Contents – Auditing: Principles and Techniques

Contents

Preface

1  Nature of Auditing

1.1 Introduction

1.2 Origin of the Word ‘Audit’

1.3 Early History of Audit

1.4 Auditing Defined

1.5 Essential Features of Auditing

1.6 Why Is There a Need for an Audit?

1.7 Objective of an Audit

1.8 Errors and Frauds in Accounting

1.9 Role of Auditors in Detecting Errors and Frauds

1.10 Relation between Book-keeping, Accountancy and Auditing

1.11 Basic Principles Governing an Audit

1.12 Postulates of Auditng

1.13 Scope and Procedures of Audit

1.14 Changes in the Concept of Auditing

1.15 Social Objectives of Audit

1.16 Advantages of Auditing

1.17 Limitations of Auditing

1.18 Qualities of an Auditor

1.19 Auditing and Other Services

Points to Ponder

Review Questions

2  Classification of Auditing

2.1 Introduction

2.2 Classification of Audit

2.3 Classification on the Basis of Organisation

2.4 Classification on the Basis of Function

2.5 Classification on the Basis of Practical Approach

2.6 Classification on the Basis of Audit Dimension

Points to Ponder

Review Questions

3  Techniques and Procedures of Auditing

3.1 Introduction

3.2 Preparatory Steps before Commencement of Audit

3.3 Preparation by the Auditor

3.4 Principles and Techniques of Auditing

3.5 Procedures Followed in Course of Audit

Points to Ponder

Review Questions

4  Internal Control, Internal Check and Internal Audit

4.1 Introduction

4.2 Internal Control

4.3 Internal Check

4.4 Internal Audit

4.5 Auditor’s Independence

4.6 Distinction between Internal Control and Internal Audit

4.7 Distinction between Internal Check, Internal Audit and Internal Control

Points to Ponder

Review Questions

5  Vouching

5.1 Introduction

5.2 Concept of Vouching

5.3 Objectives of Vouching

5.4 Importance of Vouching

5.5 Vouching and Verification

5.6 Vouching and Routine Checking

5.7 Concept of Voucher

5.8 Internal and External Evidence

5.9 General Principles of Vouching

5.10 Teeming and Lading: A Challenge to Vouching

5.11 Vouching of Different Types of Transactions

Points to Ponder

Review Questions

6  Verification and Valuation of Assets and Liabilities

6.1 Introduction

6.2 Meaning of Verification of Assets

6.3 Meaning of Valuation of Assets

6.4 Difference between Verification and Valuation

6.5 Importance of Verification of Assets

6.6 Importance of Valuation of Assets

6.7 General Principles for Verification and Valuation of Assets

6.8 Problems in Verification

6.9 Problems in Valuation

6.10 Window Dressing—A Challenge to Verification

6.11 Verification and Valuation of Assets

6.12 Verification and Valuation of Intangible Assets

6.13 Verification and Valuation of Fixed Assets

6.14 Verification and Valuation of Investments

6.15 Verification and Valuation of Current Assets

6.16 Verification and Valuation of Fictitious Assets

6.17 Verification and Valuation of Contingent Assets

6.18 Verification and Valuation of Liabilities

6.19 Verification and Valuation of Fixed or Long Term Liabilities

6.20 Verification and Valuation of Current Liabilities

6.21 Verification and Valuation of Contingent Liabilities

6.22 Events Occurring after the Balance Sheet Date

6.23 Prior Period and Extraordinary Items and Changes in Accounting Policies

Points to Ponder

Review Questions

7  Depreciation

7.1 Definition of Depreciation

7.2 Purposes of Providing Depreciation

7.3 Causes of Depreciation

7.4 Basis of Charging Depreciation

7.5 Quantum of Depreciation

7.6 Distinction between Depreciation and Amortisation

7.7 Different Methods of Depreciation

7.8 Depreciation Accounting as per AS-6

7.9 Accounting Disclosure Requirement

7.10 Legal Necessity of Provision for Depreciation

7.11 Provision for Depreciation for Past Years

7.12 Depreciation on Low Value Items

7.13 Depreciation on Wasting Assets

7.14 Change in the Method of Depreciation

7.15 Auditor’s Duty as Regards Depreciation

7.16 Legal Views as Regards Depreciation

Points to Ponder

Review Questions

8  Reserves and Provisions

8.1 Concept of Reserves

8.2 Concept of Provisions

8.3 Difference between Reserves and Provisions

8.4 Classification of Reserves

Points to Ponder

Review Questions

9  Company Audit

9.1 Introduction

9.2 Preliminaries before Commencement of Company Audit

9.3 Audit of Share Capital Transactions

9.4 Audit of Debentures

9.5 Audit of Holding Company

9.6 Audit of Pre-incorporation Profit

9.7 Specific Provisions for Accounts in the Companies Act

9.8 Payment of Interest Out of Capital

9.9 Special Requirements of Company Audit

9.10 Company Auditor

9.11 Special Auditor

9.12 Branch Auditor

9.13 Joint Auditor

9.14 Legal Views on Auditor’s Liability

Points to Ponder

Review Questions

Annexure

10  Divisible Profits and Dividends

10.1 Meaning of Divisible Profit

10.2 Meaning of Dividend

10.3 Concept of Profit

10.4 Profit vs Divisible Profit

10.5 Principal Determinants of Divisible Profit

10.6 Companies Act Relating to Payment of Dividend

10.7 Companies Act Regarding Unpaid and Unclaimed Dividend

10.8 Payment of Dividend Out of Capital Profit

10.9 Payment of Dividend Out of Capital

10.10 General Guidelines for Distribution of Dividend

10.11 Articles of Association Regarding Dividend

10.12 Auditor’s Duty as Regards Payment of Dividend

10.13 Payment of Interim Dividend and the Role of Auditors

10.14 Legal Views as Regards Dividend

Points to Ponder

Review Questions

11  Audit Report and Certificate

11.1 Definition of Report

11.2 Definition of Audit Report

11.3 Value of Audit Report

11.4 Essentials of Good Audit Report

11.5 Scope of Audit Report

11.6 Signing of the Audit Report

11.7 Contents of Audit Report

11.8 Companies (Auditor’s Report) Order, 2003

11.9 Forms of Audit Report

11.10 Audit Report and Audit Certificate

11.11 Types of Auditor’s Report

11.12 Qualified Audit Report

11.13 Types of Audit Certificate

11.14 Auditor’s Report and ‘True and Fair View’

11.15 Specimen of Clean Audit Report

11.16 Specimen of Qualified Audit Report

11.17 Legal Views as Regards Audit Report

Points to Ponder

Review Questions

12  Audit of Banks

12.1 Introduction

12.2 An Overview of Banking Institutions in India

12.3 Legislation Relevant to Audit of Banks

12.4 Approach to Bank Audit

12.5 Stages in Audit of Banks

12.6 Audit Procedures

12.7 Advances

12.8 Income Recognition

12.9 Bank Audit Report

Points to Ponder

Review Questions

Annexure

13  Audit of Insurance Companies

13.1 Audit of Companies Carrying on Life Insurance Business

13.2 Audit of Companies Carrying on General Insurance Business

13.3 Applicability of Accounting Standards

13.4 Books and Registers to be Maintained

13.5 Submission of Reports and Returns

13.6 Audit of Accounts

13.7 Preparation for the Audit

13.8 Internal Controls

Points to Ponder

Review Questions

Annexure

14  Investigation

14.1 Introduction

14.2 Definition

14.3 Objectives or Purposes of Investigation

14.4 Features of Investigation

14.5 Terms of Reference

14.6 Working Methods

14.7 Duties of an Investigator

14.8 Investigation Report

14.9 Qualities of an Investigator

14.10 Difference between Investigation and Auditing

14.11 Types of Investigations

14.12 Legal Views as Regards Investigation

Points to Ponder

Review Questions

15  New Areas of Auditing

15.1 Introduction

15.2 Cost Audit

15.3 Management Audit

15.4 Human Resource Audit

15.5 Operational Audit

15.6 Forecast Audit

15.7 Social Audit

15.8 Tax Audit

15.9 Forensic Audit

15.10 Environmental (Green) Audit

15.11 Audit Committee

15.12 Accounting Standards

15.13 Auditing and Assurance Standards

Points to Ponder

Review Questions

16  Professional Ethics and Misconduct

16.1 Introduction

16.2 Meaning of Professional Ethics

16.3 Meaning of Professional Misconduct

16.4 Schedules to the Chartered Accountants Act, 1949 Relating to Professional Misconduct

16.5 Enquiry into Charges of Misconduct of Chartered Accountants

Points to Ponder

Review Questions

17  Special Audit

17.1 Introduction

17.2 Audit of Charitable Societies

17.3 Audit of Cinema Halls

17.4 Audit of Clubs

17.5 Audit of Co-operative Societies

17.6 Audit of Educational Institutions

17.7 Audit of Hotels

17.8 Audit of Hospitals

17.9 Audit of Libraries

17.10 Audit of Nursing Homes

17.11 Audit of Travel Agencies

17.12 Audit of College Hostels

17.13 Audit of Publishing Concerns

17.14 Concluding Remarks

Points to Ponder

Review Questions

18  Audit of Soleproprietorship and Partnership Firm

18.1 Introduction

18.2 Audit of Sole-proprietorship Business

18.3 Audit of Partnership Firm

18.4 Salient Features of Audit of Accounts of Sole-proprietorship and Partnership Firm

18.5 Rights, Duties and Liabilities of Auditor of a Sole-proprietorship or Partnership Firm

18.6 Position of Auditor of a Soleproprietorship or Partnership Firm

18.7 Reports on Accounts of Individual or Partnership Firm

18.8 Comparison of Company Audit with the Audit of Sole-proprietorship and Partnership Firm

18.9 Legal Views as Regards Audit of Individual and Firm

Points to Ponder

Review Questions

19  Audit of the Accounts of Government and Public Sector Undertakings

19.1 Introduction

19.2 Audit of Public Sector Undertakings

19.3 Distinction between Audit of Public Sector Undertakings and Audit of Private Sector Undertakings

19.4 Government Audit

19.5 Distinction between Government Audit and Commercial Audit

19.6 Comptroller and Auditor General of India

Points to Ponder

Review Questions

20  Auditing in an EDP Environment

20.1 Introduction

20.2 General Approach to an EDP-based Audit

20.3 Computer Installation Review

20.4 Computer System Review

20.5 Approaches to EDP Auditing

20.6 Special Techniques for Auditing in an EDP Environment

Points to Ponder

Review Questions

Annexures

A. Important Case Decisions

B. Objective Type Questions

C. Model Questions and Answers