DEEPA RAMANATHAN

WHAT IS AUDITING??
Auditing can be broadly defined as a systematic process of obtaining and evaluating evidence regarding assertion about economic action and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the result interested parties. The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.

Objectives and advantages of Audit

The objectives of an audit may broadly be classified as 1. Primary Objectives 2. Secondary objectives. Primary Objectives: The main purpose of audit is to judge the reliability of the financial statements and the supporting accounting records for a particular financial period. The Companies Act, 1956 requires that the auditor of a company has to state whether in his opinion the accounts disclose a true and fair view of the state of company's affairs, profit and Loss Account and Balance Sheet of the state of affairs of a business, the auditor carries out a process of examination and verification of books of accounts and relevant documents. Such an examination will enable the auditor to report to his client on the financial condition and working results of the organization. While carrying out the examination of the various books of accounts, relevant documents and evidences, the auditor may came across certain errors and frauds. Despite such a possibility the detecting of errors and frauds is an incidental object. However, laymen have always associated the detection of errors and frauds as the main function of an auditor which is not true. At the same time audit also discloses how far the accounting system adopted in the organisation is adequate and appropriate in recording the various transactions as well as the weakness of these systems.

Secondary Objectives: As stated above, an auditor has to examine the books of accounts and the relevant documents in order to report on the financial condition of the business. In the process of such an investigation of accounts certain errors and frauds may be detected. These are discussed under the following two heads: A. Detection and Prevention of Errors B. Detection and Prevention of Frauds Detection and prevention of Errors: Various types of errors are mentioned below: 1. Clerical Errors: Such an error arises on account of wrong posting. For example, an amount received from Thomas is credited to Sunny. Though there is wrong posting still the trial balance will agree. Clerical errors are of three types as follows: i) Errors of Commission: There errors are caused due to wrong posting either wholly or partially of the amount in the books of original entry or ledger accounts or wrong calculations, wrong totalling, wrong balancing, and wrong casting of subsidiary books. For example Rs. 500 is paid to a vendor and the same is recorded in the cash book. While posting to the ledger, the Vendor's account is debited by Rs. 500. It may be due to carelessness of the clerk. Most of the errors of commission are reflected in the trial balance and these can be discovered by routine checking of the books. ii) Errors of Omission: Such errors arise when the transactions are not recorded in the books of original entry or posted to the ledge r. For example, sales are note recorded in the sales book or omission to enter invoices in the purchase book. For example Rs. 200 is paid to a vendor. The entry in the cash book is made on the credit side but posting to the vendor side is omitted. Errors due to entire omission will not affect the trial balance whereas errors due to partial omission will affect the trial balance and can be detected.

iii) Compensating Errors: When two or more errors are committed in such a way that the result of these errors on the debits and credits is nil, they are referred to as a compensating errors. For example, Anil's account which was to be debited for Rs. 500 was credited for Rs. 500 and similarly, Sunil's account which was to be credited for Rs. 500 was debited for Rs.500. These two mistakes will nullify the effect of each other. Both the sides of the trial balance are equally affected. As such, these errors are difficult to locate unless detailed investigation is undertaken.

2. Errors of Principle: Such errors are committed when some fundamental principle of accounting is not properly observed in recording transaction. For example, if there is incorrect allocation of expenditure or receipt between capital and revenue or when closing stock is overvalued. Though trial balance will not disagree, the Profit and Loss Account may be very much affected. Sometimes, such errors are committed deliberately to falsify the accounts or unintentionally due to lack of knowledge or sound principles of accounting. Thus, a thorough examination is to be done to locate such errors.

Detection and Prevention of Frauds: Frauds are always committed deliberately and intentionally to defraud the proprietors of the organization. If the frauds remain undetected, they may affect the opinion of the auditor on the financial condition and the working results of the organization. It is, therefore, necessary that the auditor should exercise utmost care to detect such frauds.

Importance of Auditing
For Business
1. Errors are Located Auditing is helpful for business. The error can be located through it. The location and correction of error is possible through auditing. The true and fair information about business is available. 2. Frauds are Discovered Auditing is helpful for business. The discovery of fraud is possible through it. The guilty persons can be held responsible. The auditing accounts show fair about business. 3. Loans Become Easy Auditing is useful for business. Lenders for granting loans accept the auditors accounts. The reputation of borrowers increases due to auditing. Thus auditing accounts help the businessman to expand his activities. 4. Advise about Weakness Auditing is useful for business. The people can seek advice from auditors. The auditors are professional and they know their work very well. They can spotlight the grey area. It is the duty of the business man to act upon the advice of the auditors. 5. High Moral Values Auditing is essential for business. There is moral check on the management and other staff. Auditing puts the pressure on the staff of work honestly. There is no pending work so there is less chance of errors and frauds. 6. Tax Payments Auditing is useful for business, tax authority accept audited accounts for assessment of taxes. There is no further inquiry or investigation from department. The audited accounts lessen the worries of business people. 7. Tax Owners Auditing is useful for business. The tax authorities accept audited accounts for assessment of taxes. There is no further inquiry or investigation from tax department. The audited accounts lessen the worries of business people.

