LECTURE 6 – TRUE AND FAIR VIEW OF FINANCIAL STATEMENTS.

LECTURE 6 – TRUE AND FAIR VIEW OF FINANCIAL STATEMENTS.

 

Good morning friends once again………….

It is my initial try to make the subject of audit for the CA and other professional students, as simple as possible…… and once again thank you very much to all my readers that they have given me good response on this website……..

Now concentrate on the today’s discussion.

 

Think that what is main objective of audit???

Your answer will be —- provide the opinion about the TRUE AND FAIRNESS of financial statement of organization.

 

But here still the question is that what are the parameters which decides such true and fairness??????

And you will be surprised that our great institute has asked this question in the examination many times.

 

When I was CA student then I was also confused that which statements provide the true and fair view??????

After the deep analysis I have found the way to give the answer.

In this type of question we have to write the main points which auditor should keep in to consideration during his audit process.

 

I know that last sentence is little more tricky to understand………… so now concentrate here to understand it……..

 

Think all of you that with the blessings of your parents and god you have passed your CA. Now you are authorized to put CA as prefix in your name. You have decided to join practice instead of joining industry.

 

Now you have appointed as an auditor of one of the reputed company.

Now give the answer of following questions…….

 

1. 1.     During the process of audit you have found that company has purchased one HONDA CIVIC car of Rs. 10 Lacs and entry has been passed as expenses in to the profit and loss account.
   1. a.     Does financial statement give true and fair view??
2. 2.     In the current financial year company has incurred loss of Rs. 25 Lacs due to huge fire at company godown BUT company has shown such losses under the other normal losses in profit and loss account.
   1. a.     Does financial statement give true and fair view??
3. 3.     In the current financial year company received government subsidy of Rs. 50 Lacs which shown in the profit and loss account as other operating income.
   1. a.     Does financial statement give true and fair view??
4. 4.     Secured loan received from state bank of India amounting Rs. 75 Lacs shown as unsecured loan.
   1. a.     Does financial statement give true and fair view??
5. 5.     In the current financial year due to having less profit, depreciation amounting Rs. 10 Lacs has not been ptovided.
   1. a.     Does financial statement give true and fair view??
6. 6.     Advance received from customer amounting Rs. 25 Lacs for the next financial year has been stated Sales of current financial year.
   1. a.     Does financial statement give true and fair view??
7. 7.     Some information which should be stated in to financial statement statutorily has not been disclosed properly.
   1. a.     Does financial statement give true and fair view??

 

 

I hope that you know the answer of all those questions. Each question contains the answer NO. but why??

 

Reasons are as follows.

1. 1.     Here the HONDA CIVIC car is fixed asset which should be shown as fixed assets in balance sheet and not as expenses in the profit and loss account. Only depreciation is allowed as expenses. Here the profit is under valued by amount of Rs. 10 Lacs.
2. 2.     In this issue though the journal entry has been correctly passed but the disclosure is not properly made. Means loss due to fire including huge amount require separate disclosure because it influences the decision of reader (REMEMBER THE CONCEPT OF MATERIALITY). It should not be shown under the other normal loss.
3. 3.     Same as above government grant is not the other operating income but it is a special income, so separate disclosure is required.
4. 4.     In this case reader are assuming that the loan acquired is free from any charge or mortgage. But it is not in reality. So financial statement does not give true and fair view.
5. 5.     Depreciation should be compulsorily provided. Not providing depreciation profit is overvalued by Rs. 10 Lacs.
6. 6.     In the financial statement only current year’s transaction should be shown. Advance received from customer should not be shown as sales but it should be shown under the current liabilities as advance received from customer.
7. 7.     All statutory information which required to be shown in the financial statement must be shown. For example required of Schedule VI and Section 209 of the Companies Act, 1956.

 

Auditor should use compliance and substantive procedures for assessment of truthness and fairness of financial statement.

 

When auditor finds such issues which do not provide true and fair view in financial statement, he should inform management for adjustment. If management refuses for adjustment then auditor should issue qualified report (Remember lecture no. 5 – Types of auditor’s Report.)

 

 

In the company organization auditor is a mediator between the shareholders and the management. In the audit report auditor conveys the readers or users of the financial statements that whatever is presented in to the financial statements of the company by the management is true and fair to the best of his knowledge and according to the information and explanation provided to him.

 

In sort after reading the audited financial statements user can assume that whatever is presented in to the balance sheet is also available and in existence in the company though they have not seen it.

 

For example in the balance sheet fixed assets have been shown by Rs. 5000000 then reader assumes that these assets are available in reality in company.

 

Following are main parameters which auditor should verify for deciding true and fairness of financial statements of company.

