UNIT 11 AUDITING 4 N D REPO~~TING

Structure
1 1 .I Introduction
11.2 Objectives
11.3 Audit: Concept and Objectives
11.4 Types of Auditing
1 1.5 Techniques of Auditing
11.6 Audit Report
1 1.7 Audit Programme
1 1.8
1 1.9
Information and Communication Technology and Au ltlng
Let Us Sum Up r
1 1.10 Unit-end Exercises
1 1 .I 1 References and Suggested Readings
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11. INTRODUCTION I

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In Unit 10 we have discl~ssedabout the maintenance of ac ounts'in schools. In this
unit we shall study about auditing. It is rightly said that where t e work of the accountants
ends, from there the work of the auditors begins. While ac ounting involve$ proper
recording of financial transactions, auditing involves their yerification and reporting
about the findings. We shall therefore study what 'auditing' deans, why it is necessary,
about the types of auditing and about the techniques involved in auditing.

11.2 OBJECTIVES 1.
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After studying this unit, you should be able to:
understand the concept of auditing;
develop awareness abput the types of auditink;
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comprehend the techniques of auditing;
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a discuss about an audit programme; and l
o appreciate the application of Information and Commu ication Technology (ICT)
in auditing.
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11.3 AUDIT: CONCEPT AND OBJE~TIVES

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The word 'audit' is derived from the Latin word 'nudire', bhich means 'to hear'. In
ancient times the owners of business houses used to certain persons with
expertise in this area and hear about the accounts these experts had
checked them. However this was not done in a a regular way but
whenever the businessmen felt the necessity checked and in
case frauds, misappropriations, etc., were them. Later on with
industrialization and busiRess getting including the
government getting involved
safety of their money and this
and auditing them. I I

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Econonlic Efficiency and Schoals are also enterprises althaugh they are not supposed to function as profit making
Educational Effectiveness
organizations. However financial transactions take place even in schools in a full-
fledged manner, Inflow of funds and their spending requires accounting and thereafter
auditing of the accounts. In case of schools the government or private funding agency(s)
and often parents, tao are investors and hence stakeholders. Hence it is required to
get the school accounts audited.
The original objective of audit was mainly to check if the r ~ e i p t ands payments of
cash had been properly accounted for. Detection of financial embezzlement was another
major objective of auditing. Hence mainly the cashbooks were audited. But modem
auditing is principally done to see whether the accounts maintained exhibit a correct
view of the state of affairs regarding the finances of the school and if the necessary
guidelines regarding them have been adhered to. Today in auditing detection of fraud
is'incidental and not the sole motive of this process. School audit thus involves
examination of all the accounts that would enable the auditor(s) to judge if a true and
fair view of the state of financial affairs of the school is revealed through the financial
statements. It involves the thorough examination of the books of accounts and other
financial records such as documents, vouchers, etc. so as to confirm or support the
correctness of the entries in the books (accounts) of an organisation say, school (Tandon,
' 1978).
Audit is an instrument of financial control. It acts as a safeguard on behalf of the
proprietor(s) (govemment/funding agency) against extravagance, carelessness or fraud
on the part of the proprietors' agents or servants (in our case employees of the school,
responsible for maintaiiling the school accounts) in the realization and utilization of the
funds or other assets. An audit also ensures that the accounts maintained truly represent
facts and that expenditure has been incurred with due regularity and propriety. All
these are done with the help of experts called 'auditors', (ICWAI study material,
Paper 11).
Thus we see that auditing is concerned with a systematic examination of financial
statements and related operations of the organization, which in this case happens to be
a school. It aims at the verification of financial records (accounts) and reporting about
it in a formal manner. Besides checking the veracity of the financial statements, auditing
is also done to determine whether there has been adherence to the generally accepted
accounting principles.
Auditing thus involves not only checking the arithmetical accuracy of the books of
accounts but also helps to determine the veracity of the records of the transactions
that have been entered. This requires scrutinizing the vouchers, pay orders, and other
documents supporting the records maintained. Now you have an idea about auditing.
Is it somewhat like policing or canying out investigations?In schools, school inspectors
and auditors are held in awe. To many of us auditors like police investigators come
only to detect frauds. But auditing is not synonymous with investigating. Investigation
is carried out only on the basis of a suspicion about fraud. Following investigation the
suspicion may be ruled out or be proved. But auditing is routine affair with fraud
detection being incidental. It should not be confused with policing.
An auditor is not supposed to be a detective or approach hislher work with suspicion
or with forgone conclusions or prejudices. He is a watchdog but not a bloodhound.
(Obiter dicta of Lord Justice Lopes quoted by Tandon, 1978). Therefore, as a school
head, just as you need to have an open mind about the supervision of the various
functions of the schools, similarly auditing too should be welcomed as a necessary
activity. \

Who can audit? '

Now let us study about the persons whom the school could entrust with the duty of i
auditing. The schools are by statute, supposed to engage auditors through the terms of
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a formal contract, which is binding for both parties. The with the auditor must Auditing and Reporting
clearly state the tasks expected, the terms of payment when the report must
be completed and submitted. An auditor should ngt vested interest in the
school andlor the governing body of the school. be appointed by the
governing body of the school.

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After the contract has been signed, the school head must submit to the auditor all
accounts, records, books and other necessary docuqents to acilitate their work. Oral
evidence besides the wrirten ones required by the aylditors t facilitate their work has
also to be provided. Inspection of assets if considereid neces. ary by the auditors has to
be permitted. Thorough knowledge of the school's financial for instance,
regulations, principles, policies and practices, mecharlisms
etc. on the part of the school head will greatly facilitate
The auditors, by virtue of their position, have the right
and hence documents and explanations as they
auditing.have to be provided. (Commonwealth
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Activity I
From a recognized private school and a' government chool, find out about
the agency carrying out audit for the school. What is basis of choosing
them ?

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to have expertise in their field. It is not khat any rson with the necessary
academichackground can be asked to do the job. The gui elines laid down by the
school authorities for choosing auditors must be followed. &n auditor has to be well
versed in the fundamental principles and theories of adcounting and the latest
developments in this field. Slhe has to possess the nedessary alifications and training.
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Objectives of Audit I
So far we have discussed that auditing is done main1 k and ensure the veracity
of the accounts maintained. The auditor has to:
check the arithmetical accuracy of the entries the books of account
verify the entries with reference to source doculments sdch as invoices, purchase
orders, etc.
Rigorous auditing can lead to the detection of ven fraud as discussed
below (Tandon, 1978).
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i) Detection of Errors I

Errors are usually unintentional. But they are hot always unintended mistakes.
At times fraudulent intentions can also lead to eh-rors. S me of the common types
of errors are:
a) Clerical Emor: Committed in posting, totalling d balancing. Such errors
may be of two types:
(i) Errors of Omission: Such errors dccur n a transaction has not
been recorded in the book of olly orptdrtially. Careful

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observation can detect records of sales1
purchases are entirely omitted from entry the the trial balance remains
unaffected and the omission goes undetected. It is a method tiy which
cashlgoods are misappropriated. Vouching o purchases and checking
stock books can help in detection of/such e rors. For instance, if the
sale proceeds of old furniture of theschool :,re not entered then trial
balance may not be affected but thdre could be misappropriation of
funds.
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Economic Efficiency and (ii) Error of Commission: When an entry is made in a wrong way. For
~dui!ational Effectiveness
example, if a purchase invoice of Rs. 107 1 is entered as Rs. 1701, it
will create a lot of difference. Other errors of commission are mistakes
in calculations, postings, carrying forward, etc. Non-agreement of the
trial balance can detect some of them.
b) Errors of Principle: Such errors arise when entries are not recorded
according to the fundamental principles of accountancy. For example, wrong
allocation of expenditure between capital and revenue are such errors of
principles. Such errors may affect even the balance sheet.
c) Compensating Errors or Offsetting Errors: This type of error is counter
balanced by another error(s). Such errors are not detected by trial balance.
For instance instead of teacher A, if in teacher B's account a sum is posted
then in the trial balance the error would not be detected.
d) Errors of Duplication: When an entry in a book of original entry is made
twice and is posted twice, errors of this type are made.

