Auditing

A N I T A .
INTRODUCTION TO AUDITING
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Economic decisions in every society must be based
upon the information available at the time the decision
is made. Unreliable information can cause inefficient
use of resources to the detriment of the society and to
the decision makers themselves.
As society become more complex, there is an
increase likelihood that unreliable information will be
provided to decision makers.
Introduction

Introduction
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There are several reasons for this:
1. Remoteness of information.
2. voluminous data and the existence of complex exchange
transactions.
As a means of overcoming the problem of unreliable
information, the decision-maker must develop a method of
assuring him that the information is sufficiently reliable for
these decisions. In doing this he must weigh the cost of
obtaining more reliable information against the expected
benefits.

Introduction
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A common way to obtain such reliable information
is to have some type of verification (audit) performed
by independent persons. The audited information is then
used in the decision making process on the assumption
that it is reasonably complete, accurate and unbiased.

Origin And Development
The term audit is derived from the Latin term
‘audire,’ which means to hear.
In old days whenever proprietors suspected a fraud
or error, certain people were appointed to hear
verbal evidence of transaction. (in barter system)
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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 original objective of auditing was to detect and
prevent errors and frauds.

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In India the companies Act 1913 made audit of company
accounts compulsory. With the increase in the size of the
companies and the volume of transactions 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.
Hence the emphasis was not on arithmetical
accuracy but on a fair representation of the financial
efforts the companies Act 1913 also prescribed for the
first time the qualification of auditors.

Conclusion
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The later developments in auditing pertain to the use of
computers in accounting and auditing.
In conclusion it can be said that auditing has come
a long way from hearing of accounts to taking the help of
computers to examine computerized accounts.

Meaning of Audit
 An official inspection of an organization's accounts,
typically by an independent body.
"audits can't be expected to detect every fraud"
 conduct an official financial inspection of (a
company or its accounts).
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Definition
 An unbiased examination and evaluation of the
financial statements of an organization. It can be
done internally (by employees of the organization) or
externally (by an outside firm).
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Definition
 Auditing refers to a systematic examination of
books, accounts, documents and vouchers of an
organization to ascertain how far the financial
statements present a true and fair view of the
concern.
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Definition
 ISA (International Standard of Auditing)
“ An Audit is the independent examination of financial
statement or related information of an entity, whether
profit oriented or not, and irrespective of its size, or
legal form, when such an examination is conducted
with a view to expressing an opinion thereon”
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FEATURES OF AUDITING
a. Audit is a systematic and scientific examination of the books of
accounts of a business;
b. Audit is undertaken by an independent person or body of persons
who are duly qualified for the job.
c. Audit is a verification of the results shown by the profit and loss
account and the state of affairs as shown by the balance sheet.
d. Audit is a critical review of the system of accounting and internal
control.
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Features of Auditing
e. Audit is done with the help of vouchers, documents,
information and explanations received from the
authorities.
f. The auditor has to satisfy himself with the authenticity
of the financial statements and report that they exhibit
a true and fair view of the state of affairs of the concern.
g. The auditor has to inspect, compare, check, review,
scrutinize the vouchers supporting the transactions and
examine correspondence, minute books of share
holders, directors, Memorandum of Association and
Articles of association etc., in order to establish
correctness of the books of accounts.
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Differences Between Auditing And
Accounting
 Accounting is related to the collection, recording, analysis and interpretation of financial
transactions but auditing refers to the examination of books of accounts along with the
evidential documents. So, following differences can be shown between auditing and
accounting:
1. Meaning
 Accounting is the act of collecting, recording, analyzing and interpretation of financial
transactions but auditing is the act of examination of books of accounts and evidential
documents, so as to prove the true and fair view of profitability and financial position.
2. Beginning Of Work
 Work of accounting begins when financial transactions take place but work of auditing
begins when work of accounting ends.
3. Scope
 Accounting prepares profit and loss account and balance sheet and other statements as
per the instruction of auditor but auditor checks the books of accounts considering their
fairness as well as complying with the provision of company act or not.
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Differences Between Auditing And
Accounting
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4. Nature Of Work
 Accounting keeps the record of financial transactions but auditor
checks and verifies the books of accounts.
5. Staff
 An accountant is a staff of an organization and draws the salary from
the business but an auditor is an independent person who is appointed
for specific period and gets a sum of remuneration.
6. Preparation Of Report
 An accountant does not prepare report after the completion of his task
but he has to give information to the management when needed but
auditor needs to prepare and present report after the completion of his
work to the concerned authority.
7. Responsibility
 An accountant remains responsible to the management but an auditor
is responsible to the owners or shareholders.

