INTERMEDIATE (IPC) COURSE

STUDY MATERIAL

PAPER : 6

AUDITING AND ASSURANCE

MODULE – 1

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

 This study material has been prepared by the faculty of the Board of Studies. The objective of
the study material is to provide teaching material to the students to enable them to obtain
knowledge in the subject. In case students need any clarifications or have any suggestions to
make for further improvement of the material contained herein, they may write to the Director
of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the study material has not been specifically discussed by the Council of
the Institute or any of its Committees and the views expressed herein may not be taken to
necessarily represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in retrieval system, or
transmitted, in any form, or by any means, Electronic, Mechanical, photocopying, recording, or
otherwise, without prior permission in writing from the publisher.

Revised Edition : July, 2015

Website : www.icai.org

E-mail : bosnoida@icai.in

Committee / : Board of Studies

Department

ISBN No. :

Price (All Modules) : `-

Published by : The Publication Department on behalf of The Institute of Chartered

Accountants of India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi – 110 002
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 A WORD ABOUT STUDY MATERIAL

Auditing is, perhaps, one of the most practical-oriented subjects in the C.A. curriculum. This
paper aims to provide working knowledge of generally accepted auditing procedures and of
techniques and skills needed to apply them in audit engagements. A good knowledge of the
subject would provide a strong foundation to students while pursuing the Chartered
Accountancy course. A good understanding of the theoretical concepts, particularly, in the
context of auditing standards would make practical training an enriching and enjoying
experience. While studying this paper, students are advised to integrate the knowledge
acquired in other subjects, specifically, accounting and corporate laws in a meaningful
manner. Such learning would only help a student to become a better professional.
The study material deals with the conceptual theoretical framework in detail. Its main features
are as under:
 The entire syllabus has been divided into nine chapters.
 In each chapter, learning objectives have been stated. The learning objectives would
enable you to understand the sequence of various aspects dealt within the chapter before
going into the details so that you know the direction of your studies.
 In each chapter, the topic has been covered in a step by step approach. The text has
been explained, where appropriate, through illustrations and practical problems. You
should go through the chapter carefully ensuring that you understand the topic and then
can tackle the exercises.
Handbook on Auditing Pronouncements comprises of Standards on Auditing and Guidance
Notes.
The Practice Manual aims to provide guidance as to the manner of writing an answer in the
examination. Main features of Practice Manual are as under:
 Important Definitions have been given for quick recapitulation. Students are expected to
attempt the questions and then compare it with the actual answers.
 Compilation of questions appearing during last twenty examinations.
 Exercises have been given at the end of each topic for independent practice.
This study material has been revised in view of Companies Act, 2013, Notification/Circulars
issued by MCA etc. by Auditing team of experts. The changes have been inserted in the bold
italics for convenience of the students.

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  Attention is invited to the Significant Additions/Modifications made in this edition of the
study material which are given on the next page.
 Please note that the changes over the previous edition have been indicated in bold and
italics in the chapters.
 Diagrammatic Presentation has been made in most of Chapters for quick revision of
described concept.
 Feedback form is given at the end of this study material wherein students are encouraged
to give their feedback/suggestions.
In case you need any further clarification/guidance, please send your queries at
Rajeev.sachdeva@icai.in and karuna.bhansali@icai.in.

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 SIGNIFICANT ADDITIONS/MODIFICATIONS IN 2015
EDITION OVER 2014 EDITION

