Shashikumar A

Assistant Professor
Dept of Commerce & Mgt
Surana College
Unit-1 Introduction To Auditing 10Hr
Introduction – Meaning and Definition – Objectives– Types of Audits– Merits
and Demerits of Auditing – Relationship of audit with other disciplines.
Preparations before commencement of new audit - Working Papers -Audit
Notebook, Audit Programme. Qualities of an Auditor – Audit planning – Audit
strategy ––Audit Engagement -Audit
Documentation - Audit Evidence – Written Representation.

Origin and Evolution of Auditing

• The term audit is derived from Latin word ‘Audire’, which means to hear. In
early days an auditors used to the accounts read over by an accountant in order
to check them.

• Auditing is as old as accounting It was in use in all ancient countries such as

Greece, Egypt, Rome, UK. And India. The Vedas contain reference to account
and auditing.

• The original objective of auditing was to detect & prevent errors & Frauds.

• Auditing evolved and grew rapidly after the industrial revolution in the 18th
century.

• With the growth of the joint stock companies the ownership and management
became separate.

• The shareholders who were the owners needed a report from an independent
expert on the accounts of the company managed by the board of directors who
were the employees.

• The objective of audit shifted, and audit was expected to ascertain whether the
accounts were true and fair rather than detection of errors and frauds.

• In India the companies Act 1913 made audit of company accounts compulsory

• The Companies Act 1913 also prescribed for the first time the qualification of
auditors

• The later developments in auditing pertain to use of computers in accounting

and auditing.

1
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
• In conclusion it can be said that auditing has come a long way from hearing of
accounts to taking the help of computer to examine computerized accounts.
Meaning of Auditing:
Auditing is the systematic examination and verification of an organization's financial
records and statements to ensure accuracy and compliance with established standards
and regulations. It provides an independent assessment of the financial health and
integrity of the entity being audited.
Definition of Auditing:
Auditing is a systematic examination and expression of opinion on, the financial
statements of an enterprise as presented by those entities

- The Institute of Chartered Accountants of India

(ICAI)
“Auditing is an examination of accounting records undertaken with a view to
establish whether they correctly and completely reflect the transactions to which they
relate.”

- Prof. L R Dicksee
Who is Auditor
An auditor is a person authorized to review and verify the accuracy of financial
records and ensure that companies comply with tax laws.
Difference between Accounting & Auditing
“Auditing begins, where Accountancy ends”.

Accounting Auditing
Aspect

Definition Recording, classifying, summarizing, Independent examination of

and interpreting financial transactions. financial statements and
records.
Purpose To prepare financial statements and To verify the accuracy and
reports that accurately reflect the fairness of the financial
financial position and performance of statements prepared by
the business. accountants.
Timing Ongoing process throughout the Typically conducted after the
financial year. financial year ends or
periodically.
Responsibility Performed by the company’s Conducted by external or
accountants or financial department. internal auditors.

2
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Scope Focuses on day-to-day financial Focuses on the verification,
transactions and maintaining financial evaluation, and assessment of
records. financial statements and
internal controls.

Objectives of Auditing
Primary objective
As per Section 227/143 of the Companies Act, 1956/2013 the primary duty (objective)
of the auditor is as follows

1. Reporting on Financial Statements: The primary duty of the auditor is to

report to the company's owners (shareholders) on whether the Balance Sheet
gives a true and fair view of the company's financial position and whether the
Profit and Loss Account provides an accurate representation of the profit or
loss for the financial year.

2. Verification of the Accounting System: The auditor is responsible for

verifying the effectiveness of the accounting system in correctly recording
transactions. This involves ensuring that the transactions are properly recorded
and reflected in the financial statements.

3. Compliance with Accounting Standards and Statutory Requirements: The

auditor must ensure that the financial statements are prepared in accordance
with recognized accounting policies and practices, as well as statutory
requirements. The auditor should also lecture on whether the financial
statements comply with the applicable accounting standards.
Secondary Objectives
1. Detection and prevention of errors: Errors are mistakes
committed unintentionally because of ignorance or carelessness.
Types of Errors

a) Errors of Omission: Errors of omission occur when a financial transaction is either

entirely or partially omitted from the financial records. This means that a
transaction that should have been recorded is not recorded at all or only partially
recorded.

