THIRD YEAR

SIXTH SEMESTER
PRACTICAL AUDITING
Objectives of the Course
Auditing as a separate and distinct branch of study, is an instrument of financial control and
involves critical and intelligent examination of financial statements to give in the form of
certificate or report, an attestation, an expert opinion or an expert advice. It ensures that the
accounts prepared truly represent facts and that expenditure has been incurred with due
regularity and propriety. This course is designed to make the students to learn the theoretical
legal framework of Auditing.
COURSE OUTLINE

Module I: Introduction of Auditing

a) Auditing – Meaning and Definition, Objectives and Scope of Auditing.
b) Significance and Types of Audit.
c) Relationship of Auditing with other Disciplines.
d) Auditor’s Duty in relation to Errors and Frauds in Audit of Financial Statement as per SA
240 (Standards in Auditing).
e) Fraud Reporting as per Sub-section 12 of Section 143 of Companies Act 2013.

Module II: Audit Planning and Programme

a) Audit Planning – Introduction and Advantages of Audit Planning (SA 300: Planning an
Audit of Financial Statement).
b) Audit Programme – Meaning, Objectives, Types of Audit Programme, Merits and demerits
of Audit Programme.
c) Audit Note Book –Contents and Usefulness of Audit Note Book.
d) Audit Working Papers – Merits and Demerits of Audit Working Paper – Essentials of
Good Audit Working Papers.

Module III: Internal Control, Internal Check and Internal Audit

a) Internal Control – Definition and Objectives Internal Control (SA 315).
b) Internal Check – Meaning, Objectives, Importance and Advantages of Internal Check.
c) Essentials of Good Internal Check System.
d) Basics of Standards on Internal Audit – Difference between Internal Control, Internal
Check and Internal Audit.

Module IV: Vouching

a) Vouching – Meaning, Definitions, Objectives and Importance of Vouching.
b) Vouching of Cash Receipts and Payments Transactions.
c) Verification – Meaning and Objectives.
d) Duties of an Auditor in Verification and Valuation of Assets and Liabilities.
e) Distinction Between Vouching, Valuation and Verification.
Module V: Auditors Qualification, Appointment and Powers
a) Appointment of Auditors – Appointment of First Auditor.
b) Filling of Casual Vacancy – Audit Committee and Rotation Auditors.
c) Appointment of Auditor by Central Government.
d) Appointment by Special Resolution –Re-appointment and Compulsory Re-Appointment.
e) Ceiling on the number of Auditorship.
f) Qualifications and Qualities of Auditors – Disqualifications of Company Auditor.
g) Auditor’s remuneration – Rights or Powers of Auditors.
h) Duties and Liabilities of an Auditor – Removal of Auditor.

Module VI: Audit Report

a) Audit Report – Meaning, Definition, Importance and Content of Audit Report(as per
Reporting under Companies (Auditor’s Report) Order, 2016).
b) Types of Audit Report.
c) Distinction between Auditor’s Report and Auditor’s Certificate.
d) Preparation and Presentation of Audit Report (SA 700).

Module VII: Auditing of E-Commerce Transaction

a) EDP Audit – Meaning, Division of Auditing in EDP Environment
b) Impact of Computerization on Audit Approach
c) Online Computer System Audit – Types of Online Computer Systems (Audit around and
with the Computers)
d) Procedure of Audit under EDP System.

Recommended Readings:
Books:
1. Natarajan - Practical Auditing – Margham Publication, 2018.
2. B.N. Tandon, S. Sudharsanam and S.Sudharabahu - Practical Auditing, S.Chand
Publication, New Delhi, Reprint 2016.
3. DinkarPagare, Principles and Practices of Auditing, Sultan Chand and Sons, New Delhi,
2018.
4. Ravinder Kumar and Virender Sharma - Auditing, Principles and practice, PHI Learning
Private Limited, New Delhi, Third Edition, 2016.
5. T.R. Sharma, Principles and Practice of Auditing, SahithyaBhavan Publication, Agra,
2010.
 Module I: Introduction of Auditing

a) Auditing – Meaning and Definition, Objectives and Scope of Auditing.

Meaning and Definition of Auditing

The word Audit is derived from Latin word “Audire” which means ‘to hear’.
Auditing is the verification of financial position as disclosed by the financial statements. It is
an examination of accounts to ascertain whether the financial statements give a true and fair
view financial position and profit or loss of the business. Auditing is the intelligent and
critical test of accuracy, adequacy and dependability of accounting data and accounting
statements.

Different authors have defined auditing differently, some of the definition are:
As per Spicer and Pegler: “An audit may be said to be such an examination of the
books, accounts and vouchers of a business as will enable the auditor to satisfy that the
Balance Sheet is properly drawn up, so as to give a true and fair view of the profit or loss for
the financial period according to the best of his information and the explanation given to him
and as shown by the books, and if not, in what respects he is not satisfied.”

Statement on Standard Auditing Practices (SAP) 1 by 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.”

“Auditing is an examination of accounting records undertaken with a view to

establishment whether they correctly and completely reflect the transactions to which they
purport to relate.” -L.R.Dicksee

“Auditing is concerned with the verification of accounting data determining the

accuracy and Reliability of accounting statements and reports.” - R.K. Mautz

“Auditing is the systematic examination of financial statements, records and related

operations to determine adherence to generally accepted accounting principles, management
policies and stated requirement.” - R.E.Schlosser

Objectives of Auditing
The objectives of auditing are changing with the advancement of business techniques.
Earlier it was only to check the correctness of receipts and payments. The objectives of the
auditing have been classified under two heads:

1) Main objective
2) Subsidiary objectives
 Main Objective: The main objective of the auditing is to find reliability of financial
position and profit and loss statements. The objective is to ensure that the accounts reveal a
true and fair view of the business and its transactions. The objective is to verify and establish
that at a given date balance sheet presents true and fair view of financial position of the
business and the profit and loss account gives the true and fair view of profit or loss for the
accounting period. It is to be established that accounting statements satisfy certain degree of
reliability. Thus the main objective of auditing is to form an independent judgement and
opinion about the reliability of accounts and truth and fairness of financial state of affairs and
working results.

