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Fundamentals of Auditing

Name: Fundamentals of Auditing
Author: S. K. Basu
ISBN: 9789332500891

by S. K. Basu

April 2024

Beginner to intermediate

368 pages

13h 25m

English

Pearson India

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Cover
Contents (1/3)
Contents (2/3)
Contents (3/3)
Preface
Chapter 1: Nature of Auditing
1.1 Introduction1.2 Origin of the Word ‘Audit’1.3 Early History of Audit
1.4 Evolution of Auditing
1.5 Auditing Defined
1.6 Nature of Auditing
1.7 Essential Features of Auditing
1.8 Why is There a Need for an Audit?

1.9 Object of an Audit
1.10 Errors and Frauds in Accounting
1.11 Role of Auditors in Detecting Errors and Frauds
1.12 Relation Between Book-Keeping, Accountancy and Auditing
1.13 Basic Principles Governing an Audit
1.14 Scope and Procedures of Audit
1.15 Advantages of Auditing
1.16 Limitations of Auditing
1.17 Relationship Between Auditing with Other Subjects
1.18 Qualities of an Auditor
1.19 Auditing and Other Services
Chapter 2: Types of Audit
2.1 Introduction2.2 Classification of Audit2.2.1 Classification of Audit on the Basis of Organisation
2.2.2 Classification on the Basis of Function
2.2.3 Classification on the Basis of Practical Approach (1/2)
2.2.3 Classification on the Basis of Practical Approach (2/2)
2.2.4 Classification on the Basis of Audit Dimension
Chapter 3: Techniques and Procedures of Auditing
3.1 Introduction3.2 Preparatory Steps Before Commencement of New Audit
3.3 Audit Activities
3.4 Audit Engagement Letter3.4.1 Concept3.4.2 Form and Content
3.4.3 Revision of Engagement Letters
3.5 Preparation by the Auditor
3.5.1 Audit Planning
3.5.2 Audit Programme
3.5.3 Audit Note Book
3.5.4 Audit Working Papers
3.5.5 Audit Files
3.5.6 Audit Manual
3.5.7 Audit Memorandum
3.6 Principles and Techniques of Auditing
3.6.1 Important Audit Techniques
3.7 Procedures Followed in Course of Audit
3.7.1 Audit Evidence
3.7.2 Analytical Procedures
3.7.3 Routine Checking
3.7.4 Test Checking
3.7.5 Auditing in Depth
3.7.6 Walk-Through Tests
3.7.7 Rotational Tests
3.7.8 Cut-Off Examination
3.7.9 Physical Examination
3.7.10 Statistical Sampling
3.7.11 Surprise Checking
3.7.12 Audit Flow Chart
3.7.13 Test of Control
3.7.14 Internal Control Questionnaires
3.7.15 Audit Tests
3.8 Representation by Management
3.8.1 Representation by Management as Audit Evidence
3.8.2 Documentation of Representation by Management3.8.3 Letter of Representation
3.9 Delegation, Supervision and Review of Audit Work
3.9.1 Delegation
3.9.2 Supervision
3.9.3 Review3.9.4 Control of Quality of Audit Work
3.10 Professional Scepticism
3.11 Audit Risk and Materiality
3.11.1 Concept of Materiality
3.11.2 Audit Risk3.11.3 Relationship Between Materiality and Audit Risk
3.12 Final Review
3.13 Case Studies
Chapter 4: Internal Control, Internal Check and Internal Audit
4.1 Introduction4.2 Internal Control4.2.1 Definition
4.2.2 Basic Elements of Internal Control
4.2.3 Objectives of Internal Control
4.2.4 Evaluation of Internal Control
4.2.5 Internal Control and the Auditor
4.2.6 Internal Control Checklist
4.2.7 Internal Control Questionnaire
4.2.8 Internal Control and Computerised Environment
4.2.9 Internal Control and Corporate Governance
4.2.10 Internal Control in Specific Areas of Business
4.3 Internal Check
4.3.1 Definition
4.3.2 General Considerations in Framing a System of Internal Check
4.3.3 Objectives of Internal Check
4.3.4 Internal Check and the Auditor
4.3.5 General Principles of Internal Check for a Few Transactions
4.4 Internal Audit
4.4.1 Definition4.4.2 Basic Principles of Establishing Internal Auditing in a Business Concern
4.4.3 Scope and Objectives of Internal Audit
4.4.4 Essential Elements of Internal Audit
4.4.5 Area of Internal Audit
4.4.6 Distinction Between Internal Audit and External Audit
4.4.7 Reliance upon the Work of an Internal Auditor
4.4.8 Evaluation of Internal Audit Function
4.5 Auditor’s Independence
4.5.1 Advantages of Independent Audit