Chapter Chapter Name Section/Sub Section wherein Additions / Page

No. updation have been done Number
1 Nature of Auditing 1.3.2 Diagrammatic representation showing 1.6
types of Standards issued by AASB
1.5.1 Expression of opinion 1.13
1.5.2 Errors and Frauds 1.18
1.8 Inherent Limitations of Audit 1.37
1.12 Diagrammatic representation showing 1.43
relationship of Auditing with Other
Disciplines
2 Basic concepts in 2.2.3 Sources of Audit Evidence 2.7
Auditing 2.2.4 Audit Procedures to Obtain Audit 2.8
Evidence
2.4 Concept of True and Fair 2.25
3 Preparation for an 3.1.1 Agreement on Audit Engagement 3.3
Audit Terms
3.3 Diagrammatic representation showing 3.6
techniques commonly adopted by the
Auditors
3.10.1 Diagrammatic representation showing 3.21
types of Working Paper Files
3.10.3 Ownership and Custody of Working 3.24
Papers
3.12.3 Diagrammatic representation showing 3.34
Approaches to Sampling
3.12.4 Diagrammatic representation showing 3.36
Sample Selection Methods
3.13.1 Concept of Audit Risk 3.40
4 Internal Control 4.2 Understanding the Entity and Its 4.4
Environment, Including the Entity’s
Internal Control
5 Vouching 5.2.2 Transactions with Related Party 5.9
5.2.19 Retirement Gratuity to Employees 5.22
6 Verification of Assets 6.4.5 Fixed Assets and requirement of 6.22
and Liabilities Companies (Auditor’s Report) Order,
2015
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 6.6.8 Inventory and requirement of 6.41
Companies (Auditor’s Report) Order,
2015
6.11.7 Loan and requirement of Companies 6.67
(Auditor’s Report) Order, 2015
7 The Company Audit-I 7.1 Eligibility, Qualifications and 7.2
Disqualifications of an Auditor
7.2.1.2Appointment of First Auditors in the 7.7
case of Government Company
7.3.1 Diagrammatic representation showing 7.10
Applicability of provisions of Rotation
of Auditor
7.4.1 Diagrammatic representation showing 7.14
Class of Companies required to
constitute Audit Committee
7.10.2 Diagrammatic representation showing 7.31
Modified Reports
7.10.3 Reporting under Companies (Auditor’s 7.35
Report) Order, 2015
7.14 Cost Audit 7.44
9 Special Audit 9.1.7 Diagrammatic representation showing 9.11
role of C&AG

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 STUDY PLAN – KEY TO EFFECTIVE LEARNING

