Company Audit The general definition of an audit is a planned and documented activity performed by qualified personnel to determine by investigation,

examination, or evaluation of objective evidence, the adequacy and compliance with established procedures, or applicable documents, and the effectiveness of implementation. The term may refer to audits in accounting, internal controls, quality management, project management, water management, and energy conservation. Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing the auditor perceives and recognizes the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgment which is communicated through his audit report. The purpose is then to give an opinion on the adequacy of controls (financial and otherwise) within an environment they audit, to evaluate and improve the effectiveness of risk management, control, and governance processes. Historically, the word auditing has been derived from Latin word audire which means to hear. According to Dicksee, traditionally auditing can be understood as an examination of accounting records undertaken with a view to establishing whether they completely reflect the transactions correctly for the related purpose. In addition the auditor also expresses his opinion on the character of the statements of accounts prepared from the accounting records so examined as to whether they portray a true and fair picture. Auditing is a vital part of accounting. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business.

Financial audits are performed to ascertain the validity and reliability of information, as well as to provide an assessment of a system's internal control. The goal of an audit is to express an opinion of the person / organization / system (etc.) in question, under evaluation based on work done on a test basis.

Due to constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements a concept influenced by both quantitative (numerical) and qualitative factors. But recently, the argument that auditing should go beyond just true and fair is gaining momentum.

Cost accounting is a process for verifying the cost of manufacturing or producing of any article, on the basis of accounts measuring the use of material, labor or other items of cost. In simple words, the term, cost audit means a systematic and accurate verification of the cost accounts and records, and checking for adherence to the cost accounting objectives. According to the Institute of Cost and Management Accountants of Pakistan, a cost audit is "an examination of cost accounting records and verification of facts to ascertain that the cost of the product has been arrived at, in accordance with principles of cost accounting."

An audit must adhere to generally accepted standards established by governing bodies. These standards assure third parties or external users that they can rely upon the auditor's opinion on the fairness of financial statements, or other subjects on which the auditor expresses an opinion.

The Definition for Audit and Assurance Standard AAS-1 by the Institute of Chartered Accountants of India (ICAI): "Auditing is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon." Assessments The purpose of an assessment is to measure something or calculate a value for it. Although the process of producing an assessment may involve an audit by an independent professional, its purpose is to provide a measurement rather than to express an opinion about the fairness of statements or quality of performance.

As a general rule, audits should always be an independent evaluation that will include some degree of quantitative and qualitative analysis whereas an assessment implies a less independent and more consultative approach. The outcome of the assessment should relate to the norms that were set for the task, product or event. Auditors Auditors of financial statements can be classified into two categories:

External auditor / Statutory auditor is an independent firm engaged by the client subject to the audit, to express an opinion on whether the company's financial statements are free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion over the effectiveness of internal controls over financial reporting. External auditors may also be engaged to perform other agreed-upon procedures, related or unrelated to financial statements. Most importantly, external auditors, though engaged and paid by the company being audited, are regarded as independent auditors.

Cost auditor / Statutory Cost auditor is an independent firm engaged by the client subject to the Cost audit, to express an opinion on whether the company's Cost statements and Cost Sheet are free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion over the effectiveness of internal controls over Cost reporting. These are Specialized Person called Cost Accountants in India & CMA globally either Cost & management Accountant or Certified management Accountants.[6]

The most used external audit standards are the US GAAS of the American Institute of Certified Public Accountants; and the ISA International Standards on Auditing developed by the International Auditing and Assurance Standards Board of the International Federation of Accountants.[citation needed]

Internal auditors are employed by the organizations they audit. They work for government agencies (federal, state and local); for publicly traded companies; and for non-profit companies across all industries. The internationally recognised standard setting body for the profession is the Institute of Internal Auditors - IIA (www.theiia.org). The