Subsidiary objectives: The subsidiary objectives of the auditing are:

1. Detection and prevention of fraud

The one of the important subsidiary objective of auditing is the detection and
prevention of fraud? Fraud refers to intentional misrepresentation of financial information.
Fraud may involve:
a. Manipulation, falsification or alteration of records or documents
b. Misappropriation of assets.
c. Suppression of effect of transactions from records or documents.
d. Recording of transactions without substance.
e. Misapplication of accounting policies

2. Detection and prevention of errors

Auditing ensures that there is no mis-statement in the financial statements. Errors can
be detected through checking and vouching thoroughly books of accounts, ledger accounts,
vouchers and other relevant information.
Scope of Audit

The following points merit consideration in regard to scope of audit:

1. The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited.
2. To form an opinion on the financial statements, the auditor should be reasonably
satisfied as to whether the information contained in the underlying accounting records
and other source data is reliable and sufficient as the basis for the preparation of the
financial statements.
3. In forming his opinion, the auditor should also decide whether the relevant
information is properly disclosed in the financial statements subject to statutory
requirements, where applicable.
4. The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by:
(a) Making a study and evaluation of accounting systems and internal controls
and
(b) Carrying out such other tests, enquiries and other verification procedures of
accounting transactions and account balances as he considers appropriate in
the particular circumstances.
5. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
(a) Comparing the financial statements with the underlying accounting records and
other source data to see whether they properly summarize the transactions and events
recorded therein; and
(b) Considering the judgments that management has made in preparing the financial
statements accordingly, the auditor assesses the selection and consistent application of
accounting policies, the manner in which the information has been classified, and the
adequacy of disclosure.
6. The auditor is not expected to perform duties which fall outside the scope of his
competence. For example, the professional skill required of an auditor does not
include that of a technical expert for determining physical condition of certain assets.
7. Constraints on the scope of the audit of financial statements that impair the auditor’s
ability to express an unqualified opinion on such financial statement should be set out
in his report, and a qualified opinion or disclaimer of opinion should be expressed as
appropriate.
b) Significance and Types of Audit.
Importance of auditing can be judged from the fact that even those organizations
which are not covered by companies Act get their financial statements audited. It has become
a necessity for every commercial and even non- commercial organization. The importance of
auditing can be summed in following points:
1. Ensures Accuracy and Reliability:
Auditing ensures that financial statements are accurate, complete, and reliable, which
helps stakeholders make informed decisions.
2. Provides Assurance:
Auditing provides assurance that financial statements are free from material
misstatements, which enhances the credibility of financial reporting.

3. Detects and Prevents Fraud:

Auditing helps detect and prevent fraud, which can have serious consequences for
organizations.

4. Improves Internal Controls:

Auditing identifies weaknesses in internal controls and provides recommendations for
improvement, which helps organizations, strengthen their internal control systems.

5. Enhances Transparency and Accountability

Auditing promotes transparency and accountability by ensuring that financial
information is accurate, complete, and reliable.

6. Supports Decision-Making
Auditing provides stakeholders with reliable financial information, which supports
informed decision-making.

7. Compliance with Laws and Regulations

Auditing ensures compliance with laws and regulations, which helps organizations
avoid legal and regulatory issues.

8. Improves Operational Efficiency

Auditing identifies areas for improvement in operational efficiency, which helps
organizations streamline their processes and reduce costs.

9. Enhances Stakeholder Confidence

Auditing enhances stakeholder confidence in financial reporting, which is essential
for attracting investors, securing loans, and maintaining a positive reputation.

10. Supports Good Corporate Governance

Auditing supports good corporate governance by ensuring that organizations have
effective internal control systems, accurate financial reporting, and transparent decision-
making processes.
Types of audit

Statutory Audit is often called financial Audit. Independent financial audit is

generally conducted to ascertain whether the Balance Sheet and Profit & Loss Account
presents a true and fair view of the financial position and working result of the organization
under audit. The need for financial audit arises as the control of the company is vested in the
hands of the management of the company and the financial statements are also prepared by
the management. The owners (shareholders), therefore, need assurance that the financial
Independent expert – assures the owners about the reliability of the financial
statements. Similarly, investors wish to invest their moneys in the shares of companies on the
basis of their profitability and financial position. They will also place greater reliance on
financial statements if they have been audited. Other users of financial statements, e.g., trade
creditors, banks, financial institutions, tax authorities, other government authorities, labour
unions, etc., also place greater reliance on audited accounts.
Sections 139 to 147 under chapter X of the Companies Act, 2013 contain provisions
regarding statutory audit and auditors. Section 139 contains that at the first annual general
meeting every company shall appoint an individual or firm as it auditor who will hold office
from the conclusion of that meeting till the conclusion of the sixth annual general meeting.
Section 141 contains that a person shall be eligible for appointment as an auditor of a
company only if he is a chartered accountant and in case of a firm whereof majority of
partners practising in India are qualified for appointment as aforesaid may be appointed by its
firm name to be auditor of a company. Section 143 which contains provisions regarding
powers and duties of auditors contains that the statutory auditor shall make a report to the
members of the company on the accounts and financial statements examined by him.