4.5.2 Provisions for Safeguarding Independent Auditors
4.5.3 Important Aspects of Auditor’s Independence
4.6 Distinction Between Internal Check, Internal Audit and Internal Control
4.7 Case Studies
Chapter 5: Vouching
5.1 Meaning of Vouching5.2 Objectives of Vouching
5.3 Importance of Vouching
5.4 Vouching and Verification
5.5 Vouching and Routine Checking
5.6 Concept of Voucher
5.7 Internal and External Evidence
5.8 General Principles of Vouching
5.9 Teeming and Lading: A Challenge to Vouching
5.10 Vouching of Different Types of Transactions (1/3)
5.10 Vouching of Different Types of Transactions (2/3)
5.10 Vouching of Different Types of Transactions (3/3)
Chapter 6: Verification and Valuation of Assets and Liabilities
6.1 Introduction6.2 Meaning of Verification of Assets6.3 Meaning of Valuation of Assets
6.4 Difference Between Verification and Valuation
6.5 Importance of Verification of Assets6.6 Importance of Valuation of Assets
6.7 General Principles for Verification of Assets
6.8 Problems of Verification
6.9 Problems of Valuation
6.10 Window Dressing—A Challenge to Verification
6.11 Verification and Valuation of Assets
6.12 Verification and Valuation of Intangible Assets
6.12.1 Goodwill
6.12.2 Patent
6.12.3 Copyright
6.12.4 Trade Marks
6.13 Verification and Valuation of Fixed Assets6.13.1 Land and Buildings
6.13.2 Building
6.13.3 Plant and Machinery
6.13.4 Furniture and Fixtures
6.13.5 Motor Vehicles
6.13.6 Assets Acquired Under Hire Purchase System
6.14 Audit of Depreciation
6.14.1 Legal Necessity of a Provision for Depreciation
6.14.2 Provision for Depreciation for Past Years
6.14.3 Depreciation on Low Value Items6.14.4 Depreciation on Wasting Assets
6.14.5 Change in the Method of Depreciation
6.14.6 Auditor’s Duty As Regards Depreciation
6.15 Verification and Valuation of Investments
6.15.1 Quoted Investments
6.15.2 Unquoted Investments
6.16 Verification and Valuation of Current Assets6.16.1 Stock-in-Trade
6.16.2 Work-in-Progress
6.16.3 Sundry Debtors
6.16.4 Bills Receivable
6.16.5 Cash at Bank
6.16.6 Cash in Hand
6.16.7 Prepaid Expenses
6.17 Verification and Valuation of Fictitious Assets
6.17.1 Preliminary Expenses6.17.2 Discount on Issue of Shares or Debentures
6.18 Verification and Valuation of Contingent Assets
6.19 Verification and Valuation of Liabilities
6.20 Verification and Valuation of Fixed or Long-Term Liabilities
6.20.1 Debentures6.20.2 Secured Long-Term Loans
6.21 Verification and Valuation of Current Liabilities
6.21.1 Sundry Creditors6.21.2 Bills Payable
6.21.3 Bank Overdraft
6.21.4 Provision for Taxation
6.21.5 Outstanding Liabilities for Expenses
6.22 Verification and Valuation of Contingent Liabilities
6.23 Case Studies
Chapter 7: Company Audit
7.1 Introduction7.2 Preliminaries Before Commencement of Company Audit
7.3 Audit of Share Capital Transactions
7.3.1 Audit Procedure
7.4 Audit of Debentures
7.4.1 Audit Procedure
7.5 Specific Provision As Regards Accounts in the Companies Act
7.6 Special Requirements of Company Audit
7.7 Company Auditor
7.7.1 Appointment of Auditors
7.7.2 Tenure of Appointment
7.7.3 Re-Appointment of Retiring Auditor
7.7.4 Ceiling on Number of Audits
7.7.5 Remuneration of Auditor
7.7.6 Qualification of an Auditor7.7.7 Disqualification of an Auditor
7.7.8 Removal of Auditors
7.7.9 Status of the Company Auditor
7.7.10 Auditor’s Rights, Duties and Liabilities
7.7.11 Duties of a Company Auditor
7.7.12 Liabilities of Company Auditor
7.8 Case Studies
Chapter 8: Divisible Profits and Dividends
8.1 Meaning of Divisible Profit8.2 Meaning of Dividend8.3 Concept of Profit
8.4 Profit Versus Divisible Profit
8.5 Principal Determinants of Divisible Profit
8.6 Provisions of the Companies Act Relating to Payment of Dividend
8.7 Provisions of the Companies Act Regarding Unpaid and Unclaimed Dividend
8.8 Payment of Dividend Out of Capital Profit
8.9 Payment of Dividend Out of Capital
8.10 General Guidelines for Distribution of Dividend
8.11 Auditor’s Duty As Regards Payment of Dividend