IIA has defined internal auditing as follows: "Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes".[7] Thus professional internal auditors provide independent and objective audit and consulting services focused on evaluating whether the board of directors, shareholders, stakeholders, and corporate executives have reasonable assurance that the organization's governance, risk management, and control processes are designed adequately and function effectively. Internal audit professionals (Certified Internal Auditors - CIAs) are governed by the international professional standards and code of conduct of the Institute of Internal Auditors.[8] While internal auditors are not independent of the companies that employ them, independence and objectivity are a cornerstone of the IIA professional standards; and are discussed at length in the standards and the supporting practice guides and practice advisories. Professional internal auditors are mandated by the IIA standards to be independent of the business activities they audit. This independence and objectivity are achieved through the organizational placement and reporting lines of the internal audit department. Internal auditors of publicly traded companies in the United States are required to report functionally to the board of directors directly, or a sub-committee of the board of directors (typically the audit committee), and not to management except for administrative purposes. As described often in the professional literature for the practice of internal auditing (such as Internal Auditor, the journal of the IIA) -,[9] or other similar and generally recognized frameworks for management control when evaluating an entity's governance and control practices; and apply COSO's "Enterprise Risk Management-Integrated Framework" or other similar and generally recognized frameworks for entity-wide risk management when evaluating an organization's entitywide risk management practices. Professional internal auditors also use Control SelfAssessment (CSA) as an effective process for performing their work.

Consultant auditors are external personnel contracted by the firm to perform an audit following the firm's auditing standards. This differs from the external auditor, who follows their own auditing standards. The level of independence is therefore somewhere between the internal auditor and the external auditor. The consultant auditor may work independently, or as part of the audit team that includes internal auditors. Consultant

auditors are used when the firm lacks sufficient expertise to audit certain areas, or simply for staff augmentation when staff are not available. Performance audits Safety, security, information systems performance, and environmental concerns are increasingly the subject of audits. There are now audit professionals who specialize in security audits and information systems audits. With nonprofit organizations

and government agencies, there has been an increasing need for performance audits, examining their success in satisfying mission objectives.

Quality audits are performed to verify conformance to standards through review of objective evidence. A system of quality audits may verify the effectiveness of a quality management system. This is part of certifications such as ISO 9001. Quality audits are essential to verify the existence of objective evidence showing conformance to required processes, to assess how successfully processes have been implemented, and to judge the effectiveness of achieving any defined target levels. Quality audits are also necessary to provide evidence concerning reduction and elimination of problem areas, and they are a hands-on management tool for achieving continual improvement in an organization. To benefit the organization, quality auditing should not only report non-conformance and corrective actions but also highlight areas of good practice and provide evidence of conformance. In this way, other departments may share information and amend their working practices as a result, also enhancing continual improvement.

Financial Statements Purpose of financial statements by business entities "The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions."[2] Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position.

Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."[2] Financial statements may be used by users for different purposes:

Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders. Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

Management discussion and analysis or MD&A is an integrated part of a company's annual financial statements. The purpose of the MD&A is to provide a narrative explanation, through the eyes of management, of how an entity has performed in the past, its financial condition, and its future prospects. In so doing, the MD&A attempt to provide investors with complete, fair, and balanced information to help them decide whether to invest or continue to invest in an entity.[6] The section contains a description of the year gone by and some of the key factors that influenced the business of the company in that year, as well as a fair and unbiased overview of the company's past, present, and future. MD&A typically describes the corporation's liquidity position, capital resources,[7] results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of unusual or infrequent nature (such as mergers and acquisitions or share buybacks), positive and negative trends, effects of inflation, domestic and international market risks,[8] and significant uncertainties. Notes to financial statements (notes) are additional information added to the end of financial statements that help explain specific items in the statements as well as provide a more comprehensive assessment of a company's financial condition. Notes to financial statements can include information on debt, going concern criteria, accounts, contingent liabilitiesor contextual information explaining the financial numbers (e.g. to indicate a lawsuit). The notes clarify individual statement line-items. For example, if a company lists a loss on a fixed asset impairment line in their income statement, notes could corroborate the reason for the impairment by describing how the asset became impaired. Notes are also used to explain the accounting methods used to prepare the statements and they support valuations for how particular accounts have been computed. In consolidated financial statements, all subsidiaries are listed as well as the amount of ownership (controlling interest) that the parent company has in the subsidiaries. Any items within the financial statements that are valuated by estimation are part of the notes if a substantial difference exists between the amount of the estimate previously reported and the actual result. Full disclosure of the effects of the differences between the estimate and actual results should be included.

Debenture A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.[1] Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements. Auditors Duty in Checking Debentures Auditors duty in checking debentures are: The auditor has to check that the prospectus (or) statement in lieu of prospectus had been filed within the registrar of the companies before the issue of debenture. He should vouch entries in application and allotment book withHe should vouch the receipt of cash with regard to application and allotment money with counterfoils of receipt and entries in cash book and postings in application and allotment book. Application submitted by the applicants. Directors minute book for allotment made. Check the postings to posting to each debenture holders account from application and allotment book in respect of persons to whom allotment has been made. Vouch payment side of the cash book for refunds made to those applications to whom allotment has not been made.

