve as an effective tool of cost control. Similarly, in a management audit, the
aim of audit shall be to promote the efficiency of managerial functions and to
enhance the operational efficiency besides identifying areas of weaknesses in
internal control. Thus, depending upon the nature and subject matter of specific
audit, specific and different objectives in respect of each specific audit is
required.

What are the Advantages and Disadvantages of Auditing ?

Advantages / Importance of Auditing

In today's age when businesses and industries are operating on such a large
scale, it is obvious that the importance of audit has increased. With the increase
in capital invested in business and industry, and the separation in ownership and
management, the need of audit has come out even more clearly. Every external
party, whether he is a lender, or a income tax or sales tax officer, or a
perspective buyer of the business, considers audited accounts to be more
reliable than unaudited ones. Apart from this, audited accounts are also better
acknowledged by courts as evidence as compared to unaudited accounts, and
are also helpful in obtaining licence. Hence, all big business whether they are
sole proprietorship concerns or partnership firms, get their accounts audited.
The audit of the accounts of a company has been made mandatory by law. In
business, auditing is equally important for every kind of business, and that is
why even those businessmen for whom it is not compulsory to get their
accounts audited, are getting their accounts audited. The following advantages
of auditing notes must be kept in mind

1) General Advantages
The general advantages of auditing are as follows :

a) Knowledge of the Actual Position of the Business :

Through an audit the actual position of the business comes to light. The owners
of the business are assured that the results being shown by the Profit and Loss
Account and Balance Sheet are correct.

b) Detection of Frauds and Errors :

During the examination of accounts in the course of the audit, the frauds and
errors contained therein also come to light. This also reduces the chances of
frauds and errors being committed in the future.

c) Moral Pressure on Employees :

When the employees are aware of the fact that their work is going to be
examined by an independent person, there is an indirect fear among them, and
they do their work with much greater regularity, competency and caution. They
do not have to do anything wrong or be negligent. As a result of this the
possibilities of frauds and errors being committed are also reduced.

d) Alertness among Employees and Management :

Audit makes the employees and the management more alert as it results in
healthy criticism of their work. The employees become more disciplined and
adopt better policies and procedures.
Work gets completed as per schedule. The control exercised through the audit
also helps in reducing corruption and judging the honesty and capability of
employees.

e) Proper Valuation of Business :

If any business is to be sold or in case a firm is to be converted into a company,
then audited accounts are helpful in proper valuation of the business and
the valuation of goodwill. In fact, audited accounts are considered more
dependable than unaudited ones.

f) Increase in Goodwill :
Public puts greater faith in accounts of organisations who get their accounts
audited, which enhances the goodwill of the business. The increase in goodwill
makes it very easy for the organisation to obtain loans from banks and other
financial institutions.

g) Helpful in Receiving Compensation :

In case of accidents such as fire, theft, etc., audited accounts are more helpful
in receiving compensation from insurance companies.

h) Helpful in Assessment of Tax :

Assessment of tax is much easier on the basis of audited accounts otherwise
officers usually define tax liability arbitrarily. Hence, audited accounts are
helpful in preventing arbitrary assessment of tax.

i) Helpful In Getting Declared as insolvent :

When the state of the business becomes so bad, that its liabilities exceed its
assets, then the businessmen often wants to be declared ass insolvent so that he
may be relieved of his liabilities. In such cases, the description provided by
audited accounts serves as better evidence in courts.

j) Helpful in Formulating Dividend and Bonus Plan :

The audit of accounts certifies the truthfulness of the Profit and Loss Account,
and as a result it becomes easier to declare and distribute dividends as well as
proper disbursement of bonus is facilitated. This is because the shareholders
and the workers consider the audited accounts as correct and have faith in
them.

k) Availability of Valuable Suggestions :

The auditor from time to time keeps on giving suggestion to his client regarding
book-keeping and accountancy, so as to prevent frauds and errors. Apart from
this, the suggestions of the auditor are also useful in other business matters.