8.12 Payment of Interim Dividend and the Role of Auditors
Chapter 9: Audit Report and Certificate
9.1 Definition of Report9.2 Definition of Audit Report9.3 Value of Audit Report
9.4 Essentials of Good Audit Report
9.5 Scope of Audit Report
9.6 Signing of the Audit Report
9.7 Contents of Audit Report
9.8 Forms of Audit Report
9.9 Basic Elements of Audit Report
9.10 Audit Report and Audit Certificate
9.11 Types of Auditor’s Report
9.12 Modified Reports
9.12.1 Matters That Do Not Affect the Auditor’s Opinion9.12.2 Matters That Do Affect the Auditor’s Opinion9.13 Types of Audit Certificate
9.14 Auditor’s Report and ‘True and Fair’ View
9.15 Specimen of Clean Audit Report
9.16 Specimen of Qualified Audit Report
Chapter 10: Audit of Banks
10.1 Introduction10.2 Legislation Relevant to Audit of Banks10.2.1 Legal Provisions Relating to Accounts
10.2.2 Legal Provisions Relating to Audit
10.3 Approach to Bank Audit
10.4 Stage in Audit of Banks
10.4.1 Preliminary Work
10.4.2 Evaluation of Internal Control System
10.4.3 Preparation of Audit Program for Substantive Testing and Its Execution10.4.4 Preparation and Submission of Audit Report10.5 Advances10.5.1 Legal Provisions Regarding Advances
10.5.2 Prudential Norms of RBI Relating to Advances
10.6 Income Recognition
10.7 Bank Audit Report
10.7.1 Long Form Audit Report
Chapter 11: Audit of Insurance Companies
11.1 Audit of Companies Carrying on Life Insurance Business11.1.1 Important Statutory Provisions for Audit11.2 Audit of Companies Carrying on General Insurance Business
11.2.1 Important Statutory Provisions for Audit
11.3 Applicability of Accounting Standards
11.4 Books and Registers to Be Maintained
11.4.1 Registers11.4.2 Books of Accounts11.4.3 Submission of Reports and Returns
11.5 Audit of Accounts
11.5.1 Qualification of an Auditor
11.5.2 Appointment of Auditor
11.5.3 Remuneration of Auditor11.5.4 Powers of an Auditor11.5.5 Auditor’s Report
11.5.6 Other Important Provisions Relating to Audit
11.5.7 Audit at Branch/Divisional office Level and at Head Office Level
11.6 Preparation for the Audit
11.7 Internal Controls
11.7.1 Segregation and Rotation of Duties11.7.2 Authorisation of Transactions
11.7.3 Maintenance of Adequate Records and Documents
11.7.4 Accountability for and Safeguarding of Assets
Chapter 12: New Areas of Auditing
12.1 Introduction12.2 Cost Audit12.2.1 Definition
12.2.2 Objectives
12.2.3 Advantages
12.2.4 Disadvantages
12.2.5 Appointment
12.2.6 Qualification12.2.7 Disqualification12.2.8 Cost Audit Report
12.2.9 Distinction Between Financial Audit and Cost Audit
12.2.10 Ceiling on Number of Audits
12.3 Management Audit
12.3.1 Definition
12.3.2 Objectives12.3.3 Importance
12.3.4 Scope
12.3.5 Steps
12.3.6 Advantages
12.3.7 Disadvantages
12.3.8 Appointment12.3.9 Qualities of Management Auditors
12.3.10 Management Auditor’s Report
12.3.11 Difference Between Management Audit and Cost Audit
12.3.12 Difference Between Management Audit and Financial Audit
12.4 Human Resource Audit
12.4.1 Concept of Human Resource12.4.2 Concept of Human Resource Accounting12.4.3 Concept of Human Asset Audit
12.4.4 Steps for Human Resource Audit
12.4.5 Problems of Human Resource Audit
12.4.6 Advantages of Human Resource Audit
12.5 Social Audit12.5.1 Concept of Social Responsibility
12.5.2 Concept of Social Accounting
12.5.3 Concept of Social Audit12.5.4 Objectives of Social Audit
12.5.5 Importance
12.5.6 Social Audit in India
12.6 Tax Audit12.6.1 Definition12.6.2 Types of Tax Audit
12.6.3 Tax Auditor
12.6.4 Compulsory Tax Audit Under Section 44AB12.6.5 Penalty for Non-Compliance12.6.6 Tax Audit Report
12.7 Vat Audit
12.7.1 Concept of VAT Audit12.7.2 Role of VAT Auditor
12.7.3 Preparation for VAT Audit
12.7.4 Approach to VAT Audit
12.7.5 Audit Report Under VAT
12.8 Green (Environmental) Audit12.8.1 Definition12.8.2 Objectives
12.8.3 Stages of Environmental Audit
12.8.4 Environmental Audit Practice in India12.9 Corporate Governance Through Audit Committees12.9.1 Introduction
12.9.2 Area of Work