 

• Ø all the transactions and items in the financial statements

–         properly recorded

–         correctly recorded

• Ø All the accounting policies of accounting have been applied with applicable accounting standards.
• Ø Distinction of transaction has been made properly between the capital and revenue transactions
• Ø All abnormal, nonrecurring, extra ordinary transactions are shown separately.
• Ø Assets and liabilities are properly valued and presented.
• Ø Depreciation on fixed assets provided.
• Ø Current year’s transaction has been shown in the current year only.
• Ø All statutory requirements in the financial statements has been complied with. (Requirement of the Companies Act,1956 and Schedule VI)

 

If financial statement of company is not complied with such criteria then we can say that financial statement does not provide true and fair view.

OK friends here we have discussed the concept of true and fair view of the financial statement I hope it will be very helpful to you in your concept clarity. In the next lecture we will discuss about

• Ø Audit papers
• Ø Detection of frauds and errors
• Ø Accounting policies

 

 

 

 

LECTURE 5 – AUDIT MATERIALITY…………………………..

LECTURE 5 – AUDIT MATERIALITY

Good morning friends once again…………..

In the last lecture we had discussed about the audit evidences………..

In today’s lecture we will discuss about Audit materiality………….

Now there would be very big question in your mind that WHAT IS AUDIT MATERIALITY????

Pay attention that our institute has asked this concept many times in its exams by way of theory as well as case study.

I am coming on that point but before that read this issue and just think about it……….

One day Mr. Vijay Rajput won Rs. 50 Lakhs from lottery. He went to his wise and intelligent friend CA Aryan and asked him to invest that money.

CA Aryan was known to all market flows.  He was aware about the recent boom of stock market. He advised his friend Mr. Vijay Rajput that he should invest his money in to share market. CA Aryan also advised to his friend that before investing this much money he should verify the financial statements of companies means profit and loss account, balance sheet and other important statements. He should assess the results and position of the company.

Now students pay your attention that what happened exactly…………

There was company named KBC Ltd. Vijay Rajput verified his financial statements and found following details…………………

–         Profit and loss account of previous year end was showing receipt  of Rs. 1050 Crores.

–         Expenses of that particular company were Rs. 750 Crores and profit was showing Rs. 300 crores.

–         Balance sheet was showing total assets of company which was amounting  Rs. 1000 crore out of which sundry debtor was Rs. 300 crores  and liability was Rs. 500 crore.

Now I like to ask that as being an investor should Mr. Vijay Rajput invest in such company…………….. and I am damn sure that your answer will be YES………………

You can see here that company has good income and good assets and liability position……….. from the first view it looks that there is no risk by investing in it.

Now just turn the picture by this way……………..

Now assume that…………

–         In profit and loss account out of Rs. 1050 crores receipts, Rs. 300 crores is received from government as subsidy……….

–         From the total receipt, Rs. 200 crores has been received from Insurance Company for passing claim of property damage.

–         In Balance sheet out of total of assets of Rs. 1000 crores, Rs. 300 crores is Preliminary Expenses (fictitious assets).

–         Out of total Rs. 300 crores of sundry debtors, Rs. 75 crores is of internal debtors. (Related party debtors by making internal transactions)

–         Out of liabilities of Rs. 500 Crores, Rs. 400 crores is secured by the fixed assets………….

Now think that should Mr. Vijay Rajput invest in such company???

Now your answer will be big NO……….

Now friends this is the impact…………

I am not here to advice you that in which company we should invest BUT I want to make emphasis on the point that what is the importance of disclosure………..

If disclosure is not made then we can say that decision would be different than disclosure made…………. after disclosure we can say that picture became more clear………….. and this is the concept of MATERIALITY……………….

So now you have lots of questions……………. like

• Ø What is materiality?
• Ø Which points are important to decide materiality in the process of audit?
• Ø Why materiality co ncept is important?
• Ø Which points auditor should consider for deciding materiality?

So, remember that…..

Transaction or item is material if it influences the decision of reader. Means after reading transaction or item of financial statement, if reader changes his mind or decision then, it is said that transaction is material.

And when the transaction or item is material then it is must to disclose them separately means……….. separate disclosure is required………….

So from the above issue we have verified that how important the disclosure is??????

Here we can see that concept of materiality is mainly related with the disclosure of data. In other words it is related with the presentation of data.

We all know that main objective of auditor is to express opinion about truth and fairness of financial statements.

So auditor has to verify that, all important data, which may influence the decision of reader has been disclosed separately in the financial statements.

• Ø Which points auditor should keep in mind while deciding materiality of item??????

–         It is true that each and every item of transaction cannot be said material.

–         As per PART V of schedule VI of The Companies Act, 1956 if xpenses amount is Rs. 5000 or 1% of the total revenue whichever is higher, then separate disclosure for such expenses is required.

–         For deciding materiality of transactions and items shown in the financial statements auditor should verify the data of previous year. He should make comparison and decide the disclosure item. (In the previous year there was sales of only one commodity when in current year there is sales of two commodities, so sales of both the commodities should be shown separately.)

