tybcom auditing notes

1. INTRODUCTION TO AUDITING
Prof. Dicksee defines the term as “ An examination of accounting records
with a view to establish whether they correctly & completely reflect the
transactions to which they purport to relate “.
Objectives : a) Reporting b) Detection & prevention of frauds & errors
Conclusion : The objective of auditing can further be extended depends
upon the specific terms of reference. In case of internal audit. The obj is
also examine whether the policies & procedures laid down by the top
management are properly adhered to. In case of audit by sole trade obj
may be to obtain bank loan, Insurance Claim etc.

2. WRITE SHORT NOTES ON FINANCIAL STATEMENT &
USER OF FINANCIAL STATEMENTS
• Statement of performance = profit and loss account;
• Statement of financial position = Balance Sheet;
• Statement of movement of funds = Funds Flow & cash Flow statements.
• Users of financial Statements :
Users Purpose
Management For day to day decision making & performance evolution.
Proprietor a) To analyze performance, profitability & financial Position.
shareholders b) Prospective Investors are interested in the track record of the company.
Lenders – Banks & financial To determine the financial position of the company , debt service , Coverage, etc.
institutions
Suppliers To determine the Creditworthiness of the company.
Customers To know the general business viability before entering into long term contract and
arrangement.
Goverments a) To ensure prompt Collection of Direct and Indirect Tax revenue
b) To evaluate performance and contribution to social objectives.
Research Scholars For study ; Research and analysis purposes.

3. WRITE SHORTNOTE ON INHERENT LIMITATIONS OF
AUDIT
• INHERENT LIMITATION of audit as per AAS – points out that the opinion
expressed the auditor is neither an assurance as to the future viability of
the enterprise nor efficiency and effectiveness with which management
has conducted affairs of the enterprise. This is bcoz the process of auditing
suffers from the following inherent limitations :
• A) Judgment.
• B) Nature of Evidence.
• C) Internal Control.
• D) Test Checking.

4. WHAT IS ERROR ? EXPLAIN DIFFERENT TYPES OF
ERRORS
• Innocent mistakes in bookkeeping & accountancy are called as ERRORS.
• An error can be defined as “ unintentional mis-statement or mis- description made
in the books of accounts or records”.
• Errors may be broadly classified into 2 categories :
CLERICAL ERRORS ERRORS OF PRINCIPLE
Errors of Omission. -
Errors of Commission. -
Compensating Errors. -
Errors of Duplication. -

5. WHAT IS FRAUD ? EXPLAIN ITS TYPES ?
• “The false representation or untrue entry made in the books of accounts,
intentionally or without belief in its truth with a view to defraud some
body”.
• All errors made intentionally are frauds as there is an intention to decieve
or to mislead the proprietors or somebody else. Fraud also includes willful
misrepresentation & an act to conceal the truth.
• Types : -
Misappropriation of cash or Misappropriation of Goods Fraudulent Manipulation of
embezzlement of cash. Accounts
When cash is received Issuing more quantity of Benefits of showing more
goods dn invoiced profits
When cash is paid Showing as damaged Benefits of showing less
profits

6. WRITE NOTES ON TEAMING N LADING
& WINDOW DRESSING
• It is a type of fraud in which the amount collected from the customer is misappropriated n
the amt subsequently received from another customer is used to conceal the amount so
misappropriated by crediting d amt to the earlier customers. (teaming and lading).
• Window dressing is an art of showing financial position of a company at much better level
than the existing one. A sound financial position is painted on the face of Balance Sheet by
concealing the actual state of affairs. In window dressing, assets are over – valued, liabilities
are under – valued and profit is overstated or if there is loss, it is understated.
• DIFFERENT WAYS OF DOING WINDOW DRESSING :
• Charging inadequate depreciation on fixed assets than actually required.
• Providing inadequate reserve for bad and doubtful debts.
• Charging revenue expenditure to capital account.
• Over – valuating closing stock at the end of the year.
• Showing actual liabilities are contingent liabilities.
• Showing fictitious credit sales and thereby over – valuating debtors.
• Showing fictitious assets.

7. PRINCIPLES OF AUDIT EVIDENCE
AUDIT • Audit evidence refers to any information, verbal or written, obtained by the
Auditor during the course of audit to arrive at the conclusion on which he
bases his opinion on financial statements.
Integrity , objectivity & • Need of audit evidence :
independence. • Judgment formation.
• Nature of evidence to be obtained.
Confidentially.
• Process of judgment based on evidences
Skills and competence. step PROCEDURES
Work preformed by others. 1 identify the assertion to be examined.
Documentation.
2 Evaluate the assertions as to their materially & relative importance.
Planning.
3 Collect d necessary information or evidence about the assertions.
Audit Evidence.
4 Analyze & evaluate the evidence into valid or invalid, relevant or
Accounting system and irrelevant, sufficient or insufficient, appropriate or inappropriate,
internal control. confirmatory of conclusive etc.
Audit conclusions & reporting 5 Formulate the judgment on financial statements as to the fairness if
assertions to be considered.
• Factors influencing audit evidence :
• Risk of misstatement.
• Materiality.
• Previous experience.
• Results of work.
• Information.
• Analytical reviews.