For Owners
7. Efficiency Improves Auditing is beneficial for business. The auditing determines the efficiency of employees. The training and qualifies management is an asset for any business. Such management can play dynamic role in framing and implementing the policies. 8. Dispute is Settled Auditing is essential for business. The audited accounts are helpful to settle the disputes. The audited accounts become the basis of making decisions. The dispute may relate to infringement of patents or trademarks. 9. Planning Becomes Possible Auditing is helpful for business. The audits accounts present true and fair view of business activities. The facts and figures can be used to prepare budge and estimates for the next years. The projected cash receipts and payments, income statement and balance sheet can be prepared. 10. Improvement of Internal Control Auditing is helpful for business. The auditor can point out the weakness of internal control system. The business management can take steps to remove these weaknesses. The effective control systems are essential for large-scale business enterprises. 11. Fluctuation in Profits Auditing is helpful for business. The auditor can make the detailed study to find of fluctuation in profits. There are various reasons for changes in profits. The auditor can determine the true cause of such changes. 12. High Credit Rating The auditing is beneficial for business. The auditing accounts increase the credit standing of any business house. The lenders can rely on audited accounts for granting credit facility. In fact auditing is a screening test of business entity. 13. Listing at Stock Exchange The auditing is beneficial for business. The listing of securities at stock exchange is optional. The public limited companies can get registration at stock exchange. Stock exchange management for registration purpose accepts the audited accounts.

14. Shareholders Protection Auditing is beneficial for owners. The shareholders feel that their rights are protected through auditing. They can know the performance of management. Audited accounts help to determine the value of shares. 15. Partner Satisfaction Auditing is helpful for partners. The sleeping partner feels satisfaction when there are audited. The managing partners can use business property for their personal benefit. There is moral check on managing partners. 16. Proprietors Auditing is useful for proprietors. The audited accounts help the sole traders that their business is going on properly. The error and fraud are pointed out auditors. The owners can determine the efficiency of their employees or assistants. 17. Beneficiary Auditing is valuable for beneficiaries. The auditor of a trust can nominate any person as trustee to look after the property of a trust. Auditing can safeguard the right of beneficiaries. There is a moral check on the trustee to follow the by laws of trust. 18. Deceased Estate The auditing is helpful for dependents of decreased person. The audited accounts presents true and fair view of financial statements. The family can rely on audited accounts for distributing the estate of deceased person. 19. Insolvency The auditing is beneficial for creditors. The audited accounts show true and fair view of state of affairs of sole proprietorship or partnership. The creditor can get their money first and then owners can get refund of capital. The audited accounts help to settle the cases at an early date. For Government 20. Better Performance of Tax Department Auditing is beneficial for government. Tax officers accept the audited accounts. The assessment order can be issued without further clarification. There is saving of money and time due to audited accounts. The performance of tax officers is improved. 21. Exact Revenue Amount Auditing is beneficial for

government. The collection of revenue is possible at an early date. The people are allowed to deposit various kinds of taxes. The recovery of income is made at the start of the year. The government can start welfare project on the basis of total revenue collected. 22. Progress of Economy Auditing is essential for government policies. The true fair view is stated in audited accounts. The stage of economic progress can be determined. The government can take measures to raise the rate of economic growth. 23. Purchase of Private Business Auditing is helpful for government. The private business houses may not work in favour of general public. The government can take over such business units. The purchase price is decided on the basis of auditing of accounts. 24. Sale of Government Business Auditing is useful for government. The policy can be framed on the basis of audition accounts. The management comes to know the value of business. The government can sell state owned unit to private sector. The bid price is settled on audited accounts. 25. Inspectors The auditing is helpful for government. The auditing accounts show the fair value of all assets. The value of assets. The value of assets is the basis of tax. This issue can be settle through audited accounts. The auditors are experts in their field. They know all methods of property valuation. They can issue certified the government agencies for valuation of property. For General Public 26. Insurers can Settle Claims Auditing is essential for insurers. The settlement of fire or marine insurance claims is easy through audited accounts. The policy holders and insurance company can settle actual loss of property. 27. No Loss to Lenders Auditing is essential for lenders. The banks and other lenders ask the borrowers to submit audited accounts before granting loans. The audited accounts are helpful to check the trust worthiness of customers. 28. Creditor are Protected Auditing is essential for creditors. They can know the true performance of their debtors. The creditor can accept this promise only when he feels that debtor is reliable businessman. Auditor accounts provide basic information about reliability.