Example:

• If a company receives cash from a customer but fails to record the receipt in the
cash book.
3
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
• forgetting to record an invoice received for services rendered.

b) Errors of Commission: Errors of commission occur when a financial transaction is

recorded, but it is recorded incorrectly. This includes mistakes in figures, mis
posting, or entering transactions into the wrong accounts.

Example:

• If a payment of RS 5,00,000 is mistakenly recorded as Rs 5000 this is an error of

commission.
• if a purchase is recorded in the sales account instead of the purchases account.

c) Compensating Errors: it’s an error when one error has been compensated by an
offsetting entry that's also in error.

Example: the wrong amount is recorded in inventory and is balanced out by the
same wrong amount being recorded in accounts payable to pay for that inventory.

d) Errors of Principle: Errors of principle occur when a transaction is recorded in

violation of accounting principles. This happens when an incorrect accounting
treatment is applied to a transaction, often involving the wrong classification of
revenue, expense, asset, or liability.

Example: If a company records the purchase of a fixed asset (like machinery) as an

expense in the Profit and Loss Account instead of capitalizing it as an asset on the
Balance Sheet, this is an error of principle.

e) Clerical Errors: Clerical errors involve simple mistakes made in the manual
recording, totalling, or processing of financial data. These can be arithmetic errors,
errors in data entry, or mistakes in copying figures from one place to another.
Example:
• If a company's bookkeeper accidentally adds $200 instead of $2,000 to the total of
an account, this is a clerical error.

• if the digits of a number are transposed, such as entering $2,341 instead of $2,431.

2. Detection and Prevention of Fraud: A fraud is an error

committed intentionally to deceive/to mislead/to conceal the truth or material
facts. Frauds may be of three types.

a) Misappropriation of Cash: Misappropriation of cash occurs when an

individual (often an employee) illegally takes cash belonging to the company

4
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
for personal use. This is a common type of fraud that can significantly impact
the financial health of a business.

Example: If a cashier at a retail store collects $1,000 in cash from sales but only
records $800 in the company’s accounting records and keeps the remaining
$200 for themselves, this is misappropriation of cash.

b) Misappropriation of Goods: Misappropriation of goods involves the theft or

unauthorized use of the company’s inventory or other assets. This type of fraud
often occurs in industries with significant inventory or tangible goods.

Example: In a manufacturing company, if an employee takes home company

products (like electronics or tools) without permission and without paying for
them, this is misappropriation of goods.

c) Manipulation of Accounts (“Window Dressing”): Manipulation of accounts

involves deliberately altering financial records to present a misleading picture
of the company’s financial position. This can be done to inflate profits,
understate liabilities, or achieve other deceptive financial objectives.

Example: If a company’s management intentionally inflates revenue figures by

recording fake sales or delaying the recognition of expenses to make the
company appear more profitable than it actually is, this is an example of
account manipulation.

Types of Audits
On the basis of organizational structure of Business
1. Government Audit: A government audit is conducted on the accounts of
government agencies, departments, or public sector enterprises. It is typically
carried out by government-appointed auditors to ensure that public funds are
being used properly and in accordance with the law.

2. Private Audit: A private audit is conducted for privately-owned businesses,

such as private companies, partnerships, or sole proprietorships. The audit is
usually done by a private auditing firm to ensure that the business's financial
statements are accurate and comply with accounting standards.

3. Statutory Audit: A statutory audit refers to an audit conducted by an

independent auditor to ensure that a company's financial statements are
accurate and comply with relevant laws and regulations. It is a mandatory

5
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
requirement for public companies, banks, and other entities subject to specific
regulations.
Below are the different laws that govern them
a) Companies Act 2013: Incorporation of Joint Stock Companies
b) Banking Companies Regulation Act 1949: Regulations of Banking
Companies
c) Co-operative Societies Act 1959: Incorporation of Co-operative Societies
d) Religious and Other Endowment Acts: Incorporation of Public and
charitable trust

On the basis of Practicability/Conduct of an audit work

1. Continuous/ Detailed Audit: A continuous or detailed audit is one where the
auditor examines the company’s financial transactions on a regular basis
throughout the year.

The main objective of Continuous audit is to ensure that errors and frauds are
detected quickly and that the financial records are always up to date.

2. Periodical/ Final Audit: A periodical or final audit is conducted after the end
of the financial year. The auditor reviews the entire year’s financial transactions
at once and issues a final report on the company’s financial statements.

The main objective of Periodical audit is to provide a comprehensive review of

the company’s financial position at the end of the year.

