Auditing and corporate governance, Study notes of Auditing

Download Auditing and corporate governance and more Study notes Auditing in PDF only on Docsity!

DIRECTORATE OF DISTANCE AND CONTINUING

EDUCATION TIRUNELVELI-627012, TAMILNADU

B.Com – VI SEMESTER

AUDITING AND CORPORATE GOVERNANCE

III B. COM (VI SEMESTER) – UNDER CBCS

PART III – MAJOR CORE -

AUDITING AND CORPORATE GOVERNANCE

Objective: To provide knowledge of auditing principles, procedures and techniques in accordance with current legal requirements and professional standards and to give an overview of the principles of Corporate Governance and Corporate Social Responsibility Unit 1: Introduction Auditing: Introduction, Meaning, Objectives, Basic Principles and Techniques; Classification of Audit, Audit Planning, Internal Control – Internal Check and Internal Audit; Audit Procedure – Vouching and verification of Assets & Liabilities. Unit 2: Audit of Companies Audit of Limited Companies: Company Auditor- Qualifications and disqualifications, Appointment, Rotation, Removal, Remuneration, Rights and Duties Auditor’s Report- Contents and Types. Liabilities of Statutory Auditors under the Companies Act 2013 Unit 3: Special Areas of Audit Special Areas of Audit: Special features of Cost audit, Tax audit, and Management audit; Recent Trends in Auditing: Basic considerations of audit in EDP Environment; Auditing Standards; Relevant Case Studies/Problems; Unit 4: Corporate Governance Conceptual framework of Corporate Governance: Theories & Models, Broad Committees; Corporate Governance Reforms. Major Corporate Scandals in India and Abroad: Common Governance Problems Noticed in various Corporate Failures. Codes & Standards on Corporate Governance Unit 5: Corporate Social Responsibility (CSR): Concept of CSR, Corporate Philanthropy, Strategic Planning and Corporate Social Responsibility; Relationship of CSR with Corporate Sustainability; CSR and Business Ethics, CSR and Corporate Governance; CSR provisions under the Companies Act 2013; CSR Committee; CSR Models, Codes, and Standards on CSR Text Books: 1. Ravinder Kumar and Virender Sharma, Auditing Principles and Practice, PHI Learning

2. ArunaJha, Auditing.Taxmann Publication.
3. A. K. Singh, and Gupta Lovleen. Auditing Theory and Practice.Galgotia Publishing Company.

1.2 ORIGIN AND EVOLUTION

The term audit is derived from the Latin term ‗audire,‘ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them

Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances. The original objective of auditing was to detect and prevent errors and frauds

1.3 THE EVOLUTION OF AUDITING PRACTICES

The term audit is derived from the Latin term ‗audire,‘ which means to hear. In early days an auditor used to listen to the accounts read over by an accountant in order to check them Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt, Rome, U.K. and India. The Vedas contain reference to accounts and auditing. Kautilya detailed rules for accounting and auditing of public finances in his book ―Arthasashthra‖. The original objective of auditing was to detect and prevent errors and frauds. Auditing evolved and grew rapidly after the industrial revolution in the 18th century with the growth of the joint stock companies where the ownership and management became separate. The shareholders who were the owners needed a report from an independent expert on the accounts of the company managed by the Board of Directors who were the employees. The objective of audit shifted, and audit was expected to ascertain whether the accounts were true and fair rather than detection of errors and frauds. In India the Companies Act, 1913 made audit of company accounts compulsory. With the increase in the size of the companies and the volume of transactions, the main objective of audit shifted to ascertaining whether the accounts were true and fair rather than true and correct. Hence, the emphasis was not on arithmetical accuracy but on a fair representation of the financial efforts.

The Companies Act, 1913 also prescribed for the first time the qualification of auditors. The International Accounting Standards Committee and the Accounting Standards Board of the Institute of Chartered Accountants of India have developed standard accounting and auditing practices to guide the accountants and auditors in the day to day work. The later developments in auditing pertain to the use of computers in accounting and auditing.

1.4 DEVELOPMENT OF AUDITING

The origin of auditing can be traced to Italy. Around the year 1494, Luca Paciolo introduced the double entry system of bookkeeping and described the duties and responsibilities of an Auditor.

Let us now understand the growth of auditing in India. The Indian Companies Act, 1913, prescribed for the first time the qualifications of an Auditor. The Government of Bombay was the first to conduct related courses of study such as the Government Diploma in Accountancy (GDA).

The Auditor‘s Certificate Rule was passed in 1932 to maintain uniform standard in Accountancy and Auditing. The Chartered Accountant Act was enacted by the Parliament of India in 1939. The Act regulates that a person can be authorized to audit only when he qualifies in the examinations conducted by The Institute of Chartered Accountants of India.

Following are a few other points related to Auditing in India −

 Members of Institute of Cost and Works Accountant of India are authorized to conduct cost audit according to Section 233-B of the Companies Act, 1956.  Companies Act 1931 was replaced by Companies Act 1956.  An Auditor can be appointed only by a special resolution as per section 224 The Companies (amendment) Act, 1974.

―Auditing is the systematic examination of financial statements, records and related operations to determine adherence to generally accepted accounting principles, management policies and stated requirement.‖ -R.E.Schlosser

Montgomery defines the term as ―Auditing is a systematic examination of books and records of a business or other organization in order to ascertain or verify and to report upon the facts regarding its financial operations and the result thereof‖. The Institute of Chartered Accountants of India (ICAI) is regulating the accountancy profession in India established under the Chartered Accountants Act, 1949 passed by the Parliament of India.

1.6 Objectives of Auditing

The objective of an audit is to express an opinion on financial statements. The auditor has to verify the financial statements and books of accounts to certify the truth and fairness of the financial position and operating results of the business. Therefore, the objectives of audit are categorized as primary or main objectives and secondary objectives.

Primary Objectives:

The primary or main objective of audit is as follows:

To Examine the Accuracy of the Books of Accounts

Books of Accounts mean the financial records maintained by a business concern for a period of one year. The period of one year can be either calendar year i.e., from 1st January to 31st December or financial year i.e., from 1st April to 31st March. Usually, business concerns adopt financial year for accounting all business transactions.Books of accounts include the following: ledgers, subsidiary books, cash and other account books either in the written form or through print outs or through electronic storage devices.

An auditor has to examine the accuracy of the books of accounts, vouchers and other records to certify that Profit and Loss Account discloses a true and fair view of profit or loss for the financial period and the Balance Sheet on a given date is properly drawn up to exhibit a true and fair view of the state of affairs of the business. Therefore the auditor should undertake the following steps:

 Verify the arithmetical accuracy of the books of accounts.  Verify the existence and value of assets and liabilities of the companies.  Verify whether all the statutory requirements on maintaining the book of accounts has been complied with.

To Express Opinion on Financial Statements

Financial Statement means the statements prepared at the end of the year taking into account the business activities that took place for a year, for example, transactions that takes place

accounts or committing mistakes in the process of keeping accounting records. Errors which take place in the books of accounts and the duty of an auditor to locate such errors are discussed below:

CLERICAL ERROR

Errors that are committed in posting, totalling and balancing of accounts are called as Clerical Errors. These errors may or may not affect the agreement of the Trial Balance.

Types of Clerical Errors:

(A) Errors of Omission: When a transaction is not recorded or partially recorded in the books of account is known as Errors of Omission. Usually, it arises due to the mistake of clerks. Error of omission can occur due to complete omission or partial omission.

(1) Error of Complete Omission: When a transaction is totally or completely omitted to be recorded in the books it is called as ―Error of Complete Omission‖. It will not affect the agreement of the Trial Balance and hence it is difficult to detect such errors.

Example – 1 : Goods purchased on credit from Mr. X on 10.5.2016 for Rs. 20,500, not recorded in Purchases Book.

Example – 2 : Goods sold for cash to Ram for Rs. 10,000 on 1.7.2016, not recorded in Cash Book.

(2) Errors of Partial Omission: When a transaction is partly recorded, it is called as ―Error of Partial Omission‖. Such kind of errors can be detected easily as it will affect the agreement of the Trial Balance.

Example – 1 : Credit purchase from Mr.C for Rs. 45,000 on 10.12.2016, is entered in the Purchases Book but not posted in Mr.C‘s account. Example – 2 : Cash book total of Rs. 1,10,100 in Page 5 is not carried forward to next page. (B) Errors of Commission: Errors which are not supposed to be committed or done by carelessness is called as Error of Commission. Such errors arise in the following ways:

(1) Error of Recording, (2) Error of Posting, (3) Error of casting, or Error of Carry-forward. (1) Error of Recording : The error arises when any transaction is incorrectly recorded in the books of original entry. This error does not affect the Trial Balance.