–         For profit and loss account the materiality contents are its transactions when for balance sheet it is group and presentation of items. (for example Bonus paid to employees should be shown as Bonus under profit and loss account and not as the salary……. While loan given to any party cannot be shown as Deposit in the balance sheet…………. I hope you are aware that loans and advances is different concept than deposit…………

–         If transaction contains very attractive and abnormal amount, then it is material and known as quantitative in nature (For example scrap sales of property amounting Rs. 2500000…….. Now here you can say that transaction is ordinary but due to involving huge amount it becomes material and separate disclosure is required.

–         Sometimes transaction is not huge as per amount wise but it is special in nature.

–         Though the amount involved is very small, separate disclosure is required…….. because it is material in nature. (Every statutory transaction or item, though contain only 1 RUPEE, it is material and separate disclosure is required. [For example all type of TAXES (Income tax, VAT, Excise duty, Service tax etc.), government dues such as provident fund, Municipal tax, TDS, etc……]

–         Auditor should not only verify the individual effect of materiality but should check the cumulative effect also………… (For example bank ha charged Rs. 10 from the customer account. This is not that much important or material but think that there are 100000 customers are joined with the bank and from each and every customer’s account such amount has been deducted………….. So now this transaction becomes material in nature and for this separate disclosure is required.

–         All extra ordinary transactions, non recurring transactions, exceptional and abnormal transactions required separate disclosure because they all are material in nature………..

–         When transaction contains huge amount then it is called quantitative in nature, while all extra ordinary, non recurring and statutory transactions are known as qualitative in nature and separate disclosure is required for that.

–         Following are some transactions for which the separate disclosure is required……………………and which is material………….

• Insurance claim received from insurance company
• Profit on sale of any asset or property
• Profit on sales of investments
• Fraud committed by the management
• Any kind of losses (Fire, theft, accident………..)
• Dividend
• Interest paid
• Related party transactions
• Loan taken
• Any subsidy received from government authority.
• Asset revaluation transactions.

 

Here I will emphasis on one more point that ability to decide materiality from one individual to other may be different. It depends upon personal knowledge and experience.

• Ø Now think if such data has not been shown separately in the financial statements then what will be impact?

–         Then reader may be misguided with the data

–         Probability of Audit risk will be increased………………

Now you will have one more question in your mind that what is audit risk?????

To know about the audit risk you should be familiar with term detection risk…….

Now once again you will have one more question that what is detection risk???

To know about the detection risk fist you should know about control risk…….

And to know about the control risk you should be aware about the concept of inherent risk……………

AND

To know about the inherent risk you should be familiar with the concept of inherent limitations of internal control system……………

Now don’t ask me that what is internal control system??? We have already discussed it in the LECTURE – 2……….. So we will start our discussion with the inherent limitation of internal control system……………..

So first of all lets start with the concept………..INHERENT LIMITATION OF INTERNAL CONTROL…………

In the lecture no. 2 I had discussed about the concept of internal control system, I hope you are aware about it…….

Following are the limitation of internal control system………….. means though management have established good internal control system still there are some loopholes are always available. There is no any absolute authority that frauds and errors will be detected by such internal control system………….. because every system contains some limitations………. following are the reasons for such limitations

• Ø Management may not be able to create proper internal control system
• Ø Avoidance and carelessness of top level management
• Ø Humans are not machines. So human can make mistakes in the system.
• Ø Generally internal control is always set to control normal circumstances but when there are any kind of abnormal circumstances then it may possible that current internal control system may not able enough to control it. (in the organisation internal control system has been setup for normal weather but not for flood…………)
• Ø If management itself has been involved in making frauds then there is no any internal control system in the world which can prevent the frauds.

So students pay concentration here to understand the type of risk………….

• Ø There are always some risks are involved in any kind of system due to having inherent limitations of system. Risk involved at this stage is known as INHERENT RISK…………… such inherent risk is controlled by implementing internal control system. Means………………
• Ø To avoid such inherent risk and for finding frauds and errors internal control system is implemented.
• Ø CONTROL RISK means that frauds and errors due to having inherent risk in the system will not be controlled by the internal control also.
• Ø So such risk goes ahead and now there is only one filter available known as Audit. Such risk is detected by the audit process.
• Ø But if frauds and errors still not detected by audit process also then such involved risk is known as DETECTION RISK. Means frauds and errors not detected by the audit also.
• Ø Now pay concentration here what happened ultimately……………… such frauds and errors becomes part of the financial statement and there is one another risk that opinion given by the auditor is not correct. This risk is known as AUDIT RISK.

Auditor should verify all the risks and should plan his compliance and substantive procedures accordingly.

 So now come to the original point means audit materiality…..

From the above discussion we knew that material item required separate disclosure in the financial statement if it is not disclosed properly then there is possibility of audit risk in the financial statement.

Now

During the process of audit if auditor found any material transaction and it is not shown separately in the financial statement then what auditor should do?

–         Auditor should ask management for adjustment in the financial statements. (here adjustments means improve financial statement by disclosing material items.)

–         Now if management deny to make adjustments then what auditor will do????

–         Auditor should QUALIFY his report by mentioning the same thing in to the his audit report.

Now you will have one question that what is meant by qualifying the report.

This concept is part of audit reporting.