The main provisions regarding statutory audit are:

• Auditor will have access to books of accounts and vouchers etc. at all times and he can seek
information from officers of the company as he may deem necessary.
• In his report he must state, besides other things, whether the financial statements represent a
true and fair view of the state of company’s affairs as at the end of the financial year.
• In case of any qualifications in the audit report, the reason for same must be stated in the
report.
• Auditor is required to comply with Auditing Standards.
• In case auditor suspects any fraud, he must immediately report the same to the Central
Internal Audit
Section 138 of the Companies Act, 2013 contains provisions regarding internal audit.
As per Companies Act, 2013, certain class or classes of company as may be prescribed shall
appoint an internal auditor who will conduct an audit of the functions and activities of the
company and make a report thereon to the Board of Directors. Any chartered Accountant
(except statutory auditor of the company) or Cost Account or other professional as may be
decided by the Board, can be appointed to conduct the internal audit.

According to Rule 13 of The Companies (Accounts) Rules, 2014 following class or

classes of companies shall be required to appoint an internal auditor or firm of internal
auditors, namely:
(a) Every listed company;
(b) Every unlisted public company having-
(i) Paid up share capital of 50 crore rupees or more during the preceding financial year; or
(ii) Turnover of 200 crore rupees or more during the preceding financial year; or
(iii) Outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year; or
(iv) Outstanding deposits of 25 crore rupees or more at any point of time during the preceding
financial year; and

(c) Every private company having

(i) Turnover of 200 crore rupees or more during the preceding financial year; or
(ii) Outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year:

The rules also provide that every existing company covered under above criteria in
Financial Year 2013-14 shall comply with requirements of Section 138 and Rule 13 of
Companies (Accounts) Rules, 2014 before 30th September, 2014 (within 6 months of the
commencement of Section 138, i.e. 01st April, 2014) Government.
Secretarial Audit
Secretarial Audit is a compliance audit and it is a part of total compliance
management in an organisation. The Secretarial Audit is an effective tool for corporate
compliance management. It helps to detect non-compliance and to take corrective measures.
Secretarial Audit is a process to check compliance with the provisions of various laws and
rules/regulations/ procedures, maintenance of books, records etc., by an independent
professional to ensure that the company has complied with the legal and procedural
requirements and also followed the due processes. It is essentially a mechanism to monitor
compliance with the requirements of stated laws. A Company Secretary in Practice has been
assigned the role of Secretarial Auditor under section 2(2)(c)(v) of the Company Secretaries
Act, 1980. Ever-increasing complexities of laws and responsibilities of directors (especially
non-executive directors) make it imperative that a Practicing Company Secretary (PCS)
reports whether or not there exists proper compliance mechanism and systems in the
corporate structure. PCS has also to verify whether diverse requirements under applicable
laws have been duly complied with or not and if there is a need for any corrective measures
or improvement in the system.
Secretarial Audit on a continuous basis would help the company in initiating
corrective measures and strengthening its compliance mechanism and processes. It is
recommended that the Secretarial Audit be carried out periodically (quarterly / half yearly)
and adverse findings if any, be communicated to the Board for corrective action.

Based on ownership:
On the basis of ownership audit can be:-

1. Audit of Proprietorship: 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 instructions given by the proprietor.
2. Audit of Partnership: To avoid any misunderstanding and doubt, partnership audits
their accounts. Partnership deed on mutual agreement between the partners may
provide for audit of financial statements. Auditor is appointed by the mutual consent
of all the partners. Rights, duties and liabilities of auditor are defined in the mutual
agreement and can be modified by the partners.
3. Audit of Companies: Under companies Act, audit of accounts of companies in India
is compulsory. Chartered accountant who is professionally qualified is required for
the audit of accounts of companies. Companies Act 1913 for the first time made it
compulsory for joint stock companies to get their accounts audited from a qualified
accountant. A number of amendments have been made in companies Act, 1956 and
2013 regarding appointment, duties, qualification, power and liabilities of a qualified
auditor.
4. Audit of Trusts: The beneficiaries of the trusts may not have access and knowledge
of accounts of the trust. The trustees are appointed to manage and look after the
property and business of the trust. Accounts of the trust are maintained as per the
conditions and terms of the trust deed. The income of the trust is distributed to the
 beneficiaries. There are more chances of frauds and mis-appropriation of incomes. In
the trust deed as well as in the Public Trust Act which provide for compulsory audit
of the accounts of the trust by a qualified auditor. The audited accounts of the
trust ensure true and fair view of accounts of the trust.
5. Audit of Accounts of Co-operative Societies: Co-Operative societies are established
under the Co-Operative Societies Act, 1912. It contains various provisions for the
regulations and the working of these societies. Some of the states have adopted it
without any change, while others have brought certain changes to it. The auditor of
the Co-operative Society should have an expert knowledge of the particular act under
which Co-operative society under audit is functioning. He should also study by-laws
of the society and make sure that the amendments made from time to time in the by-
laws have been duly registered in the Registrar’s Office. Companies Act is not
applicable to the co-operative Societies. The Registrar of co-operative societies shall
audit or cause to be audited by some person authorized by him, the accounts of the
society once in every financial year.
6. Government Audit: Audit of government offices and departments is covered under
this heading. A separate department is maintained by government of India known as
Accounts and Audit Department. This department is headed by the Comptroller and
Auditor General of India. This department works only for the government offices and
departments. This department cannot undertake audit of non-government concerns. Its
working is strictly according to government rules and regulations.