Example – 1 : Goods purchased from Shyam for Rs. 1000 wrongly recorded in Purchases Day Book as Rs. 100.

Example – 2 : Goods purchased from Ram for Rs. 1,000, instead of entering in Purchase Day Book wrongly entered in Sales Day Book.

(2) Error of Posting : The error arises when a transaction is correctly journalised but wrongly posted in ledger account.

Differences Between Accountancy and Auditing

Features (or) Characteristics of Auditing

 It is a systematic and independent examination of financial information

of a concern.

 Its main motive is to detect errors and frauds in the books of accounts

and financial statement.

 It is conducted either by independent or body of persons who possess in

depth knowledge and extensive practical training.

 It ensures the correctness of Trading, Profit and Loss Account and

Balance

  Sheet whether it reflects a true and fair view of the state of affairs of

the business.

 It further ensures that the financial statements follow the accounting

standards.

BASIC PRINCIPLES OF AUDITING

We know that audits are crucial to any organization. They help to examine the records of a business and to ensure that such accounting records are reliable and free of errors and fraud. But to be able to perform audits in an effective and fruitful manner, the auditors must abide by certain basic principles of auditing. Auditors need to adopt high standards of professionalism, independence, and care while carrying out their duties. It is only when an auditor exercises reasonable care and skill, that the conclusions drawn by him shall be considered to be fair. Auditing and Assurance Standards (SAs) and guidance notes issued by the Institute of Chartered Accountants of India (ICAI) dictate the principles & guidelines to be adopted by audit firms to ensure the accuracy and verifiability of auditors‘ actions and reports. The basic principles governing an audit are described below: 1) Integrity, objectivity, and independence: An auditor must be truthful, sincere, independent, and free of any bias. He should be a person of high integrity and objectivity. He should maintain impartiality at all times and should not come under any influence while performing audit work. In honest, the case that of is, London he must & notGeneral certify Bank what (1895), he does Lord not Justicebelieve Lindley to be true said and that must “an takeauditor reasonable must be care and skill before he believes that what he certifies is true”. 2) Confidentiality: The auditor must maintain the confidentiality of information obtained during the course of his work and must not disclose it without the client‘s prior permission unless there is a legal obligation to do so.

3) Skill and competence: Adequate training and experience are necessary for the auditor to carry out his work. He should be knowledgeable, skilled, and up to date with the latest developments on accounting and auditing issues, including the pronouncements of ICAI. In addition, an auditor should be well-versed in a variety of related disciplines such as accounting, economics, mathematics, and so on. The auditor must also be familiar with the general principles of the law that governs the auditee‘s enterprise. For example, while auditing a company, the knowledge of the Companies Act, 2013 is required. Similarly, if an enterprise is governed by a

Based on the audit evidence, the auditor should study and evaluate the audit conclusions. He should check to see if accounting policies have been regularly followed by the company and if financial information complies with regulatory and statutory requirements. He should also ensure that all material matters relevant to the presentation and preparation of financial information are adequately disclosed as per legislative requirements. The auditor‘s report should include a clear written opinion on the financial information. A clean audit report reflects the auditor‘s satisfaction in all aspects, and where a qualified, adverse, or disclaimer of opinion is to be issued or a reservation of opinion on any matter is to be made, the audit report should specify the grounds for doing so. CLASSIFICATION OF AUDIT According to the Organization of Business

1. Statutory Audit: A statutory audit is a legally required review of the accuracy of a company's or government's financial statements and records. The purpose of a statutory audit is to determine whether an organization provides a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records, and financial transactions.
2. Private Audit: Private companies, ranging from family businesses to global, publicly trading corporations, are not part of the government. Their profits are designated at the operators‘ prerogative, often for good old capitalist gain, and companies‘ objectives can differ vastly. According to the Ownership of Business
3. Audit of Companies:

accountant who is professionally qualified is required for the audit of accounts of companies.^ Under companies Act, audit of accounts of^ companies in India is compulsory. Chartered Companies Act 1913 for the first time made it compulsory for joint stock companies to get their accounts audited from a qualified accountant. A number of amendments have been made in companies Act, 1956 and 2013 regarding appointment, duties, qualification, power and liabilities of a qualified auditor.

2. Audit of Trusts: The beneficiaries of the trusts may not have access and knowledge of accounts of the trust. The trustees are appointed to manage and look after the property and business of the trust. Accounts of the trust are maintained as per the conditions and terms of the trust deed. The income of the trust is dis appropriation of incomes. In the trust deed as well as in the Public Trust Act which provide fortributed to the beneficiaries. There are more chances of frauds and mis-

compulsory audit of the accounts of the trust by a qualified auditor. The audited accounts of the trust ensure true and fair view of accounts of the trust.