Accounting vs Auditing
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Accounting Auditing
1. It’s a continuous process carried out
throughout the year.
1.It’s a one time activity after the closure of accounting
year.
1. No prescribed qualification is required to be
an accountant.
2. He must be the member of Institute of Chartered
Accountants of Pakistan to become an auditor.
1. An accountant is a employee of the company. 3. An auditor is an independent professional.
1. An accountant gets regular salary for his
work.
4. He gets remuneration for his professional work. Audit
fees.
1. Accounting is concerned with recording of
business transactions systematically.
2. Accounting precedes, auditing.
5. Its concerned with verification of accounts prepared by
the accountant.
6. Auditing succeeds accounting.

Qualities required in an Auditor
 Professionally Competent :-
It is a basic quality of an auditor. He must have a complete and thorough knowledge
of the accountancy. To understand the accounting details he can apply his
knowledge and skill. It is only possible if he has a sound background in accountancy
and he is professionally competent.
2. Honest :-
It is also very important quality of an auditor. Justice Hindley says "An auditor must
be honest. He must not certify what he does not believe to be true and he must take
a reasonable care and skill before he believes that what he certifies is true.
3. Auditing :-
An auditor's knowledge of auditing must be upto date. He must know the techniques
of auditing. He must have the knowledge of other subjects relating to auditing.
4. Accounting Knowledge :-
The auditor should be at home in all the management accounting cost accounting
and general accounting.
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5. Knowledge Of Business Law :-
6. Knowledge Of Taxation Law :-
7. Computer Expert :-
8. Knowledge Of management System
9. Preparation Of Budget
10. Intelligent
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11. Qualification :-
For a professional auditor it is necessary that he should be charted accountant.
According to companies ordinance it is essential qualification for auditor.
12. Tactful :-
In a particular situation auditor should deal tactfully. He should ask the questions in
such a manner that it does not show about his ignorance or weakness.
13. Maintain Secrecy :-
The auditors nature of work is confidential. He should maintain secrecy from others
about the affairs of his client.
14. Patience :-
There should be a quality of patience in the auditor. Before signing on any paper he
should check the evidence and then sign it. He never checks the papers in hurry.
15. Critical Attitude :-
It is also very essential quality of the auditor. He should examine the statements
critically. He should ask the various questions from the client and try to find
contradictions.
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16. Bold And Courageous :-
Auditor should be bold and courageous person. He should not be influenced
by any authority. He should possess the courage to face the difference of
opinion between him and client on any issue.
17. Courteous :-
It is an important quality which the auditor should possess. His attitude
towards the staff of client should be very humble and polite. He should also
stress on his own staff to be courteous with the client.
18. Independent :-
The auditor should be impartial. He should not have such relations with the
organization which may affect his independence. He should give his opinion
independently.
19. Common Sense :-
The auditor must have the quality of common sense and judgement. He may
be able to assess the value of depreciation and bad debts.
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Objectives of Auditing.
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Auditors are basically concerned with verifying whether the
account exhibit true and fair view of the business. The objectives
of auditing depends upon the purpose of his appointment.
 Primary Objective.
 The primary objective of an auditor is to respect to the
owners of his business expressing his opinion whether
account exhibits true and fair view of the state of affairs of
the business. It should be remembered that in case of a
company, he reports to the shareholders who are the
owners of the company and not tot the director. The auditor
is also concerned with verifying how far the accounting
system is successful in correctly recording transactions. He
had to see whether accounts are prepared in accordance
with recognized accounting policies and practices and as
per statutory requirements.

Objectives
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 Secondary Objective:
Detection and prevention of errors:
Errors are mistakes committed unintentionally because of
ignorance, carelessness. Errors are of many types:
 Errors of Omission: These are the errors which arise on account of
transaction into being recorded in the books of accounts either
wholly partially. If a transaction has been totally omitted it will not
affect trial balance and hence it is more difficult to detect. On the
other hand if a transaction is partially recorded, the trial balance will
not agree and hence it can be easily detected.
 Errors of Commission: When incorrect entries are made in the
books of accounts either wholly, partially such errors are known as
errors of commission.
Eg: wrong entries, wrong Calculations, postings, carry forwards etc
such errors can be located while verifying.