Check total of individual balances in debenture holders account tally with total control account of debentures in general ledger. Where debentures are to be redeemed at premium when the issue price is at par, (or) when the redemption is to be made at per when the issue is at discount, the auditor has to see that the loss on issue of debenture in this regard is accounted and is written off during the life term of debentures. The auditor should check that the terms and conditions of debenture issue are complied with especially with regard to creation of debenture redemption reserve, appointment of debenture trustee etc. Statutory provision u/s 209 (1) (d) of The Companies Act

Central Government Act Section 209 in The Companies Act, 1956

209. Books of account to be kept by company. 1[ (1) Every company shall keep at its registered office proper books of account with respect to(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; 2[ (c) the assets and liabilities of the company; 3[ and] (d) 3[ in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of Account:] Provided that all or any of the books of account aforesaid may be kept at such other place in India as the Board of directors may decide and when the Board of directors so decides, the company shall, within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place.] (2) Where a company has a branch office, whether in or outside India, the company shall be deemed to have complied with the provisions of sub- section (1), if proper books of account relating to the

1. Sub. by Act 65 of 1960, s. 60, for sub- section (1). 2. The word" and" omitted by Act 31 of 1965, s. 20 (w. e. f. 15- 10- 1965 ). 3. Ins. by s. 20, ibid. (w. e. f. 15- 10- 1965 ). transactions effected at the branch office are kept at that office and proper summarised returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place referred to in subsection (1). (3) 1[ For the purposes of sub- sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein,(a) if there are not kept such books as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions; and (b) if such books are not kept on accrual basis and accord- ing to the double entry system of accounting.] (4) 2[ 2[ The books of account and other books and papers shall be open to inspection by any director during business hours. 3[ (4A) 4[ The books of account of every company relating to a period of not less than eight years immediately preceding the current year 4[ together with the vouchers relevant to any entry in such books, of account] shall be preserved in good order: Provided that in the case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year 5[ together with the vouchers relevant to any entry in such books of account] shall be so preserved.] (5) If any of the persons referred to in sub- section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been the cause of any default by the company thereunder, he shall, in respect of each offence, be punishable with 6[ imprisonment for a term. which may extend to six months, or with fine which may extend to one thousand rupees, or with both]: Provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of 1. Subs. by Act 31 of 1988, s. 29 (w. e. f. 15- 6- 1988 ). 2. Subs. by Act 31 of 1965, s. 20, for sub- section (4) (w. e. f, 15- 10- 1965 ). 3. The brackets and letter" (a)" and (clauses (b), (c) and (d) omitted by Act 41 of 1974, s. 20) (w. e. f. 1- 2 1975 ). 4. Ins. by Act 65 of 1960, s. 60.

5. Ins. by Act 31 of 1965, s. 20 (w. e. f. 15- 10- 1965 ). 6. Subs. by Act 65 of 1960, s. 60, for" fine which may extend lo one thousand rupees" this section, it shall be a defence to prove 1[ that a competent and reliable person was charged with the duty of seeing that those requirements were complied with and was in a position to discharge that duty: 2[ Provided further that no person shall be sentenced to imprison- ment for any such offence unless it was committed wilfully.] (6) The persons referred to in sub- section (5) are the following, namely:(a) where the company has a managing agent, 3[ secretaries and treasurers or managing director or manager], such managing agent, 3[ secretaries and treasurers or managing director or manager] 4[ and all officers and other employees and agents[ as defined in sub- section (6) of section 240 but excluding bankers, auditors and legal advisers] of such managing agent or secretaries and treasurers]; (b) where such managing agent or secretaries and treasurers are a firm, every partner in the firm; (c) where such managing agent or secretaries and treasurers are a body corporate, every director of such body corporate; 5[ (d) where the company has neither a managing agent nor 6[ secretaries and treasurers nor managing director nor manager, every director of the company]; 4[ and] (e) 4[ whether or not a company has a managing agent or secre- taries and treasurers, every officer and other employee and agent (defined as aforesaid) of the company.] (7) If any person, not being a person referred to in sub- section (6), having been charged by the managing agent, secretaries and treasurers, 2[ managing director, manager] or Board of directors, as 1. The words" that he had reasonable ground to believe, and did believe", omitted by Act 65 of 1960, s. 60. 2. Ins. by s. 60, ibid. 3. Subs. by s. 60, ibid, for" or secretaries and treasurers". 4. Ins. by Act 31 of 1965, s. 20 (w. e. f. 15- 10- 1965 ). 5. The word" and" omitted by s. 20, ibid. (w e. f. 15- 10- 1965 ). 6. Subs. by Act 65 of 1960, s. 60, for" secretaries and treasurers, every director of the company". the case may be, with the duty of seeing that the requirements of this section are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with 1[

imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both]. Inspection of books of account, etc., of companies.

SA 520: Analytical Procedures

The objectives of the auditor are: (a) To obtain relevant and reliable audit evidence when using substantive analytical procedures; and (b) To design and perform analytical procedures near the end of audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with auditors understanding of the entity

Auditor should apply analytical procedures at overall review stages of audit as well as while applying substantive procedures

Application of analytical procedures is based on the expectation that relationships among data exist and continue in absence of known conditions to the contrary. Presence of these relationships provides audit evidence as to completeness, accuracy and validity of data produced by the accounting system. However, reliance on results of analytical procedures will depend on auditors assessment of the risk that analytical procedures may identify relationships as expected when, in fact, a material misstatement exists

When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative evidence

Sa 505 External Confirmations

External confirmation is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particular item

Before making use of external confirmations, auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level

To employ external confirmation procedures in consultation with the management. External confirmations are mostly sought for account balances and their components but they are not to be restricted to these items only SA 500: Audit Evidence

Auditor is required to obtain sufficient appropriate audit evidence to enable them to draw reasonable conclusions on which they can base their opinion on financial information

Auditor normally relies on evidence that is persuasive rather than conclusive in nature. Auditor may obtain evidence on a selective basis by way of either judgmental or statistical sampling procedures. Evidence is obtained through performance of compliance and substantive procedures

Compliance procedures are tests designed to obtain reasonable assurance that internal controls on which audit reliance is placed are in effect. Substantive procedures are designed to obtain evidence as to completeness, accuracy and validity of data produced by accounting system

Obtaining audit evidence from compliance procedures is intended to reasonably assure the auditor in respect of assertions of existence, effectiveness and continuity. Obtaining audit evidence from substantive procedures is intended to reasonably assure the auditor in respect of assertions of existence, rights and obligations, occurrence, completeness, valuation, measurement, presentation and disclosure

To test the reliability, few generalisations are useful such as external evidence is more reliable than internal evidence, written evidence is more reliable than oral evidence and self obtained evidence is more reliable than obtained through the entity

Auditor gains increased assurance when audit evidence obtained from different sources is consistent. Various methods for obtaining audit evidence include inspection, observation, inquiry and confirmation, computation and analytical review

Emphasis is to be laid on considering relevance and reliability of audit evidence obtained during the course of audit, and focus is to be laid on designing and performing audit procedures to obtain relevant and reliable audit evidence

SA 501: Audit Evidence Specific Considerations for Selected Items

This Standard on Auditing (SA) deals with specific considerations by the auditor in obtaining sufficient appropriate audit evidence in accordance with SA 330, SA 500 (Revised) and other relevant SAs, with respect to certain aspects of inventory, litigation and claims involving the entity, and segment information in an audit of financial statements

Inventories: Management ordinarily establishes procedures under which inventory is physically counted at least once in a year to serve as a basis for preparation of financial statements or to ascertain reliability of perpetual inventory system. When inventory is

material to financial statements, auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable. If unable to attend physical inventory count on the date planned due to unforeseen circumstances, auditor should take or observe some physical counts on an alternative date and where necessary, perform alternative audit procedures to assess whether changes in inventory between date of physical count and period end date are correctly recorded

Litigation and Claims: The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:

(a) Inquiry of management and, where applicable, others within the entity, including in house legal counsel;

(b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel;

(c) Reviewing legal expense accounts

Segment Information: Auditor considers segment information in relation to financial statements taken as a whole, and is not required to apply auditing procedures that would be necessary to express an opinion on segment information standing alone. Audit procedures regarding segment information ordinarily consist of obtaining an understanding of the methods used by management in determining segment information and performing analytical procedures and other audit tests appropriate in the circumstances