3. Interim Audit: An interim audit is carried out during the financial year, often
at intervals like halfway through the year. It’s like a preliminary check before
the final audit.

The main objective of Interim audit is to identify and correct any issues before
the year-end, and to provide early feedback on the company’s financial health.

4. Partial Audit: A partial audit focuses on only specific areas or accounts of the
business rather than the entire financial statements.

To review particular aspects of the business that may need special attention,
such as cash handling or inventory management.

Example: A company might request a partial audit to focus solely on its

inventory management, particularly if there were issues with stock levels in the

6
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
past. The auditor would then only examine inventory records and controls,
rather than the whole financial statement.

5. Cost Audit: A cost audit examines the company’s cost records to ensure that
costs are recorded accurately and that the company is managing its expenses
efficiently.

To verify that the costs associated with production or services are correct and
that there’s no waste or inefficiency.

6. Tax Audit: A tax audit is an examination of the company’s tax returns and
records by the tax authorities or an appointed auditor to ensure compliance
with tax laws.
To verify that the taxes reported and paid by the company are accurate and that
there are no discrepancies.

7. Balance Sheet Audit: A balance sheet audit focuses specifically on the items
reported in the balance sheet, such as assets, liabilities, and equity, to ensure
they are correctly stated.

To confirm the accuracy of the company’s financial position as reported in the

balance sheet.

8. Management Audit: A management audit evaluates the efficiency and

effectiveness of the company’s management practices and organizational
structure.

To assess how well management is achieving the company’s goals and using
its resources.

Merits of Auditing
Business Point of View
1. Detection of Errors & Fraud: Auditing helps in identifying mistakes or
fraudulent activities in financial records. This ensures that the company's
financial statements are accurate.

Example: Imagine a company's accountant accidentally records a $10,000

expense as $1,000. An audit would catch this mistake, ensuring the company’s
financial records are correct.

7
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
2. Helps in Loan Formalities: Audited financial statements are often required by
banks before they approve a loan. It provides lenders with confidence that the
company’s finances are in good order.

Example: A small business looking to expand might need a loan. The bank will
likely ask for audited accounts to verify the company's profitability and ability
to repay the loan.

3. Builds Reputation: Regular audits show that a company is transparent and

committed to accurate reporting, which enhances its reputation among
stakeholders.

Example: A business that consistently presents audited financials may gain

trust from investors and customers, leading to more business opportunities.

4. Proper Valuation of Assets: Auditors ensure that a company’s assets are

correctly valued on the balance sheet, preventing overstatement or
understatement.

Example: A company owns several machines. An audit helps ensure these are
valued accurately, reflecting their true worth rather than an inflated or deflated
amount.

5. Government Acceptance as it Facilitates Taxation: Audited accounts are often

accepted by tax authorities, making the process of filing taxes smoother and
more credible.

Example: A company that has its financial statements audited is less likely to
face issues during tax assessments since the figures have already been verified
by an independent auditor.

Investor’s Point of View

1. Protects Interest: Audits give investors’ confidence that the company's financial
statements are accurate, safeguarding their investments.

Example: An investor reviewing the financial statements of a company before

investing will feel more secure if the statements are audited, as it reduces the risk
of inaccuracies.

2. Moral Check: Regular audits act as a deterrent against unethical behaviour within
a company because employees know their actions could be scrutinized.

8
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Example: Knowing that an audit is likely, a manager might avoid engaging in
fraudulent activities, like inflating sales figures, because they know it will be
checked.

3. Proper Valuation of Investments: Audits help ensure that the value of

investments, such as stocks or bonds, is correctly reflected in the financial
statements.

Example: An investor in a company receives audited reports showing that the

company’s stock value is based on genuine financial performance, helping them
make informed decisions.

4. Good Security: Auditing provides assurance that the company’s financial systems
and controls are secure, reducing the risk of financial losses.

Example: An investor is assured that the company has strong internal controls in
place, minimizing the risk of financial mismanagement.

5. Updated Position of Accounts Available Then and There: Auditing ensures that
financial records are kept up to date, providing a clear picture of the company’s
financial position at any given time.

Example: Investors can rely on the latest audited reports to assess the current
financial health of a company before making investment decisions.

Other Advantages of Auditing

1. Evaluates Financial Status: Auditing provides a clear and accurate assessment of
a company’s overall financial condition.

Example: A company’s audited financial statements reveal its profitability, debt

levels, and cash flow, giving stakeholders a comprehensive view of its financial
health.