2) Advantages to Various Organisations

A) To Sole Proprietorship Concerns :
Apart from the above benefits, audit has the following advantages in case of a
sole proprietorship concern :

a) Proof In Court :
If in any business dispute any fact is to be established through the books of
accounts, then audited accounts can be produced as evidence in courts. The
former Chief Justice of India, M. Hedayatullah, observed, "When accounts
certified by an auditor are produced in court, then the judge is assured that the
accounts are true."

b) Helpful In Conversion of Business into Partnership :

in case a sole proprietor wants to convert his business into a partnership firm,
i.e. wants to take in another person as a partner in his business or himself
wants to become a partner in another firm, then audited accounts prove very
helpful.

c) Comparative Study Possible :

In case the accounts for a number of years need to be compared, on the basis of
the audit reports of the said years the accounts of one year can be compared
with those of another. This makes a comparative study of profits and losses
or income and expenditure possible.

d) Helpful in Assessment of Wealth Tax :

If the sole proprietor has a lot of assets, and upon his death taxes are to be paid
upon his wealth, audited accounts prove very helpful.

e) Helpful In Assessment of Income Tax and Sales Tex :

While determining the liability for income tax and sales tax the concerned
officers lay much greater reliance upon audited accounts.

B) To Partnership Firms :
Apart from the above described general advantages, audit has the following
advantages In case of a partnership firm:
a) Mutual Confidence among Parties :
Normally, all the partners do not participate in the day-to- day running of the
business of the firm. If the accounts of the partnership firm have been audited, it
helps in building mutual confidence among the partners. In case the firm also
has sleeping partners, the audit of the accounts of the firm becomes even more
necessary since the sleeping partners do not have complete information about
the business of the firm. Hence, audited accounts reduce the chances of disputes
at the time of division of profits among the partners, and the work of the firm
can proceed without any hindrance.

b) Helpful in Valuation of Business and Goodwill:

in case of admitting a new partner into the business of the firm, or at the time of
retirement or death of a partner, the valuation of the business, and the
valuation of its assets and liabilities and the goodwill of the firm, is greatly
facilitated if the accounts have been audited.

c) Peaceful Settlement of Accounts :

At the time of dissolution of the firm, the assets and liabilities of the firm can be
divided among the partners in a peaceful manner on the basis of audited
accounts.

C) To a Joint Stock Company :

The advantages of audit to a joint stock company, apart from the general
advantages mentioned above, are as follows :

a) Confidence among Shareholders in Management :

A company has a system of representative management. The management of the
company is in the hands of a few selected shareholders (the directors). The
remaining shareholders do not participate in the management of the company.
Hence, the managers of the company with the help of getting the accounts
audited assure the shareholders that they have been working properly and that
they have not misused their position in the company in any manner.

b) Easy Availability of Investment :

A company accumulates capital by issuing shares and debentures to the public.
The public has faith on audited accounts and it is on the basis of the same that
it invests capital in the company.
c) Helpful in Declaration of Dividends :
Since audit certifies the profits of the company, hence at the time of declaration
and distribution of dividends no suspicious are aroused. The auditor certifies in
his report that the dividend has been declared and distributed at an appropriate
rate.

d) Facilitates Amalgamation, Absorption and Reconstruction of Companies :

When ever, companies are amalgamated, absorbed or reconstructed, then
deciding the purchase consideration is greatly facilitated by audited accounts.
in such situations, audited accounts are considered to be more reliable.

Disadvantages / Limitations of Audit

the following disadvantages of auditing notes must be kept in mind :

1) Auditing Is not a Conclusive Proof of the Honesty of Employees :

if the organisation has a system of internal check in place, and the auditor is
satisfied with the working of the same, then he may certify the accuracy; of the
accounts by resorting to test checking. In a system of internal check also, two or
more people can team up and commit fraud, and such frauds may not come to
light during the audit. Hence, getting the accounts audited doesn't certify that
the employees of the organisation have worked honestly throughout the period
under review.

