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First page
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Declaration
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ACKNOWLEDGMENT
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CONTENT
 Objective of the study

 Definition of Audit
 Function of audit
 Objective of audit
 Scope of Audit
 Basic principle of audit
 Advantage and Disadvantage Of Audit
 Audit Procedure
 Classification of audit
 Internal Audit
 Evaluation of Internal Control System

 Research Methodology

 Conclusion

 Bibliography
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WHAT IS ADUIT?

“An Audit is an examination of such record to establish their reliability and

responsibility of statement drawn from them.”

Definition:-

“An audit may be said to be such an examination of the book of accounts and
voucher of a business which will enable the auditor to satisfy himself that the
Balance sheet is properly drawn up , so as to give a true and fair view of the
state of affair of business and whether the profit or loss for Account gives a
true and fair view of the profit or loss for the financial period according to the
best of his information and explanation given to him and as shown by the
books: and if not , in what respect he is not satisfied.”
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FUNCTION OF AUDIT

Following are the important functions of Audit:

1. Study the Accounting System:-

It is the basic function of auditing. In order to determine the nature, timing and
extent of the audit procedures auditor should study the accounting system.

2. Internal Control System:-

It is a process which determines that management policies are carried out

according the accounting principles. This system is very useful to safeguard
the interest of the enterprise. The auditor determines the effectiveness of this
system.

3. Vouching:-

This function is essential to determine the accuracy of accounting record.

Through audit those documents can be checked which support and prove the
business transactions. All entries in books of accounts are made on the basis
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of relevant vouchers.

4. Verification of Asset:-

It is the function of auditing that it should verify the assets of the business. It is
concerned with the determination of value, ownership and possession of
business asset. The auditor can check the existence of asset.

5. Legal Requirement:-

It is the function of auditing to verify that statements are prepared under the
legal requirements or not. There are various laws like company and income
tax ordinance which are introduced by the govt.

6. Liabilities Verification:-

The liabilities of the business can be verified from the books of accounts. The
auditor can write a letter to the creditors for the verification of liabilities. The
auditor must receive the certificate from the management in this regard.

7. Capital and Revenue:-

Auditing should make difference between capital and revenue items. The
capital items are compared to note the financial position of the business. The
revenue items are compared to determine the income. The income and
expenses related to many years can be divided in current and coming year.

8. Valuation of Liabilities:-

Through auditing value of liabilities can be checked from the books of

accounts and other papers. The auditor can also confirm the value from
outside sources. The value of liabilities is given in the balance sheet by the
management but it is the function of auditing which confirms this value.

9. Valuation of Asset:-

The management gives the value of assets and auditor can apply the
accounting principles to assess the value of assets. The auditor critically
examines and takes help from the expert.
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10. Reporting:-

Auditing important function is reporting. Auditor is an independent person and

it is his duty to submit his report in writing. If he is satisfied he can present
clean report otherwise he can give qualified report.
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OBJECTIVE OF AUDIT

Basic objective of auditing is to prove true and fairness of results presented by

profit and loss account and financial position presented by balance sheet. Its
objectives are classified into two groups which are given below:

A. Primary Objectives of Audit

The main objectives of audit are known as primary objectives of audit. They
are as follows:

 Examining the system of internal check.

 Checking arithmetical accuracy of books of accounts, verifying
posting, costing, balancing etc.

 Verifying the authenticity and validity of transactions.

 Checking the proper distinction of capital and revenue nature of
transactions.
 Confirming the existence and value of assets and liabilities.
 Verifying whether all the statutory requirements are fulfilled or
not.
 Proving true and fairness of operating results presented by
income statement and financial position presented by balance sheet.

B. Subsidiary Objectives of Audit

These are such objectives which are set up to help in attaining primary
objectives. They are as follows:
 Detection and prevention of errors
 Errors are those mistakes which are committed due to
carelessness or negligence or lack of knowledge or without having
vested interest. Errors are of various types. Some of them are:
 Errors of principle
 Errors of omission
 Errors of commission
 Compensating errors
 Detection and prevention of frauds
Frauds are those mistakes which are committed knowingly with some
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vested interest on the direction of top level management. Such frauds

are as follows:
 Misappropriation of cash
 Misappropriation of goods
 Manipulation of accounts or falsification of accounts
without any misappropriation
 Under or over valuation of stock normally such frauds are
committed by the top level executives of the business. So, the
explanation given to the auditor also remains false. So, an auditor
should detect such frauds using skill, knowledge and facts.
 Other objectives
 To provide information to income tax authority.
 To satisfy the provision of company Act.
 To have moral effect

SCOPE OF AUDIT

The Scope of an Audit are :

 Legal Requirements.
 Entity Aspects.
 Reliable Information.
 Proper Communication.
 Evaluation.
 Test.
 Comparison.
 Judgments.
 Legal Requirements:-
The auditor can determine the scope of an audit of financial statements
in accordance with the requirements of legislation, regulations or
relevant professional bodies.
The state can frame rules for determining the scope of audit work. In
the same way, professional bodies can make rules to conduct the audit.
 Entity Aspects:-
The audit should be organized to cover all aspects of the entity as far
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as they are relevant to the financial statements being audited.

A business entity has many areas of working. A small entity may have
few functions while a large concern has many functions. The auditor
has the duty to go through all the functions of the business.
The audit report should cover all functions so that the reader may know
about all the working of a concern.
 Reliable Information:-
The auditor should obtain reasonable assurance as to whether the
information contained in the underlying accounting records and other
source data is reliable and sufficient as the basis for preparation of the
financial statements.
The auditor can use various techniques to test the validity of data. All
auditors while doing the audit work usually apply the compliance test
and substance test. The auditor can show such information in the
report.
 Proper Communication:-
The auditor should decide whether the relevant information is properly
communicated in the financial statements.
Accounting is an information system so facts and figures must be
presented in that the reader can get information about the business
entity. The auditor can mention this fact in his report.

 Evaluation:-
The auditor assesses the reliability and sufficiency of the information
contained in the underlying accounting records and other source data
by making a study and evaluation of accounting system and internal
controls to determine the nature, extent, and timing of other auditing
procedures.
 Test:-
The auditing assesses the reliability and sufficiency of the information
contained in the underlying accounting records and other source data
by carrying out other tests, inquiries and other verification procedures of
accounting transactions and account balances as he considers
appropriate in the particular circumstances.
There are compliance test and substantive test in order to examine the
data. The vouching, verification and valuation technique is also used.
 Comparison:-
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The auditor determines whether the relevant information is properly

communicated by comparing the financial statements with the
underlying accounting records and other source data to see whether
they properly summarized the transactions and events recorded
therein.
The auditor can compare the accounting records with financial
statements in order to check that the same has been processed for
preparing the final accounts of a business concern.
 Judgments:-
The auditor determines whether the relevant information is properly
communicated by considering the judgment 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.

Advantages of Audit

 Access to the capital market:-The public has to remain under the

security exchanges and the requirements given under it. Once the
auditing is done the accounts that are audited are easily accepted by
the Government such as Central banks, public authorities. This carries
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greater authority standards for the account to be authorized.

 Lower capital cost:-This has reduced information that is

associated with the financial statements that have lower interest rates
and return on their investments. Sometimes this activity provides
facilitated settlements and claims of a partner. By performing the
process of auditing fraud and error can be rectified on time.

 Deterrent to fraud and inefficiency:- Auditing that has been

carried out has to be within the claimed accounts department. In the
event of loss, the property that will maintain a fund is transferred. In
case if the public has separate ownership plan then the claims have to
be resolved from the insurance claims.

 Operational improvements:- An independent auditor can be

controlled and achieved operating efficiency within the client’s
organization. It has an influence on the staffs along with the members
of the client’s organization.

 Gathering information about profit or loss:- This gathering will

help in discussing the profit and loss of the company. Here employees
can disclose their ideas upon which they are lacking and how can they
overcome those obstacles.

 Confidentiality:- During the process of the external audit, there is

more private information such as internal employee salary, CPF, etc. It
may be significant for the person to learn about the organization. It is
because the auditor makes the consideration and conducts the
meetings that are to be held regarding the audit.

 Settlement of claims:- Settlement of claims demands the

enhancement and better atmosphere that are sequenced within the
organization. For accessing and to influence moral values one has to
restrain themselves from performing fraudulent activities.

 Reports:-It produces the report of the truth and fairness of the

reported audit. It involves financial statements that are more compatible
when a person goes through the documents and reports of the audit.

 Analytical procedures: - It can neither help in prioritizing the

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changes and allocating them with the resources are recorded in the
work papers of audits. It also involves control environment and
appointment of analytical procedures of the system.

 Settlement of claims: -Some of the audited accounts that are

explained are defined and must fit into the claims so as to ensure the
recent files. It determines the value of the business so as to claim for
the purpose of the other networks.
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Disadvantage of Audit

1. Extra cost: - Testing involves the extra cost to the organization which is
considered as a burden. It involves the disruptions of multiple cases. The
auditor has to concentrate more even though there are disruptions. Before the
audit begins the auditor must get the attention of all the staff members of the
organization.

2. Evidence: - Evidence that is identified is more pervasive than conclusive.

The strength of submission of audited accounts makes major changes in the
accounts of the distribution of profits.

3. Harassment of staves: - Since the employees cannot express their own in

terms of auditing, these changes are calibrated and the employees will feel
harassed due to the changes that are caused. Even if they try to express their
knowledge of new ideas, the organization may not entertain the employees in
these types of situations.

4. Unsuitable changes: - The rules and regulations of business may vary from
time to time. It remains unstable when the program begins. It is obvious that
the company’s policies may not change periodically whereas the rules and
regulations may.
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5. Chances of fraud: - Since the information delivered after the audit

procedure is credential then there become more chances of getting the
situations where an individual will be forced to commit the crime. It harasses
the auditors to commit crime after the audit gets over.

6. Small concerns:- Small-scale industries may usually proceed with

transactions that are usually completed within a shorter period of time. Thus,
auditing is not too important.

7. Problems in remedial measures: - Here the problem is created in remedial

measures that are enhanced by the detailed interface of the data of remedial
measures. These remedial measures are not included in the audit program.

8. Insufficient considerate: - The education curve will be contented about the

business and insufficient relaxed networks and also offers systematic internal
recruitment. These may gravely obstruct the expense of all the employees.

9. Not guaranteed: - Auditing cannot provide any data that are analyzed and
prepared. It has financial accounts for the data that are provided. It is
disclosed based on the information and explanations that are agreed on by
the clients.
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Audit Procedure
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AUDIT PLAN

The audit plan is a comprehensive document which shall lay down the
areas to be covered by the audit, the manner in which the audit will be
conducted, the extent of assessment or verification to be done, the
resources to be employed and the distribution of total available time
among different activities, so that the overall objective of the internal
audit is fulfilled and the audit is conducted in accordance with the terms
of the audit engagement.

The audit planning shall begin with understanding:

1. The business of the entity, its policy, plans and procedures

2. Its hierarchical structure

3. The statutory and regulatory framework within which it operates

4. The existing accounting and internal control system

5. The prevalent management information system

6. The entity’s risk perception and risk management plan

7. The degree of complexity and materiality of the activities covered by

the terms of audit engagement.

The internal audit plan shall include:

1. The detailed program for review of different areas under audit

2. The audit procedures to be employed

3. The frequency and extent of the audit procedure

4. The criticality and complexity of specific areas requiring special

attention

5. The significant risk associated with a specific area requiring special

attention.
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Audit Programme

An audit programme is a set of instructions which are to be followed by the

auditor for the proper execution of an audit. After the audit plan has been
developed, a detailed audit programme is formulated and written.

Objectives of Audit Programs

1. Audit program helps to check systematically the books of accounts which

help to conduct fair audit.

2. Audit program specifies the time period clearly, which helps to complete the
work of audit in less time.

3. Assistant should sign after the completion of work which specifies the
responsibility and accountability of staffs. It also helps to prove the completion
of task.

4. Review of proposed scope of audit preparing proper plan.

5. Audit program shows the way to the new staffs to perform work of audit.

Advantages of Audit Programme

The following are the advantages of an audit programme.

i. An audit programme helps to ensure that all the critical areas are
covered during the audit appropriately.

ii. It helps to distribute work among the members of the audit team
and assistants as per their level of competence and experience.

iii. An audit programme gives instructions to the audit team and

decreases the scope for misunderstanding.
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iv. It helps to fix the responsibility for the work done amongst the
audit team as the work done can be traced back to the individual in the
auditing staff.

v. It helps to assess the progress of work by ascertaining the part

of the audit work that has been completed against how much is left in
order to complete the audit successfully.

vi. An audit programme serves as evidence against a charge of

negligence.

vii. An audit programme also serves as an audit record that may

come into use for future references once the audit is completed
successfully.

Disadvantages of Audit Programme

The following are the disadvantages of Audit Programmes.

i. Rigidity: An audit programme does not possess the advantage of

being flexible as the same programme cannot be used for different
types of organizations. Every business or entity has the separate and
unique issues that they face. Therefore, a single or same audit
programme cannot be laid down for every type of business.

ii. Decreases the Initiative of Efficient Staff: An audit programme

does nothing to promote the initiative of capable individuals. Assistants
and team members would not be able to suggest any improvement in
the set plan.

iii. Mechanical Audit Work: An audit programme is considered

mechanical that it ignores various other aspects such as internal
control.
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iv. Overlooking New Areas: As time passes, new problems or

issues may arise during the audit, and they may be overlooked in the
Audit Programme.

Audit Sampling

Sampling refers to selection of a portion (sample) of the total (population), on

a certain basis so that the portion is representative of the total. Therefore one
has to be careful about deciding on the size of the sample and the manner of
selecting the items from the population to ensure that the sample actually
represents the characteristics of the population.

The selection can be done using both statistical and non-statistical methods.

The statistical methods are those which use the random number table or the
theory of probability for selection of a sample.

In case of test of controls where the auditor is trying to ascertain the

effectiveness of the internal control system, the auditor’s analysis of the nature
and cause of error is more important than the statistical analysis of mere
presence or absence of error and therefore in such situation, non-statistical
sampling approach is preferred..

Now, in audit it is neither possible nor desirable to examine all the transactions
or activities of an entity within the time-frame of an audit.

Therefore the auditor has to decide upon samples from the classes of
transactions covered by the audit on which the audit procedures are applied to
obtain sufficient appropriate audit evidence that would enable the auditor to
have reasonable assurance about the characteristics of the class of
transactions.

However, it is not necessary that selective verification will be done in respect

of all classes of transactions and the auditor might decide on examination of
the total population in respect of a particular type of transaction, where in his
opinion there is a high risk of drawing an incorrect conclusion based on
selective verification and he requires a higher level of confidence about that
class of transactions.
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The size of audit samples shall largely depend on the level of confidence the
auditor has on the efficacy and actual performance of the internal control
system and the auditor’s acceptance of the tolerable error (maximum
possibility of the sample not representing the population) in sampling.

In order to lower the sampling error and thus the risk of drawing an incorrect
conclusion, size of the sample should be bigger.

The internal auditor shall first decide upon what would be the appropriate
population for deriving a particular audit assurance and whether the
population is complete.

For example to derive a assurance about the balances of debtors the

complete list of sales invoice, debit/credit notes and complete details of
receipts from debtors shall constitute the appropriate population.

The internal auditor may classify an appropriate population meant for a certain
audit procedure into various categories (or strata) based on certain criteria
(e.g. monetary value) and then decide on different sample size for different
categories..

Audit Working Paper

Audit working papers include those papers and documents, which consist of
details about accounts, which are under audit. They are the written, private
materials, which an auditor prepares for each audit. They describe the
accounting information, which he obtained from his client, the method of
examination used, his conclusions and the financial statements

Objectives of Audit Working Papers

1. The working papers serve the auditor both as useful audit tool as well as a
permanent record of the audit work performed.

2. They are useful to the auditor to control the current year’s audit work.

3. They constitute a reliable guidance for planning the future audit

assignments.
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4. A review of the audit working papers gives an assurance that the audit work
is both accurate and complete

Contents of Audit Working Papers

AAS 3 states working papers should record the auditor’s plan, the nature,
timing and extent of the audit procedures performed; and the conclusions
drawn from the evidence obtained.

Generally, audit working papers consist of the following details:

1. Schedule of debtors and creditors.

2. Trial Balance.
3. Certificate of officials regarding certain important matters like
bad debts, valuation of stock, unpaid expenses, accrued incomes, etc.
4. Statement of depreciation.
5. Correspondence between the auditor and the debtors, creditors,
etc. of the client.
6. Investment Schedules.
7. Confirmation by the bank regarding the bank balances of the
client.
8. Bank Reconciliation Statement.
9. Important extracts from the minute books such as agreement
with vendors, hire purchasers, selling agents, etc.
10. Detail of cash balance checked.
11. Adjustment entries.
12. Contingent liabilities certified by the management.
13. Draft financial accounts.
14. Details of clarifications made during the course of audit.
15. A copy of the auditor’s book.
16. Letters of representation.
17. Correspondence from legal advisors
18. Pertinent memoranda relating to the audit.
19. Data relating to the review of internal control.
20. Stock holder equity and the minutes.
21. Test of transactions.
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Audit Files

Preparing files and keeping them safe is an important task of audit office
because entire work, present as well as future, depends upon these files. The
audit files can be of two types, namely:

(1) Permanent Audit Files.

(2) Current Audit Files.

A permanent audit file normally includes:

1) Information concerning the legal and organizational structure of

the entity. In the case of a company, this includes the Memorandum
and Articles of Association. In the case of a statutory corporation, this
includes the Act and Regulations under which the corporation functions.

2) Extracts or copies of important legal documents, agreements

and minutes relevant to the audit.

3) A record of the study and the evaluation of the internal controls

related to the accounting system. This might be in the form of narrative
descriptions, questionnaires or flow charts, or some combination
thereof.

4) Copies of audited financial statements for previous years.

5) Analysis of significant ratios and trends.

6) Copies of management letters issued by the auditor, if

any. Record of communication with the retiring auditor, if any, before
acceptance of the appointment as auditor.

