LECTURE 4 – AUDIT EVIDENCES AND FINANCIAL STATEMENTS…………………

LECTURE 4  – AUDIT EVIDENCES AND FINANCIAL STATEMENTS…………………

Good morning students……….. I am really thank full to all of you that you have given good response to these online lectures of audit…………..

Now lets come to the today’s discussion points………… before it quickly revise the points which you had learned in last lectures………

–         Internal control system

–         Compliance procedures

–         Substantive procedures

–         Coverage of audit……..

–         Auditor’s role in audit

First of all we are discussing point Audit Evidences……….. before it lets understand one story……………

I hope all of you are aware about one of the most interesting, thrilling, Suspense TV Serial CID on SONY tv…………

One day there was bank robbery in CITY Credit bank and one person of bank named Ramsinh was killed. CID came to place and started Investigation.

After its analysis CID found that the incidence had happened at night and the person killed was a security guard of the bank.

CID also found that during the robbery the CC TV camera was off, which not the policy of bank was. Camera must have been on.

Means there were some internal individuals who were included in this robbery…………. but still the question was “who were they …….?”

CID started its deep investigation. ACP Pradhyumn, Inspector Daya, Inspector Abhijit started verification of each and every place, documents.

They also started strict interview of staff. They also verified each and every written or printed documents and letters.

In short CID was trying to collecting Evidences.

Evidences may be external or internal, oral or written.

CID had full suspect that the person who had done the robbery, he must be known to system of bank. So, criminal must be from internal.

CID Started following tools to get the evidences.

• Ø CID Started Inspection of records, documents, assets, persons available.
• Ø Observation of system and bank premises, location and found one of the important evidences. CID found one golden lighter on which brand symbol “Golden Star” was marked.
• Ø CID also started Inquiry and confirmation of each and every staff available in the bank. CID also inquired that what authority given to which person. From the forensic lab test CID got the confirmation that Ramsinh was killed by bullet  firing of 9 m.m. pistal. Such pistal is always used by the policeman or professional shooters.
• Ø CID made analytical review and found that recently the internal structure of bank has been changed by the order of HO. CID demanded the copy of such order passed by the HO.

 

After all these verification CID started to check the sufficiency and appropriateness of evidences.

First of all CID visit the “golden star” shop. Showed the lighter and asked the customer name.

Shop owner verified the entry in the register and said that this lighter was sold to Mr. Aditya owner of Aditya Industries.

CID once again confused that why such Rich person should try for robbery.

They went to Mr. Aditya and showed the lighter and asked about the owner.

Mr. Aditya replies that, “I was the owner of that lighter BUT before 1.5 years ago I had gifted it to My close friend………..”

CID Asked “who was your close friend?”

Mr. Aditya replied, “Mr. VIvek Solanki who is the assistant manager in City credit Bank………”

CID on the spot understand entire plan and also understand that who was behind all these……….. He was Mr. Vivek Solanki assistant manager of City credit bank.

CID also made inquiry about the appropriateness of internal structure change order made by HO. In the inquiry it is found that it was fake. Means there was no any order had been passed by the HO. It was just game plan of mr. Vivek solanki so that robbery can be done easily……

 

CID came to bank and arrested Mr. Vivek in this crime……… after being strict Mr. Vivek solanki accepted that…… yes he was behind this game plan….. for this purpose he had hired one professional shooter by making partnership of 25%.

Ramsinh was also part of this game plan but he demanded his share on the place…….. he threatened that if it will not be given then he will shout  loudly in the public at same time……….  so as the last remedy shooter shoot him and he was killed……………………

 

Dear friends don’t assume that I am a story teller…………. and i am passing time by telling all this things to you BUT my intention behind this was to explain you about importance of evidences?

In this case the golden lighter and order of HO was the main evidence and through it CID could reach to original criminal……………..

 

Once again I will say that evidences may be Internal or external, Oral or written.

Lighter was external evidence and HO order was Written and internal evidence.

Now come to the Audit……. Evidences contain same importance in the process of audit……………..

Our great Institute has also made one separate auditing standard on the audit evidences. (SA500)

I know that once again you will have one question in your mind that what is this auditing standard????

But it is not real time to describe I will discuss it at later on.

For understanding Audit evidences pay attention here…….

There was one CA final student named Brijesh wanted to know about the  audit evidences. He had no any classess.

 

He went to one professior and asked…..