Objectives
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 Compensating Errors: when two/more mistakes are
committed which counter balances each other. Such an error is
know an Compensating Error. Eg: if the amount is wrongly
debited by Rs 100 less and Wrongly Credited by Rs 100 such a
mistake is known as compensating error.
 Error of Principle: These are the errors committed by not
properly following the accounting principles. These arise
mainly due to the lack of knowledge of accounting. Eg:
Revenue expenditure may be treated as Capital Expenditure.
 Clerical Errors; A clerical error is one which arises on
account of ignorance, carelessness, negligence etc.

ERRORS
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Errors are mistakes committed unintentionally because of
ignorance, carelessness on the part of those responsible for
the preparations of the accounts, while fraud involves some
intention to gain out of manipulating records. .
Types of Errors:
Errors of
Omission
Errors of
Commission
Compensation
Errors
Errors of
Principles

Errors of Omission
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 Errors of omission generally arise due to the mistake
of a clerk.
Example: If a transaction has been omitted from being
entered in the books of accounts, wholly or partially.
Goods sold worth Rs.500 to Mr.X was not recorded in
sales book in Mr. X’s account. It is complete
omission.

Errors of Commission
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 When the amount of transaction is incorrectly
recorded in books, it is known as error of
commission.
 Examples
a. Recording of less or more amount than actual in
journal
b. Recording one transaction twice
c. Errors of addition or subtraction

Compensation Errors
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 When two or more errors conceal (hide) the mutual
effects from disclosed in Trail Balance.
Example: A’s account which was to be debited for
Rs.200 was credited for Rs.200
Compensation errors will not affect the trail balance
and such will not be detected easily. Hence their
detection requires a complete and exhaustive
preparation on the part of an auditor

Errors of Principles
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 There are certain definite principles of recording and
posting of business transactions in the books of
accounts. If something is recorded in violations of
these principles , it is called as Errors of principles.
 Example: Recording a capital expenditure as a
revenue expenditure.
1. Provision for inadequate or excess depreciation.
2. Non-provision of depreciation.
3. Under and over valuation of stock.

Frauds
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Fraud is really a false representation or entry which is
made always intentionally with some mischievous
objectives.
FRAUDS
Fraud of cash
Fraud of goods
Fraud of assets
Misappropriation of amenities
Fraud of labour
Manipulation of accounts

Auditors Duty
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 An auditor should check the internal check system in
force and examine its working in practice.
 He should ensure how far the accounting principles
have been followed in recording business
transaction.
 He has to see that the accounts have been drawn in
conformity with Companies Act
 Finally he should check that the Balance sheet
exhibits a true and fair view of the state of affairs

Advantages of Audit
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 Audited account are detected as an authentic record of
transaction.
 Errors and frauds are detected and rectified.
 It increases the morale of the staff and thus it prevents
frauds and errors.
 Because of his expertise the auditor may advise on various
matters to his clients.
 An auditor acts as a trustee of his shareholders. Hence he
safeguards their financial interest.
 For taxation purpose auditing of account is amust.
 In case of any claim is to be made from the insurance
company only audited account should be submitted.

Advantages of Audit
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 Even in case of partnership firm auditing of
accounts helps in the settlement of claim at the
time of retirement/death of a partner.
 Auditor account helps in managerial decisions.
 They are useful to secure loan at the of
amalgamation, absorption, reconstruction etc.
 Auditing safeguards the interest of owners,
creditors, investors, and workers.
 It is useful to take certain financial decisions like
issuing of shares, payment of dividend etc.

Types of Audit
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AUDIT
According to
organization
al structure
From Practical
point of View

Organization Structure
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According to
Organization
Structure
Statutory
Audit
Private
Audit
Government
Audit
Internal
Audit

Statutory Audit
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STAUTORY
AUDIT
COMPANY
AUDIT
AUDIT OF TRUSTS
AUDIT OF OTHER
INSTITUTIONS

Statutory Audit
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 In case of many undertaking, audit is made
compulsory under statue. It is so because these
undertakings are established by statute. The audit of
their accounts is termed as statutory audit.
Company Audit:
The audit of the accounts of companies in Indian
Companies Act, 1913 made it legally compulsory for
companies in India to get their accounts audited by
an independent professional accountant, but now
companies Act 2013 have made tremendous changes.

Audit of Trusts
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 Trusts are usually created for the benefit of the weak
and helpless persons like widows, minors etc, who
are not in a position to access to understand the
accounts of such trusts. The trustees are made
responsibility to look after the property and to
maintain accounts.

Audit of other Institutions
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 After companies and trusts, there are other corporate
bodies, such as electricity and gas companies, banks
and insurance companies, and other corporate public
bodies which have been formed under their
respective statutes.
 The audit of co-operative societies is conducted by
the Co-operative Department of the State
Government.

Private Audit
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 The institutions which are private in character also
get their accounts by some qualified auditors. Such
as an audit is not required by statute. Hence it is
known as private audit. These bodies have their own
arrangements for audit and run for their own
interest so that their accounts may be scrutinised by
professional accountant.
 Audit of the accounts of sole trader
 Audit of the accounts of the partnership firm.
 Audit of the accounts of other individuals and
institutions.

Audit of the accounts of sole trader
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 The appointment of an auditor rests absolutely on
the proprietor.
 He is appointed under an agreement.
 An auditor must get clear and unambiguous
instructions in writing by his client as to what he has
to do and how he has to proceed.
 This is necessary because the auditor can be held
responsible for charge of negligence and by
producing the agreement, he can protect himself.

Audit of the Accounts of Partnership Firms
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 An audit of the accounts of such a firm is always in
the interests of the partners.
 Auditor is appointed by partners.
 Rights and duties and liabilities are defined by
mutual agreement.

Audit of the Accounts of other Individuals and
Institutions
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 Other individuals like rent collectors, estate
managers etc who have large income and huge
expenditures.
 Usually clerks will do the auditors work.
 Other institutions like clubs, hospitals, libraries,
colleges, schools etc.

Government Audit
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 Government maintains a separate department in the
name of Account and Audit Department which
performs the auidit of its differents and offfices
Objectives
1. To ensure the expenditure is incurred out of the
fund which has sanctioned by the component
authority.
2. To verify that the expenditure of the Government
department is sanctioned in accordance with the
rules and regulations of the department concerned.

Objectives…
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3. To see that expenditure already sanctioned has been
incurred by an officer or officers who have
authorized to do so.
4. To ensure that payments have been made to the
right persons.
5. To verify existence and valuation of stores and the
stock.

Types of Audit
(Practical view )
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1. Complete Audit
2. Partial Audit
3. Continuous Audit
4. Periodical Audit
5. Interim Audit
6. Efficiency Audit
7. Proprietary Audit
8. Performance Audit

Complete Audit
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When the accounts of a business are examined fully, it
is called Complete audit.
If the organisation prepares Final Accounts annually,
auditing is also performed once in a year and in
case of half yearly Accounts, they are examined
accordingly .

Partial Audit
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 If only a part of the accounts of a business are
examined, it is termed as partial audit.
It may be partial
1. period-wise
2. Work-wise
Period wise implies, of a particular period, say a
month, two months or more.
Work wise implies examination of one portion of
accounts. Example: only cash transaction may be
examined.

Continuous Audit
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 When the auditor visits the client at certain or
uncertain intervals and examines the accounts up to
the date of visit during the financial period, it is
called continuous audit.
in this system audit continuous to follow
accounting without any long gap. In case of heavy-
work, the auditor deploys some of the staff on
permanent basis. But it is unusual. The usual
practice is the frequent visits of the auditor and his
team from time to time to examine the accounts of a
particular period. Also known as running audit

Advantages of Continuous Audit
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 Exhaustive and Intensive Examination.
 Greater detection Possibility of exposure of errors
and frauds.
 Early detection of errors and frauds.
 Moral impact on employees.
 Quick preparation of final accounts
 Early planning for future.
 Proper advice of advice.
 Early reflection of errors.
 Facility for Interim Accounts

Disadvantages of Continues Audit
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 Possibility of change in audited accounts.
 Snags in routine work.
 Adverse moral effect.
 More expensive.
 Dislocation of sequence of work.
 Sloth in work.

Methods to avoid disadvantages of continuous audit
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 Change in figures
 Snags in routine work
 Moral impact
 High cost (not suitable for small business)

Periodic Audit
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 When auditing is performed at the end of the
financial period after the final accounts ar ready and
the process of auditing continues without stop till it
is called periodic Audit.
 Definition :The periodical or completed audit is one
which is begun only after the close of the financial
period to which it relates.

Advantages of periodical Audit
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 No scope for change of figures
As we know, periodical audit after being started once
continues till it is completed. Therefore , there is no
possibility of change of figures by the employees because
all the books are in the possession of the auditor
throughout the process process of audit.
• No hurdle in routine work
• Economical
• Convenient
• Time saver

Disadvantages of periodical Audit
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 Lack of exhaustive audit and in-depth examination
 Errors are discovered very late
 Exposure of fraud very late
 Lack of moral impact
 Delay in Final Accounts
 Delayed advice

Interim Audit (Temporary)
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 The enterprise, which do not have continuous audit
but have the periodical audit, sometimes feel the
necessity of preparing Balance sheet and P&L
account in between the year and getting them
audited accordingly say six months or quarterly due
to certain reasons.

Efficiency Audit
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 The modern age is characterized by tough
competition and, therefore, every business wants to
increase its efficiency by way of reduction in cost and
enhancement of profit. It includes
1. Have technical estimates and detailed programmes
being made regarding the project and have cost
schedules been prepared.
2. Has there been inordinate delay in the program of
the project due to which cost overrun has occurred.

Objectives of efficiency Audit
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1. It help the management to run the business more
effectively and economically.
2. Quick and effective decision.
3. Connected with every aspect of working of
business.
4. Directly concerned with the business which is the
outcome of the improved efficiency.
5. Employees become more alert and active and their
morale is toned up.

Internal Audit
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Internal audit comprises all the measures whereby
every aspect business is controlled. A businessman
wants to control the internal functions of the
business in such a way as to maximise profits and
reduce to minimal level the possibilities of errors,
frauds.
 Internal auditing is best regarded as indicating the
whole system of controls, financial or otherwise
established for the conduct of business including
inter check, internal audit and other forms of
control.

Objectives of Internal Audit
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1. Correct accounting of transactions –
internal control ensures that all the transactions
have been correctly recorded.
2. Prevention of Errors and Frauds - one of the
objects of internal control is to prevent error and
fraud and to detect then smoothly.
3. Fixing responsibilities – Internal control is
aimed at establishing responsibility centers and
fixing accountability with regard to each activity.

Objectives of Internal Audit
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4. Safety of assets – The safety of assets is also an
important object of internal control.
5. Efficiency and improvement in performance
– Internal control has also the objective of bringing
forth efficiency in the utilisation of material, labour,
plant and capital and thereby improving the overall
performance of the enterprise.
6. To facilitate Statutory Audit – One of the
objective of the internal audit is to make the job of
statutory audit fecile.

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7. To check the arrangements of the safety of assets
and their proper accounting.
8. Improvement in procedures.
9. To check commitment in planning.
10. To review.

Internal audit process
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1. The activity to be examined must be defined. Ex: if
purchasing procedure is to be examined, it has to
be examined, it has to be determined whether the
purchasing activity shall include only the purchase
of material.
2. Thereafter, the policy with regard to the activity, its
procedure and control-devices must be observed;
workflow chart should be prepared in this regard.

Contd…
64
3. Thirdly, some samples of transactions related to that
activity shall be selected, which should represent all
the transactions of the same nature.
4. Fourth step would be to subject the selected samples
to a complete and exhaustive test, this testing shall
include the checking of documents and vouchers,
briefing from the employees and concerned outsiders
and references to relevant manuals.
5. Fifth, Important errors of examined work must be
segregated form trifling and the reason thereof,
persons responsible for them must be discovered.

Contd …
65
6. Lastly, the auditor must present the report on his
work, which should not be extensive, since, busy as
the management is, there would not be enough time
at their disposal to go through a long report. But the
report should not be so brief that there may be
difficulty in construing it. The report must suggest
measures to remove the flaws and loopholes.

Principles and Techniques
66
 Audit principles are the basic rules and involve all
those procedures which are completed during the
course of examination.
 Techniques are the devices which are adopted in
applying these principles.

Techniques of Audit
67
 Vouching :- An auditor examines documentary
evidences.
 Confirming:- It is the technique with an auditor to
contact responsible officials trough interview and
open communication with the outside parties.
 Reconciling :- The differences in figures are
reconciled and causes for their existence are brought
to light.
 Analysing
 Testing :- The technique is applied to examine a
large number of transactions.

Contd …
68
 Physical examination
 Scanning
 Footing
 Extension verification.