Based on Time: On the basis of time the audit can be of following types

1. Interim Audit: When an audit is conducted between two annual audits, such audit is
known as Interim audit. It may involve complete checking of accounts for a part of
the year. Sometimes it is conducted to enable the board of directors to declare an
Interim dividend. It may also be for the purpose of dealing with interim figures of
sales.
2. Continuous Audit: The Continuous Audit is conducted throughout the year or at the
regular short intervals of time.
“A continuous audit involves a detailed examination of all the transactions by the
auditor attending at regular intervals say weekly, fortnightly or monthly, during the
whole period of trading.” - T.R. Batliboi

“A continuous audit is one where the auditor or his staffs is constantly engaged in
checking the accounts during the whole period or where the auditor or his staffs
attends at regular or irregular intervals during the period.” -R.C Williams

Advantages of continuous Audit:

a. Complete checking of all the records: Since the audit is carried out throughout the
year, sufficient time is available for detailed checking. Any enquiry and doubt arising
in the course of audit can be tackled in a better way.
 b. Proper planning: Auditor can plan his audit work in a systematic manner. He can
evenly spread his work throughout the year. It will improve efficiency of auditor.
c. Early detection of frauds and errors: The work of auditor becomes easier for
detecting frauds and errors, otherwise it will involve more time.
d. Up-to-date accounts: The efficiency of account staff will increase and their work
will be up-to-date and accurate.
e. Valuable suggestions: Continuous audit will help the auditor to understand the
technicalities of business. This will help the auditor to make suggestions for the
improvement of business.
f. Preparation of interim accounts: Interim accounts can be prepared without much
delay. It will help the Board of Directors to declare interim dividend.

Disadvantages of Continuous Audit:

a. Expensive: It is an expensive system as it may not suit the budget of small
organizations.
b. Dislocation of routine work: Frequent visits by auditor may dislocate the smooth
flow of office work.
c. Alteration of Figures: after the accounts have been audited, the figures may be
fraudulently altered by the staff.
d. Losing link in the audit work: As the work is not completed continuously, the
auditor may lose continuity and certain questions and inquires may be left
unanswered.
3. Final Audit: Final Audit means when the audit work is conducted after the close of
financial year. A final audit is commonly understood to be an audit which is not
commenced until after end of the financial period and is then carried on until
completed.
4. Balance Sheet Audit: Balance Sheet Audit relates to the verification of various items
of balance sheet such as assets, liabilities, reserves and surplus, provisions and profit
and loss balance. The procedure under this audit is to follow a backward process. First
the item is located in balance sheet, and then it is located in original record for the
purpose of verification.

Based on Objectives: On the basis of objectives the audit can be of following types:
1. Internal Audit
It implies the audit of accounts by the staff of the business. Internal audit is an
appraisal activity within an organization for the review of the accounting, financial and other
operations as basis for protective and constructive service to the management. It is a type
of control which functions by measuring and evaluating the effectiveness of other types of
control. It deals primarily with accounting and financial matters but it may also properly deal
with matters of operating nature.
2. Cost Audit
Cost Audit is the verification of the correctness of cost accounts and adherence to the
cost accounting plans. Cost Audit is the detailed checking of costing system, techniques and
accounts to verifying correctness and to ensure adherence to the objectives of cost
accounting.
3. Secretarial Audit
Secretarial Audit is concerned with verification compliance by the company of
various provisions o Companies Act and other relevant laws.
Secretarial audit report includes
a. Whether the books are maintained as per companies act, 2013.
b. Whether necessary approvals as required from central Government, Company law
board or other authorities were obtained.
4. Independent Audit
Is conducted by the independent qualified auditor. The purpose of independent
audit is to see whether financial statements give true and fair view of financial position and
profits. Mainly it is for safeguarding the interest of owners, shareholders and other parties
who do not have knowledge of day-to-day operations of organization.
5. Tax Audit
Now-a-days tax audit has become very important to ascertain the accuracy of tax
related documents. Tax audit mostly covers income returns, invoices, debit and credit
notes and various current and fixed assets. Tax audit is an innovation of 21st century. It
has added one more chapter to the practice of auditing. Tax audit ensures the validity and
credibility of tax related documents.

c) Relationship of Auditing with other Disciplines.

Disciplines Relationship

1. Accounting
Auditor has to review and evaluate the financial statements by providing an opinion.
Therefore, he should have thorough knowledge about accounting concepts and principles.
 2. Mathematics and Statistics
Auditor deals with financial data and the amount that appears in financial statements.
Hence, it requires knowledge of calculation procedure involved in computing various items,
for example, depreciation, and provision for bad debts, tax etc.
Auditor is also expected to have knowledge of statistical sampling for making meaningful
conclusion.

3. Economics
Auditor requires knowledge regarding business and economic environment affecting
the client. Thus, economic concepts are required to perform auditing in a meaningful way.
4. Law
Audit of a business concern has to be undertaken with respect to conformity with law.
Thus, an auditor should have sound knowledge of laws affecting the client.
5. Computer Information System
In recent times, clients maintain their accounts in computer information system.
Thus, working knowledge on computer is required for auditors to conduct audit in an
effective way.
6. Financial Management
Auditor to understand and evaluate the financial statements in a better way should
have knowledge of financial techniques.
7. Behavioural Science
Auditor has to deal with many personnel to conduct the audit efficiently. Hence, he
should have the tact of getting along with people.

d) Auditor’s Duty in relation to Errors and Frauds in Audit of Financial Statement as

per SA 240 (Standards in Auditing).

As per SA 240 (Standards in Auditing), an auditor's duty in relation to errors and

frauds in the audit of financial statements is as follows:

Errors
1. Identify and correct errors:
The auditor should identify and correct errors that are material to the financial
statements.
2. Evaluate the impact of errors:
The auditor should evaluate the impact of errors on the financial statements and
consider whether they are material.
3. Communicate errors to management:
The auditor should communicate errors to management and those charged with
governance.

Frauds
1. Maintain professional skepticism:
The auditor should maintain professional skepticism when evaluating the risk of
fraud.
2. Assess the risk of fraud:
The auditor should assess the risk of fraud and design procedures to address those
risks.
3. Identify and respond to fraud risks:
The auditor should identify and respond to fraud risks, including evaluating the design
and implementation of internal controls.