ii) Detection and Prevention of Fraud

Embezzlement of Cash: The work of one employee if checked by another
minimizes chances of fraud and this is called internal check. Omitting entry
of cash received or entering lesser amount than that actually received,
making fictitious entries or more amount, on the payment side of the cashbook
have to be checked. Checking the debit side of the cashbook w ~ l hthe rough
cash book and other original records and reference to vouchers, wage sheets,
salary books, invoites etc., can detect fraud.
Falsification of accounts: This is done by showing fictitious sales or
purchases, under or over valuation of assets and liabilities, etc. and need to
be checked.
As a.school head you should be cautious of the malpractices resorted to by unscrupulous
employees, which on detection by auditors will make even the school head answerable.
Awareness about the commonly made errors can also help the school head while slhe
goes through the accounts before the auditors detect them.

1 Activity 2 I
Collect information from five schools to find out if there.were errors in
accounting tlzat were detected during auditing.

Advantages of Audit: The school head needs to be aware of the advantages of

audit and should consider it as a tool-for efficient financial management. Some of the
advantages are:
Errors and frauds are detected at an early stage by regular audit of the accounts
of the school.
The personnel of the school maintaining the accounts would perform vigilantly
and carefully if there are watchdogs i.e., auditors who would check the accounts
maintained by them.
Government authorities generally accept the income and expenditure accounts
and balance sheets that are duly audited.
Loans for the school can be obtained from financial institutions on the basis of
previously audited balance sheets.
Accounts maintained during a financial year can be compared to the audited
accounts of the previous year if the need arises.
On technical points the school head may even seek the advice of the auditors.
 Auditing and Reporting
Activity 3
From the heads of your neighbouring schools find iJ they are averse to
audit ol' look forward to it. ~ s them
k the

Check Your Progress 1 43 .

Note: Answer each of the following questions briefly.

1. What are the advantages of auditing?

What sort of persons should the managemeet hire a auditors?

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What are the common types of errors that an audit r can detect?
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Can the fear of auditing minimize fraud in s+hools? ustify your views.
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What is meant by 'true and fair' picture of the financ'al affairs of the school?
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11.4 TYPES OF AUDITING \
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Now that you know about the advantages of auditing, let us study about its types.
Auditing is of two types - External Auditing and Internal A diting. In this section we
shal! discuss these two types of auditing.
t External Auditing: External Auditing is done by financial expertise
ie., professional qualification and training. They are connection with

. the school. They are hired by'the governing body of

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sign a contract with them before they start functioning.
External auditing gives an independent report on the financ'al position of the school.
External auditors verify the accounts and carry out a thor ugh perusal, and ensure
that a true and fair picture of the financial state of the sc 001s is revealed. Besides
verifying the arithmetic accuracy in the accounts maintaine ,they also compare them
with the original documents like vouchers, pay orders etc., o check if correct entries
have been made.
Thus external auditing helps to ensure the reliability of
carried out periodically. It is a statutory obligation to gct
in the government schools.
Internal Auditing: Internal auditing is an activity,
of the school. It is one of the important functions of
regular and meticulous checking of the statements
i the school. It is done more frequently than

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Econornic Efficiency and control system, the other part being Internal Checking, about which we shall discuss
Educational Effectiveness
later.
The Institute of Internal Auditors of USA defines Internal Auditing as an independent
appraisal activity carried out within an organization for the review of operations as a
service to the management. It is thus a managerial control, which functions by measuring
and evaluating the effectiveness of other controls. The school authorities use internal
auditing as a tool to check if the other control measures exerted in financial management
such as proper accounting procedures are functioning or not. Internal auditing is thus
to be carried out on a continuous basis.
, Internal auditing is a sort of monitoring or supervising the functioning of the personnel
of the school. who are incharge of maintaining the school accounts. It thus aims to
promote efficiency in the school's financial control and management. It ensures that
financial transactions are carried out in accordance with the budgetary guidelines and
the policy framework within which the school functions.
'Internal auditing broadly encompasses the following areas:
(i) Checking the reliability of the financial and other relevant types of information
recorded.
(ii) Safeguarding the financial and other assets of the school and checking iP there
has been compliance with the policies, plans, rules and procedures set by the
governing body of the school. I ,