2) Auditing Doesn't Guarantee Cent-Per-Cent Accuracy :

Normally, large organisations have a very large number of transactions during
the financial year. Hence, it is not possible for the auditor to examine each and
every transaction in detail, nor is it viable in terms of wastage of time, effort and
money. In such cases the auditor resorts to test checking and hence it is only
natural that some frauds and errors may remain undetected.

3) Minor Things are not Paid Attention :

The auditor, during the course of his examination, gives full attention only to
matters related to Profit and Loss Account and Balance Sheet. He does not pay
much attention to small transactions or transactions entered into by the lower
staff of the organisation. Hence, it is possible that a few irregularities may
remain undetected at the lower levels, despite the audit.
4) Certain Frauds May Remain Undetected :
Despite the exercise of due diligence, competency and efficiency on the part of
the auditor, intentional and pre-planned frauds committed by the top managers
or other responsible employees of the organisation may escape getting detected.

5) Auditor does not Understand the Nature of all Business Transactions :

Even though the auditor examines the accounts of organisation in a variety of
fields, it is not necessary for him to understand the nature of each and every
transaction. Hence, it is not possible for the auditor to certify as to whether a
particular transaction makes business sense or not. During the course of audit,
transactions are examined from the legal point of view and not from the point of
view of appropriateness.

6) Auditor Merely Expresses his Opinion :

The auditor merely expresses his opinion on the accounts of the organisation.
By his expressing his opinion that the Profit and Loss Account and Balance
Sheet are correct does not mean that there can be no irregularity in the books of
accounts. Even though he gives his opinion after due examination, he is also
human, and human beings make mistakes.

7) Auditor Does not Enjoy Practical Freedom :

Even though an auditor is considered to be an independent person, since his
rights, duties and responsibilities have been specified by the Companies Act,
1956, in practice, the managers of the company always appoint their own
persons as the auditors of the company. The auditor is influenced by the
management of the company, and hence is not able to conduct a completely
independent examination of the books of accounts and gives his report on the
same.

Principles of Auditing

The institute of Chartered Accountants of India (ICAI) has laid down the basic
principles which govern an audit [SA 200; erstwhile: AAS-1]. Basic principles
of audit guide an auditor as to how to conduct am audit and give an audit report.
These basic principles govern the auditor's professional responsibilities and
must be observed whenever an audit is carried out. 9 Fundamental Principles
of Auditing are as follows :
1) Integrity, Objectivity & Independence :
a) Auditor should be straightforward, honest and sincere in his professional
work.
b) He should be fair and must not be biased.
c) He should maintain impartiality. He should be free of any interest.

2) Confidentiality :
a) He should maintain confidentiality of information acquired during his work.
b) He should not disclose any such information to a third party without specific
permission of client or legal or professional duty to disclose.

3) Skill & Competence :

a) He should perform work with due professional care.
b) Audit should be performed by persons having adequate training, experience
and competence.

4) Work Performed by Others :

a) The auditor can delegate work to assistants or use work performed by other
auditors and experts.
b) But he will continue to be responsible for his opinion on financial
information.
c) The Auditor is entitled to rely on work performed by others, provided:
i) He exercises adequate skills and care.
ii) There is nothing to doubt.

5) Documentation :
a) He should document matters relating to the audit (maintain working papers).
b) Working papers are maintained to demonstrate that the audit was carried out
in accordance with the basic principles.

6) Planning :
a) He should plan his work to conduct audit in effective and timely manner.
b) Plans should be based on knowledge of the client's business.
c) Plans should be further developed and revised during audit if circumstances
require so.

7) Audit Evidence :
a) Auditor should obtain sufficient and appropriate audit evidence by
performing compliance and substantive procedures.
b) Evidences enable the auditor to draw reasonable conclusion.
c) Compliance procedures mean the sets designed to obtain reasonable
assurance that internal controls have been properly designed & operating
effectively throughout the year.
d) Substantive Procedures are performed to obtain evidence as to the
completeness, accuracy and validity of data produced by the accounting system.

