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CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ About the Author CA. Anurag Singal is a Chartered Accountant and a graduate from St Xavier’s College, Kolkata. He secured All India Rank 22 and 25 in CA Final and CA PE-II respectively, having secured All India Highest in Mathematics in CA PE-I. He received the “CA Professional Achiever-Manufacturing Sector” at 6th ICAI Awards 2012 for his professional contribution across his stints across leading corporate houses in India. His E-learning lectures on Auditing, Strategic Financial management and Advance d Management Accounting for CA IPCC and CA Final are hosted on the Board of Studies Knowledge Portal of ICAI http://www.auditingmantras.com/ [email protected]

Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ PREFACE “I wouldn’t have had to write my CA Audit paper thrice to clear my IPCC. I wish something like this had come before” – was a spontaneous reply from the first student to whom I had showcased this book for an honest feedback. I wish this sentiment resonates amongst the larger student community

This book has been an outcome of my experiences as a student and a faculty for CA-IPCC Audit. I was always in search of book which could showcase the basic concepts of auditing in a lucid manner. Yet it had to come across a smart learning solution, striking the fine balance between detail and brevity as the CA-IPCC student gears to cover a wide array of 7 subjects for IPCC in a short span of time. This will enable the student to effectively acquire knowledge in the initial phase, as well as multiple revisions to consolidate the content from an examination preparation standpoint. This book is an exhaustive coverage of ICAI’s coverage material and also contains the chapter-wise questions list for the past 15 years at the end of each chapter. The key features of 34 SAs have been covered in a diagrammatic form I hope that my endeavours shall benefit the vast majority of students CA. Anurag Singal Kolkata http://www.auditingmantras.com/ [email protected] "Even if you lose faith in yourself, don't lose faith in what you stand for, the cause. Resurrection then is just a matter of time."

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Dedicated to my Mother who has been an unflinching support all through

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CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ TABLE OF CONTENTS Chapter 1: Introduction to Auditing Chapter 2: Basic Concepts in Auditing Chapter 3: Preparation for an Audit Chapter 4: Internal Control Chapter 5: Vouching Chapter 6: Verification of Assets and Liabilities Chapter 7: The Company Audit – I Chapter 8: The Company Audit – II Chapter 9: Special Audits Chapter 10: Standards on Auditing

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Chapter 1: Introduction to Auditing Auditing Definition – as per ICAI Did you know that the word “auditing” has been derived from the Latin word “audire” which means “to hear” As per Dicksee: a) Examine accounting records and assess whether they capture the essence of transactions that have occurred in a period b) Whether the statement of accounts is true and fair (t&f) As per ICAI: Audit is An systematic /independent examination of financial information, of any entity whether profit making or not, irrespective of its size and legal structure the ultimate objective is to express an opinion thereon While SA-200 definition stated above covers only the financial information aspect, audit today encompass a broad spectrum of non-financial areas such as Marketing, HR, Production etc.

Internal Auditor vs. External Auditor: External (appointed by the owners of the organisation, say, shareholders of the company, scope of work is determined by the statute under which they have been appointed) while Internal (management appoints and determines scope of work). Independent vis-a-vis the management of the organisation Scope of work of an internal auditor may extend even beyond the financial accounting and may include cost investigation, inquiries relating to losses and wastages, production audit, performance audit, etc.

Qualities of Auditor (N’04)