8. • Review and assess the conclusions drawn from the audit
evidence obtained from his knowledge :
• a ) The financial information has been prepared using
Size & nature of the business. acceptable accounting policies, which have been consistently
Adequate accounting system. applied;
• b ) d financial information complies with relevant regulations
Internal controls. & statutory requirements.
Different procedures. • c ) Adequate disclosure of all materials matters relevaNT
• An audit report should contain a clear written expression of
Evaluation of various internal opinion on the financial information & in the form or content
controls for greater likelihood of the report is laid down.
• Audit report is a means of communicating the results of an
of material misstatements. audit. This principle explains the various concepts relating to
an audit report.
Audit involves exercise of judgment
Unavoidable risk that some material
misstatements may remain undiscovered.
Cannot be relied upon the discovery of all
frauds or errors .
Material either individually or as a group.
Constraints.

9. A continuous audit is one in Balance sheet audit means verification of all the items
which audit works is carried out appearing in the balance sheet such as assets, capital
almost simultaneously with the reserves & liabilities of the business. Under the
recording of the transactions. balance sheet audit the auditor commence audit on
Under this, auditor visits his the basis of the balance sheet and he works back to
clients throughout the year is the books of original entry and other evidence bcoz
periodical intervals, which may be balance of profit & loss account appears In the balance
regular say monthly or two sheet. Thus, in balance sheet audit all the d items
monthly or weekly or fortnight. contained in d balance sheet and other related items
are verified completely.
Interim audit is one, which is
conducted between the two
annual audits in order to • Final audit is one which is undertaken at the
ascertain profit to declare close of the financial year when the final
interim dividend. It involves a accounts are ready. In annual or final audit visits
complete examination and his clients only once a year and the entire audit
review of the accounts and work is completed in one time ir in a single
records of business upto the uninterrupted session.
date of interim audit. It may be
ordered for six months.

10. QUALITIES OF AUDITOR
CONCURRENT AUDIT • Expert in fundamental principles and theory of
accounting.
• Knowledge of the company law and mercantile law.
Concurrent audit is a
• Knowledge of industrial management, financial
comprehensive, continuous
administration & Business Organisation.
and systematic examination of
• Honest & tactful and always exercise reasonable skill &
all transactions of an entity,
care in duty.
by a person other than
• Not adopt the attitude of suspicion.
involved in the operations, to
• Intelligent questions to his clients.
ensure accuracy , authenticity
& due compliance with the • Not influenced directly or indirectly.
internal systems, procedures • Not disclose secrets of his clients to others.
& guidelines. • Necessary courage and ability to write his report
correctly.
• Knowledge of the principles of economics and
INFERENCE : economic laws.
Concurrent audit is a • Possess a pleasing personality and other qualities like
management process and tact, judgment, self control, dignity and diligence.
looks into the establishment • Methodical, hardworking and accurate.
of sound internal functions • Knowledge of principles of accounting.
and effective control systems. • Possess knowledge of computer.

11. ADVANTAGES OF INDEPENDENT AUDIT
TRUE AND FAIR VIEW OR USE OF AUDIT ACCOUNT
AS PER THE SECTION 227(2) of • Protection of Interest.
the companies act, 1956 the
auditor of a limited company has • Moral Check.
to report to the shareholders • Tax Liability.
whether the accounts, give true
• Credit Negotiation.
and fair view.
1) In case of the balance sheet • Trade Dispute Settlement.
of the state of company’s • Control over Inefficiency.
affairs at the end of the • Funds in Trust.
financial year.
• Arbitration.
2) In case of the profit and loss
account of the profit or loss • Appraisal.
for the financial year. • Partnership cases.
section 209 (3) states that the • Assistance to Government.
books of accounts would be
so kept as are necessary to
give a true and fair view of
the state of affairs of the
company or its branch office,
as the case may be and to
explain its transactions.

12. GOING CONCERN MATERIALITY
THE GOING CONCERN IS THE • MATERIAL MEANS IMPORTANT OR ESSENTIAL.
BASIC IDEA THAT THE BUSINESS The convention of materiality is the common rule
WILL COONTINUE FOR A LONG followed by all accountants of separately
TIME, followed by all accountants,
recording and reporting the material details of
while recording and reporting the
business transactions. The going business transactions. Many business decisions
concern concept is known as the are based on the details available in the
concept of continuity. accounts. Material details mean details which
A business may be set up for a might influence a business decision. Thus what Is
particular work material depends upon the facts of each case.
Going concern concept assumes • Effect on Accounts.
that the business would continue • Recording only material details.
for a long time.
The accounts are kept on the
• Separate Record in Individual Accounts.
basis that business will go on and • Reporting only Material Details.
on and will not be closed down or
stopped in the near future.