29. Bidders Can Offer High Rate Auditing is helpful for bidders. Audited accounts provide information about net worth of any business. The people interested in purchasing the business can rely on such information. They know the fair value of business. They can offer reasonable price through open bidding. 30. Better Pay to Employees Auditing is helpful for employees. They are interests in profits. Auditing accounting proves true and fair view of profit. The employees can demand higher pay, fringe benefits and participating in profits. Audit of accounts with the independent person help the employees to make settlement with the employers. 31. Investors Can Take Decisions Auditing is helpful for inventors. The audited accounts can be used to calculate value of shares and other securities. The bargains power is given to the people who have money and they want earn income. They can protect their rights through reliable information.

AUDITOR AS A PROFESSIONAL
Auditors help to ensure that firms are run efficiently, public records kept accurately, and taxes paid properly and on time. They analyze and communicate financial information for various entities such as companies, individual clients, and Federal, State, and local governments. Beyond carrying out the fundamental tasks of the occupation providing information to clients by preparing, analyzing, and verifying financial documentsmany accountants also offer budget analysis, financial and investment planning, information technology consulting, and

limited legal services.

TYPES OF AUDITORS There are many different kinds of auditors. In this article we have focused on External Auditors, Internal Auditors, Government Auditors and Forensic Auditors. External Auditors External Auditors are also known as Independent Auditors or Professional accountants in public practice. An External Auditor audits financial statements for companies and other organizations . There is usually a requirement for some kind of authorization or certificate for External Auditors. To get certified as an External Auditor you have the pass the tests that are arranged by Revisorsnmnden commonly two times per year. It is also required that you have the correct theoretical and practical experience. It is required that you have a bachelor in Business and Administration and a practical experience of at least three years. Internal Auditors Internal auditors are employed by individual corporations, government bodies or other entities. There are different tasks that the individual auditor might perform in the organization, such as financial, internal control, operational and forensic audits and compliance. They might also do consulting within the company. Sometimes they also help the external auditors with the financial statement audit. (Eilifsen et al., 2010, s. 58) In many cases it has been internal auditors that have found financial statement frauds. This was the case with WorldCom. Cynthia Cooper, employed as an internal audit by WorldCom, was the whistleblower of the fraud. Despite the fact that the companys management ordered Cooper and her team not to continue with the investigation in areas where the fraud had been made, she and her team continued and finally uncovered the fraud. The global organisation The Institute of Internal Auditors (IIA) is the global voice of the profession. Its mission is to provide dynamic leadership for the global profession of internal auditing. (The Institute of Internal Auditors website, 10-02-2010). The organisation has produce standards that ought to be followed to internal auditors. It has also developed a certification programme where a person who meets the requirements of the certification, including passing a written examination, will be able to become a certified internal auditor (CIA). IIA has describe internal auditing as 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 Government Auditors The government auditors work in the public sector, they are employed by the national or local government institutions and public organs. The majority of the government auditors main task is to act as assurance on compliance audit and operational audit. When the auditor audit a entity the assignment is to determine which rules, policies, laws or government regulations the entity follows. When a auditor evaluate if resources are being used effectively in a part of or in the whole organisation the auditor works with operational audit. (Eilifsen A, et al. p 59.) In generally at national level the countries establish an Office of Auditor General. The office is responsible for the auditing how the government use the public funds, financial transactions and the accounts of the government. Besides the auditing they help the Parliament with economic investigation and with special audits. In more local level there is also audit offices, they have almost the same task but work on regional level. They investigate if individuals or companies pay accordingly the tax law in the region. To develop government audit there is international institute named the International Organization of Supreme Audit Institutions. They have provided an international framework to improve the audit and also its opportunity for the governments to collect and transfer knowledge about audit. Forensic Auditors Forensic audits mission is to detect, investigate and deter fraud and white-collar crimes. Forensic audits are often employees of corporations, audit firms, government agencies and investigative and consulting services firms. The global organization that supports forensic audits is called The Association of Certified Fraud Examiners (ACFE). There is a certification programmed for individuals that would like to become CFEs (Certified fraud examiners). People who become CFEs often come from various backgrounds, such as auditors, accountants, lawyers, criminologists. THE INTERVIEW