(iii) Ensuring the economic and efficient use of resources of the school.
The school authorities have to clearly spell out the fuhctions,responsibilities and authority
of the internal auditors. Internal auditors should have direct communication with the
governing body and should convey the findings on a continuous basis and highlight the
points that merit the attention of the school authorities. It ensures efficacy in managing
school funds while external auditing evaluates if accepted principles, practices and
statutory provisions of carrying out and especially in recording of financial transactions
have been followed. Besides, it is desirable that irregularities are pointed out during
internal auditing than by external agencies is.
Now let us study another tool for exerting internal control over financial, resources. .
This is called internal check.

Internal Check
The school head should have an inbuilt system of checking the accounts and preventing
errors and manipulations through a system of Internal check. Under this system work
done by one employee gets automatically checked by another employee and the
probability of fraud and especially of error get minimized. Let us study this with the
help of the following illustration.

Illustration
In a school the payment 3f d a r y is made in the follow~ngmanner. A prepares the Pay
Bill. B checks the calculations and makes entry in therecords. C authorizes the payment.
D releases the payment in cashlcheque.
From this itlustration we see that there is division of labour and instead of one person,
Inany are invoked in carrying out a particular financial transaction. Internal check
system helps in the following manner:
To specifically identify the person responsible for a particular error, default, etc.,
and thus helps in fixing responsibilities.
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To confirm facts and entries from multiple sources
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records.
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To facilitate the breakdown of routine procedbre so a1 to minimize bottlenecks
and establish an even flow of work.
To minimize the possibilities of fraud and errdrs.

Prepure a report on the system oj' internal cohtrol th

altd itztenzul check of h school.

What is then the difference among

Through Internal check the work
another while the work is still on
done by one, the other steps in
school are involved unlike in
audit and internal check are
so that there is supervision

Let us now study the techniques of auditing. The basic

auditor collects evidences for forming an opinion abaut the
to as the techniques of auditing. Which technique is to
propositions (aspects) to be reviewed and the nature
connection with the propositions. These techniquesare
to keep pace with innovations in maintaining accounts
organizational complexities. Some of the techniqufs
internal uuditing

and external audit'?

gets checkeg by
work has been

through which the

position are referred
depends upon the

Physical examinationlverification: Auditors mdy physi ally inspect the tangible

assets of the scliool. For instance the stocks, equibments,
physically verified. Physical examination includes identific
and to a certain extent also the evaluati~nof the'quality
Examination of documents
available in

of the school may be

counting (assessing)

orddbooks of accounts:
Auditing and Reporting

Documentary evidences are their appropriateness,

authenticity, authorization, whether rec6rding been followed, etc.
Authenticity refers to the genuineness of the document is genuine
only a legitimate
I or faked. Appropriateness implies that such
transaction that has been carried out by implies that the
evidence contains the necessary

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Confirmation: Written statements and certificate4 may be procured from competent
independent parties regarding certain transactions, if the a ditors require them.