4. Communicate fraud risks to management:

The auditor should communicate fraud risks to management and those charged with
governance.
5. Consider the implications of fraud:
The auditor should consider the implications of fraud on the financial statements and
the auditor's report.

Responsibility for detecting fraud:

1. Primary responsibility lies with management:
The primary responsibility for detecting and preventing fraud lies with management
and those charged with governance.
2. Auditor's responsibility is to identify material misstatements:
The auditor's responsibility is to identify material misstatements, including those
resulting from fraud.

Reporting requirements:
1. Include a statement in the auditor's report:
The auditor should include a statement in the auditor's report indicating that the audit
was conducted in accordance with SA 240.
2. Communicate fraud or suspected fraud to regulatory authorities:
The auditor should communicate fraud or suspected fraud to regulatory authorities, as
required by law or regulation.
By following SA 240, auditors can ensure that they are fulfilling their responsibilities
in relation to errors and frauds in the audit of financial statements.

e) Fraud Reporting as per Sub-section 12 of Section 143 of Companies Act 2013.

According to Section 143(12) of the Companies Act, 2013, a company's auditor must
report fraud to the Central Government if they have reason to believe that an offense has been
or is being committed against the company:

I) Auditor's duty to report fraud:

1. Reporting to Central Government:
If the auditor comes across any fraud during the audit, they must report it to the
Central Government.
2. Reporting to Board of Directors:
The auditor must also report the fraud to the Board of Directors.
II) Contents of the report:
1. Description of the fraud:
The report should describe the nature and extent of the fraud.
2. Amount involved:
The report should mention the amount involved in the fraud.
3. Parties involved:
The report should identify the parties involved in the fraud.

III) Timing of the report:

1. Immediate reporting:
The auditor should report the fraud immediately to the Central Government and the
Board of Directors.
2. Inclusion in the audit report:
The auditor should also include the details of the fraud in the audit report.

IV) Consequences of non-reporting:

1. Penalty:
If the auditor fails to report the fraud, they may be liable for a penalty.
2. Professional misconduct:
Non-reporting of fraud may also be considered professional misconduct.
By following these reporting requirements, auditors can help prevent and detect fraud,
and promote transparency and accountability in the corporate sector.
 Module II: Audit Planning and Programme
a) Audit Planning – Introduction and Advantages of Audit Planning (SA 300: Planning
an Audit of Financial Statement).
Audit Planning
As per SA 300 (Planning an Audit of Financial Statements), audit planning is the
process of developing an overall strategy for the audit. Here's an introduction and the
advantages of audit planning:

Introduction
Audit planning involves identifying the objectives of the audit, the scope of the audit,
and the procedures to be performed. It also involves identifying the risks associated with the
audit and developing strategies to mitigate those risks.

Advantages of Audit Planning:

1. Ensures Effective Use of Resources:
Audit planning helps to allocate resources efficiently, ensuring that the audit is
completed on time and within budget.
2. Identifies and Assesses Risks:
Audit planning helps to identify and assess the risks associated with the audit,
enabling the auditor to develop strategies to mitigate those risks.
3. Ensures Compliance with Regulatory Requirements:
Audit planning ensures that the audit is conducted in accordance with relevant laws,
regulations, and standards.
4. Enhances Audit Quality:
Audit planning helps to ensure that the audit is conducted in a systematic and
structured manner, enhancing the overall quality of the audit.
5. Improves Communication:
Audit planning facilitates effective communication among audit team members,
ensuring that everyone is aware of their roles and responsibilities.
6. Reduces Audit Risks:
Audit planning helps to identify and mitigate audit risks, reducing the likelihood of
audit failures.
7. Enhances Client Satisfaction:
Audit planning helps to ensure that client expectations are met, enhancing client
satisfaction and building trust in the audit process.
By following SA 300, auditors can ensure that their audits are well-planned, efficient,
and effective in achieving their objectives.
This article entails the auditor’s duties as laid down in standards on auditing SA 300
while planning the Nature, timing and scope of Audit of the Financial Statements especially
in case of recurring audit engagements.
Scope
SA 300 deals with the auditor’s responsibility towards planning for an audit of
financial statements and its context is focused more on a recurring audit. This standard also
prescribes the additional considerations required for an initial audit engagement.
Objective of the standard & Requirement laid down
The objective is to plan the audit in accordance with the size and complexity of the
entity to perform the audit in an effective manner. Partner and key members of the
engagement team are required to be involved in the audit planning through discussion which
will enhance the audit effectiveness and efficiency.

b) Audit Programme – Meaning, Objectives, Types of Audit Programme, Merits and

demerits of Audit Programme.

Audit Programme
An audit program is a set of directions that the auditor and its team members need to
follow for the proper execution of the audit. After preparing an audit plan, the auditor
allocates the work and prepares a program which contains steps that the audit team needs to
follow while conducting an audit. Thus, an auditor prepares a program that contains detailed
information about various steps and audit procedures to be followed by the audit.
An audit programme is a detailed plan outlining the procedures to be performed
during an audit. Here's a breakdown of its meaning and objectives:

Meaning
An audit programme is a written document that outlines the steps to be taken during
an audit. It's a customized plan that's tailored to the specific needs of the audit, taking into
account the entity's size, complexity, and risk profile.

Objectives
The primary objectives of an audit programme are:
1. To ensure that the audit is conducted in a systematic and structured manner.
2. To ensure that all necessary procedures are performed to achieve the audit objectives.
3. To allocate tasks and responsibilities to audit team members.
4. To establish timelines and deadlines for completing audit procedures.
5. To ensure that the audit is conducted efficiently and effectively.
6. To provide a framework for documenting audit procedures and findings.
7. To facilitate quality control and review of the audit work.