Auditing is the heart of Chartered Accountancy Course. The intent of this paper is to
understand objective and concept of auditing and gain working knowledge of generally
accepted auditing procedures and of techniques and skills needed to apply them in audit and
attestation engagements. While studying this paper, students are advised to integrate the
knowledge acquired in other subjects, specifically, accounting, corporate laws and taxation in
a meaningful manner.
For the simplicity of the students it is suggested that the entire syllabus may be segregated
into the following six parts which may be studied with the help of Chapters viz.
S. No. Topics to be covered in each part Reference of Chapters
Part 1 Auditing Concepts, Auditing engagement, Refer Chapter 1 & 2
Documentation, Audit evidence
Part 2 Standards on Auditing and Guidance Notes Prescribed by ICAI in
the form of list of
publication Given in
Handbook on Auditing
Pronouncements
Part 3 Internal Control, Internal Control and Computerized Refer Chapter 3 & 4
Environment, Approaches to Auditing in Computerized
Environment, Audit Sampling, Analytical review
procedures.
Part 4 Audit of payments, Audit of receipts, Audit of Refer Chapter 5 & 6
Purchases, Audit of Sales, Audit of suppliers’ ledger
and the debtors’ ledger, Audit of impersonal ledger,
Audit of assets and liabilities.
Part 5 Company Audit, Audit Report Refer Chapter 7 & 8
Part 6 Special points in audit of different types of Refer Chapter 9
undertakings, i.e., Educational institutions, Hotels,
Clubs, Hospitals, Hire-purchase and leasing
companies (excluding banks, electricity companies,
cooperative societies, and insurance companies),
Features and basic principles of government audit,
Local bodies and not-for-profit organizations,
Comptroller and Auditor General and its constitutional
role.
For the better understanding of the Standards on Auditing (SAs) given in Part 2 it may be
noted that they contain two distinct sections, one, the Requirements section and, two, the
Application Guidance section.
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 The fundamental principles of the Standard are contained in the Requirements section and
represented by use of “shall”. The application and other explanatory material contained in a
Standard on Auditing (SA) is an integral part of the SA as it provides further explanation of,
and guidance for carrying out, the requirements of an SA, along with the background
information on the matters addressed in the SA. It may include examples of procedures, some
of which the auditor may judge to be appropriate in the circumstances. Such guidance is,
however, not intended to impose a requirement. Further, the standard portion or principles
enunciated in a Standard need not to be given in bold face.
For the remaining part of syllabus our study is divided in nine chapters viz. Nature of Auditing,
Basic Concepts in Auditing, Preparation for an Audit, Internal Control, Vouching, Verification of
Assets and Liabilities, The Company Audit – I, The Company Audit – II and Special Audits
Chapters from 1 to 4 are the backbone of the syllabus of Auditing and Assurance. These four
chapters are basically based on Standards on Auditing. After preparing these chapters,
students will be able to understand the other chapters like Vouching, Verification of Assets
and Liabilities and Special Audit.
The Chapter 1 - Nature of Auditing deals with the Concept and objective of Auditing, aspects
to be covered in Audit, Basic Principles Governing an Audit, Scope and Inherent Limitations of
Audit, and Relationship of Auditing with other Disciplines. In this chapter, student will be able
to understand the functional classification, qualities of an auditor, objectives of audit, basic
principles of an audit, and different types of audit and relationship of auditing with other
disciplines. The student should try to carefully understand the basic concepts and the
structure of the auditing to gain the in depth knowledge of the subject. As already discussed
these chapters are interlinked with Standards on Auditing. Therefore, to better understand the
implication of this chapter, it is suggested to read it with SA 200, “Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing
and SA 240, “The Auditor's responsibilities relating to Fraud in an Audit of Financial
Statements”. Instead of cramming the contents, the student should try to bring out the very
idea of the chapter. This exercise will enable him to bridge the linkage for the further study.
After understanding the nature of auditing, student should try to link it with the basic concepts
in auditing i.e. Chapter 2 which deals with Concept of Auditor's Independence, Audit Evidence,
Concept of Materiality, Concept of True and Fair and Disclosure of Accounting Policies.
Student should refer SA 500 on Audit Evidence, SA 320 on Materiality in Planning and
Performing an Audit, SA 520 on Analytical Procedures and SA 505 on External Confirmations
etc. alongwith this chapter. The fair understanding of the chapter has its roots in the above
mentioned SAs. Hence, it is suggested that the students should understand the SAs
comprehensively.
The Chapter 3 requires the students to identify the major areas for preparation for an audit for
which they should refer SA 300 on Planning an Audit of Financial Statements, SA 220 on
Quality Control for Audit of Financial Statements, SA 230 on Audit Documentation etc. After
going through the text of these SAs the students can apprehend the chapter which deals with
Auditor's Engagement, Audit Process, Techniques, Procedure, Planning, Programme, Risk,
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 Continuous and Final Audit, Planning and Materiality, Audit Working Papers and Obtaining
Certificate from Management.
Chapter 4 is on Internal Control which deals with Concept, Environment, Inherent limitations,
Accounting and Financial Control, Internal Control - Management and the Auditor,
Relationship between the Assessments of Inherent and Control Risks, Internal Control and the
Computerized Information System (CIS) Environment, Internal Check, Internal Audit. To
comprehend this chapter the students should try to establish linkage with the SA namely 315
Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity
and its Environment, SA 330 on The Auditor's Responses to Assessed Risks, SA 610 Using
the Work of Internal Auditors etc. While answering to the questions of this chapter, students
should be analytical and objective, without losing focus on the statement.
Vouching and verification are very important chapters. While studying these chapters,
students should have knowledge of basics of an audit. Students should not stuff the steps for
vouching and verification. Instead they should apply their knowledge.
Vouching is discussed in Chapter 5 which deals with Audit of cash transactions, Audit of
Trading Transactions, Audit of Ledgers, Balance Sheet Audit and Analytical Procedures. The
general approach to study the chapter is to examine the existing internal control system in the
organisation. The appropriate ledger accounts involved, if any should also be scrutinized.
Further the vouching ends with the routine checking of the receipts and payments involved
and preparation of bank reconciliation statement.
Similarly the Verification of Assets and Liabilities is discussed in the Chapter 6. The main
aspects covered here include Capital and Revenue Expenditure, Depreciation, Reserves,
Verification of assets, Current Assets, Book-debts, Bank Balances, Cash in hand,
Miscellaneous Expenditure, Verification of Liabilities, Contingent Liabilities, Events occurring
after the Balance Sheet Date, Prior Period and Extraordinary Items and Changes in
Accounting Policies. The basic features to study involve existence, ownership, control, rights,
valuation, disclosure and presentation of the items involved. Further, student may interlink this
chapter with Guidance notes, Standards on Auditing and Accounting Standards.
The Chapter 7 - The Company Audit-I deals with Qualifications and Disqualifications,
Appointment, Remuneration, Removal, Powers, Duties of auditor, Ceiling on number of audits,
Audit Report, Audit of Branch Office Accounts, Joint Audit, Special Audit, Cost Audit and
Statutory Report. . For gaining the in depth knowledge of the subject the student should focus
on the various provisions of the Companies Act, 2013, and the reporting mechanism as
suggested by SAs in 700 series, and Statement on Reporting Under Section 227 (1A) of The
Companies Act, 1956.
The Chapter 8 - The Company Audit-II deals with General Considerations in a Company Audit,
Specific Provisions as regards Accounts in the Companies Act, 2013, Special requirements of
Company Audit, Audit of Share Capital, Option on Share Capital, Shares Transfer Audit,
Verification of Issue of Bonus Shares, Audit of Debentures, Audit of Dividends and
Presentation of Financial Statements. Again as contemplated by the chapter 7 the
requirements for understanding this chapter is same. Since the chapter deals directly with the
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 provisions of the Companies Act, 2013 the students should be very clear and concise in their
applicational attribute. They should avoid going round and round by harping on one or two
points repetitively in different ways. Instead they should reach the heart of the question and
explain the major features or matters in a logical point-wise manner with sub-headings for
each point and try to give a few examples in support of your reasoning.
The Chapter 9 Special Audits deals with Government Audit, Audit of Local Bodies, Audit of
Non-Governmental Organizations (NGO's) and Miscellaneous Audits. Students are expected
to study the procedure involved in various audits and try to establish the linkage with the
knowledge gained from other disciplines like accounting for audit of partnership firms in
learning the audit procedure. Further the students can relate their basic understanding while
going through the other audits like audit of schools, hotels, cinemas etc. The important points
in any audit include constitution, minute book, internal control, vouching of receipts and
payments, verification of assets and liabilities etc. The students should try to encapsulate the
procedures in various audits to command good holding of marks.
In general, students should in the first instance focus on studying Auditing concepts,
procedures and techniques from the study material. The knowledge gained from meticulous
study should be translated in the form of succinct notes. These notes may be accompanied by
the relevant proforma and diagrams so that at the later stages of preparation, the conceptual
knowledge underlying different topics may be gained within minimum time and minimum
efforts without going through a number of books again.
Students should also take a keen interest in updating themselves on contemporary
developments in the field of auditing by regularly referring to articles on Auditing in CA
Journal, Students' monthly Journal and other relevant professional journals, publications and
books.
Students may also scan through the Annual Financial Statements of Companies to analyse
the notes and qualifications, if any, incorporated by the Auditors in their Audit Report.