7) Notes regarding significant accounting policies.

8) Significant audit observations of earlier years.

The current file normally includes:

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1) Correspondence relating to acceptance of annual

reappointment.

2) Extracts of important matters in the minutes of Board Meetings

and General Meetings as relevant to audit.

3) Evidence of the planning process of the audit and audit

programme.

4) Analysis of transactions and balances.

5) A record of the nature, timing and extent of auditing procedures

performed, and the results of such procedures.

6) Evidence that the work performed by assistants was supervised

and reviewed.

7) Copies of communication with other auditors, experts and other

third parties.

8) Letters of representation or confirmation received from the client.

9) Conclusions reached by the auditor concerning significant

aspects of the audit, including the manner in which exceptions and
unusual matters, if any, disclosed by the auditor’s procedures were
resolved or treated.

10) Copies of the financial information being reported on and the

related audit reports.

Audit Evidence

The primary objective of internal audit is to enable the auditor express his
opinion on the efficacy and performance of the systems, procedures and
controls and the financial, cost and other statements generated by the entity.
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For this purpose, the auditor carries out audit procedures to derive sufficient
appropriate audit evidence and draws conclusion there from which forms the
basis of his opinion.

Now, “sufficiency” refers to the quantum of the audit evidence and

“appropriateness” refers to the relevance and reliability but what constitutes
“sufficient appropriate audit evidence” depend on the professional judgment of
the auditor.

The internal auditor’s judgment as to “sufficient appropriate audit evidence” is

influenced by the nature and materiality of the item, nature and size of the
business, efficacy and functioning of the controls and his assessment of the
risk of a material misstatement.

The source of the audit evidence which can be internal or external and in
whose custody it is being kept, decides the level of reliability of the evidence,
to a great extent.

The main types of audit evidence in order of their reliability are:

(a) Documentary evidence originated from and held by third party.

(b) Documentary evidence originated from third party and held by the entity.

(c) Documentary evidence originated from the entity and held by third party.

(d) Documentary evidence originated from and held by the entity.

The internal auditor obtains the audit evidences through:

(a) Compliance procedures which are tests of control and are intended to
obtain reasonable assurance that the controls on which audit reliance are to
be placed are in effect

(b) Substantive procedures which are performed to obtain satisfaction about

the completeness, validity and accuracy of the data on which the audit
procedures are carried out.
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The substantive procedures are of two types:

a) Tests of details of transactions and balances

b) Analysis of significant ratios and trends and resultant
enquiry into unusual fluctuations and items.

The internal auditor obtains evidence by performing one or more of the

following procedures:

a) Inspection of records or tangible assets

b) Observation of a process or activity being performed by
others
c) Inquiry whether formal written inquiry or informal oral
inquiry, seeking relevant information from competent persons
whether within or outside the entity and confirmation received in
response to the inquiry
d) Checking the arithmetical accuracy of the records and
doing independent calculations and
e) Analysis of significant ratios and trends and resultant
enquiry into unusual fluctuations and items.

Analytical Procedures

The internal auditor carries out the analytical procedures initially to understand
the functioning of the entity, its environment and the risk of material
misstatement in the information on which the audit procedures will be carried
out and based on this understanding he plans the nature and extent and
timing of the audit procedures.

The analytical procedures are applied again to corroborate the conclusions

drawn from the evidence arising out of the tests of details, based on the
findings of which the auditor might decide to apply further audit procedures to
derive higher level of assurance about the evidence.
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Analytical procedures also involve establishing relationships between various

elements of the financial data or non-financial data or both and drawing
conclusion from there.

Where the result of the analytical procedures show significant deviations or

fluctuations or establish relationships that are inconsistent with the results of
other audit procedures or the expected results the auditor shall obtain
sufficient explanation from the management to remove the doubt about any
irregularity or obtain appropriate corroborative evidence or apply further audit
procedures until the auditor is satisfied with the results.

Where the deviation, fluctuation or relationship is not satisfactorily explained or

where the auditor is not satisfied with the results of further audit procedures it
might be indicative of possible irregularity which should be brought to the
notice of the management and suitable course of action may be suggested.

For finding out the similarity or divergence, comparison of the derived ratio
and trends is generally done with:

(a) The documents and reports of the previous periods

(b) Projections or budget of the entity

(c) Information from the industry like the industrial standard or comparable
data from a similar entity within the same industry

(d) The estimates of the internal auditor based on his study of the ratios and
trends of the entity.
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The methods and extent of application of analytical procedures depends on

the judgment of the internal auditor based on:

(i) Nature of the entity

(ii) Availability, reliability and relevance of the information available

(iii) Source of the information e.g. internal or external

( iv ) Comparability of the information

(v) Efficiency and effectiveness of a particular procedure to achieve a

particular objective

( vi ) Experience from the previous internal audits conducted at the entity

(vii) Effectiveness of the controls over the preparation of the information.

However, the extent of reliance the internal auditor shall place on the results of
the analytical procedures will depend on the judgment of the internal auditor
based on:

(a) Materiality of the items involved

(b) Outcome of the other audit procedures

(c) The extent to which the outcome of the analytical procedure can be relied
for deriving assurance about a particular item

(d) Whether the systems, procedures and controls as a whole are efficient and
functioning effectively.
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Method of Checking

There are different methods of checking, which are as follows:

1) Routine checking
2) Test checking
3) Checking in depth
4) Overall checking

Routine Checking

Whether a business is big or small, the record of its daily transactions is kept
in the books of accounts. The daily checking of these books of accounts under
audit is called Routine Checking.

P ur pos e of Rout ine Che c k ing

1. Making totals and sub-totals of primary books of accounts,
carrying them forward to the next page, and calculating the balances and
their checking.
2. Checking of the ledger postings derived from the primary books
and journal, and to see whether they are properly done or not.
3. To see the totals of debits and-credits of different accounts and
their balances.
4. To check whether balances of various accounts are properly
taken to the Trial Balance, or not.

O bje c tiv e s of Rout ine Che c k ing

1. To know the mathematical accuracy of the accounts entered in
the primary books of accounts.
2. To know the regularity of accounting in primary books of
accounts.
3. By making use of distinct Ticks and Marks to know that no
changes are made in figures after the check.

Test Checking
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Test checking in Audit means checking a few transactions selected at random

from a large number of transactions. It is also known as “Selective Verification”
or “Sampling Process“.

Checking in Depth

Audit or checking in depth means examination of a transaction thoroughly

from beginning to end in the order of its happening or in sequence. In this all
the entries of the accounts are not examined, rather a few selected are
examined and verified in all its aspect. This method is based on test checking.

Overall Checking

A detailed or comprehensive examination of accounts is known as overall

checking. This includes all those techniques and procedures used by the
auditor to detect the errors and frauds are not detected during routine
checking.
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Classification of Audit
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Classes of Audit
According to the Organization Structure of the Business

1) Statutory audit

By statutory Audit we mean the compulsory Audit under statute or law the
organization is establish under specific statute are bound to get their
account Audited.

It is legally compulsory for the following organization to get their account

audited:-

Company act, 1956, 2013, and 2017

Banking companies act, 1949

Insurance companies act, 1938

Local bodies and local authorities

Public and charitable trust act, 1950

Co-operative society act, 1912

2) Private Audit

It is also known as voluntary Audit. The right, duties, qualifications,

remunerations and scope of duties of the auditor determine by mutual
agreement between the auditor and owner.

Sole proprietorship- The extent and the number of account to be audited

is decided by the owner of the business. The Auditors of determine on the
basis of contract between the client and auditor.

Partnership-Although it is not legally mandatory, yet most of the

partnership concerns get their account Audited. The term and condition of
appointment and scope of auditor work is based on mutual agreements. If
there is no such agreement the provisions of Indian partnership act, 1932
shall apply.
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Audit of other individuals & institution-Sometimes an individual with

large income and expenditures gets his accounts audited. Some other
institution like clubs and other welfare societies also get their accounts
audited.

3) Government
audit

The audit of accounts of government departments and institute is known as

government audit.sec 2 (45) of the companies act 2013 state that
government companies means any copies in which not less than 51% of
the paid up share capital is healed by the central government or any others
which is subsidiary of government companies as thus define.

Example:-

 Heavy Electrical
limited.
 Fertilizer Ltd.
 Hindustan Anti-
Biotic Ltd.

4) Internal Audit

Internal Audit can be defined as “an independent, objective assurance

and consulting activity which involves a continuous and critical
appraisal of the functioning of an entity designed to add value and
improve an organization's internal control system, risk assessment and
management mechanism and overall governance mechanism”.

The definition brings to the following points:

1. Independent and objective assurance.

2. Continuous and critical appraisal of the functioning.

3. To improve the effectiveness of the risk management, control and

governance process.

According to practical utility

37

1) Complete Audit

An audit of both financial statement and the documents underlying them.

That is, a complete audit does not only look at financial statements to make su
re they make sense, it also makes sure that statements compare well with the
documents used to create them. Complete audits are less likely than other au
dits to contain errors.

2) Partial Audit

An audit which is conducted considering the particular area of accounting is

known as partial audit. Under partial audit, audit of whole account is not
conducted. Audit of particular area where the owner thinks essential to
conduct audit will be conducted. Generally, transaction of business is related
to cash, debtor, creditor, stock etc. A business may conduct an audit of any of
these transactions.
An auditor should conduct audit of that transaction as per the scope
determined by the agreement. Method of conducting such audit is similar to
other audit but an auditor should sign the report clearing stating the 'partial
audit'. If it is not done so, an auditor will be liable for the loss which is caused
due to using the report as complete audit.

Objectives of Partial Audit

Partial audit has following objectives:

a) To know whether the capital is fully mobilized or not.

b) To clarify the doubts where the owner has suspected.
c) To conduct final audit in less time and in less expenses because
Particular area of account is checked in detail.

3) Continuous Audit

Continuous audit is an internal process that examines accounting

practices, risk control, compliance, information technology systems and
business procedures on an ongoing basis. Continuous audits are usually
technology-driven and designed to automate error checking and data
38

verification in real time. A continuous audit driven system generates alarm

triggers that provide notice about anomalies and errors detected by the
system.

4) Periodical Audit

Periodic audit is done at the close of the financial year at the time of preparing
final accounts. The auditor visits the client only once in a year and complete
the examinations of all books and accounts. It covers entire examination of
books and completes verification of account. Periodic audit is also known as
final audit and complete Audit.

5) Interim Audit

An interim audit involves preliminary audit work that is conducted prior to

the fiscal year-end of a client. The interim audit tasks are conducted in
order to compress the period needed to complete the final audit. Doing so
benefits the client, which can issue its audited financial statements
sooner. An interim audit also helps the auditors, who now have more time
available during their peak audit season to engage in activities for more
clients.

An interim audit can also refer to a full audit that is conducted for an
interim period, such as for a quarter or half-year. This is a relatively
uncommon event, since publicly held companies only need to have a
review conducted at quarterly intervals, not a full audit. Thus, the purpose
of Interim Audit may be:

6) Cost Audit

The terminology issued by the CIMA defines Cost Audit as “the verification of
the correctness of cost accounts and of the adherence to the cost accounting
plan”.

ICWAI defines Statutory Cost Audit as a “system of audit introduced by the

Government of India for the review, examination and appraisal of the
39

cost accounting records and added information required to be

maintained by the specified industries”.

Cost Audit is a critical review undertaken for the purpose of:

(a) Verification of the correctness of cost accounts, and

(b) Checking that Cost Accounting Plan is adhered to.

7) Tax Audit

A tax audit is an examination of an organization's or individual's tax return to

verify that financial information is being reported correctly. While the chances
of being singled out for closer scrutiny are statistically low, there are factors
that could increase your odds of receiving an audit notice. Fortunately, there
are measures you can take now to minimize future problems.

8) Management Audit

A systematic assessment of methods and policies of an organization's

management in the administration and the use of resources, tactical and
strategic planning, and employee and organizational improvement.

The objectives of a management audit are

(1)To establish the current level of effectiveness,

(2) Suggest improvements, and

(3) Lay down standards for future performance. Management auditors

(employees of the company or independent consultants) do not appraise
individual performance, but may critically evaluate the senior executives as a
management team.

