1.

2 DEFINITONS Examinaiton of books, a/c's and vouchers as shall enable the auditor to satisfy him self that wheather: . B/S properly drawn up to give true n fair view of state of affairs of business. . P & L a/c gives true and fair view of profit or loss for the period to the best of knowledge. If not, in what respect he is not satisfied. 1.3 OBJECTIVES OF AN AUDIT 1 Detection and Prevention of errors and mistakes a) Clerical Errors i) Errors of Ommission (Completely missing and entry, no effect of trial balance) ii) Errors of Commission (Wrong posting & Entries. e.g. wrong c/f and b/f, wrong Dr and Cr, etc) iii) Compensatory Errors (error is counter balanced by another error) iv) Trial Balance Errors (Casting Errors of T/B. e.g. Omiting to draw balance or balance on wrong side) b) Errors of Principal i) Incorrect Allocation (Wrong capital and revenue treatment) ii) Ommission of O/S Assets & Liabilities (Ommiting prepaid, unearned, Accruals, etc) iii) Incorrect Valuation of Assets LOCATION OF ERRORS i) Trial Balance Checking (proper posting, correct balances, correct side, etc) ii) Short Cut Method (look for amount half of differce that might pe posted on wrong side) (If differece divisible by 9, then may be transposition error) (If differece round, then may be wrong totals) (If differece is large amount, then check previous year's balances) iii) Extensive Checking 2 Detection and Prevention of Fraud a) Embazzlement of Cash (Ommitting receipts or fictious payments) b) Misappropriation of Goods (Stealing or personal usage) c) Fraudulent Manipulation of Account (Normally by higher management) Expression of Independent Opinion on Accounts Moral Check Visits of Auditior have moral check on staff and create influence Difference b/w Auditing & Book Keeping/Accounting Meaning (Examining - Preparing) Span of Work (Auditing stars where accounting finished) Performer (Accountant - Auditor) Statutory Requirement Qualification Appointment

3 4 1.4 1 2 3 4 5 6

1.5 QUALIFICATION OF AN AUDITOR Auditor of Pulic Ltd Co. or Private Co. subsidary of Public Co. must be CA within meaning of CA Act 1961 All Private Companies with paidup capital of 3 M+ must get a/cs audited by CA as per CA Act 1961 DISQUALIFICAITON OF AUDITORS i) Any time during last 3 years director, employee or officer of a firm II) Partner of, or in employment of above mentioned persons iii) Spouse of Director of Company iv) Indebted to the Company

v) Person, his spouse or children holds shares of auditor client vi) A Body Corporate 1.6 PROFESSIONAL ETHICS Necessary and appropriate for the auditing profession as trust is placed on him with expectation Code of ethis is made for the purpose PRINCIPLES 1 Integrity Follow High Standards of fairness and integrity, Achieve work with honesty and responsibility Observe law and make disclosures, Not part of illegal activity, Respect the integrity of other auditiors 2 Objectivity Should not feel any influence, Conduct audit as instructed by audit protocol, Not market their services during audit, Avoid conflict of interest, Shouldn't do 2 consecutive audit for a company Confidentiality Confidentiality of clients info, Carefull in use of information, No personal gain with info, Take all reasonalbe steps to secure audit results, data and views Competency Do services for which they have full knowledge, improve their proficiency, Be consistent and accurate in evaluations, serve client in respectful & efficient manner, assist client in post audit questions Share collective knowledge,

1.7 TYPES OF AUDIT LEGAL BASE 1 Statutory Audit Public Ltd. Co. or its subsidry by CA necessarily by CA Pvt. Ltd. Co. with paid up capital 3M+ by CA Govt. Organizations, Provincial Councils, by Audito General Cooperatives by Commissional of Coop. Development 2

Company's Act 1982 Company's Act 1982 Finance Act Coop. Development Act

Private Audit No legal Requirement, Independent Auditor, Personal agreement b/w the owner and the auditor e.g Sole proprietorships, Partnerships and Societies, etc.

TIME OF EXECUTION 1 Continuous Audit Throughout the year, Remain with the client and Include interim audits Adequate time for investigation, Early detection of errors, Early rectification of errors, Moral check Certified Financial Statements can be presented easily, increase efficiency, accuracy and the neatness of accounts, Facilitates preparation of interim accounts 2 Interim Audit For a part of accounting year, In between two annual audits half yearly, quarterly or monthly Lies between continuous audit and final audit, Entrepreneurs need Final Audit Full facts relate to accounts are submitted to the auditor, Completion in one session Less chances of manipulation and alteration of figures after checking, Less expensive Management Audit, Cost Audit, Marketing Audit, System Audit, Operational Audit

Other Types:

2.1 SYSTEM OF INTERNAL CONTROL Whole system of controlls by management including internal check, internal audit and other controls to: * Avoid imporper disbursement of Assets * Avoid occurrence to improper liabilities * Assure accuracy and dependability of financial and operational information * Judge operating efficiency * Measure adherence to policies of company Internal Check System under which the work of one person is automatically checked by another person Internal Audit Continuous review of operations and records by specially assigned staff 2.2 EVALUATION OF INTERNAL CONTROL There are four methods for evaluation of internal control i) Oral Approach Oral descussion to identify strengths and weaknesses ii) Memorandum Approach Full notes are taken during descussion and analysis is conducted. iii) Internal Control Questionaire (ICQ) Questionaire like yes or no, agree, disagree, etc. iv) Flow Charts Flow Charts of each business activity 2.3 TYPES OF INTERNAL CONTROL Typically management's responsibility but every employee is responsible for development 1 Detective Controls Search for and identify errors after occurance. Expensive than preventive contols but measure their efficiency and controll certain type of errors. Reconciliations, Payroll Distribution observations, inventory counts, passwords, transaction edits and internal audit are examples. 2 Corrective Controls They begin when improper outcomes occur and are detected and keep the "spotlight" on the problem until management can solve the problem or correct the defect. Preventive Controls designed to discourage or pre-empt errors or irregularities from occurring. More cost-effective than detective controls. Credit checks, job descriptions, required authorization signatures, data entry checks and physical control over assets to prevent their improper use are all examples of preventive controls.

2.4 Internal Audit Continuous review of operations and record. Scope Examination and evaluation of adequacy and effectiveness of system of internal control and quality of performance in carrying out assigned responsiblities Role of Internal Audit Evaluating controls and advising managers at all levels Evaluating risks Analysing operations and confirming information Reviewing compliance Difference B/W Internal And External Auditor * * * * Appointment (Management / S. Holders) Nature (employee / Outsider) Major Concern (Mgmnt Needs / Compliance) Basic Job (Review / Opinion) * * * Areas of Focus (Whole org. / Finance & Accounting) Independence Driving Results (Improvement in performance / Improvement in Financial control)

Determination of Scope of work

2.5 Internal Control over Fixed Assets Fixed Assets are sometimes referred to as Property, Plant and Equipment (PP&E) and the terms are used interchangeably. In many companies the following elements of Internal Control over PP&E are considered and performed according to standard guidelines: Approval process for Capital Expenditures (Capex) Determination whether planned expenditure is capitalized or expensed Purchasing and Accounts Payable systems are correctly applied If capitalized, appropriate useful life and salvage value determined Correct depreciation expense is calculated and applied each period Property tax reports filed with tax jurisdictions Insurance coverage relates directly to asset exposure