2. Listing of Shares/Payment of Dividend: Companies often require audited

accounts to list their shares on stock exchanges or decide on dividend payments to
shareholders.

9
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Example: A company looking to go public will need audited financials to list its
shares, ensuring potential investors that the company’s finances are legitimate.

3. Settlement of Claims and Settlement of Accounts: Audited accounts provide

reliable data, which can be crucial when settling disputes or claims, such as in cases
of mergers or acquisitions.

Example: During the acquisition of a company, audited financials ensure that both
parties agree on the value of assets and liabilities, facilitating smoother
negotiations.

4. Facilitates Calculation of Purchase Consideration: In business transactions like

mergers or acquisitions, audited accounts help in determining the fair purchase
price of a company.

Example: When one company buys another, the audited financial statements help
in deciding how much the buyer should pay for the acquisition based on the true
value of the company.

5. Evidence in Court as Audited Accounts are Treated as Authentic Records of

Transactions: In legal disputes, audited financial statements are considered
credible evidence because they are verified by an independent auditor.

Example: If a company is sued for financial misrepresentation, its audited accounts

can be used in court to prove the accuracy of its financial reporting.
Demerits of Auditing
1. High Cost: Auditing can be expensive, especially for small businesses, as it
requires hiring professional auditors.

Example: A small bakery may have to spend a significant portion of its budget
on auditing services, which could be a financial burden compared to larger
companies.

2. Time-Consuming: Auditing can take a long time, which might delay important
business decisions until the audit is complete.

Example: A company wanting to launch a new product might have to wait until
the audit is finished before proceeding, potentially missing out on market
opportunities.

10
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
3. Dependence on Auditor's Competence: The quality of the audit depends on the
skill and honesty of the auditor. If the auditor is not systematic, errors might go
unnoticed.

Example: If an inexperienced auditor overlooks a critical mistake in the financial

records, the company could make decisions based on incorrect information.

4. Potential for Disruption: The auditing process can disrupt the daily operations
of a business, especially if employees need to spend time assisting the auditors.

Example: Employees in a retail store might have to pause their usual work to
gather documents and information for the auditors, affecting the store's
efficiency.

5. False Sense of Security: Sometimes, businesses might rely too heavily on the
audit results, assuming that an audit guarantees everything is perfect, which isn’t
always the case.

Example: A company might ignore other signs of financial trouble because they
assume the audit would have caught any issues, leading to potential problems
down the road.
Preparation before Commencement of Audit
1. Understand the Business Environment: Before starting an audit, it's crucial to
understand the business environment in which the organization operates. This
includes knowing the industry, market conditions, competitors, and the
company’s internal processes and systems.

Example: If you are auditing a retail company, you should be familiar with the
retail industry's trends, such as online shopping, customer preferences, and supply
chain challenges. You also need to understand the company’s internal systems like
inventory management and sales tracking.

2. Review Previous Audit Findings: Reviewing the findings from previous audits
helps in identifying recurring issues, areas of improvement, and the effectiveness
of past recommendations.

Example: If a previous audit revealed that a company had issues with inventory
accuracy, this area should be revisited to see if improvements have been made or
if it remains a concern.

3. Define Audit Objectives & Scope: Clearly defining the objectives and scope of the
audit ensures that the audit team focuses on the right areas. Objectives outline
what the audit aims to achieve, while the scope specifies the boundaries of the
audit, including what will and will not be examined.
11
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College

Example: For a financial audit, the objective might be to verify the accuracy of the
financial statements, and the scope could include checking the revenue, expenses,
and compliance with accounting standards.

4. Engage with Key Stakeholders: Engaging with key stakeholders, such as

management, employees, and other relevant parties, is essential to gather insights,
understand concerns, and ensure that everyone is on the same page regarding the
audit process.

Example: Before starting the audit, you might meet with the company’s CFO to
discuss the audit plan, understand any concerns, and ensure that the finance team
is prepared to provide the necessary documents.

5. Develop a Risk Assessment: A risk assessment helps identify and prioritize the
areas where the organization is most vulnerable. This allows the audit team to
focus on high-risk areas where issues are more likely to occur.

Example: In a manufacturing company, you might identify the risk of production

delays due to supply chain disruptions as a high-risk area, which would then
receive extra attention during the audit.
6. Allocate Resources Effectively: Allocating resources effectively means assigning
the right people, time, and tools to the audit. This ensures that the audit is
conducted efficiently and within the set timeline.

