AUDITING ASSIGNMENT

Presented By Vinitha. K 159

9/5/2011

INTRODUCTION TO AUDITING
INTRODUCTION:
The term audit is derived from the Latin word audile, which means to hear. Initially, the team audit or auditing was taken to mean examination of the books of accounts of a business to ascertain whether the persons in charge of Receiving and paying cash and maintaining the books of accounts had properly Accounted for all cash receipts and cash payments on behalf of their principal(i.e., the owners of the business).

Definition:
According to L.R. Dicksee, Auditing can be understood as an examination of Accounting records undertaken with a view to establishing whether they correctly And completely reflect the transaction to which they purport to relate. In some Instance, it may be necessary to ascertain whether the transactions are supported By authority.

Spicer and Pegler have defined audit as such an examination of the books, accounts and vouchers of a business as will enable the auditor to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and whether the profit and loss account gives a true and fair view of the profit or loss for the financial period, according to the best of his information and the explanations given to him and as is shown by the books, and if not, in what respects he is not satisfied.

AUDIT PROGRAMME
It is a detailed listing of the steps to be taken by an auditor , such as a Certified Public Accountant (CPA) , when analyzing transactions to determine the acceptability of financial statements. Major accounting firms may prepare an audit program for each client and require the person who does the work to sign or initial each step performed. It is the identification of the audit procedures followed in an audit and outline and description of the steps and work to be conducted in an audit engagement. Typically, it specifies the name of the auditor responsible for a given job including the estimated time to conduct the audit task. The audit program guides and controls the work of staff assistants. When a task is conducted, identification is made of who performed it and the date.

Objectives:
j To determine the reliability and integrity of key financial information; j To determine whether controls are adequate and effective in the safeguarding of assets; and j Determine whether internal control procedures are in place and functioning as intended.

Program Steps

Audit Program Step

I. Background 1. Review departments responses to the Internal Control Questionnaire, completed by the appropriate departmental personnel, to determine if additional areas need to be addressed. 2. Determine if personnel have completed their required University training requirements. (Handbook of Operating Procedures Part 3 Personnel Part 1 Sec. 1.4) 3. Obtain and review the following information: y Mission Statement Best Practice y Goals and Objectives Best Practice y Current Policies and Procedures Manual Best Practice y Organizational Chart 4. Determine if any employees have outside employment. If yes determine if they have filled out the required University documentation (Handbook of Operating Procedures Part 3 Personnel Part 1 Sec. 10) 5. Select a sample of employees within the department and verify that performance evaluations have been performed as per University requirements. II. Reliability and Integrity of Key Financial Information A. Expenditures 1. Obtain a listing of accounts under the Department Heads responsibility and determine signature authority on departmental accounts from the Accounting System (DEFINE). Document this information. 2. Select a sample of non-payroll expenditures (operating and Travel) from DEFINE. The sample should include Operating and Travel expenses. Please include some Procured expenditure transactions. Document the population and sampling procedures used. Determine: y Were they properly approved y Was adequate documentation maintained y Recalculate for mathematical accuracy (travel expenses have guidelines for mileage, lodging and meals) Remember 14 state funded travel. and 19 local funded travel, different restrictions on travel y Were expenditures appropriate as to account and object code 3. Based on the testing performed in Steps 3 and 4, conclude whether nonpayroll expenditures are properly recorded and approved and that the expenditures are reasonable and adequately supported. B. Account Reconciliation

Initials and Date

W/P Referen ce

Audit Program Step

1. Obtain the Statements of Account and monthly reconciliations for a selected number of months covered in the audit scope and verify that: y Both revenues and expenditures are correctly reconciled on a monthly basis for all accounts with transaction activity, Best Practice y The person preparing the reconciliation signs and dates, Best Practice y The department head or designated person reviews the monthly statements and reconciliations and signs and dates to document the review. Best Practice y Determine if department has petty cash, if yes review their reconciliation procedures 2. Based on responses to the Internal Control Questionnaire and testing performed conclude whether account reconciliations are being adequately performed. C. Revenue and Cash Receipts 1. Review all revenue accounts and determine what types of revenues are received (document). If the department collects cash/checks (this includes any money that may accidentally come into the department on a regular basis). Verify that all receipts are being recorded in some sort of log. y Document the departments cash handling procedures, and determine if they have been recorded and placed in their policies and procedures manual. Best Practice y Determine if deposits are made daily as per Management Responsibilities Handbook p.16 #4 y Determine if adequate segregation of duties has been established with cash handling procedures. Best Practice 2. Based on the testing performed, conclude whether receipts are being properly recorded and deposited. All Best Practice y Select a sample of cash received from the departments log y Vouch cash received to supporting documentation y Trace cash received to deposit slip (from accounting department) and to monthly statement of account y Verify that the income was recorded in the correct account and with the correct object code Document population and sampling procedures 3. Based on testing determine whether controls over cash are adequate. D. Time Reporting