Preparation before audit
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 Scope of work to be determined
 Knowledge about business
 Instructions to the client
 Preparation by the auditor

Scope of work to be determined
70
 Depends upon the agreement entered into between
him and his client.
 No question of agreement arises in case of joint stock
companies.
 But in other cases its client who decides the extent of
work which the auditor has to perform.
 Before performing his duties auditor should discuss
the nature, purpose etc..
 Thoroughly know the limitations if any.

Knowledge about business
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 He should go through the rules and regulations.
 He should examine the method of maintaining
accounts.
 Examine the system of internal check in operation
 Technical details about the business.
 To look after previous years accounts, and look into
the various objections made.

3. Instructions to the Client
72
 After having acquired an up-to date knowledge of the
affairs of a concern, the auditor should ask the client
to direct his staff with regard to the following:
 The books of accounts should be totalled up and
should be kept ready.
 All the vouchers should be serially arranged and
filed.
 The schedules of debtors and creditors should be
prepared.
 A list of bad and doubtful debts should be prepared.

Instructions to the Client
73
 Schedule of outstanding and prepaid expenses
should kept ready.
 Stock sheet indicating the method of valuation of
stock should be drawn up.
 Schedule of investments indicating their cost price
and market price should be prepared.
 A certified list of goods returned by different
branches, agents, and other similar institutions
should be made available at the time of audit.
 A statement containing details about the permanent
capital expenditure should be kept ready.

Instructions to the Client
74
• A list of those documents to which the auditor will
have the access should be prepared.
• Names and addresses of Manager and MD should be
kept ready for the submission to the auditor.

PREPARATION BY THE AUDITOR
75
a) Distribution of work
b) Audit programme
c) Audit files
d) Audit Note-Book
e) Audit Evidence
f) Audit working papers

Distribution of work
76
 The auditor should distribute the work and assign
duties among his subordinates according to their
qualifications, experience and training.
 They can be of two types- senior and junior
 Seniors should be assigned with difficult and
technical work.
 Juniors should be assigned with simple works.
 Finally it is the auditor who has to certify the
accounts.

Audit Programme
77
 An Audit programme is a detailed plan of the audit
work to be performed, specifying the procedures to
be followed in verification of each item in the
financial statements and giving the estimated time
required.
 The preparation of such work involves i) How much
work is to be done. ii) who is going to do a particular
portion of work iii) what is the duration of time.

Advantages of Audit Programme
78
1. Audit programme is prepared to locate exactly the
responsibility of every clerk.
2. Auditor can know about the progress.
3. No work is left from checking.
4. It increases the efficiency of his staff.
5. Minimizes the possibility of errors.
6. In case a clerk goes on leave, the portion of the
work where he has left can easily be located and
assigned to another clerk.
7. Work can be completed in time.

Disadvantages of Audit programme
79
1. A written audit programme leaves no scope for
creativity.
2. Different audit programme is needed for different
companies.
3. Inefficient audit staff may try to hide their
incompetence behind rigid/fixed audit programme.

Audit Files
80
 It is necessary for an auditor to maintain a record of
each audit for ready reference. Such record is
maintained in files called audit files.
there may be two types of Audit Files
1. Permanent audit files
2. Current audit file.

Permanent audit file
81
 The rules which govern the company or the organisation
under audit such as MOA and AOA in case of company
and partnership deed in case of Partnership firm.
 Copies of minutes and extracts of agreements.
 A brief description of business, its nature, address, area
of operation.
 Particulars of the organisation of the business along with
the list of officials, branches and departments.
 Copy of instructions.
 List of books and registers and names of persons dealing.
 Copies of audited financial statements of previous years.

Current Audit Files
82
 Audit programme duly amended and modified in
accordance with the system of internal control in
use.
 Internal questionnaires.
 Flow chart covering the time budget.
 All relevant notes properly filed and indexed.
 Banks and petty cash reconciliations.
 Weakness inherent in the system of internal control.
 The draft final accounts and Balance sheet and their
copies.

Advantages of Audit files
83
 It assist in preparation of audit plan which paves a
way for subsequent audit engagements.
 It is a useful file for the use of auditor who depend on
it for forming an opinion about the matters to be
included in his report.
 It is a ready reference for an auditor and provides
different materials to be used in the field of auditing.
 It provides efficiency in procedures.

Audit Note-Book
84
It is maintained by audit clerk. It contains
1. Technical details about the business.
2. Queries for which explanation and information
have to be demanded.
3. Fraud and errors found in the books during the
course of audit.
4. Details which are to be included in the audit report.
5. Notes regarding the system of maintaining the
accounts.
6. Information to be needed in future.