Happy Reading and Best Wishes!

© The Institute of Chartered Accountants of India

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 SYLLABUS

PAPER – 6: AUDITING AND ASSURANCE

(One Paper- Three hours -100 Marks)
Level of knowledge: Working Knowledge
Objective:
To understand objective and concept of auditing and gain working knowledge of generally
accepted auditing procedures and of techniques and skills needed to apply them in audit and
attestation engagements.
Contents:
1. Auditing Concepts ─ Nature and limitations of Auditing, Basic Principles governing an
audit, Ethical principles and concept of Auditor’s Independence, Relationship of auditing with
other disciplines.
2. Standards on Auditing and Guidance Notes ─ Overview, Standard-setting process,
Role of International Auditing and Assurance Standards Board, Standards on Auditing issued
by the ICAI; Guidance Note(s) on ─ Audit of Fixed Assets, Audit of Inventories, Audit of
Investments, Audit of Debtors, Loans and Advances, Audit of Cash and Bank Balances, Audit
of Miscellaneous Expenditure, Audit of Liabilities, Audit of Revenue, Audit of Expenses and
provision for proposed dividends.
3. Auditing engagement ─ Audit planning, Audit programme, Control of quality of audit
work ─ Delegation and supervision of audit work.
4. Documentation ─ Audit working papers, Audit files: Permanent and current audit files,
Ownership and custody of working papers.
5. Audit evidence ─ Audit procedures for obtaining evidence, Sources of evidence,
Reliability of audit evidence, Methods of obtaining audit evidence ─ Physical verification,
Documentation, Direct confirmation, Re-computation, Analytical review techniques,
Representation by management, Obtaining certificate.
6. Internal Control ─ Elements of internal control, Review and documentation, Evaluation
of internal control system, Internal control questionnaire, Internal control check list, Tests of
control, Application of concept of materiality and audit risk, Concept of internal audit.
7. Internal Control and Computerized Environment, Approaches to Auditing in
Computerised Environment.
8. Auditing Sampling ─ Types of sampling, Test checking, Techniques of test checks.
9. Analytical review procedures.