Internal Audit
40

Internal audits evaluate a company’s internal controls, including its corporate

governance and accounting processes. They ensure compliance with laws
and regulations and help to maintain accurate and timely financial reporting
and data collection. Internal audits also provide management with the tools
necessary to attain operational efficiency by identifying problems and
correcting gap before they are discovered in an external audit.

According to Institute of Internal Auditors, New York -

Internal audit is a independent appraisal activity within an organization for the

review of accounting, financial and other operation as a basis for services to
management. It is a managerial control which functions, by measuring and
evaluating effectiveness of other controls.

Definition bring to the following points:

1. Independent and objective assurance.

2. Continuous and critical appraisal of the functioning.

3. To improve the effectiveness of the risk management, control

and governance process.

Scope of Internal Audit

Following is the scope of Internal Audit according to the Institute of Internal
Auditors −

 Safeguarding the assets.

 Economical and efficient use of resources.

 Reliability and integrity of information.

 Accomplishment of established objectives and goals for

operations or programs
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Advantage of Internal Audit

i. Internal audit helps the management in formulating of plans and
programmed and their effective control for increasing the profitability of
the organization.

ii. It also helps to avoid depreciation of capital as it assures best

utilization by doing regular checking.

iii. It helps to reduce the chances of errors and frauds.

iv. It gives constructive advise to the management according to

needs of the organization.

v. Internal audit helps finding out employee and labor problems and
solutions.

vi. It helps in increasing consumer satisfaction as it tries to establish

sound relations with them.

vii. It helps in determining the work standard for the employees.

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Disadvantage of Internal Audit

i. If internal audit staff is not capable or effective, the whole
exercises of internal audits wasted.

ii. It involves high cost, so it does not suit for small business
undertakings.

iii. Internal auditor being employees of the concern , may resort to

malpractices i.e, showing wrong position with a view to mislead others.

iv. There are no statutory qualifications for an internal auditor, so his

appointment depends upon personnel relations.

v. The element of pressure of the management cannot be ignored

as the internal auditor is not independent and works under the
management.
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Importance of Internal Audit

a. It is an independent evaluation of business activities and
accounting records and systems.

b. Internal audit is in a way a management control.

c. Internal audit increase efficiency of accounting system.

d. Internal audit acts as an aid to final audit.

e. Internal auditor examines day-to-day transaction, which help in

reducing possibilities of errors and frauds.
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Objective of internal Audit

1. Review:- The first objective of internal audit is to review the
function of other employees.

2. Prevention and Detection of Error and Frauds: - Internal audit

evaluate the various transaction, errors and minimize the possibility of
occurring frauds. And motive employees to work in right direction.

3. Rules and Procedures:-Internal audit ascertain that all the

activities of the organization are performed according to pre-determined
or authorized policies, rules or procedures.

4. Effectiveness of Internal Check System:-It ensures the

management that the internal check system in operation is effective.

5. Control over Assets and Liabilities: - Internal audit assure

Organization for their protection ,control and effective utilization of
assets and liabilities. For this internal auditor use many techniques
such as test of compliance, test checks and list of verifications.
45

6. Improvement and Suggestion: - Another important objective of

internal audit is to improve the present system of recording transaction
and to give valuation suggestions to management in this regard.

7. Verification of Profitability: - It help to know the profitability and

productivity of various business transaction.

8. Examination of Procedure:-Internal audit examines whether the

plane and procedures framed for every activity was carried out
accordinglyor not.

9. Aid to Statutory Audit:-Internal audit reduce the work of

satatutory audit. If the audit and internal check system is effective, the
work of statutory auditor finishes easily and at the earliest.

Basic Principles of Internal Audit

1. Proper conduct of the internal audit requires that the following

principles be adhered to Independence of the auditor is a primary
requirement for any audit which aims at ensuring that the outcome of
the audit is not prejudiced. While there have been serious efforts
tonsure “independence” by laying down in the Indian Companies Act,
certain relationships between the auditor and the auditee, existence of
which will deter a person from being the auditor, these cannot be the
only test for lack of independence of the auditor. Accordingly it is more
important for the auditor to act professionally, maintaining the highest
levels of ethics and competence and not to give in to any interference in
performing his duties.

2. The internal auditor should be professionally competent and

46

exercise care, diligence and skill necessary for discharging his

responsibilities, the extent of which depends on the scope of the
assignment and auditor’s assessment of the environment in which he is
discharging his duties. Audit environment is determined by the nature of
the organization, its internal control system and the complexities of its
activities.

3. The internal auditor should ensure confidentiality of the

information received by him in the course of the audit. Unless he is
otherwise required by any legal, regulatory or professional
pronouncement, he shall not divulge any information without the
express consent of the management. The internal auditor is primarily
responsible for expressing his opinion on the areas subjected to audit
and therefore he has to take sufficient care to be satisfied that he can
adequately rely on the work performed by other professionals/experts,
before he uses the work done by others in forming his opinion..

4. Like any other audit, documentation is very important in internal

audit as it provides evidence of the audit having been conducted in
accordance with the applicable standards and substantiate that his
findings are based on sufficient appropriate evidence which forms the
basis of his opinion. It also helps in current and future planning of the
audit-work, supervision and review of the audit functions.

5. Effective and timely conduct of any activity depends largely on

the efficiency of the planning which precedes the performance of the
activity. It primarily focus on the selection of skilled personnel in
accordance with the degree of complexity and materiality involved
extent of work to be done for obtaining sufficient and appropriate
evidence and the time frame for completion of each activity. The
planning process shall start with understanding the legal and regulatory
framework within which the entity operates, the hierarchical structure of
the organization, the organizational policy and plans, the activities and
the processes carried out, the design and efficacy of the financial and
cost accounting systems, internal control system and risk management
system and above all the terms of engagement

6. The final output of the internal audit is the audit report which
shall be carefully drafted to ensure lucid communication of the findings
47

of the audit relating primarily to the shortcomings of the internal control

system, risk management system and the governance processes and
the measures required for correction and improvement. The audit report
shall also highlight on other issues which in the opinion of the auditor
should be brought to the notice of the management.