Audit- Books Contd…
85
7. Names of officials who certify bad debts.
8. Record of all important correspondence.
9. Totals of important ledger accounts.
10. Progress of audit report.
11. Record of suggestions made by the audit staff.

Advantages of Audit-Book
86
1. The auditor is enable to record important points.
2. Auditor can produce this book as documentary
evidence in a suit filed against him.
3. A note book makes the work of audit convenient as all
the important details about audit can be recorded.
4. Such a book can help in making an assessment of the
knowledge, efficiency and audit clerks.
5. It makes the procedure of subsequent audit more easy.
6. It provides the key to evaluate the efficiency of the
audit staff.

Disadvantages
87
 It develops a fault finding attitude in the minds of
the audit staff.
 It places too much reliance on the staff of the client
for its preparation.
 If an audit note book is prepared negligently, the
auditor can use it as an evidence of negligence in the
courts of law.
 Very often, it creates misunderstanding between the
clients staff and the auditing staff.

Audit Evidence
88
 It has got a wide coverage and direct impact on mind of
an auditor.
 It helps an auditor to judge the truthfulness of
prepositions brought before him for scrutiny and
analysis.
 It also helps an auditor to form an opinion about the
financial affairs.
 Evidences are to be collected to declare in financial
statement.
 Evidences are not only documentary evidences but may
be in the form of personal enquiries, observations,
verifications and inspections.

Audit Evidence
89
 There are two important considerations for planning
the method of obtaining audit evidence which are-
1. Types of evidence to be made available to the
auditors
2. Means of getting such evidences
 To be noted that the nature of evidences depends
entirely upon the circumstances of individual cases
 In the absence of well-knitt internal control
system, the need for proper evidences becomes
more imperative.

Types of Audit Evidences
90
 Physical verification or inspection- It can be easily
made in inspection of cash, tangible assets, petty cash etc
which will be ensured in the existence of business.
 Statement by independent third parties- It is one
of the strongest types of audit evidence. The evidence
statement may be oral or written. Ex: debtors, creditors,
solicitors of the company.
 Authoritative documents- These evidence are more
reliable than oral representations. They are considered to
be the main sources of evidences. Ex: contract deeds,
receipts, invoices, vouchers, debit and credit notes etc.

91
 Statements by officers & employees of the
company- The statements may be formal or informal. The
auditor should not fully rely on these statements, because
they may hide some material facts. In case of doubt, the
auditor may call them for explanation.
 Calculation performed by the auditor- The auditor
after collecting the evidence may re-calculate to know the
accuracy and also record the re-calculated which may act
as evidence.
 Satisfactory Internal control – Auditor should check
whether internal control is satisfactory or not, if not, such a
system cannot be considered as an evidence of reliability

92
 Subsequent actions by the company under
examination and by others- The subsequent
action by the company under examination
constitutes a type of evidence in the sense that the
statement of fact by the company as to the events
subsequent to balance sheet date may materially
affect the financial statement and auditor’s report.
this is because the actual audit work starts after the
end of the financial year.

93
 Subsidiary or Detailed Records with an
significant indication of irregularity- Records
like stores ledger if maintained properly and having
no indication of irregularity may appear to be
supporting evidence.

Audit Working Papers
94
 Audit working papers are those papers and
documents which consists of details about accounts
which are under audit. Such details may be
1. Schedules of debtors and creditors.
2. Certificates of officials in regard to such important
matters as bad debts, unpaid expenses etc.
3. Certificates issued by banks in regard to bank
balance.
4. Correspondence between the auditor and debtors,
creditors.

Audit working Papers
95
5. Rough trail balance.
6. Important extracts from minute book.
7. Particulars of investment.
8. Draft final accounts.
9. A copy of auditor’s book.

Purpose of working Papers
96
1. Represents the volume of work which has been
performed by the auditor and his staff.
2. The various minute details and aspects of the audit
report can be well sustained on the basis of findings
summarized in the report.
3. The working paper become an asset for the auditor
on the occasions when he has to defend himself
against the charges.
4. The auditor can co-ordinate and organize the work
of audit clerks with the help of working papers.

Purpose of working Papers
97
5. The auditor’s detailed advice to his client in regard
to improving the system of internal check and
efficiency of the accounting system.
6. The working papers act as a guide to the auditor in
subsequent examinations.

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