Key Components of an Audit Programme

1. Audit objectives and scope
2. Audit procedures and tests
3. Allocation of tasks and responsibilities
4. Timelines and deadlines
5. Documentation requirements
6. Quality control and review procedures
 By having a well-designed audit programme, auditors can ensure that their audits are
conducted efficiently, effectively, and in accordance with professional standards.

Types of Audit Programmes

1. General Audit Programme:

A general audit programme is a broad outline of the audit procedures to be performed.
It's a flexible plan that can be adapted to different audit engagements.
2. Specific Audit Programme:
A specific audit programme is a detailed plan tailored to a specific audit engagement.
It outlines the exact procedures to be performed, including tests and sampling.
3. Continuous Audit Programme:
A continuous audit programme involves ongoing audit procedures throughout the
year. This type of programme is often used for large or complex organizations.
4. Compliance Audit Programme: A compliance audit programme focuses on evaluating an
organization's compliance with laws, regulations, and standards.

Merits of Audit Programme

1. Ensures Systematic Approach:

An audit programme ensures that the audit is conducted in a systematic and structured
manner.
2. Improves Efficiency:
An audit programme helps to allocate tasks and responsibilities, reducing duplication
of effort and improving overall efficiency.
3. Enhances Quality:
An audit programme ensures that all necessary procedures are performed, enhancing
the overall quality of the audit.
4. Facilitates Communication:
An audit programme provides a framework for communication among audit team
members, ensuring that everyone is aware of their roles and responsibilities.
5. Supports Risk Assessment:
An audit programme helps to identify and assess risks, enabling the auditor to develop
strategies to mitigate those risks.

Demerits of Audit Programme

1. Inflexibility
An audit programme can be inflexible, making it difficult to adapt to changing
circumstances or unexpected issues.
2. Overemphasis on Procedures
An audit programme can lead to an overemphasis on procedures, potentially
overlooking the overall objectives of the audit.
3. Time-Consuming
Developing an audit programme can be time-consuming, particularly for complex or
large organizations.

4. May Not Cover all Risks

An audit programme may not cover all potential risks, potentially leading to audit failures or
material misstatements.
5. Requires Regular Updates
An audit programme requires regular updates to ensure that it remains relevant and
effective.

c) Audit Note Book –Contents and Usefulness of Audit Note Book.

Audit Notebook
An audit notebook is a record of the audit procedures performed, observations made,
and conclusions drawn during an audit. Here's an overview of its contents and usefulness:

Contents of an Audit Notebook

1. Audit planning documents
Audit programme, audit scope, and audit objectives.
2. Audit procedures performed
Details of tests, inspections, and observations made during the audit.
3. Audit findings and conclusions
Notes on material weaknesses, deficiencies, and areas for improvement.
4. Working papers and schedules
Supporting documentation, such as ledgers, journals, and reconciliations.
5. Correspondence and communications
Letters, emails, and other communications with clients, management, and other
stakeholders.
6. Audit team meeting notes
Minutes of meetings with the audit team, including discussions and decisions made.

Usefulness of an Audit Notebook:

1. Provides a permanent record

An audit notebook serves as a permanent record of the audit, providing a clear trail of
evidence.
2. Facilitates audit planning and execution
An audit notebook helps auditors plan and execute the audit, ensuring that all
necessary procedures are performed.
3. Supports audit findings and conclusions
An audit notebook provides documentation to support audit findings and conclusions,
reducing the risk of disputes or misunderstandings.
4. Enhances audit quality
An audit notebook promotes audit quality by ensuring that auditors follow a
systematic and structured approach.
5. Assists in audit reporting
An audit notebook helps auditors prepare accurate and comprehensive audit reports.
6. Provides a basis for future audits
An audit notebook serves as a valuable resource for future audits, providing insights
into the entity's systems, processes, and controls.

d) Audit Working Papers – Merits and Demerits of Audit Working Paper – Essentials
of Good Audit Working Papers.

Audit Working Papers

Audit working papers are the outcome of the documentation process. Working papers
are the record of various audit procedures performed, audit evidence obtained, allocation of
work between audit team members etc. Audit working papers are the documents and
evidence that an auditor collects and retains with him during the audit.
Audit working papers are documents that record the audit procedures performed,
evidence obtained, and conclusions drawn during an audit. Here's an overview of their merits,
demerits, and essentials:

Merits of Audit Working Papers

1. Provides a permanent record

Audit working papers serve as a permanent record of the audit, providing a clear trail
of evidence.
2. Facilitates audit planning and execution
Audit working papers help auditors plan and execute the audit, ensuring that all
necessary procedures are performed.
3. Supports audit findings and conclusions
Audit working papers provide documentation to support audit findings and
conclusions, reducing the risk of disputes or misunderstandings.
4. Enhances audit quality
Audit working papers promote audit quality by ensuring that auditors follow a
systematic and structured approach.
5. Assists in audit reporting
Audit working papers help auditors prepare accurate and comprehensive audit reports.
Demerits of Audit Working Papers:

1. Time-consuming and costly

Preparing and maintaining audit working papers can be time-consuming and costly.
2. May be voluminous
Audit working papers can be voluminous, making it difficult to review and analyze
them.
3. May contain confidential information
Audit working papers may contain confidential information, requiring adequate
security and storage measures.
4. May be prone to errors
Audit working papers may be prone to errors or omissions, which can impact the
validity of the audit findings.