Necessity of internal Audit

Internal audit programs are critical for monitoring and assuring that all of your
business assets have been properly secured and safeguarded from threats. It
is also important for verifying that your business processes reflect your
documented policies and procedures. Here are 5 reasons that Internal Audit is
needed:

1. Provides Objective Insight:-You can’t audit your own work

without having a definite conflict of interest. Your internal auditor, or
internal audit team, cannot have any operational responsibility to
achieve this objective insight. In situations where smaller companies
don’t have extra resources to devote to this, it’s acceptable to cross-
train employees in different departments to be able to audit another
department. By providing an independent and unbiased view, the
internal audit function adds value to your organization.

2. Improves Efficiency of Operations:-By objectively reviewing your

organization’s policies and procedures, you can receive assurance that
you are doing what your policies and procedures say you are doing,
and that these processes are adequate in mitigating your unique risks.
By continuously monitoring and reviewing your processes, you can
identify control recommendations to improve the efficiency and
effectiveness of these processes. In turn, allowing your organization to
be dependent on process, rather than people.

3. Evaluates Risks and Protects Assets:-An internal audit program

assists management and stakeholders by identifying and prioritizing
risks through a systematic risk assessment. A risk assessment can help
to identify any gaps in the environment and allow for a remediation plan
to take place. Your internal audit program will help you to track and
document any changes that have been made to your environment and
ensure the mitigation of any found risks.
48

4. Assesses Controls:-Internal audit is beneficial because it

improves the control environment of the organization by assessing
efficiency and operating effectiveness. Are your controls fulfilling their
purpose? Are they adequate in mitigating risk?

5. Ensure Compliance with Laws and Regulations:-By regularly

performing an internal audit, you can ensure compliance with any and
all relevant laws and regulations. It can also help provide you with
peace of mind that you are prepared for you next external audit.
Gaining client trust and avoiding costly fines associated with non-
compliance makes internal audit an important and worthwhile activity
for your organization.

Terms of engagement of Internal Auditor

Unlike a statutory audit where the scope of the audit and the authority
and responsibility of the auditor is guided by the statute under which the
appointment is made, in case of internal audit and several other
aspects are ascertained specifically for each audit engagement and
decided and agreed upon jointly by the internal auditor and the auditee.
Thus in case of an internal audit the audit engagement letter assumes
special significance. The letter may be drawn up by the auditor but it
needs to be approved by the Board of Directors or the Audit Committee
or any person officially authorized for this purpose. The drawing up of
the letter is preceded by extensive discussion on the terms of the
internal audit which shall include:

1. Scope: The broad areas which should be covered by the audit and
what is expected from the auditor should be clearly laid down in the
engagement letter. Internal audit generally serves the “objectives” but
the functions of the auditor and what is expected as the output of the
audit e.g. observations, suggestion and recommendations in general or
on a specific function of the entity, should be outlined. It shall also
mention that the internal auditor is not required to express an opinion or
issue any sort of assurance on the financial statements.
49

2. Responsibility: While most of the auditor’s responsibilities arise

from the scope of the audit and the statutory and professional
pronouncements, the responsibility of the auditee which plays an
important role in the effective completion of the audit needs to be
mentioned in the engagement letter along with the responsibility of the
internal auditor. The auditor’s responsibility includes timely intimation of
material weakness or other major issues related to the internal control
system and material misstatements in the cost and financial information
to the management and others to whom the auditor is required to
intimate. The auditor’s primary responsibility is to extend fullest co-
operation to the audit team and provide correct and precise data,
information and records in time.

3. Authority: The auditor should be authorized to have unhindered

access to the data, information, records, properties and personnel. He
should have the authority to call for information from the concerned
department/personnel and to carry out audit procedures using his
technologies, hardware and audit tools.

4. Confidentiality: The engagement letter shall mention that the

auditor will ensure full confidentiality of the data, information and
records accessed in the course of the audit subject to any statutory
obligation to share the same with any authority. While the audit working
papers are the sole property of the auditor, he may share non-
proprietary information with the auditee and the engagement letter shall
mention the modalities for sharing of information with the auditee and
third parties like the external auditor or for the purpose of ‘peer-review’.

5. Limitation: The audit engagement letter should mention any

limitation on scope, coverage and reporting requirement if there is any.
For example, the letter may state that the internal auditor or any of its
team members shall not be liable for any claim, damage, liability or
expense relating to the engagement more than the aggregate amount
of compensation agreed between the auditor and the audited.

6. Reporting: The manner of reporting, the periodicity of reporting and

the intended recipients of the report should be clearly mentioned in the
letter.
50

7. Compensation: The remuneration payable for the audit assignment

and what expenses incurred in connection with the audit will be
reimbursed to the internal auditor and to what extent, shall be
mentioned in the audit engagement letter.

8. Compliance with the standards: The audit engagement letter shall

contain a statement that the auditor will comply with the applicable
professional pronouncements.

The terms of audit engagement shall be reviewed from time to time

jointly by the auditor and the auditee in relation to the changing
circumstances or requirements and the addition or alteration in the
terms shall be documented in form of the audit engagement letter.

Stage of Internal Audit Process

Internal auditors generally identify a department, gather an understanding of

the current internal control process, conduct fieldwork testing, follow up with
department staff about identified issues, prepare an official audit report, review
the audit report with management, and follow up with management and the
board of directors as needed to ensure recommendations have been
51

implemented.

EVALUATION OF INTERNAL CONTROL SYSTEM

52

The auditor should study and evaluate the internal control system to determine
the extent and timing of audit procedures to be used during the examination of
the records and accounts.

Internal control comprises of the plant of organization and all the coordinate
method and measure adopted with a business its assets, check the accuracy
and reliability of its accounting data promotes operational efficiency and
encourages to audience to prescribed managerial policies.

Administrative controls: This is the internal control that relates to the promotion
of operational efficiency and encourage adhere to managerial policies.
Management primary objective, as it is believed the maximization of profit. The
Auditor primary objective should be to determine whether management
financial statement are prepared in accordance with generally accepted
accounting principles in the case of capital budget preparation, the auditor
should be concerned with capital project in process . The auditor may use
clients to monitor the project for possible cost over runs which may
necessitate a write down of the cost incurred for the cost incurred for the
project.