There are mainly four types of audit reports are issued by the auditor

–         Unqualified or clean report

–         Qualified report

–         Disclaimer of opinion

–         Adverse report

Now let’s understand each report one by one………….

• Ø Unqualified or clean report

–         When auditor is fully, 100% satisfied with the presentation in financial statements he issues cleans and unqualified report.

–         In this situation auditor makes this statement……………….. “to the best of my knowledge and prudence, financial statement of ………………. ltd. Provides true and fair view………….”

• Ø Qualified report

–         During the audit process there are some transactions for which the opinion of auditor and management remains different. Not only that management doesn’t give his consent to adjust it. Here auditor remains dissatisfied to those transaction and presentation. In such particular situation auditor issues qualified report.

–         In this situation auditor makes following statement…………. “to the best of knowledge and prudence, financial statements of…………… ltd. Provides true and fair view EXCEPT………………………(mention issue on which auditor is not satisfied.)

–         For example Honda City purchased by Rs. 9 Lakhs shown as expenses in the profit and loss account. In this case auditor should issue qualified report because Motor car purchased should be shown as fixed assets and not as expenses.

• Ø Disclaimer of opinion

–         Sometimes auditor demands some details or records from management but due to having some reasons management does not provide that information or records. In such case auditor will not be able to verify those particular transactions and for that transaction auditor should issue disclaimer of opinion.

–         “to the best of our knowledge and prudence it is our opinion that financial statements of ……………. ltd. Provides true and fair view except…………….. (mention records or item which not provided by yhe management) as it is not provided by the management.

–         For example auditor demanded original investment certificate amounting rs. 50 crores from company but company does not provide it. So auditor should mention that except investments financial statement provides true and fair view because management has not provided investment records.

• Ø Adverse opinion

–         When auditor is dissatisfied with the entire presentation of financial statement he issues adverse opinion.

–         When there is huge fraud is involved and huge manipulation of accounts has been made, financial statements are not providing true and fair situation as per actual, auditor should issue adverse opinion.

–         For example in the audit process it is found that actual sales of the company is only Rs. 100 crores when in the profit and loss account it has been shown by Rs. 550 crores. In this case auditor should issue adverse opinion.

I hope now you are aware about the concept of qualified report.

Now sometimes institute asking the question that what is relationship between audit materiality and audit risk????

• Ø Auditor will consider the audit materiality to draft his audit planning and audit programme
• Ø Audit planning may be changed at any time by considering materiality level of the organisation.
• Ø If materiality level is high then there is more transparency in the financial statements.
• Ø More transparency means there is less chances of having frauds and errors and due to that there is lower audit risk in the financial statements. So auditor will complete his audit by using less time.
• Ø If there is lower material level then auditor has to perform more substantive procedures to avoid the audit risk. So audit risk is more if there is lower level of materiality.
• Ø So relationship between audit risk and audit materiality is inverse relationship.

 

So fiends in summary we have learned following points today…………..

• Ø Concept of materiality
• Ø Different types of risks concepts
• Ø Audit materiality and audit risk relationship
• Ø Factors affecting audit materiality.

Thank you very much students……………. we will meet once again in next lecture with some more concept……………

If you have any dought about this concept then please ask here……………

 

Take care………………….

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…………………..

LECTURE 3 – AUDITOR AND COVERAGE (SCOPE) OF AUDIT…………

LECTURE 3 – AUDITOR AND COVERAGE (SCOPE) OF AUDIT…………

 

Good morning friends once again…………..

 

Before starting today’s lecture quickly revise what we have learned from past lectures?………

 

• Why audit is required?
• Audit tools
• Internal control system
• Compliance procedures and substantive procedures

 

Now lets start with today’s topics……….

 

Wait for some moments before going further just think on some issues…………

 

 

Issue 1 : –  

 

CA Arjun was appointed as an auditor of Hastinapur Sugar Mill Limited. He enjoyed his audit with handsome amount of fees.

 

One day client Mr. Duryodhana (means Director of Hastinapur Sugar Mill Limited) came to CA Arjun having lots of anger on his face.

 

CA Arjun could not understand that why today his client converted his colour of face to Red?

 

Before waiting for a moment client started shouting with anger on CA Arjun.

 

“Do you understand Yourrself as an Auditor?”

 

“Of course, Yes……. Look at the wall. There is degree of ICAI which I have obtained.”

 

Client started thinking for some seconds and then again asked the question……..

 

“Have you done your Articleship purely???”

 

 Now Arjun Started thinking and replied, “ha???…… yes…. But why do you ask me this kind of questions and what happened?”

 

“What happened????……. You were the auditor of my company…… we had trust on you….. we were thinking that in the audit you will be able to find out each and every frauds………… but you are failed Mr. Arjun…….”

 

“Failed and I Am!!!!!!!!……….. what’s happened say clearly……..”

“I hope Mr. Arjun that in the audit you should have verified all the debtors and cash………. Am I right???”