(a) SA-200 mentions IOI (Integrity, Objectivity and Independence) (b) Knowledge: Knowledge of client’s business, its peculiar trends and general economic environment etc. Legislative framework such as Income Tax Act, Contract Act, Partnership Act, Companies Act, Cooperative Societies Act etc. is also required He must continuously update his knowledge to conduct audit effectively. Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ (c) Technical skills: He must have good hands on experience in accounting & auditing. Moreover, he should be aware of the latest developments in auditing standards so that he can perform audit in effective manner. (d) The Personal Qualities required, according to Dicksee, are tact, caution, firmness, good temper, integrity, discretion, industry, judgement, patience, clear headedness and reliability. (Elaborate) London & General Bank case: An auditor must be honest that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true Objective and Scope of Audit The objective of audit of financial statements is to enable the auditor to express an opinion on whether they represent true and fair view. Royal Mail Steam Packet Company’s Case: Shift of emphasis from arithmetical accuracy to the question of reliability to the financial statements. A statement may be reliable even though there are some errors or even frauds, provided they are not so big as to vitiate the picture Kingston Cotton Mills Co Case: If there remains a deep laid fraud in the accounts, which in the normal course of examination of accounts may not come to light, it will not be construed as failure of audit, provided the auditor was not negligent in the carrying out his normal work Unless doubtful situations are there, auditor is totally justified in relying upon the management / employees of the client. He is a watchdog not a bloodhound Detection of errors and frauds is not the primary aim of audit; the primary aim is the establishment of a degree of reliability of the annual statements of account It can be examined by considering whether a) Financial statements have been prepared using consistent and acceptable accounting policies b) Financial statements comply with relevant rules and regulations c) Financial statements contain disclosure of all material matters As per SA-200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing,” Auditor to opine whether the financial statements are prepared, in all material respects, as per the applicable financial reporting framework. Auditor’s opinion therefore does not assure, for example, the future viability of the entity nor the efficiency or effectiveness of management unless specific requirements such 227 (1A) and 227 (4A) of the Companies Act, 1956 Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ As per SA-240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Fi nancial Statements” (a) Primary responsibility of prevention, detection and correction of misstatement is that of management (b) However, if there are doubtful situations where some material misstatement may exist, auditor should extend his procedure to confirm / dispel the doubt (c) Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the SAs (d) Audit may not reveal all the misstatements (due to inherent limitations of audit) (e) If auditor performs his work in accordance with basic principles governing an audit, he cannot be held liable for non-detection of misstatement in financial statements of clients (f) However, if he notices material misstatement resulting from fraud, he should communicate the same at appropriate level of management. If the auditor can prove with the help of his papers (documentation) that he has followed adequate procedures necessary for the proper conduct of an audit, he cannot be held responsible for postaudit detection of fraud and error Fraud Risk Factors (M’98, N’01) Conditions which increase the risk of misstatement in financial statement 1. Weakness in internal control system 2. Doubt about competence and integrity of management. domination by one person, high turnover rate of employees, frequent change of legal counsels or auditors 3. Unusual pressure within entity e.g. entity facing problems in getting finance, need to raise share prices 4. Unusual transactions e.g. transactions with related parties 5. Problems in obtaining sufficient and appropriate audit evidence. E.g., inadequate documentation, significant differences between the figures as per the accounting records and confirmation received from third parties, etc Objective and Scope of Audit of Financial Statements Objective an Audit

of (a) Express an opinion on financial statements prepared by the management of entity (b) Must ensure that financial statements are prepared as per the recognised accounting policies and relevant statutory requirement and they should disclose all material matters (c) However, his opinion does not constitute an assurance as to future viability of the enterprise or the efficiency or effectiveness with which its management has conducted the affairs of the enterprise Responsibility (a) The management is responsible for maintaining an up to date and proper for the accounting system and finally to prepare financial statements financial (b) The auditor is responsible for forming and expressing an opinion on the financial statements statements (c) The audit of financial statement does not relieve the management of its Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ responsibility Scope of an The auditor decides the scope of his audit having regard to: Audit The requirement of relevant legislation The pronouncements of the Institute (ICAI) Terms of engagement However, the terms of engagement cannot supersede the pronouncements of the Institute or the provisions of the relevant legislations

Basic Principles Governing and Audit (N’00, N’06, N’08, N’09, N’02)

SA 200 “Basic Principals Governing an Audit”, describes the basic principles which govern the auditor’s professional responsibilities and which should be complied with wherever an audit is carried. (See Chapter 10) Inherent limitations of Audit – what are they? (N’01, M’03, N’05, M’11) SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with Standards on Auditing”, the objectives of an audit of financial statements, prepared per recognised accounting policies and practices and statute is to enable an auditor to express an opinion on such financial statements. In forming his opinion on the financial statements, the auditor follows procedures to check whether t&f Nature of Reporting

Financial Auditor exercises judgment in evaluating the reasonableness of judgments and estimates made by the management in preparing the financial statements

The judgment made by auditor may not always be correct The Nature of Audit Auditors use sampling during performance of audit. It is not possible for him to Procedures e.g. Test conduct detailed checking due to time constraints and other practical Checking problems. As he does not check each and every item, it is impossible for him to detect all frauds and errors Management or others may not provide, intentionally or unintentionally, the complete information Fraud =sophisticated and carefully organised; involving senior management or collusion Nature of evidences

The evidences obtained by the auditor are persuasive rather than conclusive

They can enable auditor to draw only reasonable conclusions there-from Inherent limitations of Internal controls suffer from limitation such as collusion among employees or internal control wrong use of authority by management etc. Auditing Mantras for CA IPCC [email protected]

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If internal controls are weak, auditor may not be in a position to obtain assurance

Unavoidable risk: Some material misstatements of f.s. not detected, though the audit is properly planned and performed in accordance with SAs State the matters which the statutory Auditor should look into before framing opinion on accounts on finalisation of audit of accounts? Discuss over all audit approach. Answer Formation of opinion on accounts: The principal aspect to be covered in an audit to form an opinion, an auditor has to look into following matters: a) Examine accounting system and internal control (ASIC) to check if appropriate for the business and helps in properly recording all transactions b) Reviewing the system and procedures to find out whether they are adequate for F&E detection c) Arithmetical accuracy of the books of account by the verification of postings, balances, etc. d) Verification of the authenticity and validity of transactions e) Whether a proper distinction between items of capital and revenue nature and that the amounts of various items of income and expenditure adjusted in the accounts corresponding to the accounting period. f) Comparison of the P&L and BS with the underlying record in order to see that they are in accordance therewith g) Reporting to the appropriate person/body whether the statements of account examined do reveal a t&f view of the state of affairs and of the profit and loss of the organisation

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Scanner-Chapter 1

Sl. Question Term No 1 Mention briefly the conditions or events, which increase the M’98,N’01 risk of fraud or error leading to material misstatement in Financial Statements 2 Write a short note on – Errors of Commission N’98,M’01

Marks

3

Distinguish between Auditing and Investigation

M’99,N’12

10

4

Comment on the “An opinion expressed by the auditor is neither an assurance as to the future viability of the enterprise nor the efficiency or effectiveness with which management has conducted the affairs of the enterprise”. What are the basic principles governing an audit as laid down in AAS 1 (SA 200)? Do you agree with the view that there are inherent limitations of Audit? Mention briefly the conditions or events, which increase the risk of fraud or error leading to material misstatement in Financial Statements Comment on the “Auditor’s professional responsibilities are governed by basic principles which should be complied with whenever an audit is carried out.”? Mention any twelve title of Statements on AASs (hitherto known as SAs) and the dates of coming into force What are the auditor’s responsibilities for detection of Frauds and Errors? State briefly the qualities of Auditors

M’00

6

N’00,N’06,N’08,N’09

10

N’01,M’03,N’05,M’11,

8/4

N’01

8

N’02

10

M’04

6

N’04

8

N’04

4

Auditors of M/s Fortune India (P) Ltd. were changed for the accounting year 2004-05. The closing stock of the company as on 31.3.2004 amounting to Rs. 100 lacks continued as it is and became closing stock as on 31.3.2005. The auditors of the company propose to exclude from their audit programme the audit of closing stock of Rs. 100 lacks on the understanding that it pertains to the preceding year which was audited by another auditor. Mr. K. auditor of ABC Ltd. Is of the opinion that “Auditing and Assurance Standards” are meant only for references and it is not necessary to follow such Auditing and Assurance Standards Procedural error arises as a result of transactions having been recorded in a fundamentally incorrect manner Audit is not an insurer

N’05

5

M’07

6

M’08

2

N’08

2

5 6 7

8

9 10 11 12

13

14 15

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8

4

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ 16

N’09

2

M’10

2

M’10

2

N’10

5

M’11

8

21

The auditor, in the interest of the users, while explaining the nature of his reservation, can describe the work of the expert with his name, in the audit report without obtaining prior consent of the expert. The auditor compares entries in the books of accounts with vouchers and if two agrees, his work is done When an auditor identifies a Misstatement resulting from fraud, it is his responsibility to communicate it to the regulatory and enforcement authorities apart, from those charged with governance Factors governing modes of communication of auditor with those charged with governance Discuss perquisites and fundamental principles to be possessed by an auditor Discuss the types of audits required under law

N’11

5

22

What are the advantages of an independent audit?

M’12

8

17 18

19 20

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Chapter 2: Basic Concepts in Auditing Auditor’s Independence-Concept SA-200 Independence is one of the basic principles governing an audit Guidance Note issued by the ICAI on “Independence of Auditors” “Independence implies that the judgment of a person is not subordinate to the wishes or directions of another person who might have engaged him or to his own self-interest”. Companies Act 1956 A person is disqualified to act as an auditor from being appointed as such if he is: i) An officer or employee of the company; ii) A partner or an employee of an officer or employee of the company; or iii) Indebted to the company for a sum exceeding of ` 1,000. iv) A person holding any security (any financial instrument which carried voting rights) of that company after a period of one year from the date of the commencement of the Companies (Amendment) Act, 2000. Auditor purchases goods or services from a company audited Independence violated by him on credit>Rs 1,000 Auditor recovers his fees on a progressive basis in accordance Not violated with the terms of his engagement

Ceiling on the number of audits that can be undertaken by a CA Special Resolution for appointing auditors in certain cases Other provisions on appointment, re-appointment and removal of auditors Power to qualify his report Chapter on Professional Misconduct enacted in the Schedules to the Chartered Accountants Act, 1949

Auditor’s Independence-Importance Why Audit? a) Company - Divorce between ownership and management - shareholders have no direct control on the day-to-day administration of the company b) Proprietorship – e.g. Funds from financial institution, etc. c) Partnership firm – e.g. Valuation of goodwill at the time of admission, retirement and death of a partner. Auditing Mantras for CA IPCC [email protected]

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Informed, objective and forthright opinion by an independent professional auditor

One can easily understand the state of affairs

Advantages Users can know whether financial statements are reliable and accurate and not fraudulent./misleading

Used by stakeholders such as shareholders for making significant economic decisions (Shareholders,Investors, Management etc)

Audit Evidence (M’00) SA 500 “Audit evidence” a) Information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. b) Includes both information contained in the accounting records underlying the financial statements and other information. i) ii)

Necessary to support the auditor’s opinion and report. Cumulative in nature and is primarily obtained from audit procedure s

Sufficient and Appropriate (S/A): Quantum and Quality Higher the assessed risks of misstatement/materiality of item, the more audit evidence is likely to be required Higher the quality (Relevance and reliability to support audit opinion, the less quantu m may be required SA 330 requires the auditor to conclude whether sufficient appropriate audit evidence has been obtained.

Audit Procedures to Obtain Audit Evidence Compliance procedures are performed to check designing, operating effectiveness and continuity of I.C. system. Auditor performs compliance procedures in respect of the following assertions relating to internal control system:

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D C

O

Design Operating Effectiveness Continuity

Are appropriate controls designed? Were they implemented effectively? Throughout the period?

When internal control is found to be to an acceptable level, the accounting entries generated in such a system is more reliable than in one where the control is weak Substantive procedures (N’99, M04, and M’10) are performed to check completeness, accuracy and validity of transactions and balances. Auditors perform substantive procedures in respect of following assertions relating to data produced by accounting system:

P V

R

O

E

C Presentation disclosure Rights Obligations Existence Measurement Completeness Occurrence Valuation

M & An item is disclosed, classified and described as per recognized accounting policies and relevant statutory requirements, if any. & That an asset is a right of the entity and liability is an obligation of the entity at a given date. That an asset or liability exists at a given date. That a transaction is recorded in the proper period at proper amount. That there is no unrecorded asset or liability or transaction. That a transaction or an event took place which pertains to the entity during the relevant period. That an asset or liability is recorded at an appropriate carrying value.

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CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ The checking of transaction and balances involves vouching of sales, purchases, payments, receipts and scrutiny of ledgers. The analytical procedure involves critically examining the accounts in an overall manner and it may entail computation of ratios, trend analysis so as to dwell in length for examination of unusual or unexplained deviations

Types of Audit Evidence

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Types of Audit Evidence Difference between Internal & External Evidence Basis Internal Meaning Created & retained within client’s organisation. Example Copies of sales invoice, wage sheet Source Inside the entity Reliability Less reliable

External Originates outside client’s organization. Purchase invoice, bank statements Outside the entity More reliable

Methods to Obtain Audit Evidence (M ’03, M’11)

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Inspection External Confirmation

Observation

Reperformance

Inquiry

Analytical Procedures

Recalculation

Fundamental Accounting Assumptions (N’99, M’01, N’03)

Consistency

Going Concern

Accrual

CAG- Consistency; Accrual and Consistency: It is assumed that accounting policies are consistent from one period to another. Accrual: Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. Going Concern: Continuing in operation for the foreseeable future. Neither the intention nor the need of liquidation or of curtailing materially the scale of the operations a) AS 1 – These form the base of the preparation and presentation of financial statements. b) They are usually not specifically stated because their acceptance and use are assumed. c) Disclosure is necessary if they are not followed. Appropriateness of Going Concern assumption (N’05) Covered by SA 570 "Going Concern” Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern e.g. a) Funding arrangements are guaranteed by the Central Government and suddenly withdrawn b) Privatisation Financial Net liability or net current liability position.

Inability to comply with the terms of loan agreements.

Adverse key financial ratios.

Change from credit to cash-on-delivery transactions with suppliers.

Arrears or discontinuance of dividends.

Inability to pay creditors on due dates. Operational

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Management intentions to liquidate the entity or to cease operations.

Loss of key management without replacement.

Loss of a major market, key customer(s), franchise, license, or principal supplier(s).

Others

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Shortages of important supplies.

Emergence of a highly successful competitor.

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Non-compliance with capital or other statutory requirements.

Uninsured or underinsured catastrophes when they occur.

Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy.

Changes in law or regulation or government policy expected to adversely affect the entity.

Mitigants e.g. new supplier Risk Assessment: The auditor should consider the risk that the going concern assumption may no longer be appropriate

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CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Chapter 3: Preparation for an Audit Letter of Engagement Scenario Pepsi Ltd wants to appoint KPMG as its auditors for YE Mar’14 but wants to clarify before hand as to what would be the work that KPMG would perform for it so that no dispute later SA 210 “Agreeing the Terms of Audit Engagement - How auditor should agree to the terms of engagement and how to respond if client request change – wants lower level of assurance Appointment of auditor = under law for companies, co-operative societies, and registered societies Appointment of auditor = under contract for preparation of accounts for tax returns, checking of the sales tax –returns Objective and Scope of work, auditor’s responsibilities to the client and the form of report are documented in the engagement letter = No Misunderstanding later on Key Theme 7 Vows of Marriage between husband and wife: who needs to do what? When it is repetitively issued: (i) Client has misunderstood the objective and scope of audit. (ii) Change in management, board, or ownership so that it is felt that it is pertinent to remind them of the engagement terms again. (iii) Revision by way of +/-/change in the engagement letter originally issued. (iv) Significant changes had occurred in nature, volume of the business transactions of the client e.g. a company with Rs 5 crores turnover has grown 100 times into Rs 500 crores; started exporting into African markets etc (v) Need to modify audit approach to be in line with the pronouncements of ICAl, the Companies Act Key Theme Misunderstood scope / Change in terms/Change in business/Change in law Example of an Engagement Letter for an Audit under a Statute