Accounting controls: This is concerned with internal control that relate to the
assets and the reliability of financial records. The accounting controls
designed to safeguard assets project the client from incorrectly accounting for
the movement of assets. The auditor is concerned with the accounting
controls for the physical protection of cash supplies inventories of scrap, such
as cash, inventory and gain or loss accounts for the disposal of assets may
not be in error.

Internal control system designed to provide reasonable assurance that:

 Transactions are executed with managements general or specific

authorization.

 Access to assets is permitted only in accordance with management

authorization.

 Transactions are recorded as necessary to permit the preparation of

financial statement in conformity with generally accepted accounting
principles and to maintain accountability for assets.
53

 The recorded accountability for assets is compared with the existing

assets at reasonable intervals and appropriate actions taken with reference
to any differences.

For efficiency in accounting control in the evaluation of internal control system

the auditor would consider at is a responsibility to review or audit the
following:-

i. Auditing of cash

ii. Auditing of credit sales system

iii. Auditing of property, plant and equipment

iv. Auditing of inventory system

v. Auditing of investment

vi. Auditing of liability

vii. Auditing of stock and owners equity

viii.Auditing of nominal accounts.

54

OBJECTIVE OF THE STUDY

The work was fundamentally undertaking to study internal auditing efficiency
as a tool to improve companies’ performance. The main purpose of this study
is find out some of the reason for deficiency and inefficiency in the company
which is usually believed as not existing but in fact they exist and to find some
way of eradicating it using auditing efficiency. Findings will be done to know
the extent to which the management has appraised their own operation and
how competent they have been in determining operational ills and weak
points.
55

Literature View
56

Firms Profile
Background
Ojha & Associates is a leading chartered accountancy firm
rendering comprehensive professional services which include
audit, management consultancy, tax consultancy, accounting
services, manpower management, Ojha & Associates is a
professionally managed partnership firm. The Team consists of
distinguished Chartered Accountants, corporate financial advisors
and tax consultants. The firm represents a combination of
57

specialized skills, which are geared to offers sound financial advice

and personalized proactive services. Those associated with the
firm have regular interaction with industry and other professionals
which enables the firm to keep pace with contemporary
developments and to meet the needs of its clients.

Our Commitment
We are committed to provide consistent, customized and workable
solutions to our clients and strive to support our services with the
highest level of professionalism, efficiency and technology.

Vision
To accomplish the assignment through the experience of firm’s
partners & professional staff and also to arrange specific technical
expertise from our associates of various streams of professions.

Introduction about UP Agro Fertilizers Limited

Incorporated in the year 2011, UP Agro Fertilizers Limited is a

well-established organization engaged in Manufacturing,
58

Supplying and Trading Bio fertilizer, Bio Pesticide, Micro Nutrient,

Organic Fertilizer, Plant Growth Promoter and Bentonite. It is the
best provider of fertilizers and pesticides and supply premium
products at cost-effective range.

The production of agriculture completely depends on the quality of

soil. To improve this quality we provide the superior most
fertilizers and pesticides. It`s headquarter is located in Uttar
Pradesh and we ensure rich harvesting by helping the farmers in
protecting their crops and vegetables from diseases and
infections. It acquire a huge infrastructure and have employed
competent team of experts. Our team carries good industrial
experience and knowledge which help to manufacture optimum
quality of products at economical market range. It provides
products in perfect and secure packing.

UP Agro Fertiliser have been able to manufacture optimum quality

products which support in improving the global production of
agriculture. It carry a huge distribution network and try to cater our
products even to the remote and urban villages.
59

Audit procedures followed by Ojha & Associates

The primary goal Ojha & Associates at the time of involving in any
audit engagement is to provide the opinion on Financial
Statements in accordance with Indian Standards on Auditing (ISA)
as well as International Standards on Auditing (ISA). Ojha &
Associates also seek to provide auditing and management
consultancy services that are innovative, efficient and most
importantly responsive to the client’s needs.

It is another fact that before starting the audit procedure there

presents a series of more procedures. For example audit
engagement letter, audit clearance letter, team meeting etc.

Audit Procedures followed:-

There are seven steps involved in the procedures that come one
after another. The procedures followed by the Ojha & Associates
are basically inspired by the approaches suggested by ICAI in
Audit Practice Manual. Steps are as follows:

1. Identity Overall Goals

2. Gather & Evaluate Initial Information
3. Assess General Risks
4. Assess Account Specific Risk
5. Develop Efficient And Effective Audit Plan Program
6. Conduct Audit Testing
7. Evaluate And Communicate Audit Results
60

RESEARCH METHODOLOGY

INTRODUCTION

This chapter focuses on research methodology that is

been used is the study.

RESEARCH TYPE- Descriptive Research

DATA COLLECT-This research include only secondary data

through which the study is been conducted.

SECONDARY DATA- It’s include

 ARTICLES
 BOOKS-AUDITING (SBPD PUBLICATION-2011-12)
 www.indiamart.com
 www.indiafilings.com
 www.taxmann.com
 https://www.seminarsonly.com/Engineering-
Projects/Finance/Audit-Of-Bank.php

 https://studypoints.blogspot.com/2011/09/explain-
functions-of-audit-or-
61

 auditing_3520.htmlhttps://accountlearning.blogspot
.com/2012/01/objectives-of-audit.html
 https://iedunote.com/audit-scope

Conclusion
The Achievement of the organization objective of the companies depends on
the nature of audit work been carried out in the company. It is clear that the
human and the material resources put together , with a wives to achieve a
common goal, this will only be efficiently, effectively and economically be
realized under the condition of check and balance using auditing to archive
the. Good company can be maintain if auditing process can be introduced as
a perfect solution to some of the myriad of the problem otherwise such
organization may become expiring.

The optimistic is that some the finding area discoursed in this research work
will help the management of the companies to understand the auditing
problem in the organization. There is no gainsaying the fact that if the
subjected recommendation, if adhered strictly to will ensure effectiveness,
efficiency in the auditing problem in the auditing process of the organization
and at the long run there will improvement in the company performance.
62

Bibliography
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