Essentials of Good Audit Working Papers

1. Clear and concise

Audit working papers should be clear, concise, and easy to understand.
2. Accurate and complete
Audit working papers should be accurate, complete, and free from errors or
omissions.
3. Organized and indexed
Audit working papers should be well-organized, indexed, and easily retrievable.
4. Cross-referenced
Audit working papers should be cross-referenced to other relevant documents and
working papers.
5. Securely stored
Audit working papers should be securely stored, with access restricted to authorized
personnel.
 Module III: Internal Control, Internal Check and Internal Audit
a) Internal Control – Definition and Objectives Internal Control (SA 315).

INTERNAL CONTROL MEANING

“Internal control is regarded as the whole system of controls, financial and otherwise
established by the management in the conduct of a business including internal check, internal
audit and other forms of control.
Definition
“ According to American Institute of Certified Public Accountants:” Internal control
comprises of the plan of organization and all the coordinate methods and measures adopted
within a business to safeguard its assets, check the accuracy and reliability of its accounting
data, promote operational efficiency and to encourage adherence to prescribed managerial
policies.”
Internal control comprises of the policies and procedures adopted by the management
of an entity to assist in achieving the following objectives:

(a) Orderly and efficient conduct of business.

(b) Adherence to management policies
(c) Safeguarding of assets
(d) Prevention and detection of fraud and errors
(e) Accuracy and completeness of accounting records
(f) Timely preparation of financial statements

OBJECTIVES
 To encourage adherence to prescribed policies: The system of internal control is
introduced to provide reasonable assurance that the various plans, policies and
procedures laid down by the entity are being followed.
 To avoid frauds and errors: The main objective of any control system is to detect
and prevent frauds and errors by keeping an inherent check.
 To promote operational efficiency: The internal controls within an organization are
meant to prevent unnecessary duplication of efforts, protect against waste and
discourage any inefficient use of resources of the organization.
 To safeguard assets and records: The other important objective of internal control
system is to safeguard the assets and records from unauthorized access, use and
disposition.
 To provide accurate and reliable data: The internal control system ensures that all
the transactions are recorded in the correct amount, in the appropriate account and in
the accounting period to which they relate.
 To assist in timely preparation of Financial Information: Information is of no use
if it is not provided in time. Internal control system facilitates timely preparation of
financial statements.
INTERNAL CONTROL (SA 315)

SA 315 (Identifying and Assessing the Risks of Material Misstatement through

Understanding the Entity and Its Environment) emphasizes the importance of internal control
in the audit process. Here are the key aspects:

Definition of Internal Control:

Internal control is a process designed, implemented, and maintained by those charged
with governance, management, and other personnel to provide reasonable assurance about the
achievement of an entity's objectives.

Components of Internal Control

1. Control Environment:
The overall attitude and awareness of the organization regarding internal control.
2. Risk Assessment:
The process of identifying and assessing risks that may impact the achievement of the
entity's objectives.
3. Control Activities
The policies, procedures, and processes implemented to mitigate risks and achieve the
entity's objectives.
4. Information and Communication
The systems and processes used to capture, process, and communicate financial and
operational information.
5. Monitoring Activities
The processes used to monitor and review the effectiveness of internal control.

Auditor's Responsibility:
The auditor's responsibility is to identify and assess the risks of material misstatement,
including the risk of fraud. The auditor must also evaluate the design and implementation of
internal control and determine whether it is operating effectively.

Procedures for Understanding Internal Control

1. Inquiries
Making inquiries of management, employees, and others to gain an understanding of
internal control.
2. Observation
Observing the application of internal control procedures.
3. Inspection:
Inspecting documents, records, and other evidence to gain an understanding of
internal control.
4. Walkthroughs
Performing walkthroughs of significant transactions or processes to gain an
understanding of internal control.
b) Internal Check – Meaning, Objectives, Importance and Advantages of Internal
Check.

INTERNAL CHECK - Meaning

Internal check refers to the procedures and processes implemented by an organization
to ensure the accuracy, completeness, and reliability of its financial and operational
information.

Definition
According to ‘F. R. M. De PAULA’, “Internal check means practically a continuous
internal audit carried on by the staff itself, by means of which the work of each individual is
independently checked by other members of the staff.”

According to ‘D.R. DAVAR,’ “Internal check is a system or method introduced with

defined instructions given to staff as to their sphere of work with a view to control and
verification of their work and also maintenance of accurate records as the ultimate aim.”

Objectives of Internal Check

1. To exercise moral pressure over staff.
2. To ensure that the accounting system produces reliable and adequate information.
3. To provide protection to the resources of the business against fraud, carelessness and
inefficiency.
4. To distribute the work in such a business transaction is left unrecorded.
5. To allocate duties and responsibilities of each clerk in such a way that he may be held
responsible for particular fraud or error.
6. To minimize the chances of errors, frauds or irregularities in the business based on the
principle of division of labour.
7. To detect errors and frauds easily if it is committed, because in an efficient internal
check system, there is based on the principle of division of labour.
8. To detect errors and frauds easily if it is committed, because in an efficient internal
check system, there is a provision for independent checking.

Importance of Internal Check in Auditing

Internal check is a crucial aspect of auditing, and its importance cannot be overstated.
Here are some reasons why internal check is important in auditing:

1. Prevents and Detects Errors

Internal check helps to prevent and detect errors, irregularities, and fraud. By
verifying transactions, checking authorization, and evaluating segregation of duties, internal
check ensures that financial and operational information is accurate, complete, and reliable.
2. Ensures Reliability of Financial Statements
Internal check provides assurance that financial statements are reliable and free from
material misstatement. By evaluating internal control procedures and processes, auditors can
rely on the accuracy and completeness of financial information.
3. Reduces Audit Risk
Internal check reduces audit risk by identifying and mitigating potential risks and
errors. By evaluating internal control procedures and processes, auditors can identify areas of
high risk and focus their audit efforts accordingly.
4. Improves Efficiency and Effectiveness
Internal check improves the efficiency and effectiveness of auditing by identifying
areas where internal controls can be improved. By streamlining internal control procedures
and processes, organizations can reduce costs and improve productivity.
5. Enhances Corporate Governance
Internal check enhances corporate governance by ensuring that organizations have
effective internal control systems in place. This promotes transparency, accountability, and
good corporate governance practices.
6. Supports Compliance with Regulations
Internal check supports compliance with regulations and standards by ensuring that
organizations have effective internal control systems in place. This helps organizations to
comply with relevant laws, regulations, and standards.
7. Provides Assurance to Stakeholders
Internal check provides assurance to stakeholders, including investors, creditors, and
regulatory bodies, that an organization's financial and operational information is accurate,
complete, and reliable.