In accordance with the instructions given by our teacher Ms RAMITHA ,we fixed up an appointment with Mr.A.S.VARADHARAJAN (ACA). Mr.VARADHARAJAN runs a firm called VARADHAN &CO at No 1 Raja street mandaveli Chennai 600028. The following questions will give you insight into the work of an auditor. Question Which of the following types of risks assumes an absence of compensating controls in the area being reviewed? Answer A.Control risks B.Detection risks C.Inherent risks D.Sampling risks Question The primary purpose of compliance test is to verify whether? Answer A. Controls are implemented as prescribed. B. Documentation is accurate and current. C. Access to users is provided as specified. D. Data validation procedures are provided. Question If accountant miss the journal entry of outstanding Expense since it is an error of omission it cannot affect,The Trial Balance, how does auditor find it out? Auditors should check him booking of expense. Like Telephone, Electricity, water, Security expense etc. All the expenses, should be booked for the entire 12 months by this auditor can find Out the missing provision entries. Auditor can find it by seeing the expenses. Entries of April & May next year as most of the expense. Must have been entered by that time.

Question If we miss an entry at journal can we find it in latter? Stage or in audit how can be find it Answer Trial balance will not get tallied. Its corresponding account will not tally. Basically it is found out only while preparing t a/cs and Sometimes we can pass a rectification entry also. Question How would u audit a production department? Answer As per as Cost Audit, efficiency, quality, less cost, improved Methodology is to be observed. So that Material, Labour, Overhead, Stock of WIP, Finished goods are to be checked Also give your valuable qualification on the object matters. Question What is tax audit? Answer Every person who has turnover above 40 lacs is foll under audit compulsury . This is the tax audit . In tax audit every transaction is checked carefuly relating tax and or that transaction comes under any Act.carrying on business shall, if his total sales, turnover or gross receipts,as the case may be, in business exceed or exceeds forty lakh rupees in any previous year or carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year; or carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD or section 44AE or section 44AF, as the case may be, and he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year get his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed: Provided that this section shall not apply to the person, who derives income of the nature referred to in section 44B or section 44BB or section 44BBA or section 44BBB, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later: Provided further that in a case where such person is required by or under any other law to get his accounts audited it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnishes by that date the report of the audit as required under such other law and a further report in the form prescribed under this section.

Question What is the basic work nature of an auditor? Answer The information is based on the details given by the auditor: An auditor prepares an engagement letter conforming the auditors acceptance of the appointment, scope of the audit and more importantly the extent of the auditors responsibility to the client. It is given by the auditor preferably before the commencement of an audit to avoid any misunderstanding with respect to the scope of work.

Typically an audit engagement letter will cointain the following: Object of audit Scope of audit Managements responsibility for the financial statement on-going basis, adoption and application of accounting standards, maintenance of adequate records, internal control etc, Unrestricted access to books, records, documents and other vital information. Fee and billing arrangements. Mr.Varadhrajan also provided us a insight on different types of clients he works with and what type of audit he undertakes and statutory audit, tax audit, internal audit, stock audit, bank audit, and govt audit is undertaken by his firm. He also said about finding frauds and errors, and only at rare occasion they come across frauds and errors during audit. At times of purchase and expense bills are fabricated to understate profit. Its very difficult to find out at the cursory glance. It can be found out only after in depth analysis and by comparing previous years figures.

Enlc:Example of An audit engagement is given below.

Sample Audit Engagement Letter (for REFERENCE ONLY)

Our Ref.

Date

The Incorporated Management Committee of

Dear Sirs,

AUDIT ENGAGEMENT LETTER

The purpose of this letter is to set out the basis on which we are to act as auditors of the IMC and the respective areas of responsibility of the Incorporated Management Committee (IMC) and of ourselves.

RESPONSIBILITIES OF INCORPORATED MANAGEMENT COMMITTEE AND AUDITORS 1.1 As IMC of the School, you are responsible under the Education Ordinance for maintaining proper books or records of accounts and other financial records. You are also responsible for preparing accounts which present fairly (see Note) the financial transactions and financial position of the IMC and for ensuring that the IMC has complied with the relevant provisions of the Education Ordinance, the Codes of Aid, the relevant letters, circulars and guidelines issued to the IMC by the Education Bureau (EDB), if any. 1.2 You are responsible for ensuring that the IMC has complied with laws and regulations, which are relevant to the operations of the IMC.