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To the Board of Directors (or the appropriate representative of senior management :) You have requested that we audit the balance sheet of Vodafone Ltd as at 31st March, 2013 and the related profit and loss account and the (cash flow statement) for the year ended on that date. We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements. We will conduct our audit in accordance with the auditing standards generally accepted in India and with the requirements of the Companies Act, 1956. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. However, having regard to the test nature of an audit, persuasive rather than conclusive nature of audit evidence together with inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements of financial statements, resulting from fraud, and to a lesser extent error, if either exists, may remain undetected. In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in accounting and internal control systems which might come to our notice. The responsibility for the preparation of financial statements on a going concern basis is that of the management. The management is also responsible for selection and consistent application of appropriate accounting policies, including implementation of applicable accounting standards along with proper explanation relating to any material departures from those accounting standards. The management is also responsible for making judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the entity at the end of the financial year and of the profit or loss of the entity for that period. The responsibility of the management also includes the maintenance of adequate accounting records and internal controls for safeguarding of the assets of the company and for the preventing and detecting fraud or other irregularities. As part of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit. We also wish to invite your attention to the fact that our audit process is subject to 'peer review' under the Chartered Accountants Act, 1949. The reviewer may examine our working papers during the course of the peer review. We look forward to full cooperation with your staff and we trust that they will make available to us whatever records; documentation and other information are requested in connection with our audit. Our fees will be billed as the work progresses. This letter will be effective for future years unless it is terminated, amended or superseded.

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Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements. Deloitte Haskins & Sells Chartered Accountants .......... (Signature) (Name of the Member) (Designation) Acknowledged on behalf of Vodafone Ltd. .......... (Signature) Name and Designation Date

Key Points Objective & Scope/Applicable Law& auditing framework/ financial statements on going concern & ASIC for safeguarding assets= management’s responsibility/ auditor merely expresses opinion/test nature/ access to records/peer review Case Study X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He sent his letter of engagement to the Board of Directors, which was accepted by the Company. In the course of audit of the company, the auditor was unable to obtain appropriate sufficient audit evidence regarding receivables. The client requested for a change in the terms of engagement Analogy You can’t change horses’ mid-stream Audit Programme As per Standards on Auditing: -

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CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ A written audit programme which contains the procedures needed to implement the audit plan. It may contain area-wise audit objectives and should be detailed enough to guide assistants involved and as a means to control. Plan in detail as to how you would conduct the audit in a given situation to meet your audit goal Guides the audit staff Nature, Timing and Extent of Audit Procedures (NTE)

Objective and Scope of work

Nature, size and composition of the business

Past Experience with this client

Internal control

Should be regularly reviewed in course of audit and updated (Decide whether more work/less work is required) Case Law Pacific Acceptance Corporation Ltd. v. Forsyth and Others: Audit programme for company that finances house needs to be modified when it starts financing real estate acquisition How useful is an Audit Programme? Theme Auditing Mantras for CA IPCC [email protected]

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If Grant Thornton didn’t have an audit programme, how would it efficiently manage 20 audits of different industries with different focus areas and allot its staff, known who worked where and performed which procedure, which partner reviewed and prove (if required) in court that it did the work as per the highest standards But audit programme cannot be mechanical; nor should restrict the creativity of people and should be updated with change in business/staff/Int. Control Sample Audit Programme- Audit of Receipts of Participation Fees of a National Convention for doctors by Medical Council of India One time event- a Special Cell made to handle the entire event. Since few people would be handling the event, the internal controls may not be that strong and, thus, more emphasis is required to be given on substantive procedure. Audit of receipt of participation fees should be under the following areas: The theme revolves around Total Collection = Rate per participant * No of Participants

Rate: Board Resolution, Brochure

No of Receipts issued: ASIC, BRS

(I)

No of Participants: Kits, Lunch, Auditorium Seating Capacity. Free participants? Authorisation

Internal Control System (i)

Check the organization structure- Special Cell, division of responsibilities amongst persons and control/custody over receipt books.

(ii) Internal control system to stop participation of unregistered delegates. (II) Rate of Participation Fees (i)

Resolution passed by the Organizing Committee/Medical Council of India.

