B.com Part2 Auditing Notes!

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Essentials of Internal Audit

1. Planning

Planning is an essential feature of internal audit. The auditor can plan to check the accounts system. The plan may relate to accounting functions like purchase, sales, income, expenses and shares. The planning includes degree of risk and extent of audit. It also states the nature of audit work.


2. Controlling

Controlling is an essential feature of internal audit. The auditor examine the operation of accounting system. He can control audit work through audit programme. The whole work is distributed among audit staff.


3. Recording

Recording is an essential feature of internal audit. The auditor can record the facts and figures in order to express his views in the business activities. The auditor notebook and audit working papers are used to record the information.


4. Independence

Independence is essential element of internal audit. An employee of the company does the work of internal audit. Management must not influence him. He must be free in developing audit programme, audit investigation and audit reporting.


5. Staffing

Staffing is an essential part of internal audit. The trained staff is needed to conduct internal audit. The reasonable number of persons can perform the work of examination. The inadequate and untrained staff cannot serve the purpose of checking efficiency of managers.


6. Training

The internal audit staff must be trained. In order to achieve better results there is a need of training in audit work. Proper arrangements should be made to provide training to internal audit staff.


7. Relationship

The internal audit staff must have friendly relations with management, external audit staff and consultants. There is a need of complete harmony among various groups of people.


8. Evidence

Evidence is essential part of internal audit. The evidence must be reliable, relevant and sufficient. The business documents are sources of entries in accounting books and records. The reliable can be seen through signature of manager. The relevant documents show the name of concern.


9. Due Care

Due care is an essential part of internal audit. The auditor must use skill, care and judgement. He should have technical knowledge, honesty and integrity.


10. Reporting

Reporting is an essential part of internal audit. The auditor can inform the management through audit report. It may be long or short report. The finding of the auditor is put before the management. There is a need to act upon the advice of the internal auditor for better result.












Functions of Internal Audit

The function of internal audit is concerned with analysis of internal check. The internal auditor can look in to the duties of each employee. All employees are provided jobs on the basis of their abilities.


2. Application of legal Requirements

The function of internal audit is the examining of the application of legal requirements. The accounts are prepared under certain legal framework. The Company's Ordinance 1984, the Stock Exchange and Security Rules 1971, the Banking Companies Ordinance 1962, The Insurance Act 1938. The Modaraba Ordinance 1980 and similar other laws are followed for preparing finance statement.


3. Verification of Accuracy

Verification of accuracy is a function of internal audit. The accuracy of accounting books and records can be verified with the help of auditing techniques. The audit techniques include inspection, observation, inquiry, confirmation, computation and review. An auditor can check the accuracy through these techniques.


4. Confirmation of Liability

Confirmation of liability is a function of internal audit. The internal auditor can determine the work done by every person. The careless or negligence on the part of worker is noted. The concerned person is given a chance to explain his position. If the reason is not justified, the liability is confirmed.


5. Examination of Assets Protection

The function of internal audit is to examine the assets protection. The proper record is to be maintained. The possession must be in the hands of senior officer. The assets are used for business only. There is proper purchase and disposal of these assets. The internal auditor can check that assets are protected.


6. Detection of Fraud

Detection of fraud is a function of internal audit. The work of accounting and auditing go side by side. When accounting work is over it is checking by audit staff. There is not time gap so fraud is detection at an early date. The plan of fraud requires time to think. When time is not allowed it is detected on the spot.


7. Ascertain Proper Authority

The function of internal audit is to ascertain the proper authority. The shareholders, partners and single owners have full authority. They can delegate such authority to managers. The signature of owners or managers must be noted on every voucher in order to ascertain that transaction is proper.


8. Detection of Errors

The function of internal audit is to detect errors in the accounting records. The audit staff can check the records in detail. There is not time limit. There is possibility of disclosed of error due to cent percent checking. The corrections can be made as early as possible to reflect the true and fair view.