Advantages of Internal Check

Some of the widely accepted advantages of an efficient system of internal check are
as follows.
1. Proper division of work
Internal check entails a proper and rational distribution of work among the
members of staff of the enterprises keeping in view their individual qualifications,
experience and area of specialization.
2. Detection of errors and frauds
Since no individual worker is allowed to handle a job completely from the
beginning to the end, and the work of each clerk is automatically checked by the
other, this heaps in the early detection and discovery of errors and frauds and the
possibilities of the commission of errors and frauds can be minimized.
3. Increased efficiency coupled with economy
A good system of internal check increases the efficiency of work among the
staff and leads to overall economy.
4. Moral check
Knowledge of subsequent checking of each employees work by others, acts as
a great check to commission of errors and frauds.
c) Essentials of Good Internal Check System.
A good internal check system is essential for ensuring the accuracy, completeness,
and reliability of financial and operational information. Here are the essentials of a good
internal check system:

1. Clear Division of Responsibilities:

Clearly define roles and responsibilities to ensure that no single individual has control
over all aspects of a transaction.
2. Authorization and Approval
Establish procedures for authorization and approval of transactions, including limits
of authority and approval procedures.
3. Segregation of Duties
Segregate duties to prevent any one person from having too much control over a
transaction.
4. Physical Controls
Establish physical controls over assets, such as cash, inventory, and equipment.
5. Reconciliations and Reviews
Regularly reconcile and review financial and operational information to ensure
accuracy and completeness.
6. Independent Verification
Independently verify transactions and financial information to ensure accuracy and
completeness.
7. Documentation and Record-Keeping
Maintain accurate and complete documentation and records of transactions and
financial information.
8. Regular Review and Update
Regularly review and update the internal check system to ensure it remains effective
and relevant.
9. Training and Awareness
Provide training and awareness programs for employees to ensure they understand the
internal check system and their roles and responsibilities.
10. Monitoring and Reporting
Establish procedures for monitoring and reporting internal control weaknesses or
failures.
d) Basics of Standards on Internal Audit – Difference between Internal Control, Internal
Check and Internal Audit.

BASICS OF STANDARDS ON INTERNAL AUDIT

The Institute of Chartered Accountants of India (ICAI) has issued Standards on
Internal Audit (SIAs) to provide guidance on internal audit assignments. Here's a breakdown
of the basics:

Definition of Internal Audit

Internal audit is an independent and objective assurance and consulting activity
designed to add value and improve an organization's operations.

Objectives of Internal Audit

1. Evaluate and Improve
Evaluate and improve the effectiveness of risk management, control, and governance
processes.
2. Provide Assurance
Provide assurance to stakeholders that the organization's risk management, control,
and governance processes are operating effectively.

Scope of Internal Audit

1. Risk Management: Evaluating the organization's risk management processes.
2. Control: Evaluating the effectiveness of internal controls.
3. Governance: Evaluating the organization's governance processes.

Standards on Internal Audit (SIAs)

1. Planning: Planning the internal audit assignment.
2. Execution: Executing the internal audit assignment.
3. Reporting: Reporting the findings and recommendations.
4. Follow-up: Following up on the implementation of recommendations.
Difference between Internal Check and Internal Audit

Differences between Internal Control and Internal Audit

 Module IV: Vouching
a) Vouching – Meaning, Definitions, Objectives and Importance of Vouching.

Vouching
Vouching is a fundamental concept in auditing that involves verifying the authenticity
and accuracy of transactions and events. Here's a detailed explanation of vouching:

Meaning of Vouching
Vouching is the process of verifying the authenticity and accuracy of transactions and
events by examining the underlying documents, records, and other evidence.

Definitions of Vouching
1. According to the Institute of Chartered Accountants of India (ICAI):
"Vouching is the process of verifying the authenticity and accuracy of transactions and events
by examining the underlying documents, records, and other evidence."

2. According to the American Institute of Certified Public Accountants (AICPA):

"Vouching is the process of verifying the accuracy and completeness of transactions and
accounts by examining the underlying documents and records."

Objectives of Vouching

1. To verify the authenticity of transactions

Vouching helps to ensure that transactions are genuine and not fictitious.
2. To verify the accuracy of transactions
Vouching helps to ensure that transactions are accurately recorded and reported.
3. To detect errors and irregularities
Vouching helps to detect errors and irregularities in transactions and accounts.
4. To provide assurance on financial statements
Vouching provides assurance that financial statements are accurate, complete, and
reliable.

Importance of Vouching

1. Provides assurance on financial statements

Vouching provides assurance that financial statements are accurate, complete, and
reliable.
2. Helps to detect errors and irregularities
Vouching helps to detect errors and irregularities in transactions and accounts.
3. Enhances credibility of financial statements
Vouching enhances the credibility of financial statements by providing assurance that
they are accurate and reliable.
4. Supports decision-making:
Vouching provides stakeholders with reliable financial information, which supports
informed decision-making.