Initials and Date

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Audit Program Step

1. For exempt payroll expenses (recorded in the 09 & 10 accounts), select a sample of employees for testing. The sample should include any employees with the ability to influence payroll information. y Obtain payroll records for a sample month from DEFINE and determine the gross monthly salary paid to each employee in the sample. y Compare actual salary to the authorized salary listed in the appropriate fiscal year budget (Budget Salary Roster). If there were changes made during the fiscal year, verify approvals and changes on the employees Personnel Action Form (PAF). y Verify the any longevity pay or other additional pay is accurate. f y Investigate and document any exceptions. 2. For non-exempt employees (recorded in the 20 account), select a sample and perform the following procedures: y Examine the personnel records for each employee in the sample to determine the authorized hourly rate. y Select a sample of pay periods, and compare employee time card with pay rate found in personnel to the employees actual payment seen on the departments statement of account. Ensure the payment was for the correct amount. y Determine if time cards have been signed by employee and supervisor y Recalculate any overtime pay . If the employee received compensatory time off, verify tracking procedures and that the employee is receiving 1 times the hours worked as time off. Compare the amount to payroll records to verify that employees were accurately paid. 3. Document the departments procedures for the reporting and recording of employee vacation and sick leave. y Determine if department procedures agree with University procedures y Select a sample of months Determine if employees reported sick leave agrees to what is found on payroll records. 4. Based on the testing performed in Steps 1 through 6, conclude whether payroll expenditures are being properly recorded. E. Segregation of Duties 1. Based on the testing performed in Parts A through D, conclude whether adequate segregation of duties exist to ensure the reliability and integrity of key financial information.

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Audit Program Step

III. Safeguarding of Assets 1. Obtain a copy of the most current inventory listing from the department under review, Information Resources and Inventory departments and perform the following: y Compare listings and note any discrepancies, determine reasons for discrepancies. y Select a sample of capital assets from the departmental listing of capital inventory and verify the assets existence, location, and tag number. y Select a sample of capital assets located within the department and trace each item to inventory records to verify location, description, and tag number. (Note: All items costing $5,000 or more and all weapons, computers, FAX machines and selected other items, regardless of cost, must be included on the inventory listing.) y Document population and sampling procedures. y Determine if department has flash drives, if yes then determine if they keep inventory of these. Best Practice 2. Determine that when inventory (laptops, projectors etc.) is taken off campus that it is adequately tracked and that the proper University documentation is completed. 3. Determine whether university property for phone bills (including cellular), fax machines, etc. is monitored for personal use. Best Practice 4. Obtain an understanding of the departments process for records retention. Determine if the process is in line with UTPB Policy and other state regulations where applicable. Handbook of Operating Procedures Part 6 Sec 11 5. Based on responses to Internal Control Questionnaire and testing, conclude whether assets are properly safeguarded. IV. Information Technology 1. Identify Unique Software: Determine if there are any applications that are unique to the department and have an impact on the reliability and accuracy of its financial information, its overall control environment or the safekeeping of its assets. If so, document and understanding of the system and key controls related to the audit objectives. The understanding should include information about user access, security, backup of data and system maintenance. y Test key controls over unique applications, as applicable. 2. Determine whether user access to all software applications for any terminated employee within the last three years and the departing department head has been taken away. 3. Determine if employees have appropriate access as per their job description.