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CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ (ii) Brochure/registration form for the conference. Charge more from Foreign Delegates (if) (III) Receipts of Participation Fees (i)

Verify counter foil of the receipts issued for individual registration.

(ii) Cash received  Receipt issued for registration (iii) Accounting entry in Bank Statement/Cash Book. (iv) BRS for dishonoured cheques. (v) Subsequent recovery in respect of dishonoured cheques. (IV) Overall Checking (i)

Total Collection = Rate per participant * No of Receipts issued

(ii) Cross check the total number of delegates with reference to kits/meals/participati on certificates (iii) Check Auditorium seating capacity Vs Actual Participants (iv) How many absentees? If nil, then enquire (v) Proper authorization for free participants Classification of audit based on frequency Continuous Audit/Concurrent Audit (N’98) (N’01) Audit Frequency = Round the clock / Frequent intervals say weekly. Going to the temple (Daily/every Tuesday) to confess your sins

Advantages: Control perspective - Quicker detection of Fraud/Error; transaction checked as soon as it occurs, rectification = quick Staff less likely to commit as fraud (as they are afraid of quick detection) Books of account up-to-date. Continuous interaction with client = More detailed knowledge of the client’s affairs = More efficient discharge of duty Drawbacks Audit in several instalments = Possible Gaps = Some transactions may escape audit scrutiny Post-audit tampering of books Uneconomic if company is small – suitable for Reliance industries, not for Balaji Traders Final Audit Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Starts after the books have closed at the end of the accounting period and continues till completion and signing of audit report Advantages: No need to return repeatedly No possibility of Post-audit tampering of books Easier allocation of work for staff Drawbacks Delay in audit since accounting periods of several clients end on the same date say 31st March Confess your sins@ Durga Puja (once a year) Audit Risk (N’02, M’ 04) Even though you do an audit thoroughly, the risk that some material misstatements may remain undetected (Due to the test nature and other inherent limitations of Internal control system) SA-500 on “Audit Evidence” also makes it clear that the auditor’s procedures should get sufficient appropriate audit (S/A) evidence. (S/A) evidence = function (assessment of risk of misstatement) Low –risk areas: Vouching, casting, checking High-risk areas: Adequacy of provisions, full disclosure of liabilities, including contingent liabilities SA 330 "The Auditor’s Responses to Assessed Risks High audit risk at inherent level = More elaborate audit procedures to be performed before you sign the report SA-400, three components of audit risk- misstatement in transaction, account balance, financial statement

Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/

Inherent Risk

Control Risk

Detection Risk

Detection Risk α 1/ (Inherent Risk+ Control Risk)

Comment on what should be the Overall Audit Approach (1) Management responsible for preparation of financial statements (as a going concern), choose and apply proper accounting policies , reasonable accounting estimates to give a true and fair view (t&f) (2) Management responsible for Accounting System and Internal Control (ASIC) (3) Auditor entitled to unrestricted access to records, documentation etc Audit Working Papers (M’10, N’11, M’07, and N’12)

Theme If you haven’t documented, you haven’t performed SA 230 “Audit Documentation (N’08) Utility: Document the Nature, Timing and Extent of Audit Procedures (NTE) performed Auditing Mantras for CA IPCC [email protected]

CA IPCC | Auditing & Assurance http://www.auditingmantras.com/ Responsibility since audit staff sign the checklists Allows senior to review audit work by juniors Evidence in the court of law when a charge of negligence is brought against the auditor. Enable the conduct of quality control reviews and inspections in accordance with SQC 1. Engagement Quality Control Review Applicable for audits of financial statements of listed entities etc Quality control reviewer shall review (a) Significant matters with the engagement partner; (b) Financial statements and the proposed auditor’s report; (c) Audit documentation relating to the significant judgments the engagement team made and the conclusions (d) How appropriate are the conclusions reached (e) Firm’s independence in relation to the audit engagement ( for listed company’s audit) Audit Sampling Tasting a spoon of rice to check whether the entire 2 kg in the utensil is good! Principal asking questions from only selected students to form an opinion about the whole batch SA 530, Audit Sampling Applying audit procedures to