 

Arjun was thinking about that………….. now sweat started on his head. Duryodhana once again started his firing………..

“after completion of your audit we have found that…….. some employee were misappropriating cash by manipulating debtors’ Account……..

 

This fraud is detected by us Mr. Arjun and not by you, though you were the auditor of the same company.

We are considering it as your failure and we will sue on you. and we are demanding our fees paid back ………………………………………………………”

 

 

 

Dear students I hope you have understand it perfectly now there are lots of questions arises in our mind that what may be happened in such situation. Will client Duryodhana win the case or CA Arjun?????

 

Some other questions………

• Is auditor liable and has he to pay his fee back?
• Really auditor has made negligence of professional duty?
• Is it main objective of auditor to find out frauds and errors?
• What is scope of audit?
• Which precaution should auditor take care to avoid such critical situation?
• Did management misunderstand the scope of audit?
• We have listened that auditor should be independent then what is independence of auditor?

 

 

We will discuss on it but later on before that lets understand another issue……..

 Issue 2 :-

 

CA Ram was appointed as auditor of Shyam’s company. Shyam and Ram was very close friends.

 

During the audit process Ram found that Sales was actually of Rs. 360 Crores but in the profit and loss account it was shown by Rs. 500 Crores. Ram informed Shyam about it.

 

Shyam Smiled and replied to Ram, “ I know Ram…….. that’s why I have appointed YOU as my auditor, because you are my friend……”

 

Now ram was in confusion that what should he do????? Sign report with Rs. 500 Crores or Rs. 360 Crores  and forget friendship???

 

 

Dear students I want to ask you that what you will do if you were auditor of that particular company?????

 

Some students had replied that auditor should independently. BUT what is independency?????

 

Now from the above two issues following main concepts we have to understand…………..

 

• Management’s expectation from the auditor and scope of auditor – Clarification
• Independence of auditor.
• Objective of audit and auditor
• What is role of auditor?

 

 

Lets start with discussion

 

• Auditor’s objective

 

Be clear friends that auditor is not a fraud detector. But he is a verifier who expresses his opinion on the financial statements.

 

Auditor’s main objective is to express opinion on the financial statements about its truthness and fairness.

 

Detecting frauds and errors is secondary objective.

I have already mentioned that detecting frauds and errors is the duty of management and not of Auditor. For it management should have strong internal control system and auditor should strictly verify that internal control system by using compliance procedures.

 

If management expecting more from auditor then sorry BOSS…….. it is mistake of management and not of Auditor…………

 

Now some auditors are taking wrong interpretation of this statement……. Means they are thinking that if they will pay less concentration in audit, still they will enjoy…………..

 

Then I will say that sorry dear, it is not like that way…….. you don’t know our Great Institute…………

 

It doesn’t mean that though auditor has dought, he disregard the matter. Suspicious points are like Red Light. Auditor must have to pay more concentration on those areas by using substantive procedures.

 

If auditor will totally neglect, then he will be held guilty of professional misconduct by not following his duties.

 

If in the Above Issue 1:- CA Arjun has performed his duty well by using audit techniques and evidences thereof are available to him, he will not be held guilty……….. Otherwise……… you can understand what may be happened……….

 

 

• Now come to second issue can CA Ram allow Rs. 500 Crores as sales instead of Rs. 360 Crores by maintaining his relationship with friend.

 

 

The answer is big NO.

 

Institute is not providing us degree of CA for doing SEVA of our friends and relatives. But it is given to us because we have some social and professional responsibilities…………..

 

If CA Ram has allowed Rs. 500 Crores in the report the  it will be termed as Misuse of CA designation and he will be held guilty of professional misconduct.

 

Means auditor should be free from all the bias……… means he should be independent…….

 

 

• Now u will have one more question in mind that What is independency of auditor………

 

Lets start with the topic and………………. Remember this question has been asked many times by our institute in the examination so understand it carefully………..

 

 

• Independency of Auditor

 

–         Independence means opinion of auditor should be his own opinion and it should not be influenced by any force, relation, threat

–         Though there is relation, friendship, pressure but opinion should be that which auditor feels.

–         Standard on auditing issued by the our great institute has also included this quality.

 

Now question why auditor should be independent?

 

Then I will again say that company running is not from its own money BUT money from share holders and investors and they have right to know about true position of company. And it is a duty and responsibility of an auditor to show the true picture to them………….

 

So CA Ram should report in his audit report accordingly (means actual situation).

 

 

• Now there is one question that what is role of auditor???

 

Before going to that discussion lets understand 3 Cases…………..

 

 

 

 

• Bhopal Gas Leak disaster in 1984

 

The Bhopal disaster (commonly referred to as Bhopal gas tragedy) was a gas leak incident in India, considered one of the world’s worst industrial catastrophes.

 

It occurred on the night of December 2–3, 1984 at the Union Carbide India Limited (UCIL) pesticide plant in Bhopal, Madhya Pradesh, India. A leak of methyl isocyanate gas and other chemicals from the plant resulted in the exposure of hundreds of thousands of people.

 

The toxic substance made its way in and around the shantytowns located near the plant Estimates vary on the death toll. The official immediate death toll was 2,259 and the government of Madhya Pradesh has confirmed a total of 3,787 deaths related to the gas release.

 

Others estimate 3,000 died within weeks and another 8,000 have since died from gas-related diseases.

A government affidavit in 2006 stated the leak caused 558,125 injuries including 38,478 temporary partial and approximately 3,900 severely and permanently disabling injuries.

 

(From Ref.:- http://en.wikipedia.org/wiki/Bhopal_disaster)

 

 

• I want to add here further that there was one reporter in Bhopal who had received the news before some days ago of happenings that company has no any strong internal control system for verification of GAS drums periodically.
• Not only to that but drums were containing excess gas than its original capacity.

 

Reporter had suspect about such happenings, and it became true……

 

 

• 2 G spectrum Case

The 2G spectrum scandal involved officials in the government of India illegally undercharging mobile telephony companies for frequency allocation licenses, which they would use to create 2G subscriptions for cell phones.

The shortfall between the money collected and the money which the law mandated to be collected is estimated to be 176,645 crore (US$38.86 billion) as valued by Comptroller and Auditor General of India based on 3G and BWA spectrum auction prices which held in 2010.

However the exact loss is disputed, Central Bureau of Investigation (CBI) pegged the loss at 30,984.55 crore (US$6.82 billion) in its first charge sheet filed on 2 April 2011, whereas Telecom Regulatory Authority of India in a response to CBI’s query said that the Govt. has actually gained 3,000 crore (US$660 million) by selling the spectrum.

Kapil Sibal, minister for communications & IT, said in a press conference that there was no loss caused by selling 2G licenses.

However in September 2011, CBI argued before the Supreme Court that it was unsafe to read a “no loss” conclusion in the telecom regulator’s calculations on irregular spectrum allotment as the methodology adopted admittedly did not take into account the market mechanism.

All the speculations of profit, loss and no-loss were put to rest when on 2 February 2012 the Supreme Court of India delivered judgement.

The Supreme Court declared the allotment of spectrum as “unconstitutional and arbitrary” and quashed all the 122 licenses issued during tenure of A. Raja, the main accused in the 2G scam case.

The court further said that A. Raja “wanted to favour some companies at the cost of the public exchequer” and “virtually gifted away important national asset”.

The issuing of licenses occurred in 2008, but the scam came to public notice when the Indian Income Tax Department was investigating political lobbyist Nira Radia.

The government’s investigation and the government’s reactions to the findings in the investigation were the subject of debate, as were the nature of the Indian media’s reactions. Much of the credit of bringing this whole scam into the public light (by pursuing it in the court of law) goes to Subramanian Swamy who is the chief petitioner for this case in the court of law.

In 2011, Time magazine listed the scam at number two on their “Top 10 Abuses of Power” list (just behind the Watergate scandal).

Ref:- http://en.wikipedia.org/wiki/2G_spectrum_scam

• Now there you will have one question that what is Comptroller and auditor general of India?  For that please have some patience, I will discuss it on later lectures………….

 

• Satyam Scam (Raju Ramlingam Scam)

Ramalinga Raju resigned from the Satyam board after admitting to cheating six million shareholders.

 After being held in Hyderabad‘s Chanchalguda jail on charges including cheating, embezzlement and insider trading, Raju was granted bail on 18 August 2010.

A botched acquisition attempt involving Maytas in December 2008 led to a plunge in the share price of Satyam.

In January 2009, Raju indicated that Satyam’s accounts had been falsified over a number of years. He admitted to an accounting dupery to the tune of 14000crore rupees or 1.5 Billion US Dollars and resigned from the Satyam board on January 7, 2009. In his letter of resignation, Raju described how an initial cover-up for a poor quarterly performance escalated: “It was like riding a tiger, not knowing how to get off without being eaten.”

Raju and his brother, B Rama Raju, were then arrested by the CID Andhra Pradesh police headed by Mr. V S K Kaumudi, IPS on charges of breach of trust, conspiracy, cheating, falsification of records. Raju may face life imprisonment if convicted of misleading investors. Raju had also used dummy accounts to trade in Satyam’s shares, violating the insider trading norm.

It has now been alleged that these accounts may have been the means of siphoning off the missing funds. Raju has admitted to overstating the company’s cash reserves by USD$ 1.5 billion. Raju was hospitalized in September 2009 following a minor heart attack and underwent angioplasty. Raju was granted bail on condition that he should report to the local police station once a day and that he shouldn’t attempt to tamper with the current evidence. This bail was revoked on 26 October 2010 by the Supreme Court of India and he has been ordered to surrender by 8 November 2010. The people of his native village, Garagaparru, hail the development works undertaken by the Byrraju Foundation, the charitable arm of Satyam.

Ramalinga Raju was Granted a bail by the supreme court on 4th november 2011 after the Central Bureau of investigation failed to chargesheet Raju within the statutory period.

 

• After this scam ICAI became active to action……… read this article which was written on 7^th January, 2009. (Means at the time of scam)

 

New Delhi: The apex chartered accountants’ body ICAI will seek an immediate explanation from Satyam Computer’s auditors, PriceWaterHouse Cooper (PwC), on the financial fraud unearthed by the software company’s chairman B Ramalinga Raju, before taking any action.

“ICAI will write a letter to PwC on 8 January and will seek an immediate reply on the issue and inform them about the process of investigation, which is on,” ICAI president Ved Jain told PTI.

He said that strict action will be taken if the auditors, of country’s fourth largest IT firm Satyam, are found guilty.

“We will ensure that to any person who has not worked according to our standards and our expectations, severe punishment be given,” he said.

PwC’s comments are still awaited.

Following a letter from the Satyam chairman, who accepted that he had misrepresented facts in the company’s balance sheet, role of auditors and accountants for the company has also come under scanner.

In fact, the Ministry of Corporate Affairs announced that role of directors and auditors at Satyam would be scanned by ICAI and the apex body of company secretaries ICSI.

However, Jain also pointed out that before the body takes any action against the members involved in the “fraud”, it needs to collect facts and information. “So we are looking into that and we will start our proceedings,” he added.

“All one needs to prove is he (auditor) was a party to the fraud. He can be booked under the Companies Act and the Chartered Accountants Act… in case of negligence by the chartered accountant, we have a severe punishment,” Jain said.

Dear students please read above cases carefully…….. and try to understand that how important is the role of auditor…………..

• In the Bhopal case if auditor would have performed his duty well by using surprise check of Gas drum then it might be possible that, whatever had happened it could be stopped…………..
• In the 2G Spectrum scam the auditor has performed his duty well and with the surprise I will say that telecome minister has to go in the JAIL……………
• In the 3^rd case of Satyam computer auditor was not able to detect this much BIG fraud……….. So I can say that he has not performed his duty well.

 

Many of you have joined the article ship and in that you are doing lots of vouching……… and may feel that audit means only vouching but no friends it is more broader than that………..

• Lets understand that what is coverage of audit… means what should we do in the process of audit?????

First.

–         Decide terms of engagement between auditor and management

–         Consider statutory requirements (Means Acts and provisions thereof applicable to organization)

–         Auditor should take in to consider the announcement made by the institute.

Now what these announcements are?

• Announcements mean Standard on auditing and guidance notes issued by the institute.

We will discuss about these things later on.

–         Legal judgments given by the various courts of statute.

Second

–         Check the appropriateness of accounting and internal control system by using compliance procedures

–         Check the appropriateness of transactions by comparing them with supportive documents and evidences.

–         If organization is maintaining manual system of accounting then verify the arithmetical accuracy in totaling, posting, casting, brought and carry forward of balances.

–         Verification of different assets and liabilities with having supportive documents and evidences.

• what is difference between vouching and verification
• Vouching is generally made for profit and loss account item which are just transactions like – Income, Expenditure, Sales, purchase, adjustments etc. Here auditor is checking recording, correctness of total, transaction relation, concern with particular year, capital and revenue difference of transaction.
• When verification is made for balance sheet items with supportive documents and evidences to check whether the same balances are available on the same date or not. Here auditor should verify the existence, ownership, valuation and shown in balance sheet.

Dear friends according to me auditor should physically check each and every item presented in balance sheet.

Now Just think that if this tool was used in the case of Bhopal or Satyam by the auditor then it could detect it before happenings…………….

–         Application of Accounting Standards, standards on asuditing.

–         Disclosure requirement of Financial statements.

–         Check that expenses, revenue, sales and purchase of current year is recorded in same year.

–         Verify the allocation between revenue and capital

 

Thanks friends……….

In the next lecture we will discuss about audit evidence…….. and financial statement

Have a nice day………………

Lecture 2 Basic of Audit – Internal Control system, compliance procedures and substantive procedures…………………

Lecture 2 Basic of Audit – Internal Control system, compliance procedures and substantive procedures…………………

Good Morning friends once again…

In the last lecture we have come to know about the concept of audit now today we are going to know further more about audit. In the last lecture we have also learned that, what the limitations of audit are?

In today’s lecture we will understand about the Internal control system, Compliance procedures and substantive procedures.

Lets understand this

One day CA Abhishek received one notice from R K oil Limited about to make audit of that particular company. It was very well established manufacturing company containing very huge amount of transactions.

Now as being an auditor which point should be thought ?

According to me following points I will think first…..

What is company doing?

How will I do audit? Within how much time will it take? What will be audit programme?

In the company………………

• What are the policies of accounting transactions?
• What are the flows of transactions?
• Who is authorized to make, which kinds of transactions?
• What is system of accounting communication?
• Organizational structure
• Computer Technology used for accounting.
• Management’s efforts to control and detect frauds – errors.
• Allocation of authority and responsibility.

From the above points it should be cleared that it is management’s duty to prepare and implement well system to prevent and detect frauds and errors.

Now what management can do to prevent and detect frauds and errors?

Some examples are……..

• C. C. TV cameras
• Allocation of authority and responsibility
• Data access as per the authority and responsibility
• Password protected system
• Periodical verification of transactions (means internal audit)
• Internal check
• Change the job of employee so that one employee’s work is checked by the other employee. For example one employee should collect cash and other should make the entry in to the system by using his ID and Password. This password and ID should not be accessible to Cash collecting employee.
• Budget preparation and periodical comparison.

Dear friends this entire system design to prevent and detect frauds and errors is known as Internal Control System where work of one person is checked by the other person.

 

Here the chances of making frauds and errors automatically reduces.

Ok……..

 Then what is Internal check???

• When work of one person is checked by the other person is known as internal check. This entire process and system is known as the internal control system.

Preventing and detecting the frauds and errors is the duty of management and not of the auditor.

Then

What is the duty of auditor??

• auditor’s duty is to check whether such internal control system is 

–         established

–         Implemented

–         And was in operation through out the year or not

How can auditor perform his such duty?

• By using compliance procedures

What is Compliance procedure?

• Assessment of internal control by auditor is known as compliance procedure.
• The extent of substantive is known by such compliance procedure.

What techniques are used by the auditor in application of compliance procedure?

• First technique is known as flow chart analysis of organization.
• When flow chart is not prepared by the management then Internal control questionnaire is used by the Auditor.
• Surprise check made by the auditor.
• Main objective of such techniques is to know the transaction process system and flow of transactions of organization.

Now lets discuss points one by one

• Flow chart

–         In the company where the transactions are in the huge amount, it becomes necessary for the management to allocate the authority and responsibility.

–         Not only that it is also specified that which employee will be responsible to which officer?

–         By whose authority the transaction will be approved and at which authority the reporting will be made.

–         Entire such flow is drawn as diagram by the organization which is known as the flow chart.

• Internal control questionnaire

–         Some company does not prepare the flow charts.

–         So auditor send questionnaire to the various responsible officers, mentioning sequential questions of the organization about internal control.

–         By this way also auditor come to know about the internal control. Not only to that auditor can know also that at where he should pay more concentration. Auditor can know about his substantive procedures.

You will have question that what this substantive procedure is?

But dear wait for some more time I will discuss it at later on in some paras.

• surprise check

–         Surprise check is one of the most effective technique to know about the organization’s internal control

–         Auditor should visit client place without informing client and should make surprise checking.

–         Auditor can make surprise checking of the following particulars

• cash on hand
• Investment on hand
• Bank balance on hand
• Stock and inventory on hand
• Assets verification
• Salary payment on the payment date

Now question arises that what is the substantive procedure……….

Thanks for waiting………….

• Substantive procedure

 

Just assume that during the surprise check, auditor found major variance in to the inventory by showing more inventories on hand in book, but actually it was not there.

Inventory has been shown excessively. What may be the reasons?????

–         Error in recording

–         Sales has been made but not recorded

–         Excess purchase has been shown

–         There is misappropriation of inventory by some employees.

–         There may be some accident or destruction

There may be lots of reasons BUT……… reason to believe is available thereat.

So auditor will pay more concentration on such area. Means he will make his verification strict by

–         Vouching,

–         verification,

–         total check,

–         analytical review,

–         comparison,

–         reconciliation,

–         re computation,

–         confirmation

–         Erithmatical accuracy checking

–         brought / carry forward verification

With the help of above, auditor will try to clear his dought and if there is any kind of error or fraud is lying in the transactions, chances of detection will be increased.

This process of audit is known as the substantive procedures. Means process other than compliance procedure.

Vouching is generally made for items of profit and loss account when verification is made for the items mentioned in balance sheet………..

Hope you are aware about profit and loss account and balance sheet.

Understand????????????

I hope yes………….

So now u should be clear in the compliance procedures and substantive procedure

Now question is what is the relation between these two things?????

Lets understand………. If management has implemented very strong internal control system, there will be less chances to have frauds and errors in the system and if still they are available, they will be detected by the compliance procedures and be resolved.

If there are less chances of having frauds and errors, means auditor can rely on the financial statement prepared by the organization and he will use less vouching and verification means substantive procedures.

So if internal control system is strong more compliance procedures will be used than substantive procedures

If internal control is weak then more substantive procedures will be used than compliance procedures.

Means we can say that compliance procedure is filter of system when substantive procedure is scanner of transactions. If error is not found by filter then use scanner.

Still remember that auditor will be solely responsible for his audit………

Dear students here we have just completed the concept clarity of internal control and its main procedures in the next lecture we will discuss about……….basics of audit and Auditor………………….in  which we will discuss following points…………..

–         what is audit?

–         Objective of audits

–         What are the financial statements?

–         What is auditor?

–         Scope of audit

–         Independence of auditor

–         Importance of evidences

–         Explanation of some terminologies

Thank you take care………………………

We will meet soon………………….

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……….