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CLASSIFICATION OF AUDITS
A. On the basis of scope: i. General ii. Specific

B. On the basis of nature of activity: i. Commercial ii. Non commercial

C. On the basis of form of organization: i. Private ii. Government

D. On the basis of who conducts the audit: i. Independent (external) ii. Internal

E. On the basis of legal necessity: i. Statutory ii. Non statutory

F. On the basis of method of examination: i. Continuous audit ii. Periodical/ completed/ annual audit iii. Balance sheet audit

A. On the basis of scope: an audit examination can be general specific. A general audit will cover all the areas of business. The audit can be Independent or internal. On the other hand specific audit concentrates on Particular areas object or may be period. On the basis of emphasis it can be further classified as: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. Partial audit Occasional audit Interim audit Cost audit Management audit Performance audit Standard audit Audit in depth Post and vouch audit Operational audit Cash audit

B. On the basis of nature of activity: the activity which are the subject matter Of the audit may be commercial or non commercial. The nature of activity Will determine the scope and approach of the audit. While the audit of profit Motive organizations can be called commercial audit, the audit of nonprofit Organizations will fall under non commercial audit. E.g.:- government audit, audit of organization involved in promotion of Education, health or environment etc. on non profit basis.

C. On the basis of organization: on the basis of form of organization the audit may be classified as private and government. The method of appointment and reporting will differ considerably these two types of audit. private audit When the audit is not a statutory requirement, but is conducted at the Owners, such audit are a private audit. The audit is conducted primarily for their own interest. 1. 2. 3. 4. Audit Audit Audit Audit of of of of sole traders accounts; accounts of partnership firm; accounts of individuals; institutions not covered by statutory audit.

1. Audit of sole traders account: in case of proprietary concerns, the owner himself takes the decision to get the accounts audited. Sole trader will decide about the scope of audit and appointment of auditor. The auditing work will depend upon the agreement of audit and the specific instruction given by the proprietor.

Advantages of Audit to a sole trader:i. He is assured of his accounts being properly prepared and his expenditure Properly vouched. He can come to know any frauds by his employees and agents. Audited accounts are considered reliable by income tax authorities.

ii. iii.

2. Audit of accounts of partnership firm: to avoid any misunderstanding and doubt, Partnership firms recognize the advantage of audit of financial statements. Partnership deed on mutual agreement between the partners, may avoid for audit of final statements. Auditors are appointed by the mutual concern of the partners. Rights, duties and liabilities of the auditor are defined in the mutual agreement Can be modified by the partners. It will be in the interest of the auditors to get in Writing the natural and scope of his work, to avoid any dispute later on. He should obtain a copy of such deed certified by one of the partners.

Advantages of audit of partnership firm:i. If the accounts of the firm are audited ,it facilitates settlement of accounts and valuation of goodwill on retirement, death or admission of a partner. Audit is advisable to avoid any financial dispute among the partners. The firm can avail the benefit of audit for purposes of taxation or improvements in operation.

ii. iii.

3. Audit of accounts of individuals: many of the individuals derive income from property, shares, investments and other sources. They may be incurring heavy expenses for earning such income: 1. Audited accounts are generally taken as correct by income-tax authorities. In the way, it helps in the assessment of income for income-tax purposes. 2. Individual is assured of accuracy of accounts without any error or fraud by Accountants or agents.

b. Government audit: Audit of government office and department is covered under this heading. A separate department is maintained by the government of India, known as account and audit department. This department is headed by comptroller and auditor general of India. This department works only for government offices and departments. Its working is strictly according to government rules and regulations.

Objectives of government Audit:i. ii. iii. To ensure every payment is made as per the rules and regulations. Payments have been sanctioned by the proper authority. To see that the expenditure is incurred by the right person.

D. On the basis of who conducts the Audit: 1. Independent / external audit:- It refers to the audit of an organization undertaken independently by a qualified auditor. In other words, it is the audit of an organization undertaken by a professionally qualified auditor. who is independent of the organization hiring his services for the purpos of audit. Objective:i. To render an opinions to whether the financial statements have been prepared in conformity with the generally occurring accounting principles &legal requirements. Whether the financial statements give a true & fair response of the profit & the financial position of the center price.

ii.

2. Internal Audit:-it implies the audit of accounts by the staff of the business. The staff may or may not have professional qualification for audit of accounts. The internal staff audit is permanent in nature and helps the business in early detention of errors and frauds. The objective and function of internal audit depends upon the nature of operations and business. a) To evaluated the working of accounting, and operational control. b) To determine the level of adherence of pre-determined policies, plans and Procedure of accounting c) To determine the extent to which assets are accounted for safeguard from Loses.