SA 505: External Confirmations

External confirmation is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particular item

Before making use of external confirmations, auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level

To employ external confirmation procedures in consultation with the management. External confirmations are mostly sought for account balances and their components but they are not to be restricted to these items only

The use of confirmation procedures may be effective in providing sufficient appropriate audit evidence when auditor determines higher level of assessed inherent and control risk

The request for confirmations is to be made either at the date of financial statements or at a date close to it. Requests are to be designed to specific audit objectives

Auditors understanding of clients arrangements and transactions with third parties is important in determining the information to be confirmed. Auditor may use positive or negative external confirmation requests or a combination of both

To consider whether there is any indication that external confirmations received may not be reliable. To evaluate the conformity between results of external confirmation process together with results from any other procedures performed. If Auditor seeks for an external confirmation and management requests the auditor not to do so, auditor should consider

whether there are valid grounds for such a request and obtain evidence to support validity of managements requests SA 520: Analytical Procedures

The objectives of the auditor are: (a) To obtain relevant and reliable audit evidence when using substantive analytical procedures; and (b) To design and perform analytical procedures near the end of audit that assist the auditor when forming an overall conclusion as to whether the financial statements are consistent with auditors understanding of the entity

Auditor should apply analytical procedures at overall review stages of audit as well as while applying substantive procedures

Application of analytical procedures is based on the expectation that relationships among data exist and continue in absence of known conditions to the contrary. Presence of these relationships provides audit evidence as to completeness, accuracy and validity of data produced by the accounting system. However, reliance on results of analytical procedures will depend on auditors assessment of the risk that analytical procedures may identify relationships as expected when, in fact, a material misstatement exists

When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative evidence SA 230: Audit Documentation

Audit documentation that meets the requirements of this SA and the specific documentation requirements of other relevant SAs provides (a) evidence of auditors basis for a conclusion about the achievement of overall objective of audit; and (b) evidence that the audit was

planned and performed in accordance with SAs and applicable legal and regulatory requirements

Audit Documentation refers to the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance the quality of audit and facilitates effective review and evaluation of audit evidence obtained and conclusions reached before finalizing auditors report

To document discussions of significant matters with management, those charged with governance, and others, including the nature of significant matters discussed and when and with whom the discussions took place

Auditor may consider preparing and retaining a summary (Completion Memorandum) that describes significant matters identified during the audit and how they were addressed. SA 220 requires auditor to review audit work performed through review of audit documentation. Standards on Quality Control (SQC) 1 require firms to establish policies and procedures for timely completion of assembly of audit files. An appropriate time limit within which to complete the assembly of final audit file is ordinarily not more than 60 days after the date of auditors report. SQC 1 requires firms to establish policies and procedures for retention of engagement documentation

Retention period for audit engagements ordinarily is no shorter than ten years from the date of auditors report, or, if later, the date of group auditors report

SA 240: The Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements

Auditor is concerned with fraud that causes a material misstatement in financial statements

Two types of intentional misstatements are relevant misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets

Primary responsibility of prevention and detection of frauds is of the management as well as those charged with governance. It is important that management, with oversight of those charged with governance; place a strong emphasis on fraud prevention which may reduce opportunities for fraud to take place and act as a deterrent

Auditor is responsible for obtaining reasonable assurance that financial statement taken as a whole are free from material misstatement, whether caused by fraud or error. While auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for him to determine whether misstatements in judgment areas such as accounting estimates are caused by fraud or error

Risk of auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees. Auditor is responsible for maintaining an attitude of professional skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud

Auditor shall identify and assess risks of material misstatement due to fraud at financial statement level, and at assertion level for classes of transactions, account balances and disclosures. Auditor must make appropriate inquiries of the management. Auditor must discuss with those charged with governance as they have oversight responsibility for systems for accounting risk, financial control and compliance with the law

When auditor identifies a misstatement, s/he should consider whether such a misstatement may be indicative of fraud and if there is such an indication, s/he should consider the implications of misstatement in relation to other aspects of the audit, particularly the reliability of management representations

When the auditor identifies a misstatement resulting from fraud, or a suspected fraud, s/he should consider auditors responsibility to communicate that information to management, those charged with governance and, in some circumstances, when so required by laws and regulations, to regulatory and enforcement authorities also

To obtain written representations from management

To document the understanding of entity and its environment and the assessment of risks of material misstatement, responses to assessed risks of material misstatement and communications about fraud made to management, those charged with governance, regulators and others

SA 250: Consideration of Laws and Regulations in an Audit of Financial Statements

To recognise that noncompliance by entity with laws and regulations may materially affect financial statements. It is managements responsibility to ensure that entitys operations are conducted in accordance with laws and regulations

Auditor is not responsible for preventing noncompliance. The auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error

Risk of non detection of material misstatements is higher with regard to material misstatements resulting from noncompliance with laws and regulations due to various factors. To obtain a general understanding of legal and regulatory framework applicable to the entity and how it is complying with that framework

After obtaining general understanding, auditor should perform procedures to identify instances of noncompliance with these laws and regulations where noncompliance should be considered when preparing financial statements. Further, auditor should obtain sufficient appropriate audit evidence about compliance with those laws and regulations generally recognised by Auditor to have an effect on determination of material amounts and disclosures in financial statements

To obtain written representations that management has disclosed all known actual or possible noncompliance with laws and regulations whose effects should be considered when preparing financial statements. This SA does not apply to other assurance engagements in which auditor is specifically engaged to test and report separately on compliance with specific laws and regulations. Whether an act constitutes a noncompliance can be determined only by a court of law

The Standard envisages "engaging a legal advisor to assist in monitoring legal requirements" instead of "establishing a legal department" as one of the policies to ensure compliance with laws and regulations. The Standard, in larger entities, also envisages existence of a separate "compliance function" in addition to internal audit function and audit committee to supplement policies and procedures for ensuring compliance with laws and regulations

SA 260: Communication with those Charged with Governance

To communicate with those charged with governance, auditors responsibilities in relation to financial statements audit, an overview of planned scope and timing of audit and significant findings from the audit

Such matters include: Overall scope of audit; selection of/ changes in significant accounting policies; potential effect on financial statements of any significant risks and exposures, such as pending litigation; adjustments to financial statements arising out of audit that have a significant effect on entitys financial statements; material uncertainties related to events and conditions that may cast significant doubt on entitys ability to continue as a going concern, disagreements with management about matters that could be significant to entitys financial statements or auditors report; expected modifications to auditors report. Auditors should communicate matters of governance interest on timely basis

Auditors communication may be made orally or in writing. In case of oral communication, auditor should document their oral communications and response thereof

SA 265: Communicating Deficiencies in Internal Control to those Charged with Governance and Management

The objective of the auditor is to communicate appropriately to those charged with governance and management deficiencies in internal control that the auditor has identified during the audit and that, in the auditors professional judgment, are of sufficient importance to merit their respective attentions

The auditor shall determine whether, on the basis of the audit work performed, the auditor has identified one or more deficiencies in internal control. If the auditor has identified one or more deficiencies in internal control, the auditor shall determine, on the basis of the audit work performed, whether, individually or in combination, they constitute significant deficiencies.

SA 299 (AAS 12): Responsibility of Joint Auditors

Joint auditors should, by mutual discussion, divide audit work. Division of work would usually be in terms of audit of identifiable units or specified areas. Division of work may be with reference to items of assets or liabilities or income or expenditure or with reference to periods of time

If a Joint auditor comes across matters which are relevant to areas of responsibility of other joint auditors and which deserve their attention, or which require disclosure or discussion with, or application of judgment by, other joint auditors, he should communicate the same to all other joint auditors in writing prior to finalisation of audit

Certain areas of work, owing to their importance or owing to the nature of work involved, would often not be divided and would have to be covered by all joint auditors

Each joint auditor is responsible only for the work allocated to them, whether or not s/he has prepared a separate report on work performed by them

All joint auditors are jointly and severally responsible in respect of the audit work which is not divided amongst them, for the appropriateness of decisions taken by them concerning the nature, timing or extent of the audit procedures to be performed by any of the joint auditors, for examining that the financial statements of the entity comply with disclosure requirements of relevant statute, for ensuring that audit report complies with the requirements of relevant statute and in respect of matters which are brought to the notice of joint auditors by any one of them and on which there is an agreement among joint auditors

Each joint auditor is entitled to assume that other joint auditors have carried out their part of audit work in accordance with generally accepted audit procedures. Normally, joint auditors are able to arrive at an agreed report. However, where the joint auditors are in disagreement with regard to any matters to be covered by the report, each one of them should express his own opinion through a separate report

SA 300: Planning an Audit of Financial Statements

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan. The objective of auditor is to plan the audit so that it will be performed in an effective manner

Once the overall audit strategy has been established, an audit plan can be developed to address various matters identified in the overall audit strategy, considering the need to achieve the audit objectives through efficient use of auditors resources

To consider various matters in developing the overall plan like: terms of engagement; nature and timing of reports; applicable legal or statutory requirements; accounting policies adopted by the client; identification of significant audit areas; setting of materiality levels, etc.