8) Accounting System & Internal Control :

a) Internal control system ensures that the accounting system is adequate and
that all the accounting information has been duly recorded.
b) The auditor should understand the accounting system and related internal
controls adopted by the management.
c) He should study and evaluate internal controls system to determine the
nature, timing and extent of other audit procedures.

9) Audit Conclusions & Reporting :

a) The auditor should review and assess the conclusions drawn from the audit
evidences obtained through performance of procedures.
b) The audit report should contain clear written expression of opinion on the
financial statements.
c) His report is on whether :
i) The financial information has been prepared using acceptable accounting
policies which have been consistently applied;
ii) The financial information complies with relevant regulation and statutory
requirements, and
iii) There is adequate disclosure of all material matters.
d) The report should be as per legal requirement. When other than clean opinion
is given, the audit report should state the reasons thereof.

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TYPES OF AUDIT
1. Internal audit
Internal audits take place within your business. As the business owner, you
initiate the audit while someone else in your business conducts it.
Businesses that have shareholders or board members may use internal audits as
a way to update them on their business’s finances. And, internal audits are a
good way to check in on financial goals.
Although there are many reasons you may conduct an internal audit, some
common reasons include to:
 Propose improvements
 Monitor effectiveness
 Make sure your business is compliant with laws and regulations
 Review and verify financial information
 Evaluate risk management policies and procedures
 Examine operation processes

2. External audit
An external audit is conducted by a third party, such as an accountant, the IRS,
or a tax agency. The external auditor has no connection to your business (e.g.,
not an employee). And, external auditors must follow generally accepted
auditing standards (GAAS).
Like internal audits, the main objective of an external audit is to determine the
accuracy of accounting records.
Investors and lenders typically require external audits to ensure the business’s
financial information and data is accurate and fair.
Audit reports
When your business is audited, external auditors usually give you an audit
report. Audit reports include details of the audit process and what was found.
And, the report includes whether your financial records are accurate, missing
information, or inaccurate.

3. Financial audit
A financial audit is one of the most common types of audit. Most types of
financial audits are external.During a financial audit, the auditor analyzes the
fairness and accuracy of a business’s financial statements.Auditors review
transactions, procedures, and balances to conduct a financial audit.
After the audit, the third party usually releases an audit opinion about your
business to lenders, creditors, and investors.

4. Statutory audits
It take place to report the current state of a company’s finances and account to
the Indian government. These audits are mandated by the law to ensure the fair
practice of accounts management. Statutory audits are performed by
knowledgeable and qualified Chartered Accountants who work as external and
independent parties. The internal audit is usually conducted at the request of the
internal management so that they can get a proper idea of all the financial
functioning and efficiency. These audits can be done by an independent party or
by the internal staff of the company.
5. Operational audit
Operational audits are similar to internal audits. An operational audit analyzes
your company’s goals, planning processes, procedures, and operation results.
Generally, operational audits are conducted internally. However, an operational
audit can be external.
The goal of an operational audit is to fully evaluate your business’s operations
and determine ways to improve them.

6. Compliance audit
A compliance audit examines your business’s policies and procedures to see if
they comply with internal or external standards.
Compliance audits can help determine whether or not your business is
compliant with paying workers’ compensation or shareholder distributions.
And, they can help determine if your business is compliant with IRS
regulations.

7. Information system audit

Information systems audits mostly impact software and IT companies. Business
owners use information system audits to detect issues relating to software
development, data processing, and computer systems.
This type of audit ensures the system provides accurate information to users and
makes sure unauthorized parties do not have access to private data.
Also, IT and non-software businesses should regularly conduct mini
cybersecurity audits to ensure their systems are secure from fraud and hackers.

8. Pay audit
Pay audits allow you to identify pay discrepancies among your employees.
A pay audit can help you spot unequal pay at your company. During a pay
audit, analyze things like disparities due to race, religion, age, and gender.
Pay audits can also help you ensure workers are paid fairly based on your
business’s industry and location.