1.3 You are responsible for procuring your Managers to give us full co-operation to facilitate our audit work and for making available to us, as and when required, all the IMCs books of account and all other relevant records and related information, including minutes of all meetings of the IMC.

1.4 We have a statutory responsibility under the Education Ordinance to report to the EDB whether in our opinion the accounts present fairly (see Note) the financial transactions and financial position of the IMC. In arriving at our opinion, we are required to consider the following matters, and to report on any in respect of which we are not satisfied:

(a)

Whether proper books or records of account and other financial records have been maintained; Whether the IMCs income and expenditure account and balance sheet are in agreement with the books of accounts; and Whether we have obtained all the information and explanations which we consider necessary for the purposes of our audit.

(b)

(c)

1.5 We have a professional responsibility to report if the accounts do not comply in any material respect with applicable accounting standards, unless in our opinion the non-compliance is justified in the circumstances. In determining whether or not the departure is justified, we consider:

(a) Whether the departure is required in order for the accounts to present fairly; and (b) Whether adequate disclosure has been made concerning the departure. SCOPE OF AUDIT

2.1 Our audit will be conducted in accordance with Hong Kong Statements on Auditing and Statements of Auditing Standards issued by the Hong Kong

Institute of Certified Public Accountants, and will include such tests of transactions and of the existence, ownership and valuation of assets and liabilities as we consider necessary. We shall obtain an understanding of the accounting systems and internal control systems in order to assess their adequacy as a basis for the preparation of the accounts and to establish whether proper books of accounts have been maintained by the IMC. We shall expect to obtain such appropriate evidence as we consider sufficient to enable us to draw reasonable conclusions there from.

2.2 The nature and extent of our procedures will vary according to our assessment of the IMCs accounting system and, where we wish to place reliance on it, the internal control systems, and may cover any aspect of the IMCs operations that we consider appropriate. Our audit is not designed to identify all significant weaknesses in the IMCs systems but, if such weaknesses come to our notice during the course of our audit, which we think should be brought to your attention, we shall report them to you. Any such report may not be provided to third parties except the EDB to meet the requirement stipulated in the Code of Aid and other circulars/guidelines issued by the EDB, without our prior written consent. Such consent will be granted only on the basis that such reports are not prepared with the interests of anyone other than the IMC in mind and that we accept no duty or responsibility to any other party as concerns the reports.

2.3 As part of our normal audit procedures, we may request you and your Managers and Management Staff to provide written confirmation of certain oral representations which we have received from you and your Managers and Management Staff during the course of the audit on matters having a material effect on the accounts.

2.4 In order to assist us with the examination of the accounts, we shall request sight of all documents or statements, including the annual budget, operating and financial review, chairmans statement and the IMCs report, which may be issued with the accounts. We are also entitled to attend all general meetings of the IMC and to receive notice of all such meetings.

2.5 The responsibility for safeguarding the assets of the IMC and for the prevention and detection of fraud, error and non-compliance with law or regulations rests with the IMC. However, we shall endeavour to plan our audit so that we have a reasonable expectation of detecting material misstatements in the accounts or books of accounts (including those resulting from fraud, error or noncompliance with law or regulations), but our examination should not be relied upon to disclose all such material misstatements or frauds, errors or instances of non-compliance as may exist.

2.6 Once we have issued our report we have no further direct responsibility in relation to the accounts for that period. However, we expect that you will inform us of any material event occurring between the date of our report and that of submission of accounts to the EDB.

2.7 The officer(s) of the EDB has the rights to communicate with us on matters concerning the accounts and the supporting statements.

FEES

3.

Our fees are computed on the basis of the time spent on your affairs by the partners and our staff and on the levels of skill and responsibility involved. The audit fee can also be a fixed fee agreed before commencement of audit. Unless otherwise agreed, our fees will be billed at appropriate intervals during the course of the audit and will be due on presentation.

AGREEMENT OF TERMS

4.

Once it has been agreed, this letter will remain effective, from one audit appointment to another, until it is replaced arising from changes in audit scope or other circumstances. We shall be grateful if you could confirm in writing your agreement to these terms by signing and returning the enclosed copy of this letter, or let us know if they are not in accordance with your understanding of our terms of engagement.

Yours faithfully,

ABC & Co. Certified Public Accountants

We agree to the terms of this letter. ______________________________ Supervisor, for and on behalf of the Incorporated Management Committee

Date: