Auditing

Audit
Auditing is an examination of the accounting books and the relative documentary evidence so that an auditor may be
able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial
statements.

Difference between Auditing & Accounting”

Auditing Accounting
1: Auditing means examining the books of accounts. 1: Accounting means maintaining the books of accounts.
2: Auditing is performed by an auditor. 2: Accounting is performed by accountants.
3: Auditor is appointed by shareholders. 3: Accountant is appointed by management.
4: Auditor job is not so mechanical. 4: Accounting job is of a mechanical nature.
5: Auditor responsibility is fixed by law. 5: Accountant responsibility is fixed by management.
6: Auditor cannot be removed till he completes his period 6: Accountant can be removed by management at any
of appointment. time.

Auditor:
An auditor is a professional who examines and evaluates financial records and statements to ensure accuracy,
compliance with accounting standards, and adherence to laws and regulations.

Qualification:
A person shall not be qualified for appointment as an auditor unless he is a chartered accountant.

Disqualification:
The following person cannot become an auditor of a company:
An employ of the company.
A director or shareholder of the company.
A partner of a public company.
A person who is in debted to the company.
The spouse of director of the company.

Appointment:
A: Appointment of first director by the Directors:
The first auditor is appointed by the directors within first sixty days of the incorporation of the
company.
B: Appointment by Shareholders:
At each general meeting the company’s shareholders appoint an auditor to hold the office of auditing
until the conclusion of the agreement between them.
C: Appointment by the Government:
The government appoint an auditor in the following cases:
1: If the directors fail to appoint the auditor in first 60 days.
2: If the company fails to appoint the auditor in the first 120 days.
3: If an auditor is not willing to act as an auditor of the company.
4: Casual vacancy of an auditor is not filled within 30 days after the occurrence.
D: Appointment on Casual Vacancy:
The auditor who is working dies or resign during his period of contract then the director may appoint
an auditor until the next annual general meeting.

Remuneration:
If an auditor is appointed by the directors then they will fix the remuneration. If the auditor is appointed by the
company then company will fix it. If the auditor is appointed by the government then the government will fix
the remuneration.
Removal:
According to the Company’s Act 2017 the company is not entitled to remove an auditor before the completion
of his term. Only the first appointed auditor can be removed by the annual general meeting.

Rights of an Auditor:
A: Access to the books:
It is the right of an auditor to access the books of accounts, vouchers etc of the company at any time.
B: Right of inspection:
It is a right of the auditor to inspect the record of the company at any time.
C: Right of information:
Auditor can demand any information which he needs for the audit from the directors and officers.
D: Receiving notices:
It is the right of the auditor to get the notices relating to the general meeting as these are sent to the
shareholders.
E: Right of attending the meeting:
It is the right of the auditor to attend the annual general meeting.
Duties:
A: Professionally competent:
An auditor must have a complete and thorough knowledge of the accountancy.
B: Honest:
An auditor must be honest, he must not certify what he believe is not true.
C: Up to date knowledge:
An auditor knowledge about auditing must be up to date.
D: Knowledge of business law:
Auditor must have an adequate knowledge about business law.
E: Knowledge of Taxation:
An auditor must also have the knowledge and up to date information about the laws of taxation.
F: Critical Attitude:
An auditor must critically examine the documents while performing the audit.
G: Bold and courageous:
An auditor must be bold and courageous. He should not influenced by any authority.

Objectives of Auditing:
1: Verification of books and statements:
The main objective of auditing is the verification of books of accounts and financial statements.
2: Discovery and prevention of errors:
While examining the books the auditor may find some errors and then rectify them. So auditing
prevents errors.
3: Discovery and prevention of frauds:
It is the duty of an auditor to detect frauds and prevent any fraud from happening.
4: Independent Opinion:
Auditing is very useful to obtain the independent opinion of the auditor about the condition of the
business.
5: Protects the interests of the shareholders:
Through audit the shareholders are assured that the accounts of the company are maintained properly
and their interests will not suffer.
6: Check on directors:
Audit act as a check upon directors and a precaution against fraud on the part of the management.
7: Valuable:
The auditor has expert knowledge about the accounts and finance problems, so he may be consulted
on these problems.
8: Loan Facility:
If the accounts are audited, then the true picture will be known to the financial institutions and they
will never hesitate to lend the money.

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ERROR

1. ERROR OF OMISSION
When any transaction is not recorded in the books of accounts it is called error of omission so
transaction is absolutely omitted from the record.
2. ERROR OF COMISSION
When the transaction is recorded but incorrectly we say that error of commission is committed
3. ERROR OF PRINCIPLE
When the entries are not recorded according the fundamental principles of accounting .such error may
arise which are called error of principle. Such error may be committed influentially or existentially.

4. COMPENSATING ERROR
When one error is counter balanced by another error or errors is called compensating error.
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Frauds
Its means false representation making wrong entry intentionally believing to be wrong.
There are following important types of frauds

1: MISAPPROPRIATION OF CASH
It means to take money dishonestly for oneself. There are two methods by which misappropriation of
money to be concealed by the dishonor employee.
A: Entering fictitious or excess payment.
B: Omitting to enter receipts.
2: MISAPPROPRIATION OF GOODS
It means to take the goods dishonestly. Theft of goods are found very common among the employees
where internal control system over the employee is very poor.
3: MANIPULATION OF ACCOUNTS
This type of frauds are usually committed by the directors and management of the company.

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Types of Auditing:

Continuous Audit.
The audit which remain continue throughout the financial year is called continuous audit. In this case the auditors
visits at regular or irregular intervals during the financial year. He checks each and every transaction. At the end of
the year he checks the balance sheet and profit and loss account.
Advantages
Early Location of Errors.
It is the main advantage of continuous audit that error are located at the early stage.
Check on frauds.
Continuous check is very effective in controlling the frauds because book are examined after certain regular or
irregular intervals.
Quick rectification.
Due to continuous audit errors are located easily and rectified at an early stage.
Special attention
Before the finalization of account an auditor has a sufficient time to pay proper attention to the checking of
account and detection frauds and errors
Up to date account
Accounts of the business are kept up to date by the staff because they know that the auditor may visit and
check the accounts at any time

Disadvantages:
Alteration of Figures:
Already checked figures of accounts may be altered by the dishonest staff and frauds may be
committed.
Expensive:
 Continuous audit is more expensive than other audits as the auditor has to devote more time to it.
Inconvenience:
Frequent checking and frequent visits of the auditor may disturb the work of the client and its staff.
Mechanical Work:
The work of the auditor may become mechanical as it continues throughout the year.
Queries Problem:
It the auditors two visit period is long then then so many queries remain outstanding.

Interim Audit:
The interim audit is an audit which is conducted between two annual audits for the purpose of
finding interim dividend.
Advantages:
Publication of interim figures:
In some cases the publication of interim figures is compulsory. So in such cases the interim audit is
very useful.
Easy detection of errors:
By conducting the interim audit errors and frauds are detected at in time.
Completion of final audit:
If interim audit is conducted then final audit can be complete very soon and easily.
Suggestion Implementations:
In case of interim audit, auditor’s suggestions can be implemented quickly.
Satisfactory Work:
Staff of the client may work with proper attention satisfactorily along with the advice of the auditor.
Disadvantages:
Disturbance:
Regular accounting work of the interim audit. May disturb the work of the client staff.
Burden of work Increases:
Audit staff will also have to prepare the audit notes of the interim audit so the burden of work
increases.
Changing In Figures:
A dishonest official may change the figures of accounts which is already audited. The chance of fraud
increases.

Final Audit:
Final audit is started at the end of the financial year when financial statements are finalized and it is carried
out until completion.
Advantages:
Alteration Chances limited:
After the final audit it is very difficult for anyone to change the figures of the accounts for his
benefits.
Checking of Complete Record:
In case of final audit the whole record is supplied to the auditor for checking.
Advantageous for the Shareholders:
Final audit is very useful for the shareholders to know the real financial position of the business.
Convenient:
Final audit is suitable both for the auditors as well as the client as it saves both from continuous
disturbance.
Legal Demand:
For joint stock companies it is compulsory to conduct a final audit.
Economical:
Final audit is economical in comparison to continuous or interim audit.
Disadvantages:
Shortage of time:
The auditor has a shortage of time as he has to check the complete record in a limited time.
Complete checking not Possible:
The complete checking of the record may not be possible due to the shortage of time.
May Misrepresent:
There may be a chance that the audit report misrepresent the correctness of accounts as each and
every transaction is not checked.
 No Moral Influence:
The auditor visit once a year so he has no moral influence on the clients staff so that they maintain the
books correctly.

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Audit Working Papers:
1: Appointment Letter:
An auditor should confirm his appointment letter first of all.
2: Nature of Audit:
Auditor should know the nature of the audit.
3: List of Books:
He should obtain the list of books that are being used by the business.
4: Names of Officers:
The auditor should take the list of all the officers with their names, duties and powers.
5: Documents:
He should also get the copy of memorandum and article of association.
6: Prospectus:
The auditor should examine the prospectus.
7: Accounting Systems:
The auditor must examine the accounting system being used by the client.
8: Minutes Book:
The auditor should get the minute book and read it carefully.
9: Internal Control System:
Internal control system prevailing in the business must be studied by the auditor.
10: Personal Visit of the Site:
The auditor should personally visit the site of business.
11: Study of Contracts:
The auditor should study all the contracts which are made by the company.
12: Case of Joint Auditors:
If there are more than one auditor then they should distribute their work between them.
13: Previous Report Inspection:
The auditor should inspect the report of the previous audit.
14: Audit Programme:
The auditor should chalk out his audit programme keeping in view the above points.
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VOUCHING
Vouching is a very useful in proving the accuracy of the entries in the books of accounts and it also indicates the
transaction which is omitted from the books of accounts.

PRINCIPAL OF VOUCHING
ARRANGE VOUCHER:
First of all auditor should check all the vouchers provided by the clients or properly arrange these in
the same order as the entries are made in the book.
CHECKING OF DATE:
The auditor should compare the date of the voucher with the date recorded in the cashbook.
Compare the words and figures:
The auditor should satisfied himself amount written numbered consecutively all the vouchers should
be properly filled.
Checking of authority:
The auditor should examine that all the vouchers are pass by the authorized officer.
CHECKING OF ACCOUNTS HEAD:
The auditor should check if the account head is written correctly.
REVENUE STAMPS:
The auditor should check if the required revenue stamps are attached to the voucher.
CASE OF CANCELLED VOUCHERS:
The auditor should not accept cancelled vouchers as they have served their purpose of payment.

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Vouching of Cash Book
Cash book vouching is the process of verifying the entries recorded in the cash book of the business. The main
objectives of Cash Book vouching is to check the cash in hand and at the bank.

VOUCHING THE RECIEPT SIDE

EXAMINATION OF INTERNAL SYSTEM

In case of receipt side the auditor has to depend upon the internal checks and external documentary
evidence. He should pay special attention on the weak points of the internal check system.
COMPARE COUNTERRFOIL WITH CASH BOOK
The auditor should check the received cash with the counterfoil. He should also verify that unused
receipt book are kept under lock and key or not.
SALE OF ASSETS
The auditor should check the money receive from the sale of assets and vouch it with reference to the
correspondence of contract and other available evidence.
TERM OF DISCOUNT.
Auditor should verify about the term and condition on which discount or given to the debter.He
should also test a few items on their base.
RECIPTS OF INTERST:
Auditor should also verify that all the due interest on loan have been received or not.

PAYMENT SIDE

CHECKING OF INTERNAL SYSTEM

With reference to cash payment auditor should examine the internal check system keep in view the
weak point while auditing.
PETTY CASHH CHECKING
Auditor should check the petty cash in hand and verify the balance of petty cash with cash book.
CHECKING OF PAYABLE BILL
The auditor should examine these bill with the return bill if these are paid through bank than pass
book should be checked.
CHECKING OF RAVENUE AND EXPENDITURE
The auditor should verified that proper allocation has been made between capital revenue and
expenditure.
CREDITORS PAYMENT
Auditor should also examine the record and documentary evidence about the payments made the
creditors.

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VOUCHING OF SALE BOOK

INTERNAL CHECKING SYSTEM
Auditor should check the working of internal control and the test the few entries.
CHECKING OF INVOICE
The auditor should check A) debtors name (B) date and amount (C) the authority (D) trade discount
(E) authority for granting discount.
DUPLICATE INVOICES
Auditor should check the entries in the sale book with duplicate invoices.
AUTHORITY CHECKING
It should also be checked by the auditors that the invoices should be authorized by the responsibility
officers.
OVER ALL CHECKING
The auditor should check the cost and carry forward of the sale book.
VOUCHING OF SALARY
While the salary auditor should pay attention to the following points:

A: the auditor should check the salary book.

B: He should check the salaries actually paid during the year.
C: He should compare the salary book and check drawn for the particular month.
D: He should compare the salary book with the cash book.
E: Auditor should see the sign of each employee are available on the book.
F: Auditor should also examine terms and conditions of the officer’s employment.
G: Revenue receipt should also be checked by the auditor.
H: Auditor should also verify that all the deduction like income tax and other funds have been credited in their
respective heads.

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VOUCHING OF PURCHASE BOOK

While vouching the purchase book auditor should pay special attention to the following points:

INTERNAL CONTROL EXAMINATION

Auditor should the check the internal system and decide that up to how much extent he can rely upon it

CHECKING OF INVOICES
While checking the purchase invoices the auditor should pay proper attention to the following points
A: the date of invoices B: the name of the suppliers C: the entry in the good revived registered
D: the accounts involved E: initial of the checking authority
COMPARISON WITH ORDER BOOK:
Various entries of the purchases should be compared with the order book to trace out fictitious bills.
CHECKING OF Authority:
The auditor should also check that all the entries made in the book must be authorized.
OVERALL CHECKING:
The auditor should check the cost, cross cost and carry forward of the amounts of purchase book.

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Internal Control:
Internal control means all the measures taken by the organization for the purpose of,
Protecting its resources against wastage, fraud or miss use.
Insuring the reliability of accounting data.
Securing compliance with management policies.
Evaluating the performance of employee’s management & departments within the organization.

Components of Internal Control:

Internal Check
Internal Audit
Features of Internal Control:
Plan of Organization:
A proper organizational structure provides for the proper assignment of authority and responsibility
among the staff.
Authorization:
Reasonable accounting control over assets, liabilities, income and expense by proper authorized staff.
Managerial Supervision:
The supervision of management keeps the staff in check and helps the management to have a clear
view on the internal environment of the organization.
Sufficient Staff:
The management should hire sufficient staff keeping in view the nature and size of the organization.
Division of Work:
The work should be divided among the staff according to their training and abilities.
 Clear Rules and Regulations:
The rules and regulations of the management should be clear the staff.
Objectives of Internal Control:
Assets Protection
Authorized Access to Assets
Best Use of Resources
Accurate Record
Detection of Errors and Frauds.

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Internal Audit:
Internal audit is a vital function within an organization aimed at evaluating and improving the effectiveness of
risk management, control, and governance processes.
Objectives of Internal Audit
Risk Management:
Identifying and assessing risks that could hinder the achievement of organizational objectives.
Internal Controls:
Evaluating the effectiveness and efficiency of internal controls in mitigating risks.
Governance:
Assessing the governance structure and processes to ensure they support ethical behavior and
accountability.
Compliance:
Ensuring compliance with laws, regulations, and internal policies.
Operational Efficiency:
Improving the efficiency and effectiveness of operations.
Principles of Internal Audit
Independence:
Internal auditors should be independent from the activities they audit to ensure objective and unbiased
evaluations.
Objectivity:
Internal auditors should maintain impartiality and fairness, avoiding conflicts of interest.
Integrity:
Internal auditors should perform their duties with honesty, diligence, and responsibility.
Confidentiality:
Internal auditors should respect the confidentiality of information acquired during the audit process.
Competence:
Internal auditors should possess the necessary knowledge, skills, and experience to perform their
duties effectively.

Advantages of Internal Audit:

Improved Risk Management:
Identifying and mitigating risks before they become significant issues.
Enhanced Control Environment:
Strengthening internal controls to prevent fraud and errors.
Operational Efficiency:
Identifying areas for cost savings and process improvements.
Regulatory Compliance:
Ensuring compliance with laws and regulations, avoiding legal penalties.
Stakeholder Assurance:
Enhancing the confidence of stakeholders in the organization's governance and operations.
Detection of Errors and Frauds:
Internal audit detect errors and frauds and helps rectify them before external audit.
Moral Influence:
Internal audit has a moral influence on the staff and the chances of frauds decreases.
Helps External Audit:
Internal audit makes the work of external audit easy.
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Audit Report:
Audit report is the expert opinion expressed by the auditor as to the fairness of financial statement.

Characteristics of Audit Report:

Final Stage:
Audit report is the final stage in the audit process. It is an end product of every audit.
Written Statement:
Audit report is a written statement of facts collected from the books and accounting records.
Auditor’s Responsibility:
It is auditor’s responsibility to make a report to the members of the company on the books of accounts
and financial statements.
Valuable Document:
It is a valuable document in which auditor gives his independent opinion.
Addressee:
The audit report is addressed to the shareholders and the directors of the company.
Important Part:
Audit report is an important part of the audit process.
No Guarantee:
Audit report does not provide guarantee of the correctness of books of accounts and financial
statements. It is an expression of auditor’s opinion.
Identification:
The audit report should identify the financial statements that have been audited.

Kinds of Audit Report:

Statutory Report
Prospectus Report
Solvency Report
Final Report
Unqualified Report
Qualified Report
Interim Report
Partial Report

Statutory Audit Report:

The report given to the directors before first general meeting with the shareholders before six months and not
less than three months from the date of commencement of business.

Prospectus Report:
When a company is carrying on its business and offers its unauthorized capital to the public for subscription, a
prospectus is issued by the company with a prospectus report in it. The report contains the detail about the
profit and loss of the business.

Solvency Report:
When a company is being wind up an audit is performed to know the financial position of the business. The
report of this audit is known as solvency audit report.

Interim Report:
When an audit is performed between two final audits to find the interim dividend, the report of this audit is
known as interim audit.

Partial Report:
When an auditor is appointed to audit some books of accounts instead of the whole record, the report
submitted by the auditor is known as partial audit report.

Final Report:
The report which is submitted by the auditors after the audit of the whole record of the whole financial period
is called final audit report.
Kinds of Final Reports:
Unqualified Report:
When the auditor is fully satisfied about the accounts matters, legal requirements and with the
performance of the management, he submits a report which is called unqualified report.
An audit report which contains no reservations or objections is called unqualified or clean
report.
Contents:
All information & explanations obtained
Prepared books of account
Financial statements as per the ordinance
Financial statements agree with the accounts
Expenditure for the purpose of the business
Investments and expenditure meeting company’s objectives.
Financial Statements give fair and true view of the financial position
Deduction of Zakat

Qualified Report:
An audit report which contains objections and reservations is called qualified report.
Contents:
No proper books of accounts
Informal financial Statements
Changes in accounting principles
Investments and expenditure not meeting company’s purpose
No access to the books of account
Inappropriate accounting method
No satisfactory evidence
No zakat deduction
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