UNIT I: CONCEPT,

NEED AND
PURPOSE OF
AUDIT 1
Scope of Audit
◦ Audit is applicable for all types of organizations and entities. Mandatory audit
is required for all companies falling within the purview of Companies Act, 2013.
◦ Audit looks into every aspect of the company’s financial statement which are
either prima facie given in the balance sheet or off balance sheet items as well.
◦ The extent of audit is limited to its primary and secondary objective thereby
the auditor can only provide his opinion on certain matters of materiality.
◦ Audit is an interdisciplinary area.

2
Objective of Auditing
◦ Primary objective- To provide an opinion on the true and fair view of the
financial statements of the entity and thereby verify the regulatory and
compliance requirements for the said financial statements.
◦ Secondary objective- To provide an opinion on the existence of
misstatements (errors or frauds) in the financial records and thereby
commenting whether the financial statements are free from material
misstatements.

3
 Basic Principles governing an audit
As per SA 200, “Overall objectives of the Independent Auditor and the conduct
of an Audit in accordance with Standards on Auditing” , the basic principles
governing the auditor’s professional responsibilities, and which should be complied with
while carrying out the Audit are as below:
◦ Integrity, Objectivity and Independence
◦ Confidentiality
◦ Skill and Competence
◦ Work performed by others
◦ Documentation
◦ Planning
◦ Audit evidence
◦ Accounting system and Internal control
◦ Audit conclusion and reporting
4
Errors
◦ Error refers to an unintentional or innocent mistake in financial statements
including mathematical or clerical mistakes in accounting data or oversight or
misinterpretation of facts which existed at the time when financial statements
were prepared.

Different kinds of error:

5
 Frauds
◦ Fraud refers to any illegal act undertaken intentionally for deceiving others.
◦ It includes misappropriation of cash or goods and misrepresentation of financial
information for misleading others.

Different types of fraud:

6
Audit vs Investigation
Basis for comparison Auditing Investigation
Meaning The process of inspecting the books An enquiry conducted for
of accounts of an entity and reporting establishing a specific fact or
on it, is known as Auditing truth is known as an
investigation
Nature General examination Critical and in depth
examination
Evidences The evidences are persuasive in The evidences are decisive in
nature. nature.
Time horizon Annually As per requirement
Performed by Chartered Accountant Experts
Reporting General purpose Confidential
Obligatory Yes No
Scope Seeks to form an opinion on the Seeks to answer the questions
financial statements that are asked in the
engagement letter.
7
Classification of Audit
Organization structure-wise:
1. Statutory audit-
◦ It is conducted compulsorily as per statute.
◦ It is completed before the statutory meeting.
◦ The Report of the statutory auditor is placed in the statutory meeting for perusal
and consideration of the members.
◦ Example, Banking company’s, Insurance company’s etc need to get their account’s
audited as per laws governing them.
2. Non-statutory audit-
◦ It is conducted without any legal requirement.
◦ Example, Audit in sole-proprietorship concern, partnership concern etc

8
 Classification of Audit
Objective-wise:
1. Internal audit - SA 610
◦ It is an independent and continuous appraisal and review of accounting, financial and
other operations of the undertaking.
◦ It checks transactions with large financial impact to see whether there is any revenue
leakage in disguise.
2. Independent Financial audit-
◦ It is the audit conducted by a person who is “independent” of the firm.
◦ He verifies the books of accounts on the basis of the supporting documents and
vouchers to form an unbiased opinion on the reliability and fairness of financial
statements.

9
Classification of Audit
Periodicity-wise:
1. Periodical-
◦ It is undertaken after the end of the accounting year.
◦ The auditor starts his job after all the books are balanced and the compilation of accounts
is over.
2. Continuous-
◦ It is undertaken throughout the course of the accounting year.
◦ A thorough and detailed checking of the books of accounts is undertaken.
3. Interim-
◦ It is conducted in between two annual audits.
◦ It is conducted for some specific purpose.
4. Final-
◦ It is the audit which is statutorily recognized and is carried out by professionally qualified
auditors.