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Recomputation: An auditor can check the figures bf the fi ancial records/statements
by repeating the arithmetic calculations involved. This is mainly done to verify the
arithmetic accuracy in the records maintained.
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Retracing bookkeeping procedures: Postings from the books of prime entry are
traced to ledgers or fresh trial balances of various ledgers re prepared. The auditors
thus repeat a number of bookkeeping procedures.
Inquiry: In order to get relevant information the aqditors ay raise queries. Normally
predetermined questionnaires are used. I I
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Scanning: An account or a book of original entry is scanded to find out whether the
transaction follows a logical pattern or something 1s unusu$l.
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Economic Efficiency and Flow Charting: Auditors may prepare anduse flow charts that depict graphically the
Educational Effectiveness
various activities, controls and stages of the system, to analyse the system and evaluate
its effectiveness.
Analysing financial statements: Analysis of financial statements by correlating
various transactions or figures with each other is done. The harmony or consistency
of the accounts as a whole can thus be checked.
Correlation with related information: An auditor may reconcile the accounting
figures with a related account or a piece of information. For example, total fees received
in a school may be verified by reconciling with the fees that should be collected from
the number of students enrolled and the fees they actually pay.
These are some of the techniques adopted for auditing. But a school head would not
be carrying out audit, then why is it important for himlher to be aware of these
techniques? This is because awareness of these techniques will help the school head
-to ensure the proper and effective functioning of internal auditors and also help him1
her respond to the requirements of the external auditors.

Activity 5
A school has $1 student strengtlz of' 3,000. Teaching and non-teaching stajr
total up to 200. Internal auditing besides external audititzg is carried out
regularly. W11atare the reasons .fbr which the school head has to be aware of
( the teclzniques qf u~,ditirqg? I

11.6 AUDIT REPORT

After auditing has been carried out through examination and evaluation of the financial
records, the auditors have to prepare a report comprising their findings and views.
The audit report is thus the end product of every audit carried out. It serves as the
medium through which the auditors express their opinion about the financial affairs of
the school.
An auditoton failing to obtain sufficient information or access to records may mention
it as the reason for hislher inability to provide a true and fair view of the financial
situation. The auditor's opinion may be qualified, unqualified or adverse depending
upon the state of the accounts maintained and other evidences examined. Qualified
opinion indicates certain reservation(s) of the auditor about the financial situation of
the school.
On the other hand an unqualified opinion in the report indicates a positive and
satisfactory situation. Adverse reporting as is understood,indicates dissatisfaction
about the financial situation. An audit report points out in writing the following (Financial
Management, Commonwealth Secretariat, 1 993):
a Weakness (es)/strength(s) in the accounting system of the school
a Deficiency(s) in the financial control system
a Inadequacies in the financial policies and practices
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m Non-compliance with accounting standards and legislations.
The report also explains implications of the. above points and gives advice/
recommendations for improvement. One of the main schedules in an audited report is
the balance sheet, which is a summary statement of all assets and liabilities of the
school at the date of the report in reference.
 Auditing and Reporting
Activity 6
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Study an audit report of a school and find out th queries raised about

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the hooks of accounts.
(ii) Critically evaluate the report for its strengths an weaknesses.
(iii) Does it indeed reveal a true and fair of the finuncial situations
of the school? Discuss critically.
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In response to the queries raised by the auditor, the school may take the following
steps:
Submit further information (evidences) on the which queries
have been t'aised and respond satisfactorily
Give access to assets of the school to the

all the accounts books to the trial balance.

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In the trial balance check the figures, calculatians, debt rs and creditors, entry of

Consider taking steps like reviewing assets against liabil ties, writing off bad debts
etc.
Going over the cashbook and other financial d~cumentand financial statements
to reach the errors and frauds that have been pointed o t by the auditor and take
corrective actions.
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Activity 7 I

In the last activity you have gone through an dudit redort. Now find out how

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the queries were answered by the school head. In case there were no queries,
you may ask the school head about tlze audit queries th t are generally raised.
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11.7 AUDIT PROGRAMME

An audit programme is a comprehensive outline of the steps/brocedures to be followed
in the verification of the financial records of the school. It isa guideline of the work to
be performed and helps to ensure that requisite woq'k in the oncerned areas has been
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accomplished. I
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Audit programme is prepared in advance. It should clear1 state the objectives and
instructions for the different areas to be covered. Work to be performed by the

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members of the team is also planned in advance and tnention d in the audit programme.
An audit programme will obviously be prepared by extern 1auditors but as a school
head you should be aware of its importance for audjting sin+einternal auditing would
be carried out in your school and preparing an audiit progra me in advance would be
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helpful.
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Specimen of school audit programme tan don,^ 1978).