“Dear sir, I want to know about audit evidences”

“Really??? Ok then listen carefully…………. remember one thing that main objective of audit is to enable an auditor to express his opinion about the truth and fairness of financial statements.”

• Ø How an auditor can express such opinion?

By examining transactions recorded in the books.

• Ø How an auditor can examine such transactions?

By generating necessary audit evidences

• Ø How auditor can generate such evidences?

By performing compliance and substantive procedures

• Ø What kind of audit evidences auditor should generate?

Auditor should generate sufficient and appropriate audit evidences.

• Ø What are the methods available to decide the appropriateness and sufficiency of audit evidences?

–         Inspection

–         Observation

–         Inquiry and confirmation

–         Analytical Review

–         Computation

 

• Ø Which are the factors which influence audit evidences? Means points to be taken in to consideration before deciding appropriateness of audit evidences.

–         Nature of transaction

–         Adequacy of internal control system (If internal control is strong then we can say that evidences are more appropriate.)

–         Size of the business of organisation

–         Situation of business organisation (For example one company is making huge losses since last 5 years, still he obtained loans and deposits. We know that it is difficult to digest so auditor should trust on external evidences such as confirmation and not internal documentary evidences.)

–         The Materiality of transaction (once again new concept but we will discuss it later on.)

–         Experience of the auditor. (If auditor know from his experience that Net Profit ratio of one company is in the range of 5% to 7% of his sales since last 8 years and in current year it shows the profit of 3% only then we can have absolute dought that, DAL ME KUCHH KALA JARUR HAI………….”

–         Trend and accounting ratio analysis (remember above issue………)

• Ø Which audit evidence is more reliable oral or written internal or external?????

Generally written audit evidences are more reliable than oral evidences and external evidences are more reliable than internal evidences as external people have no any authority to manipulate the books of internal organisation BUT if external party has spoiled the relation with organisation then in such cases, Internal evidences are more reliable than external evidences………….

• Ø Mention type of internal and external evidence list……..

There is no any exhaustive list of evidences but for concept clarity some of them are mentioned here…………….

–         Internal evidences

• Vouchers of Income
• Vouchers of expenses
• Sales Bill
• Inventory Sheet
• Wage Sheet
• Bank Reconciliation
• Tax computation
• Reports generated by the internal staff

–         External evidences

• Bank pass book
• Debtor’s confirmation
• Creditor’s Confirmation
• Certificates issued by the external parties (Such as CA, CS, Engineer etc.)
• Purchase Bills and Invoices.
• Valuation Reports.
• Sale or purchase deed of property.

 

Dear friends I hope that you are clear in the concept of audit evidences still if you have any querry you can ask me…………..

Now lets discuss the concept of Financial statements…………….

As being a professional student I don’t think that there will be any one who is not aware about the term Financial Statement.

Ok

Think about one question………… If you want to look yourself what you will do???

–         Definitely you will look in to the mirror…………..

 

Same way if someone wants to look at the position and situation of company or organisation what he should look?????

The answer is Financial statements…………………

In the audit process auditor decides his audit plan, after verifying financial statements first…………..

From the financial statements one can know about the profit, incomes, expenses, assets, liabilities and the flow of funds. In sort result and position of organisation can be known by the financial statements……….

 

Financial statements includes………………

• Ø Trading account (I hope you are aware about it…………..)
• Ø Profit and loss account (same hope)
• Ø Balance Sheet
• Ø Cash flow statement / Fund flow statements

Trading account and profit and loss account provides the result of organisation when Balance sheet provides the situation of organisation, when cash flow statement / fund flow statements provides information that what are the sources of funds and application of funds in the organisations.

Public is investor……….. So from the first look they are assuming that whatever has been shown in these statements are true………………………..

Auditor makes audit process and gives the opinion that , Financial statements gives true and fair views…………………….

So what is true and fair views???????

We will discuss it at the next lecture…………………

So mirror of organisation becomes more clean after process of audit………….BUT…………

Remember one thing that audit doesn’t give surety about truthness of Financial statements but it is just an opinion…………….

 

As being an auditor he contains authority and powers by Law so, auditor should perform his professional duties well…………………….

Thank you Friends……………. i hope that you are clear in the concept of Audit evidences and Financial statements…………… Please if you have any querry then ask here…………………

In the next lecture we will discuss about Audit Materiality and true and fair view of financial statements…………………..