9. Make Investigation

The function of internal audit is to make investigation. It is an inquiry in to business activities by specially assigned staff. The facts and figures are collected; analyzed and true position is put before the management. The grey area can be spot lighted by an auditor in the interest of business.


10. Performance Appraisal

The function of internal audit is to note the performance of business employees and management. The standard are fixed and performance is compared with standards. The management can feel satisfaction if the performance is at standard.


11. Give Suggestion

The function of internal audit is to give suggestion for business problems. These suggestions are not costly. In the long run there may be large number of benefits from such ideas. The management has the right to accept or reject the ideas.


12. Reporting

Reporting is a function of internal audit. The auditor can find out the weaknesses of various functions. The report is submitted to the management. There is a need to go through the report. The weakness and proposal can be examined in detail.
 

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Advantages of Internal Audit

1. Proper Accounting System

The benefit of internal audit is that proper accounting system is introduced. Accounting system is a chain of activities in an entity by which transactions are processed for maintaining financial record. There is a need of orderly devices to achieve desirable results.


2. Better Management

The benefit of internal audit is that there is better management of business concern. The auditor can point out the weak areas of management. The goals of business can be achieved if there is proper internal control, internal check and internal audit. It should be noted that management could rely on internal audit for best results.


3. Progressive Review

The internal audit is beneficial to review progress of a business concern. The figures of previous years are compared with this year. Moreover the performance result of similar companies can be compared to determine the progress made by the entity. The management can review progress through internal audit.


4. Effective Control

The internal audit is helpful to have effective control over business activities. Control is a management function, which related to supervision and direction of on going activities. The manager concerned can remove the difficulties for smooth working internal audit alerts the management for effective control.


5. Assets Protection

The assets protection is possible through internal audit. The management can use the assets for the benefit of business only. The assets cannot be used for private purposes. The embezzlement of cash, misappropriation of stock and misuse of other assets is not possible as the internal auditor keeps close watch over assets.


6. Division of Work

The internal audit is helpful to apply division of labour. The division of labour is necessary to watch the activities of all employees including management. The auditor can suggest the way and means improve the performance of business.


7. No Error

The internal audit is used to protect accounting records from errors. The accounting and auditing go side by side when accounting work is over there is start of audit. There is not time gap. In such situation the accounting staff is not in a position to commit any error.


8. Fixing Responsibility

Internal audit is used to fix the responsibility of people having poor performance. The management establishes the performance standards. The internal auditor can evaluate the result of all persons. The people can be help responsible for below standard work and action can be taken against them.


9. Helps External Auditing

The work performed by internal auditor can be helped for external auditor. The auditor procedure of internal and external audit is almost the same. The auditor can go through the internal audit report at the time of starting audit work. Anyhow external auditor is responsible for external audit.


10. No Fraud

The internal audit is beneficial to detect frauds in the books of accounts and other records. The auditor provides no time tag lag to continue any fraud. The work of accounting staff is examined on daily basis. The accounting staff has no time to plan any type of fraud.


11. Performance Improves

Internal auditor is helpful to improve the performance of the organization. The achievements of previous year are the basis of preparing budget for the next years. The projected income statement and balance are drawn up. An attempt is made to get the positive result. Thus internal audit improves performance of business and employees.


12. Proper Use of Resources

Internal audit is used to check the proper use of resources. The misuse of resources can increase the cost of organization. The optimum use of resources can be determined to control the cost of output. In this way internal audit is a tool to use the resources in the best internal of the business.


13. Investigation

Internal audit is help to investigate in to the business matters. In case of doubt internal auditor can be asked to examine the facts and figures to confirm or clear any doubt. The internal auditor can investigate the matter in any manner. Such investigation can be made at the request of management or owners.


14. Suggestions

Internal auditor is used to suggest the ways and means for improving the business performance. The management can rely on the internal auditor. The workable ideas of the internal auditor can be put into practice.

