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 10. Audit of payments ─ General considerations, Wages, Capital expenditure, Other
payments and expenses, Petty cash payments, Bank payments, Bank reconciliation.
11. Audit of receipts ─ General considerations, Cash sales, Receipts from debtors, Other
Receipts.
12. Audit of Purchases ─ Vouching cash and credit purchases, Forward purchases,
Purchase returns, Allowance received from suppliers.
13. Audit of Sales ─ Vouching of cash and credit sales, Goods on consignment, Sale on
approval basis, Sale under hire-purchase agreement, Returnable containers, Various types of
allowances given to customers, Sale returns.
14. Audit of suppliers' ledger and the debtors' ledger ─ Self-balancing and the sectional
balancing system, Total or control accounts, Confirmatory statements from credit customers
and suppliers, Provision for bad and doubtful debts, Writing off of bad debts.
15. Audit of impersonal ledger ─ Capital expenditure, deferred revenue expenditure and
revenue expenditure, Outstanding expenses and income, Repairs and renewals, Distinction
between reserves and provisions, Implications of change in the basis of accounting.
16. Audit of assets and liabilities.
17. Company Audit ─ Audit of Shares, Eligibility, Qualifications and Disqualifications of
Auditors, Appointment of auditors, Removal of auditors, Remuneration of Auditors, Powers
and duties of auditors, Branch audit , Joint audit , Reporting requirements under the
Companies Act,2013, Other Important Provisions under the Companies Act, 2013 relating to
Audit and Auditors and Rules made thereunder.
18. Audit Report ─ Qualifications, Disclaimers, Adverse opinion, Disclosures, Reports and
certificates.
19. Special points in audit of different types of undertakings, i.e., Educational institutions,
Hotels, Clubs, Hospitals, Hire-purchase and leasing companies (excluding banks, electricity
companies, cooperative societies, and insurance companies).
20. Features and basic principles of government audit, Local bodies and not-for-profit
organizations, Comptroller and Auditor General and its constitutional role.
Note:
(i) The provisions of the Companies Act, 1956 which are still in force would form part
of the syllabus till the time their corresponding or new provisions of the
Companies Act, 2013 are enforced.
(ii) If new legislations are enacted in place of the existing legislations, the syllabus
would include the corresponding provisions of such new legislations with effect
from a date notified by the Institute.

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 CONTENTS

MODULE – 1
Chapter 1 - Nature of Auditing
Chapter 2 - Basic Concepts in Auditing
Chapter 3 - Preparation for an Audit
Chapter 4 - Internal Control
Chapter 5 – Vouching

MODULE – 2
Chapter 6 - Verification of Assets and Liabilities
Chapter 7 - The Company Audit-I
Chapter 8 - The Company Audit-II
Chapter 9 - Special Audits
Appendix: A Summary of the Significant Legal Decisions

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 DETAIL CONTENTS : MODULES – 1