10
 Classification of Audit
Technique-wise:
1. Balance sheet-
◦ It means verification of all items appearing in the balance sheet.
◦ Under this type of audit, examination starts from the balance sheet and goes back to the books of original
entry and supporting documents.
2. Standard-
◦ It is a thorough checking and analysis of certain items in the accounts which are of material importance.
◦ There is an appropriate test check applied to the remaining items based on auditing standards provided
there is an adequate system of internal check in operation.
3. Systems-
◦ It examines the sustainability of various systems of accounting prevalent in the firm.
◦ It is a kind of an investigation of the system of accounts whose purpose is to design appropriate system of
accounts.
4. EDP-
◦ EDP auditing is the process of collecting and evaluating evidence to determine whether the computer
system in the organization is being operated in a way to safeguard its assets properly, generate data
smoothly, maintaining the integrity of data, achieve organizational goal effectively and consume resources
efficiently. 11
Why are SA’s required?
◦ Enhance quality and relevance of auditing practices
◦ Consistency and comparability in reporting
◦ Uniformity / standardization of practice
◦ Guidance in performing an audit
◦ Strengthen public confidence in auditing and assurance profession

12
 Standards on Auditing
◦ 200-299 General Principles and Responsibilities

◦ SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accord
ance with Standards on Auditing
◦ SA 210, Agreeing the Terms of Audit Engagements
◦ SA 220, Quality Control for an Audit of Financial Statements
◦ SA 230, Audit Documentation
◦ SA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
◦ SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements
◦ Revised SA 260, Communication with Those Charged with Governance
◦ SA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance a
nd Management
◦ Revised SA 299, Joint Audit of Financial Statements

13
Standards on Auditing
◦ 300-499 Risk Assessment and Response to Assessed Risks
◦ SA 300, Planning an Audit of Financial Statements
◦ SA 315, Identifying and Assessing the Risks of Material Misstatement Through Understandin
g the Entity and Its Environment
◦ SA 320, Materiality in Planning and Performing an Audit
◦ SA 330, The Auditor’s Responses to Assessed Risks
◦ SA 402, Audit Considerations Relating to an Entity Using a Service Organisation
◦ SA 450, Evaluation of Misstatements Identified During the Audit

14
Standards on Auditing
◦ 500-599 Audit Evidence
◦ SA 500, Audit Evidence
◦ SA 501, Audit Evidence-Specific Considerations for Selected Items
◦ SA 505, External Confirmations
◦ SA 510, Initial Audit Engagements – Opening Balances
◦ SA 520, Analytical Procedures
◦ SA 530, Audit Sampling
◦ SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimate
s, and Related Disclosures
◦ SA 550, Related Parties
◦ SA 560, Subsequent Events
◦ Revised SA 570, Going Concern
◦ SA 580, Written Representations
15
Standards on Auditing
◦ 600-699 Using Work of Others
◦ SA 600, Using the Work of Another Auditor
◦ Revised SA 610, Using the Work of Internal Auditors
◦ SA 620, Using the Work of an Auditor’s Expert

16
Standards on Auditing
◦ 700-799 Audit Conclusions and Reporting
◦ Revised SA 700, Forming an Opinion and Reporting on Financial Statements
◦ SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
◦ Revised SA 705, Modifications to the Opinion in the Independent Auditor’s Report
◦ Revised SA 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Indepe
ndent Auditor’s Report
◦ SA 710, Comparative Information—Corresponding Figures and Comparative Financial State
ments
◦ Revised SA 720, The Auditor’s Responsibilities Relating to Other Information

17
Standards on Auditing
◦ 800-899 Specialized Areas
◦ SA 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with
Special Purpose Frameworks
◦ SA 805, Special Considerations—Audits of Single Financial Statements and Specific Element
s, Accounts or Items of a Financial Statement
◦ SA 810 , Engagements to Report on Summary Financial Statements

18