Bajaj Auto The Bajaj Group is amongst the top 10 business houses in India. Its footprint stretches over a wide range of industries, spanning automobiles (two-wheelers and three-wheelers), home appliances, lighting, iron and steel, insurance, travel and finance. The group's flagship company, Bajaj Auto, is ranked as the world's fourth largest two- and three- wheeler manufacturer and the Bajaj brand is well-known across several countries in Latin America, Africa, Middle East, South and South East Asia. Founded in 1926, at the height of India's movement for independence from the British, the group has an illustrious history. The

integrity, dedication, resourcefulness and determination to succeed which are characteristic of the group today, are often traced back to its birth during those days of relentless devotion to a common cause. Jamnalal Bajaj, founder of the group, was a close confidant and disciple of Mahatma Gandhi. In fact, Gandhiji had adopted him as his son. This close relationship and his deep involvement in the independence movement did not leave Jamnalal Bajaj with much time to spend on his newly launched business venture.

His son, Kamalnayan Bajaj, then 27, took over the reigns of business in 1942. He too was close to Gandhiji and it was only after Independence in 1947, that he was able to give his full attention to the business. Kamalnayan Bajaj not only consolidated the group, but also diversified into various manufacturing activities. The present Chairman of the group, Rahul Bajaj, took charge of the business in 1965. Under his leadership, the turnover of the Bajaj Auto the flagship company has gone up from INR.72 million to INR. 120 billion, its product portfolio has expanded and the brand has found a global market. He is one of Indias most distinguished business leaders and internationally respected for his business acumen and entrepreneurial spirit. Bajaj Auto is the flagship of the Bajaj group of companies. The group comprises of 34 companies and was founded in the year 1926.

The companies in the group are:

Bajaj Auto Ltd. Bajaj Holdings & Investment Ltd. Bajaj Finserv Ltd. Bajaj Allianz General Insurance Company Ltd. Bajaj Allianz Life Insurance Co. Ltd Bajaj Financial Solutions Ltd. Bajaj Auto Finance Ltd. Bajaj Allianz Financial Distributors Ltd. Bajaj Auto Holdings Ltd. P T Bajaj Auto Indonesia (PTBAI)

Bajaj Auto International Holdings BV

Bajaj Electricals Ltd. Hind Lamps Ltd. Bajaj Ventures Ltd. Mukand Ltd. Mukand Engineers Ltd. Mukand International Ltd. Bajaj Sevashram Pvt. Ltd. Jamnalal Sons Pvt. Ltd. Rahul Securities Pvt Ltd Shekhar Holdings Pvt Ltd Madhur Securities Pvt Ltd Niraj Holdings Pvt Ltd Shishir Holdings Pvt Ltd Kamalnayan Investments & Trading Pvt Ltd Sanraj Nayan Investments Pvt. Ltd. Hercules Hoists Ltd. Hind Musafir Agency Pvt. Ltd. Bajaj International Pvt. Ltd. Bachhraj Factories Pvt. Ltd. Baroda Industries Pvt. Ltd. Jeevan Ltd. Bachhraj & Co Pvt Ltd The Hindustan Housing Co. Ltd. Hospet Steels Ltd

Bajaj Auto's has in all three plants, two at Waluj and Chakan in Maharashtra and one plant at Pant Nagar in Uttranchal, western India Balance sheet of Bajaj Auto

Balance Sheet

2013

2012

2011

Equity

And

Liabilities Share Holders Funds Share Capital 289.37 Reserves And Surplus 7,612.58 7,901.95 Non-current Liabilities Long Term 71.27 115.10 122.06 134.61 443.04 Current Liabilities Short Term 1,979.61 546.16 1,607.86 1,957.79 604.33 2,066.05 0.00 157.84 1,789.26 477.11 1,431.26 157.07 111.85 414.84 193.71 124.54 481.84 48.44 97.48 133.88 29.71 289.37 5,751.70 6,041.07 289.37 4,620.85 4,910.22