Example: If the audit involves complex IT systems, you might allocate a

specialized IT auditor to handle that part, ensuring that the audit team has the
expertise needed for that area.

7. Plan for Unforeseen Challenges: Planning for unforeseen challenges involves

anticipating potential issues that could arise during the audit and developing
contingency plans to address them.

Example: If the audit is conducted in multiple locations, you might plan for
possible travel delays or access issues by building extra time into the audit
schedule and having remote access options available.

8. Ensure Compliance with Ethical Standards: Ensuring compliance with ethical

standards means that the audit is conducted with integrity, objectivity, and
confidentiality. This is essential for maintaining the credibility and reliability of the
audit findings.

12
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Example: If the audit team discovers a conflict of interest where an auditor has a
personal relationship with a client employee, they must disclose it and take steps
to ensure that it does not affect the audit’s objectivity.

Audit Procedure: An audit procedure involves a series of steps auditors take to

examine and verify a company's financial records and operations. It typically occurs
in two main phases:
Audit Procedure involves two phases:
1. Audit planning is the initial phase of the audit procedure, where the
groundwork is laid for the entire audit process. This phase involves preparing
for the audit by setting objectives, identifying risks, gathering information
about the organization, and creating a detailed audit plan.
Key Activities in Audit Planning:
• Understanding the Business: Gathering information about the organization’s
industry, operations, and internal controls.

• Risk Assessment: Identifying areas where there might be a higher risk of errors
or fraud.

• Defining Scope and Objectives: Clearly outlining what the audit will cover and
what it aims to achieve.

• Resource Allocation: Assigning the right team members and tools to different
parts of the audit.

• Engagement with Stakeholders: Communicating with key personnel to discuss

the audit plan and expectations.

Real Audit Work: The real audit work is the execution phase where the audit plan is
put into action. This phase involves collecting evidence, analysing data, and
conducting various audit tests to ensure that the financial statements are accurate and
reliable.

a) Vouching: Vouching is the process of checking and verifying the authenticity of

the entries recorded in the books of accounts. This involves tracing the entries back
to the source documents, such as invoices, receipts, and contracts.

Example: If the company has recorded a sale in its books, the auditor will check the
corresponding invoice and delivery receipt to ensure that the sale actually took place
and is recorded correctly.

b) Valuation and Verification of Assets: Valuation and verification involve

checking that the assets listed in the financial statements are correctly valued and
13
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
actually exist. This process ensures that the assets are not overstated or
understated.

Example: If the company has listed a building as an asset, the auditor will verify the
ownership documents, check the current market value, and physically inspect the
building to confirm that it exists and is valued correctly.

c) Reporting: Reporting is the final step in the audit process, where the findings are
compiled, and an audit report is prepared. The report includes the auditor's
opinion on whether the financial statements present a true and fair view of the
organization’s financial position.

Example: After completing the audit work, the auditor will issue an audit report,
which may include an unqualified opinion (if everything is in order), a qualified
opinion (if there are some issues), or an adverse opinion (if there are significant
problems with the financial statements).

Audit Planning
"Audit planning" means developing a general strategy and a detailed approach for
the expected nature, timing and extent of the audit. The auditor plans to perform the
audit in an efficient and timely manner.

Planning is required to complete the audit effectively within the specified time. Audit
planning is a process of deciding in advance

- what is to be done.

- who is to do it

- how it is to be done.

- when it is to be done by the auditor in order to have efficient and effective completion
of work.
Benefits of Audit planning
1. It helps the auditor obtain sufficient appropriate evidence for the circumstances:
Proper planning allows the auditor to know exactly what kind of evidence they
need to gather. This helps ensure that the evidence is reliable and relevant to the
audit.

Example: Imagine an auditor is reviewing a company’s sales records. By planning,

they know they need to collect invoices, receipts, and customer confirmations. This
ensures they have enough proof that sales are recorded correctly.

14
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
2. It helps to keep audit costs at a reasonable level: When an audit is well-planned,
the auditor can be efficient in their work, which helps reduce unnecessary
expenses.

Example: If an auditor knows in advance which documents they need to review,

they can focus on those specific areas instead of spending extra time and money
looking at irrelevant records.

3. It helps to avoid misunderstandings with the client: Clear communication during

planning ensures that both the auditor and the client are on the same page about
what the audit will involve.