Limitations of Internal Audit

1. Incompetent Staff

The limitation of internal audit is that audit staff may be incompetent. The purposes of internal audit fails to help the management. There may be lack of experience and training on the part of internal audit staff.


2. Staff Shortage

The limitation of internal audit is staff shortage. There may be need of reasonable audit staff to examine the record. The shortage of staff is a hurdle to get benefit of internal audit.


3. Time Lag

The limitations of internal audit starts when true is time lag between recording and checking of entries. The accounting and internal audit must go side by side with minimum time gap.


4. Executive Function

The limitation of internal audit is that the internal audit may be linked with executive function. In this case he cannot examine the accounting books and other records. He cannot find out his own weakness. It will be wastage of time and money to conduct internal audit.


5. Error

The limitation of internal audit is that there may be error in the books of accounts. It depends upon the expertise of internal audit staff. If audit staff is competent there is less chance of error. In case of poor audit staff there is no guarantee that audited accounts are free from errors.


6. Responsibility

The limitation of internal audit is that management may not feel their responsibility in completing the audit formalities. The audit staff may responsibility in completing the audit formalities. The audit staff may give suggestion for proper working of business. The top-level management may not pay attention to suggestions. In this way the audit work cannot help the business.


7. Duties

The limitation of audit is that there may not proper division of duties. In this case the internal auditor is unable to fix the responsibility for negligence of duties. The management must be aware about division of duties. The audit work can point out the weakness of business employee, otherwise whole arrangement goes wasted.
 

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* Audit Programme

* Kinds of Audit Programme

* Contents of Audit Programme

* Advantages of Audit Programme

Definition

Audit programme is a list of work to be done by an auditor. The time period is started for completing the work. The duties are assigned to audit staff. The procedure that will help to verify each time of financial statements. The duplication of work is avoided and an pace of audit work. The auditor is able to have control over the audit staff and their work. The cost of audit remains in line with the audit fee. The auditor can handle audit of many concerns at the same time. Every aspect of financial activities require audit program. The combination of all such programs is considered as master audit programme. The auditor can make changes from time to time in order to meet the requirements of nature and size of business.
Kinds of Audit Programme

1. Standard Audit Programme

This type of audit programme is preprinted and suitable for all purposes. It saves time and gives added assurance that no important procedure will be overlooked while in the opinion of some others, this type of audit programme is too much mechanical. Due to complexities in the business conditions system of accounting and internal control system, it is not possible to follow a standard audit programme.


2. Modified Standard Audit Programme

These type of audit programme contain the usual audit procedures, common to most business and provide space for other specific procedures applicable to the business under examination. This modification of the audit steps and the insertion of the steps that are peculiar to the audit in questions, make the audit programme a modified standard audit programme.


3. Tailor-Made Audit Programme

This is individually written programme prepared specially for each audit. It is known as tailor made because a tailor cuts the cloth according to the body of every person. The auditor should take care of such a programme so that no important steps is overlooked or missed. It lists the procedures to be followed on any specific engagement indication any departure from normal practices and specifying the extent of the test of transaction.

Contents of Audit Programme

1. Name
The audit programme contains the name of client. The auditor can write the name of business. There is a need of complete address of the concern in case of public limited company.

2. Objects
The audit programme contains the objects of the business enterprise. There are various objects of any business unit. A small business has few objects while large companies have many objects.

3. Date
The audit programme contains the date of start of an audit. The auditor can consult the client before fixing the audit date. It must be convenient to the management. The audit programme can show the details of audit work date wise.

4. Duration
The audit programme contains the time limit of starting and completing the work. The duration of audit period may be one month. The size of audit work becomes the basis of duration.

5. Accounting System
The audit programme contains information about accounting system. The auditor can examine the accounting system and procedure in operation. The understanding of accounting system helps to develop the audit programme.

6. Internal Check
The audit programme contains the effectiveness of internal check system. The effective internal check is helpful for auditors. He can apply test checking due to proper internal check system. If the system is not good it increases the duties of audit staff.