Borrowings Deferred Tax Liabilities(net) Other long

term liabilities Long term

provisions

Borrowings Trade payables Other current Liabilities Short Term

Provisions

4,133.63 Total 12,478.62 Assets Non Assets Fixed Assets Tangible Assets Intangible Assets Capital Work In Progress Intangible Assets Under Development 1,804.43 223.29 70.26 2,097.98 Non Current 3,719.15 462.39 1.02 4,182.56 Total 6,280.54 Current Assets Current 3,786.21 579.90 1.43 29.88 11.77 1,479.59 2.14 current

4,628.17 11,084.08

3,855.47 9,247.53

1,478.43 4.28 69.86 0.00 1,523.38 4,035.08 226.96 401.77 4,367.54 5,890.92 4,663.81 6,216.38 1,552.57

Investments Long Loans Advances Other Non term And

Current Assets

Investments Inventories

2,711.33 636.28 767.58 558.85 1,311.72 212.32 6,198.08 12,478.62

1,096.60 678.53 422.79 1,653.83 1,042.81 295.59 5,190.15 11,081.07

686.83 547.28 359.89 228.78 992.09 216.28 3,031.15 9,247.53

Trade Receivables Cash And

bank Balances Short Loans Advances Other Current Assets Term And

Total

Profit and loss account particulars Sales 2014 2013 20,617.8 7 Less: duty Net sales Exice 1,128.91 19,488.9 6 Other operating revenue Revenue from operations (net) 508.29 19,997.2 5 2012 19,827.0 3 946.76 18,880.2 7 648.71 19,528.9 8 16,398.2 3 15,896.8 2 501.41 2011 16,830.2 3 933.41

Other income

795.49 20,792.7 4

608.04 20,137.0 2

576.51 16,974.7 4

Total Revenue (

Expenses: Raw cost material 13,523.7 4 purchase goods traded (Increase)/decre ase inventories in of of 858.83 24.00 13,445.5 4 751.15 - 94.15 - 82.79 11,311.8 9 568.41

finished goods, work-inprogress and 639.48 0.54 Depreciation 163.97 Other expenses 1,378.80 Expenses included (capatilised) Total Expenses 16,526.5 1 15,976.8 5 13,351.5 4 -62.85 145.62 1,215.77 - 49.43 - 16.66 952.58 122.84 540.11 22.24 1.69 493.58

traded goods Employee benefits Financial cost

Profit before expectional itms and tax(1-2) Expectional Item Profit Tax before

4,266.23 4,266.23

4,160.17 - 134.00 4,026.17

3,623.20 724.55

4,347.75

tax expenses Current Tax 1,156.00 Defered Tax 66.66 Total Expenses Profit After Tax For The Year Tax 1,222.66 3,043.57 1,022.12 3,004.05 1,008.02 3,339.73 1,003.39 18.73 28.02 980.00

Ratios Ratios For Share holders Profit After Tax Weighted Average Number of Shares 3,043.57 28,93,67,02 0.00 103.81 3,004.05 3,339.73 28,93,67,02 0.00 115.42 10.00 10.00

Outstanding 28,93,67,02 0.00 105.18

during the year Earning per Share(EPS) Face Value

Per Share

10.00 2013 2012 45.00 2011 45.00

Dividend (Declared) Equity Share Dividend Payout Ratio Book Value of Shares Share capital Reserves and surplus Book Value of Shares Price earning Ratio market price Price earning Ratio Earning Yield Ratio Financial Ratios current / / per

45.00

2.34

2.31

2.56

289.37 7,612.58 273.08

289.37 5,751.70 208.77

289.37 4,620.85 169.69

1,990.80 18.93

1,950.00 18.78

1,500.00 13.00

2%

2%

3%

1.49942786

1.12142596

0.78619467

Ratio Fixed Asset Ratio

4 5.00

3 3.82

9 3.49

Asset turn over ratio Fixed Asset Ratio Working Capital Working Capital Ratio

21.72 10.80 2,064.45 9.44

22.43 12.76 561.98 33.60

17.90 10.75 -824.32 -19.28

Long Term Debt Equity Ratio Debt Equity Ratio

0.01

0.02

0.03

0.58

0.83

0.88