Features:1) Internal audit is undertaken by concerns which are 2) It is not compulsory; it is purely optional or voluntary. 3) The scope of internal audit may vary, depending upon nature &size of concern. 4) Internal audit is carried on continuously through out the year. Internal auditors audit the accounts & others. 5) Internal audit may be in addition to independent auditing of statuary audit. 6) Internal audit is usually, conducted by the staff or employ of the concern ,specially appoc ted for the purpose, sometimes determined by independent persons , i.e. professional C.A appointed for auditing. 7) The staff engaged in internal audit is appointed by the mgt & so, they are responsible to the management. 8) The techniques & methods of auditing employed in internal audit are the same as those in independent audit. 9) Internal audit are conducted to ascertain whether an effective internal control system exists to prevent errors & fraud, &whether the accounting systems and procedures are adequate.

E. On the basis of legal necessity: An audit by qualified person which is Compulsory requirement under law is known as statutory audit. The qualified Chartered accountants, who are not connected with the preparation of the accounts or management of the concern, can be appointed as auditors. The various matters relating to conduct of audit, appointment, duties, and rights,

liabilities of auditors and presentation of reports are provided in the concerned statue. Essential characteristics of statutory audit 1. It is compulsory audit 2. Statutory audit must be complete audit, it cant be partial audit. 3. The Act allows provide for norms regarding the appointment of an auditor. 4. The Auditor must be qualified accountant 5. The auditor must not be disqualified as per the provision of law. 6. Auditors in an independent person. Management has no control over his work.

F. On the basis of method of examination: 1. Continuous Audit As against periodical audit, the continuous audit is conducted throughout the year at the regular short intervals of time. Under this audit, auditor visits his clients regularly and each and every transaction is checked. DEFINITION by R.C WILLIAMSA continuous audit is one where the auditor or his staff is constantly engaged in checking the accounts during the whole period or where the auditor or his staff attends at regular or irregular intervals during the period 2. Annual or periodical audit Annual or periodical means when the audit work is conducted after the financial year the auditor visits the client and completes audits in one sitting. After the accounts are finalized the auditor is invited to audit the accounts. 3. Balance Sheet audit balance sheet audit relates to the verification of various items of balance sheet such as assets , liabilities, reserves and surplus , provision and profit and loss account .

Vouchers
Introduction:An auditor vouches the transaction recorded in the books of accounts with the help of vouchers.

Meaning:A voucher refers to an documentary evidence in support of an entry in the books of accounts ,say , the receipt obtained from the payee, the counterfoil of the receipt issued to a payee , invoice,etc..

Examples of vouchers
The following are some of the examples of vouchers: a) Receipt obtained from the payee for the payment to him. b) Counterfoil or the receipt or an carbon copy of a receipt issued to a payee. c) Inward invoice or purchase invoice. d) Outward invoice or sales invoice. e) Cash memo. f) Banking pay-in-slip. g) A contract or an agreement. h) A resolution passed at the meeting of board of director or shareholders. i) Minutes of the meeting. j) Correspondence with the parties. k) Bills. l) Bought notes. m) Sold notes. n) Debit notes. o) Credit notes. p) Demand notes. q) Wage sheet or books. r) Salary registers. s) Copies of orders placed for goods. t) Goods inward book. u) Order received for sales. v) Goods inward book.

Types of vouchers
Vouchers are of two types they are: 1. Primary voucher 2. Collateral or secondary vouchers 1. Primary vouchers- It is written evidence in original. In other words it is an original evidence of transaction or an entry. Purchase invoices, cash memo for goods purchased, statement prepared by the bank, written responses to confirmation request as to debtors or creditors account etc are the examples of primary vouchers.

2. Collateral or secondary vouchers- When evidence in original (i.e., original vouchers) is not available, copies of the original evidence are produced in support. Again, sometimes, subsidiary evidence are also produced for the purpose of audit. Such vouchers (i.e. copies of the original evidence or secondary evidence) are usually known as collateral or secondary vouchers. Carbon copies of sale invoice, copies of receipt issued to debtors, copies of resolution passed at the meetings of the board or shareholders etc.. Are the examples of secondary vouchers.