7. Old Reports
The audit programme keeps the contents of old audit report. The auditor can pay attention to old reports. The weakness reported in previous reports must not be repeated in present accounting records. It is the duty of the audit staff to note the performance of management.

8. Checking Books
The audit programme contains the details of checking accounting books. The number of
books kept is stated in the programme. The books are distributed among audit clerks so that whole data may be examined.
 

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Advantages of Audit Programme

1. Supervision of Work
The editor can judge the efficiency of his audit team with the held of an audit program. He is in a position to know the progress of the work. He can see at any time that what part of the work has been completed and what remains to be done.

2. Division / Distribution of Audit Work
The division of audit works is very useful for the audit staff for maintaining the difference of works among senior or junior clerks according to their ability and skill so that the work is divided to get better results.

3. Systematic and Uniformity of Work
Audit program helps in setting all the things in advance. So the systematic and uniformity of work is necessary to achieved the desire.

4. Basic Instrument of Training
Audit program is infact a training instruments for the audit staff and also very useful for the new auditors. It provides training and guidance to him. So, it is rightly called the basic instrument for training for the staff at the right time of need.

5. Fixation of Responsibility
Audit programmes fixed the responsibilities of the staff. If any error or fraud remains undetected the responsibility of negligence will fall on that particular assistant who has performed that job and no one can blame on each other.

6. Several Audit May be Controlled
The auditor controls the audit of various companies at the same time. In the absence of audit program he cannot supervise them effectively.

7. Easy Transfer
The principle auditor can transfer to any other person easily. If one assistant is unable to continue the work given to him it can be given to another person. Audit program guides him that what is done and what is remaining.

8. Final Review
Before signing the report, Final Review is made and for this purpose also auditing program is very useful and any deficiency or missing in steps can be identified and completed.

9. Useful For Future
The audit programme is very useful in the future. On completion of an audit. It serves the purpose of audit record that may be useful for future reference. In case of auditor is appointed for the same concern in any future time the auditor can use the same audit programmes with some changes.

10. Progress of Audit Work
Audit programme is useful to note the progress of work. Audit programme is a timetable, which can show the work done on any particular date. The pace of work is going on with the passage of time. The adjustment can be made if there is more work and less time and vice versa. In this way work can be completed in time.

11. Supervision of Audit Staff
Audit programme is beneficial for auditor. He can supervise the activities of audit staff. He can use the audit programme as basic of supervision. Every part of audit work can be complete as per schedule. He can control the activities of audit staff through observation and direction when the audit work can be complete in time.

12. Audit Staff Needed
Audit programme is helpful to determine the number of persons needed to do the work. The staff requirement is essential for every auditor. The shortage of staff means slow progress. The exact number of senior and junior audit clerk can be determined. In this way an auditor is able to handle the audit work properly.

13. Same Work
The benefit of audit programme is that new instructions are not issued due to change in staff. The nature of work remains the same. The audit clerks can know their job just by reading the written programme. The time is saved due to written instructions.

14. Time Table
The benefit of audit programme is that work is complete with in stated time period, the saving of time means saving of labour. The saving of time means saving can control the cost of audit due to fixed time. He can arrange audit work of other business concerns.

15. Responsibility for Poor Work
The benefit of audit programme is that auditor can fix responsibility for negligence. Audit programme is a timetable of whole audit work to be done by auditors. Every staff member is given some sort of duty to do the audit work. The staff is responsible for completing of work. The performance is noted and responsibility if fixed poor work.

16. Guide To Audit Assistants
The merit of audit programme is that it serves as a guide to audit assistants. The junior audit staff can start and complete the audit work with the help of audit programme. There is no need to repeat the instructions every time. Moreover it serves as a guide for future. The new audit programme can be developed can be developed on the basis of old work.

17. Dealing with New Clients
The merit of audit programme is that it helps to deal with client. The spare time of audit staff can be used for doing with new clients. The whole year time can be divided. The auditor can audit the accounts if various concerns under audit programme.