Example: Before starting the audit, the auditor discusses the audit plan with the
client, explaining which areas will be reviewed and why. This avoids surprises
later on, like the client asking, "Why are you checking this? I didn’t know it was
part of the audit!"

4. It helps to ensure that potential problems are promptly identified: Planning

allows the auditor to spot areas where there might be issues early on, so they can
address them before they become bigger problems.

Example: During the planning stage, the auditor might notice that the company
has recently changed its accounting software. They can then focus on checking if
the transition was handled correctly to avoid any errors in the financial records.
5. It helps to know the scope of the audit program by an auditor: Planning helps
the auditor clearly define what areas and activities will be included in the audit.

Example: If a company operates in multiple locations, the auditor decides during

planning whether to audit all locations or just a few. This helps them understand the
full scope of their work.

6. It helps to carry out the audit work smoothly and in a well-defined manner: A
well-planned audit follows a clear structure, which makes the entire process more
organized and efficient.

Example: With a detailed plan, the auditor knows which tasks to complete first,
like verifying cash balances before moving on to inventory checks. This ensures
the audit progresses logically without confusion.

Process of Audit Planning: According to the international standard of auditing (ISA),

an audit plan should be based on an overall audit strategy. Process includes the
following procedures.

15
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College

1. Understand the client’s operations: This including how they get funding, legal
rules they follow, and any risks they face.

2. Development of audit strategies or overall plan (who, when and how): Plan
who will do the audit, when it will happen, and how it will be done.

Example: deciding which team members will audit specific areas and setting
timelines.

3. Preparation of audit programmer: Create a detailed checklist of tasks for the

audit, ensuring all important areas are covered.

Example: listing steps to verify all major financial transactions of the company.

Audit Strategy
An audit strategy is a plan that guides how an audit will be done, including when it
will happen, what areas it will cover, and how resources will be managed. It helps
auditors respond to risks effectively and ensures the audit is completed efficiently.
Contents of audit Strategy

• Significant Risks: This section highlights the biggest risks in the audit, like fraud
or errors, and explains how auditors will address them.
Example, if there's a risk of incorrect revenue reporting, auditors will closely check
all sales records.
2. Materiality: This sets the thresholds for what amounts are big enough to affect
decisions, like only focusing on errors above $10,000.
Example, if a $500 mistake is found, it might be ignored if it’s too small to
matter.

3. Deliverable and Timetable: This outlines when the audit work will be done
and what documents will be provided.
Example: the final audit report might be scheduled for delivery by the end of
October.

4. Independence: This shows how auditors stay neutral and unbiased during the
audit.

Example: auditors avoid any business ties with the company they are auditing
to keep their judgment clear.

16
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College

5. Audit Approach and Scope: This details the methods and rules auditors follow
and whose work they trust.

Example, auditors might rely on the internal auditor's reports if they are
proven reliable.

6. Audit Engagement Team: This names the key people leading the audit, like
the audit manager and team leader.

Example, the team leader ensures the audit follows the plan and is completed
on time.
7. Overview: This summarizes the auditors’ main duties, like giving an opinion
on the company’s financial statements.

Example, auditors may state if the company’s records fairly reflect its financial
position.

Importance of audit strategy

• This method sets an audit engagement's scope.

• It establishes the requirements concerning documentation for the audit
methodology.
• Sets the correct audit approach.
• it establishes the audit's timeframe.
• This allows auditors to arrange and manage the audit correctly and efficiently.

Audit Strategy vs Audit plan

Aspect Audit Plan

Audit Strategy
Scope Provides a broad overview of the audit Details the specific procedures
approach. and tasks to be performed.
Timeframe Developed at the beginning of the audit
Developed after the strategy
process.
and updated as the audit
progresses.
Focus Focuses on step-by-step actions
Focuses on overall goals, objectives, and
and methods to achieve the
direction.
strategy.

17
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Audit Engagement
An audit engagement is a formal arrangement between an auditor and a client to
perform an audit. It involves agreeing on the scope, objectives, and terms of the audit
work. The engagement ensures that the auditor evaluates the client's financial
statements or operations according to agreed standards. It establishes the
responsibilities of both parties and outlines how the audit findings will be reported.

• Planning: Develop a detailed audit plan outlining the scope, objectives, and
methodology. This step ensures that the audit is organized and aligned with the
client's needs and regulatory requirements.

• Risk Assessment: Identify and evaluate potential risks that could affect the
financial statements or audit process. This helps focus the audit efforts on areas
with higher risk and ensures effective use of resources.