Let us now study a specimen of school audit progrgmme. e programme is not to be
taken rigidly since it has to be specific to the a particular school.
To examine the by'laws, rules and regulatiohs, trust (deeds, etc., of the school.
Rules regarding accounting merit special attehtion.
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To study the minutes of the meetings of the govbrning b y of the school regarding
financial issues. . ~
vis-a-vis students' registers.
Fees not recoverable. to be written off and abthorizdion thereof.
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To check the fees received with reference td counte oils of the receipt books
Economic Efficiency and Examine if outstanding fees or those received in advance are accounted for.
Educational Effectiveness
To ascertain the system of recovery of fines, late fees etc.
To examine the receipt of funds from different sources and their accounting.
Receipt from admission fees to he compared with admission forms duly signed
by the school head.
Examine records pertaining to freeships.
To vouch grants from the government by examining the relevant correspondence.
To check that caution money and security deposits are shown on the liability side
of the balance sheet.
To vouch the payment of salaries with reference to pay roll register, bank book
and bank'statement. Increments in salary if sanctioned have to be checked. For
this reference may be made to copies of letters of appointmentlagreement.
To vouch the capital expenses to see that necessary sanction of the governing
body is there besides verifying records and doing physical inspection
To see that internal check system regarding purchases is efficient.
To see that grants/donation/money raised for a particular purpose is spent
accordingly.
To verify the. stocks and assets, their maintenance and records. To verify records
relating to recurrent expenses
Amount relating to provident fund is invested according to the provident fund
rules and guidelines provided to the school.
To see that income tax is deducted from the salary of the staff wherever it is
necessary.
This is not an exhaustive list but a broad specimen as every school has a unique
situation. Hence the items to be verified may differ.
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Activity 8
Find outfrom the Audit Programme of a school, the items to be verified.

11.8 INFORMATION AND COMMUNICATION

TECHNOLOGY (ICT)AND AUDITING
Under this section we shall discuss two aspects:
, Use of Computer as Audit Tool
Computer ( I ~ T Auditing
)
You know that today with every field getting invaded by Information and Communication
Technology (ICT), management of schools remains no exception. Hence it is necessary
for the school head to be acquainted with these issues. Let us first discuss about the
use of computer as a tool for audit.

Computer as a tool for audit

Auditors nowadays often use computers for carrying out audit. Many software have
inbuilt data analysis facilities. For instance some softwares have the facility for tracing
out dependencies between cells, sorting data ranges, etc. Database programmes even
have custom report facilities to help the process of auditing i.e. data can be processed
and various types of reports can be prepared with the help of the facility in built in the
software.
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For auditing computers can be used for purposes such as:
Checking arithmetical computations
Analyzing, comparing and summarizing data
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Auditing and Reportlng

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By statistical sampling techniques, transactions may be elected and verified.
Besides navigation from data under one head to another or f m one date to another
becomes easy.

Computer Auditing -
Computer Auditing is also called system/ software auditing o I c T auditing. Here the

the auditors. It is a branch of auditing and peruses computer systems and 1

computer instead of being used as a tool for auditing, itself is he target of scrutiny by

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networks so as to examine the effectiveness of their technical nd procedural controls.
This is done to ensure that the system has not been tamper d with intentionally or
unintentionally while maintaining financial records.
A system through which financial data is recorded and proce sed, if programmed in a 1
manner, which would lead to errors, then the computetized da maintained, would not
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be authentic: Due to the increasing use of computerization and etworking of computers,
computer auditing is also required to minimize errors and that may occur by
tampering with the programme used.

Activity 9
Prepare a questionnaire and collect informatiori from sample of 50 school
heads and senior teachers to assess the& awareness ut the use of ICT for
auditing as well as auditing ICT and whether tlisy internal uuditing.

Check Your progress 2

Note: Answer each of the following questions bri$fly.
1. Explain the types of auditing. I
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2. Why is internal auditing necessary?
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3. Explain what is meant by internal check system
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4. Explain the role of ICT as a tool for auditing.

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Economic Efficiency and
Educational Effectiveness