18. Proof for Audit Work Done
The merit of audit programme is that auditor can use it as proof for work done. In court of law the auditor can avoid liability for negligence. Audit programme is a permanent record of an audit process. The audit programme shows the work performed date-wise. In this way he cannot be held responsible for carelessness.
 

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Disadvantages of Audit Programme

1. Not Comprehensive
Auditors may have covered the whole fie but I cannot be said with certainty that all the necessary work has been done.

2. Rigidness
Audit program looses its flexibility. While each business have a separate problems. So audit program cannot be laid down for each type of business.

3. No Initiative
It kills the initiative of capable persons. The assistant cannot suggest any improvement in the plan.

4. Too Mechanical
Such audit program is too mechanical that it ignores many other aspects like internal control.

5. Large Concerns / Not Suitable for Small Concerns
Audit programme is helpful in large business concerns. It has been proved that audit program is not suitable for small business concerns.

6. New Problems Over Looked
In the audit programme there is no chances to accept the changes with the passage of time new problems arise that may be over looked.

7. Changes
The drawback of audit programme is that changes in it are not acceptable. The nature of activities of concern may change. There is a need to adjust the changes in the programme. A master programme cannot be drafted.

8. Revision
The demerit of audit programme is that there is no revision in it. The business changes from year to year. The working may expand or contract. The audit programme requires adjusting itself to the changing circumstances.

9. Types
The demerit of audit programme is that is not suitable for all types of business concerns. A small business may have few books of accounts. It is not necessary to prepare audit programming for small concerns.

10. Staff
The accounting staff can know the working of audit. The auditor applies various methods for checking the accounting books. Having knowledge of auditing the accounting staff can devise means to record the transaction. In this way they can avoid their responsibility.

11. Negligence
The demerit of audit programme is that it provides protection to inefficient audit assistant. The junior auditors can protect themselves due to weakness of audit programme. The clerks feel responsibility for the duties stated in the programme.

12. Errors
The drawback of audit programme is that it may fail to located error. The errors of principles cannot be detected, as the double entry is complete in such case. No doubt the location of errors and fraud is the responsibility of management. But owner depends upon auditors to protect their rights.
 

Fozu

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Chapter 2 - Types of Auditing


* Kinds of Auditing

* Final Audit

* Advantages of Final Audit

* Disadvantages of Final Audit

* Continuous Audit

* Advantages of Continuous Audit

* Disadvantages of Continuous Audit

Kinds of Auditing

Continuous Auditor Running Audit
Continuous auditor also known as running audit or detailed audit. In large-scale business it is not possible for the auditor to get the true and fair view about the business in a short time period. So for the purpose of finding the correct information the continuous audit is conducted. Continuous audit is the audit that is conducted throughout the year with the fixed or non-fixed period.

Interim Audit
In normal word Interim means half yearly. It is conducted usually between two annual general meetings and only one time, not in intervals.

Final Audits or Complete Audit or Balance Sheet Audit
Final audit is also called as the Balance sheet audit or the Periodical Audit. Final audit is started when the books of accounts closed at the end of the year. It is the most satisfactory form of audit from the point of view of an auditor. In this audit there is cent percent checking of the accounts. In case if the business has an effective and proper internal control system. Then the audit sampling is possible.
 

Fozu

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Objects of Verification

The object of verification of assets is the satisfaction by the auditor as to its existence, proper disclosure, proper valuation and correct ownership on the balance sheet. The following are the main objects of the verification.

1. Certify the Ownership
The object of verification is to certify the ownership. The document deeds, vouchers and agreements etc can obtain the real ownership.

2. Position of Assets
The audit by the verification of the assets in the business the assets may be mortgaged or pledged for borrowing money. The auditor has to check that the same has been written in the balance sheet in the proper way.

3. Existence of Assets
The object of the verification is to ascertain the existence of the assets. The existence of assets is stated in the proper but there may be the assets be sold, stolen or destroyed. In this case the auditor has to check the assets physically.