• Testing: Conduct tests to gather evidence on the accuracy and reliability of

financial information. This includes checking transactions, balances, and
compliance with accounting standards.

• Evaluation of Internal Control: Assess the effectiveness of the client's internal

controls to prevent and detect errors or fraud. Strong controls reduce the risk of
misstatements and enhance the reliability of financial reporting.

• Communication: Maintain clear and ongoing communication with the client and
audit team throughout the engagement. This ensures that issues are addressed
promptly, and all parties are informed about the audit progress.
• Reporting: Prepare and present an audit report summarizing findings,
conclusions, and recommendations. This report provides stakeholders with an
independent assessment of the financial statements and internal controls.

Types of Audit Engagement

• Financial Statement Audit: Examines the accuracy and fairness of a company’s

financial statements to ensure they reflect true financial performance and position.
This audit is typically conducted by external auditors.

• Compliance Audit: Assesses whether an organization is following laws,

regulations, and internal policies. This ensures adherence to external requirements
and internal controls.

18
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
• Operational Audit: Evaluates the efficiency and effectiveness of an organization’s
operations and processes. The focus is on improving operational performance and
resource utilization.

• Information System Audit: Analyses the controls, security, and reliability of an

organization's IT systems. It ensures that information systems are secure, reliable,
and aligned with business objectives.

• Internal Audit: Conducted by an organization’s own audit team to assess internal

controls, risk management, and governance processes. It aims to improve internal
operations and ensure compliance with policies.
Audit Documentation
Audit documentation refers to the records and working papers that auditors create
during an audit. These documents provide evidence of the audit work performed,
support the auditor's conclusions, and ensure that the audit complies with
professional standards. They also serve as a reference for future audits and help
maintain transparency and accountability.
Audit Evidence
Audit evidence refers to the information auditors collect to support their conclusions
about the accuracy and completeness of an organization's financial statements. It
includes documents, records, observations, and confirmations that help verify the
truthfulness of reported figures. The quality and sufficiency of audit evidence are
crucial for forming a reliable audit opinion.
Relevance and Reliability
Relevance in Audit Evidence: Relevance means that the evidence directly relates to
the specific audit objective or question being addressed.

Example, if an auditor is verifying the value of inventory, the evidence should directly
show how much the inventory is worth.

Reliability in Audit Evidence: Reliability refers to the trustworthiness of the

evidence. Reliable evidence is accurate, credible, and can be depended on to form a
conclusion.

Example: a signed contract from a supplier is more reliable than an informal email
confirmation.
Written Representation in Audit

• A Written Representation in an audit is a formal statement provided by the

management of a company to the auditors.

19
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
• In this statement, management confirms that they have provided all the
necessary information and that the financial statements are accurate and
complete to the best of their knowledge.
• It serves as a form of assurance to the auditors that the information they are
auditing is trustworthy.
Audit Notebook
An Audit Notebook is a detailed record maintained by an auditor during the audit
process. It includes notes on important observations, issues, and questions that arise
while examining the company’s financial records and operations. The notebook serves
as a reference for the auditor to ensure all aspects of the audit are thoroughly reviewed
and documented.

Audit Notebooks includes 2 types of information those are as follows

General Information to be Recorded in the Audit Notebook
1. Business Nature and Key Documents: Understand the type of business and
review key documents like

• Memorandum of Association and Articles of Association for companies,

• Partnership Deed for partnership firms, along with other legal documents.

2. Client and Audit Year: Note the client’s name and the specific year for which the
audit is being conducted.
Example
Client Name: Tata Consultancy Services

Audit Year: 2023-2024

3. Books of Accounts: List all the accounting books used by the business, like
ledgers, journals, and cash books.

4. Key Officers: Identify the main officers in the business, along with their roles and
responsibilities.

5. Accounting and Financial Systems: Understand the accounting system, financial

procedures, and internal checks that the business follows.

6. Accounting and Financial Policies: Gather details about the accounting and
financial policies the business uses, such as how they value assets or recognize
revenue.

Example: Asset Valuation methods: the cost approach, the market approach, and
the income approach etc.

20
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
7. Audit Program: Keep a copy of the audit plan that outlines the steps and
procedures for the audit.
Special Matters to be Recorded in the Audit Notebook
1. Unresolved Queries: Record any routine questions that haven’t been
answered, like missing receipts or vouchers.

