Audit of IPCC – Lecture 1

Audit for IPCC

Lecture 1

Basic of audit

 

Good Morning Friends

Lets start with the one of the most important subject of Professional course Audit.

In CA this subject is coming at two steps first it cones in IPCC and second it is coming in the CA final.

1.

Why the audit should be studied?

            First reason it is compulsory subject at both the steps means at CA IPCC as well as at CA Final. Secondly Audit contains very broad meaning and importance within it. Now a days audit is used to ensure the accuracy, trust, accountability and system maintenance of the organization. It is also useful to detect frauds and errors.

Now there are questions like these – what is audit? As being an auditor how can we detect errors and frauds? Which tools we can use for doing audit? Which terminologies are used in audit? And most interesting question how can we pass in subject of Audit?

Before understanding all these things lets understand one story……………

Before lots of years ago there was one man named birbal who had been selected as national advisor in the kingdom of Mughal Samrat Akabar. He was wise enough to understand entire system of the government. One day king asked this man that find out the reason why the income of nation is decreasing rapidly during few months?

Man replied that My lord please provide me 60 days for assessment. King gave the time and ordered to report after these days.

Birbal started inquiry by studying the accounting process, lots of documents, such as Payment voucher, sales, Purchase, receipt voucher, available inventory, available jewellery, diamonds, valuable items, available balance sheet and profit and loss accounts, He demanded confirmation from lots of sundry debtors and sundry creditors, loan holders. He Verified originality of the transaction. He verified the documents related construction made in the nation during the particular period. Not only to that he also verified the documents purchase of horses, elephants and other cattle. With that he also verified documents related to purchase of all arms such as swords, bow and arrow, Bhala, Dhal and Bhakhtars (armours). He also verified documents related to salary paid to lots of soldiers and staff. Expenditure made on the welfare of the nation and losses made during the war. Compensation paid to the all died soldiers. Benefit received from the won country.

Not only to that he also compared entire documentation with the actual situation and also assessed that whether all these decision which has been taken by the all these officials are true and fair to nation or not.

After 60 days Birbal went to akabar’s darbar and presented his report as following.

–         15000 staff members are paid salary of amount Rs. 7 crores who are not born in this world till today.

–         Construction amount of Rs. 250 crores made whose valuation is not more than Rs. 110 crore

–         Actual horses purchased from Arabia are 50000 when in the document it is shown 70000 difference amount Rs. 1.25Crore. Actual elephants are 15000 on book when on documentation it is shown of 20000 difference amount of Rs. 2.5 crore

–         Since last 1 year 80 % of officers who are 3000 in number have purchased their own building, gold, jewellery amounting of Rs. 350 crores when their average salary was not more than Rs. 70000 per month.

–         War armours and arms purchased actually available of Rs. 300 crores on book it is shown at 325 crores.

–         Expenses wrongly debited in the profit and loss account is rs. 30 crores.

–         Loss to nation due to wrong decision amounting Rs. 150 Crores – (No need to expend money thereat still spent money.)

• According to me profit and loss account and balance sheet does not provide true picture of Nation’s position and corruption is the main reason behind reason of decreasing the national income.

After listening all these Akabar became very angry. He ordered punishment to personnel who were liable behind these. Not only to that he also ordered that now such verification will be made once in each year so that true picture of nation’s assets, liabilities, Income and expenditure can be known. He made Birbal chief auditor of the Nation with handsome amount of salary and accommodation.

Conclusion

–         Dear students what do we understand by this story?

• The process and tools used by the Birbal to find out all these is known as Audit.
• The report submitted by Birbal to Akabar is known as Audit report in which Birbal has provided his opinion.
• Birbal is known as Auditor.
• Akabar’s Kingdom is known as appointing authority.
• Darbar of Akabar is known as General Meeting.

It was just a story but now come to real picture and some technicality.

Right now audit is compulsory for the companies as per the Companies Act, 1956 but why?

–         As we all know that company whether limited or unlimited, true owners are share holders.

–         Share holders have not that much technical and business knowledge to manage entire organization so they are appointing one managerial body which known as Board of directors.

–         Share holders invest their money in to the company with hope that they should get good return on their invested money. Not only to that, they are always desiring about the growth of the company so that they can get more and more benefit and returns.

–         But how can they ensure that whatever profit has been earned by the company is true?… investment made by the managerial body is fair with welfare of the company?….

–         The answers of above question is by making the audit.

–         Auditor verify the system and transactions flow with the actual situation in the company and issue his report thereon.

–         So, we can say that auditors are eyes of shareholders who verify the system and transactions on behalf of the shareholders.

–         The companies Act, 1956 has also made provisions regarding propriety verification and Audit provisions. Such as section 209 to 211 and CARO, 2004.

Now you will thing that what are these CARO, 2004 and these sections. But have some patience we will discuss it later on.

2.

 

Now from the above story we can not say that Birbal would have checked or verify each and transactions at the process he must have applied lots of audit tools.

Now what are these audit tools?

Audit tools are the tools which make the audit work easy and qualitative.

Which type of audit tools are available?

• Compliance procedures

–         Audit Questionnaire

–         Flow chart analysis

–         Surprise Check

• Substantive procedures

–         Vouching

–         Verification

• Audit techniques

 

–         Inquiry

–         Information

–         Confirmation

–         Posting

–         Casting

–         Bank Reconciliation

–         Physical Examination

–         Re Computation

• Auditing in depth
• Analytical Process
• Analytical Review
• Sampling
• Cut off procedures

Now students you will be in confusion once again. You will think that what these things are? Most of the terminologies you are listening at first time. But don’t worry about it because we are going to understand each and every terminologies in the next some paras.

Here you have to keep one thing in to the consideration that for knowing one abovementioned concept u must have to know about another concept. For example if you know about the Compliance procedures then you must have to know about the Internal Control concept first. But we will discuss it lateron.

Why Audit tools are required?

 

• When, auditor has to complete big audit within short period of time then he can not verify each and every transaction and system due to having some inherent limitation of audit.

Now again you will ask that what are these inherent limitations of audit?

Lets discuss it first then we will go for other concepts of Audit.

 

• Inherent Limitations of Audit

 

• Every system is working with some limitation.
• There is no absolute surety that all kinds of frauds and errors will be detected by making audit. In above story we can say that Birbal’s report may contain some data which is not absolute.

Now again the question is arises that why these kinds of limitations are there?

Reasons are as follows

• The main objective of the auditor is not to detect frauds and errors but to express the opinion about the truth and fairness of the Financial statements.
• The detection of frauds and errors is an incidental or secondary objective
• There should be no suspicious mind during Audit process.

• For Example Possible reasons for having less net profit in current year

–         Less Sales

–         High purchase prices

–         More expenses

–         Loss due to accident

–         More bed debt

–         More depreciation and interest

–         Some fraud and error

So here auditor can not assume initially that there is fraud and error. Any other reasons from above may be thereat.

• Auditor can expect fraud and error only up to his expression of opinion and not beyond it. Auditor is only concern with his opinion and not concern with, how the management is running??
• If fraud and error is detected even after completing audit work auditor will not be held guilty if he exercised reasonable care during his audit process.
• Detecting fraud and error is the duty of management by implementing Internal Control System.
• Audit is Time binding activity. Auditor always facing lack of time during his audit process so he has to apply some audit techniques to complete audit process within reasonable time.

Now in the next lecture we will discuss compliance and substantive process. For that we have to understand one of the beautiful concepts named Internal control system.

 

Up to that take care all of you……………

We will meet very soon……….