4. Detect Fraud
Another purpose of verification is to find out the frauds if conducted. In come cases the assets may be stole or misused. The auditor can verify the real position of assets. The responsibilities of fraud are to be the management.

5. Verify Possesssion
The purpose of verification is to check the possession of the assets. The assets should be safeguarded the assets of the business is used for the business only. The possessions of the assets are in the management.

6. True and Fair View
Another object of the verification is to determine the true and fair view about the business financial statements. After the verification it is confirmed that the financial statements are according to the requirements and is fact.

7. Depreciation Plans
Another purpose of the verification is the examination of the depreciation of assets of the business. The auditor has to check that the proper state the depreciation is charge on the assets according to the accounting principal. As the life of each assets is different, so the depreciation is charged as per rule.

8. Valuation of Assets
The object of the verification is also to check the assets valuation. Which does the management value. The auditor has to fine that the valuation is true and according to the accounting principal.

9. Valuation of Liabilities
The management determines the valuations of the liability. The object of verification is to check that the valuation is the true and according to the accounting principals.

10. Evaluation Methods
The object of the verification is to the check the methods of evaluation. To evaluate the recorded items the compliance and substantive test are applied. According to the business requirements the auditor can rely upon anyone method from above.

11. Recording Methods
The object of the verification is to determine the method of recording of the both sides of the balance sheet as the assets and liabilities. The auditor has check that all types of assets recorded separately and the depreciation is deducted and the value of asset is charged according to the rule.

12. Internal Control
To evaluate the internal control is also the object of the verification. The business management is efficient if the internal control is effective. And if the internal control is not effective the assets cannot be used properly.

13. Arithmetic Accuracy
Another object of the verification is to note down the arithmetical accuracy of the balance sheet. All the recording of the transactions, their posting of totals, sub-totals, addition and depreciation must required the calculation. The auditor has to require the accuracy of the figure work.

14. Treatment of Items
The object of the verification is to check that the different items have been treated correctly as the treatment of the taxes and discount etc.

15. Current Period
The object of verification is to check that the transactions of the business are related to the current year for which the audit work is being done.
Techniques of Verification

In the process verification following techniques are used

1. Physical Existence of Assets
Verification techniques of an asset are to check the physical existence of the asset. The auditor can count, measure and also the inspect of the various assets.

2. Proper Disclosure
It is also the techniques of the verification that the auditor has satisfied himself that the management has disclosed all the assets and the liabilities as required by law.

3. Ownership of Assets
Another technique of the verification is to determine the ownership of business. The assets must be held in the name of the business.

4. Assets in Possession
In the technique of the verification the auditor has to check the possession of the assets, which are in the custody of the management. It is in the possession of the cashier and the stock in trade is in the fold of the store officer. The auditor has to check the custody of different employees.

5. Proper Valuation of Assets
The technique is also to check the valuation of an asset. The assets may be fixed or circulating. The auditor can check the valuation of assets, which are determined by the management. In this case the arithmetical accuracy can be examined.

6. Valuation of Liabilities
Auditors should also satisfy themselves about the liabilities that these are properly valued, which are shown on the balance sheet, overstated or understated liabilities do not give a true picture about the financial position.

7. Correct Valuation
Auditor should pay special attention to this point, because profit and loss account also depends upon the accuracy of valuation of assets and liabilities. Valuation main object is that balance sheet should show a true and correct view about the financial position of a client firm.

8. Purchase By Proper Authority
Another technique of the verification is that The Auditor satisfied himself that there is a proper authorization for any acquisition or disposal or any other form of movement for the assets and liabilities which is stated in the articles and memorandum of association.

9. Business Motive
Keeping in mind the business motive, the auditor has to be satisfied himself that all the assets, which are purchased are for the business motive only and not for the use of personal requirements.

10. Charge Free
The technique of verification is the examination of charge on assets. In case of lend the loan the assets are transfered in the name of the lender the auditor has to check that the assets are free.
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