2. Errors Found: Note any mistakes or errors discovered during the audit.

3. Important Issues: Highlight issues that need the auditor’s attention, such as
the company not following legal requirements or the rules in its key
documents.

4. Key Extracts: Include important excerpts from meeting minutes, contracts, or

communications with government agencies, banks, customers, and suppliers.

5. Audit Report Points: List the issues that should be included in the final audit
report.

6. Further Clarifications Needed: Note any areas that need more explanation,
like changes in how inventory is valued or how depreciation is calculated.

7. Audit Dates: Record when the audit started and when it was completed.

8. Future Reference: Document important matters that might be useful for future
audits.

9. Final Accounts Considerations: Highlight special points that need to be

considered when preparing the final accounts.

21
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Audit Working Papers
Audit Working Papers are the documents auditors prepare and collect during an
audit to record their findings, evidence, and procedures. These papers support the
auditor's conclusions and provide a basis for the audit report. They ensure
transparency, accuracy, and compliance with auditing standards.
Purpose of Audit Working Paper

• Record of Work Done: They keep a clear record of all the work done during
the audit, showing what was checked and how it was checked.

• Support for Conclusions: They provide evidence to back up the auditor's

conclusions, ensuring that decisions are based on solid facts.

• Communication Tool: They help communicate findings to other team

members and supervisors, making sure everyone understands what was
found.

• Future Reference: They serve as a reference for future audits, helping to

compare past and present situations.

• Proof of Compliance: They show that the audit was done according to the
required standards and procedures, proving that the audit was conducted
properly.
Audit files
Audit files are like organized folders or digital documents where auditors keep all the
important papers and notes related to an audit. These files help the auditor track what
they’ve checked, what they’ve found, and how they’ve reached their conclusions.
Current Audit File:
1. Copy of accounts or statements under review.

2. Audit program and details of audit tests performed.

3. Minutes of meetings with directors, shareholders, or trustees.

4. Queries raised during the audit and official responses.

5. Letters confirming accounts, stock valuation, and provisions.

6. List of missing vouchers.

7. Bank reconciliation statements.

8. Computation of tax, bonus, and gratuity.

22
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Permanent Files:
1. Certified copy of the company's Memorandum and Articles of Association, or
partnership trust deed.

2. Copy of relevant statutory or legal regulations.

3. Brief note on the business nature and office/factory locations.

4. Copy of client's instructions for non-statutory audits.

5. List of important books of accounts and registers maintained by the client.

6. List of company directors and their other affiliations.

7. List of officials, their roles, and organizational chart.

8. Details of holding and subsidiary companies.

9. Description of internal control and audit systems.

10. Statements on stock valuation, work in progress, and depreciation.

The files must be preserved and should be kept up-to-date periodically.

Difference between Audit Files, Audit Notebook, Audit Working Papers

Aspect Audit Files Audit Working

Audit Notebook
Papers
Purpose Record of work done in Detailed notes and Detailed
each audit observations by the auditor documentation
supporting audit
conclusions
Type Permanent and current Informal and personal, Structured,
files with structured often handwritten or typed detailed
documents. notes. documentation
used to
substantiate audit
findings
Content Documents related to Notes on audit procedures, Evidence,
the specific audit year observations, and queries calculations, and
analyses used in
audit
Scope Includes finalized Includes auditor’s personal Includes detailed
reports, minutes, and notes and ongoing records of evidence
correspondence observations and analysis
Retention Kept up-to-date and Typically kept as long as Kept as part of the
preserved for future necessary for the audit audit file for
reference reference

23
Shashikumar A
Assistant Professor
Dept of Commerce & Mgt
Surana College
Usage For record-keeping and For auditor’s personal use To support audit
review by other auditors and reference opinions and
conclusions
Examples Accounts, audit Notes on client discussions, Copies of invoices,
program, minutes of preliminary findings bank statements,
meetings tax computations

Other Aspects of Audit

Audit Tick: An audit tick is a mark or symbol used by auditors to indicate that they
have reviewed and verified a specific entry or document. It helps keep track of what
has been checked during the audit.

Routine Checking: Routine checking involves reviewing common or regular

transactions and processes to ensure they are correct and follow standard procedures.
It focuses on the usual day-to-day activities of the business.

Test Checking: Test checking means examining a sample of transactions or records

rather than reviewing everything. This approach helps auditors assess the accuracy
and reliability of the financial information without inspecting every single item.

24