Chapter 1 - Nature of Auditing

1.1 Introduction ............................................................................................................. 1.1
1.2 Definition of Auditing ............................................................................................... 1.3
1.3 Standards on Auditing ............................................................................................. 1.4
1.4 The Auditor ........................................................................................................... 1.11
1.5 Objectives of Audit ................................................................................................ 1.13
1.6 Basic Principles Governing an Audit ...................................................................... 1.32
1.7 Scope of Audit ....................................................................................................... 1.34
1.8 Inherent Limitations of Audit .................................................................................. 1.37
1.9 Auditing and Investigation ...................................................................................... 1.39
1.10 Types of Audit ....................................................................................................... 1.40
1.11 Advantages of an Independent Audit ...................................................................... 1.42
1.12 Relationship of Auditing with other Disciplines ........................................................ 1.43
Case Study ................................................................................................................... 1.45
Chapter 2 - Basic Concepts in Auditing
2.1 Concept of Auditor’s Independence.......................................................................... 2.1
2.2 Audit Evidence ........................................................................................................ 2.5
2.3 Concept of Materiality ............................................................................................ 2.23
2.4 Concept of True and Fair ....................................................................................... 2.25
2.5 Disclosure of Accounting Policies .......................................................................... 2.27
Chapter 3 - Preparation for an Audit
3.1 Auditor’s Engagement ............................................................................................. 3.1
3.2 Audit Process .......................................................................................................... 3.4
3.3 Audit Techniques..................................................................................................... 3.5

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 3.4 Audit Planning ......................................................................................................... 3.7
3.5 Audit Programme .................................................................................................. 3.10
3.6 Methods of work .................................................................................................... 3.15
3.7 Continuous and Final Audit .................................................................................... 3.15
3.8 Audit Planning and Materiality................................................................................ 3.17
3.9 The Overall Audit Approach ................................................................................... 3.18
3.10 Audit Working Papers ............................................................................................ 3.19
3.11 Quality Control for Audit Work ................................................................................ 3.26
3.12 Elements of Statistical Sampling ............................................................................ 3.29
3.13 Audit Risk.............................................................................................................. 3.39
3.14 Surprise Checks .................................................................................................... 3.45
3.15 Obtaining Certificate from Management ................................................................. 3.47
Chapter 4 - Internal Control
4.1 Concept of Internal Control ...................................................................................... 4.2
4.2 Understanding the Entity and its Environment, including the Entity’s
Internal Control ...................................................................................................... 4.3
4.3 Accounting and Financial Control ........................................................................... 4.10
4.4 Internal Control and Management .......................................................................... 4.11
4.5 Internal Control and the Auditor ............................................................................. 4.12
4.6 Review of Internal Control by the Auditor ............................................................... 4.12
4.7 Testing of Internal Control ..................................................................................... 4.16
4.8 Examination in Depth ............................................................................................ 4.18
4.9 Relationship between the Assessments of Inherent and Control Risks .................... 4.19
4.10 Communication of weaknesses in Internal Control .................................................. 4.20
4.11 Internal Control in the Small Business .................................................................... 4.21
4.12 Internal Control and the Computerised Information System (CIS) Environment ....... 4.21
4.13 Internal Check ....................................................................................................... 4.31

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 4.14 Internal Audit ......................................................................................................... 4.34
4.15 Relationship between the Statutory and the Internal Auditors ................................. 4.38
Chapter 5 - Vouching
5.1 Audit of cash transactions ........................................................................................ 5.2
5.2 Audit of Payments ................................................................................................... 5.7
5.3 Cash Receipts ....................................................................................................... 5.22
5.4 Verification of Bank Balance and Cash-in-Hand ..................................................... 5.30
5.5 Audit of Trading Transactions ................................................................................ 5.32
5.6 Audit of Purchases ................................................................................................ 5.38
5.7 Sales ................................................................................................................... 5.44
5.8 Cut-off Arrangement .............................................................................................. 5.47
5.9 Audit of Ledgers .................................................................................................... 5.48
5.10 Outstanding Liabilities ........................................................................................... 5.57
5.11 Outstanding Assets ............................................................................................... 5.58
5.12 General scrutiny of Expense Accounts ................................................................... 5.59
5.13 Income accounts ................................................................................................... 5.60
5.14 Asset Accounts ..................................................................................................... 5.61
5.15 Liabilities ............................................................................................................... 5.62
5.16 Balance Sheet Audit .............................................................................................. 5.62
5.17 Analytical Procedures ............................................................................................ 5.64
5.18 Direct Confirmation of Balances ............................................................................. 5.69

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