12.9.3 Relevant Provisions Regarding Audit Committee
12.9.4 Functions of the Audit Committee
12.9.5 Audit Committee Under Clause 49
12.10 Accounting Standards
12.10.1 Concept12.10.2 Objectives/Importance
12.10.3 Accounting Standards and the Auditor
12.11 Auditing and Assurance Standards12.11.1 Background
12.11.2 Concept
12.11.3 Scope12.11.4 Objectives and Importance
12.11.5 Procedures for Issuing Standards
12.11.6 AAS and the Auditor
Chapter 13: Special Audit
13.1 Introduction13.2 Audit of Charitable Society13.2.1 General Matters
13.2.2 Receipts
13.2.3 Payments and Expenses
13.2.4 Assets and Liabilities
13.2.5 Income Tax13.2.6 Financial Statement13.3 Audit of Clubs
13.3.1 General
13.3.2 Receipts13.3.3 Payments and Expenses
13.3.4 Assets and Liabilities
13.3.5 Income Tax13.3.6 Special Accounts13.3.7 Financial Statements13.4 Audit of Co-Operative Societies
13.4.1 General
13.4.2 Receipts
13.4.3 Payments and Expenses
13.4.4 Assets and Liabilities
13.4.5 Income Tax
13.4.6 Financial Statement13.5 Audit of Educational Institution13.5.1 General
13.5.2 Receipts
13.5.3 Payments and Expenses13.5.4 Assets and Liabilities
13.5.5 Income Tax
13.5.6 Financial Statements13.6 Audit of Hotels
13.7 Audit of Hospitals
13.7.1 General Matters
13.7.2 Receipts
13.7.3 Payments and Expenses
13.7.4 Assets and Liabilities
13.7.5 Income Tax13.7.6 Financial Statement13.8 Audit of Hire Purchase and Leasing Companies13.8.1 Introduction
13.8.2 Audit of Hire Purchase Transactions
13.8.3 Auditor’s Duty
13.8.4 Audit of Lease Transactions
13.8.5 Auditor’s Duty
Chapter 14: Audit of the Accounts of Governments and Public Sector Undertakings
14.1 Introduction14.2 Audit of Public Sector Undertakings14.2.1 Some Special Features of Public Sector Undertakings
14.2.2 Distinction Between Audit of Public Sector Undertakings and Audit of Private Sector Undertakings
14.2.3 Audit of Departmental Commercial Undertakings
14.2.4 Audit of Statutory Corporations
14.2.5 Audit of Government Companies
14.3 Government Audit
14.3.1 Objectives
14.3.2 Distinction Between Government Audit and Commercial Audit
14.4 Comptroller and Auditor General of India
Chapter 15: Audit in CIS Environment
15.1 Introduction
15.2 General Approach to an EDP-Based Audit
15.2.1 Organisational Review15.2.2 System Review15.3 Computer Installation Review
15.3.1 Safeguarding of the Client’s Records
15.3.2 Control over the Data Passing Through the EDP Department
15.3.3 Controls over the Operation of the Computer
15.3.4 Control over the Resources, Assets and Liabilities of the EDP Department
15.4 Computer System Review
15.5 Approaches to EDP Auditing
15.5.1 Auditing Around the Computer
15.5.2 Auditing Through the Computer
15.6 Special Techniques for Auditing in an EDP Environment
15.6.1 What Are CAATs?15.6.2 Need for CAATs15.6.3 Considerations in the Use of CAATs
15.6.4 Types of CAATs
Annexure A: Important Case Decisions (1/2)
Annexure A: Important Case Decisions (2/2)
Annexure B: Objective Type Questions (1/2)
Annexure B: Objective Type Questions (2/2)
Index

Content preview from Fundamentals of Auditing

10.8

| FUNDAMENTALS OF AUDITING

10.4.2 EVALUATION OF INTERNAL CONTROL SYSTEM

Internal control evaluation is an important element of audit process. In the case of audit of banks, it assumes

even greater importance due to the enormous volume of transactions entered into by banks. Evaluation of

design and operation of internal control system enables the bank auditors to perform more effective audits.

The auditor should, therefore, study and evaluate the design and operation of internal controls. This would

assist him in determining the nature, timing and extent of substantive procedures in various areas, depending

upon whether the internal controls are adequate and observed in practice.

10.4.3 PREPARATION OF AUDIT PROGRAM FOR SUBSTANTIVE TESTING ...

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Fundamentals of Auditing

by S. K. Basu

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