3. Audit of Accounts of Co-operative Societies: Co-Operative societies are established under the Co-Operative Societies Act, 1912. It contains various provisions for the regulations and the working of these societies. Some of the states have adopted it without any change, while others have brought certain changes to it. The auditor of the Co which Co-operative-operative Society should have an expert knowledge of the particular act under society under audit is functioning. He should also study by-laws of the society and make sure that the amendments made from time to time in the by-laws have been duly registered in the Registrar‘s Office. Companies Act is not applicable to the co-operative Societies. The Registrar of co-operative societies shall audit or cause to be audited by some person authorized by him, the accounts of the society once in every financial year.
4. Audit of Government Offices: Audit of government offices and departments is covered under this heading. A separate department is maintained by government of India known as Accounts and Audit Department. This department is headed by the Comptroller and Auditor General of India. This department works only for the government of government concerns. Its working is strictly according to government rules and regulations.fices and departments. This department cannot undertake audit of non-
5. Audit of Proprietorship: In case of proprietary concerns, the owner himself takes the decision to get the accounts audited. Sole trader will decide about the scope of audit and appointment of auditor. The auditing work will depend upon the agreement with auditor and the specific instructions given by the proprietor.
6. Audit of Partnership: To avoid any misunderstanding and doubt, partnership audits their accounts. Partnership deed on mutual agreement between the partners may provide for audit of financial statements. Auditor is appointed by the mutual consent of all the partners. Rights, du auditor are defined in the mutual agreement and can be modified by the partners.ties and liabilities of
7. Audit of Individuals: An Individual such as estate managers, rent collectors, investors, etc. who engaged in business/ or profession is required to maintain books of account and to get them audited and obtain and furnish Tax Audit Report of the Income Tax Act (1961) from a Chartered Accountant if the sale, gross receipts or turnover etc. exceeds prescribed limit. According to the Time of Audit
8. Interim Audit:

Cost Audit is the verification of the correctness of cost accounts and adherence to the cost accounting plans. Cost Audit is the detailed checking of costing system, techniques and accounts to verifying correctness and to ensure adherence to the objectives of cost accounting.

4. Secretarial Audit: Secretarial Audit is concerned with verification compliance by the company of various provisions of Companies Act and other relevant laws. Secretarial audit report includes a) Whether the books are maintained as per companies act, 2013. b) Whether necessary approvals as required from central Government, Company law board or other authorities were obtained.
5. Independent Audit: Is conducted by the independent qualified auditor. The purpose of independent audit is to see whether financial statements give true and fair view of financial position and profits. Mainly it is for safeguarding the interest of owners, shareholders and other parties who do not have knowledge of day-to-day operations of organization.
   6. Tax Audit: Now-a-days tax audit has become very important to ascertain the accuracy of tax related documents. Tax audit mostly covers income returns, invoices, debit and credit notes and various current and fixed assets. Tax audit is an innovation of 21st century. It has added one more chapter to the practice of auditing. Tax audit ensures the validity and credibility of tax related documents.

AUDIT PLANNING

Introduction An audit is a professional service to a client. The review of accounting, financial and other operations form a basis of such service. Before commencing audit, an auditor must prepare himself well. Preparation for an audit relates to audit planning, preliminary preparations by the auditor, audit programme, audit note book, audit working papers, audit evidence, commencement of a new audit, test checking, and routine checking. Meaning of Audit Planning An audit plan is a detailed strategy that sets the nature, timing, scope, and boundaries for the auditor to carry out the entire audit procedure.An audit plan contains the nature, timing, and extent of audit procedures (including risk assessment procedures) to be performed by engagement team members to obtain sufficient appropriate audit evidence. Planning the audit includes establishing the overall audit strategy for the engagement and developing an audit plan, which includes, in particular, planned risk assessment procedures and responses to material misstatement risks. Planning is not a discrete phase of an audit but a continual and iterative process that might begin shortly after (or in connection with) the completion of the previous audit. It continues until the completion of the current audit. A good plan and actual control of the work as per the plan will prove to be valuable evidence that the audit has been carried out according to generally accepted auditing practices if the plan and controls exercised are adequately documented. Audit control seeks to ensure that the work is carried out as intended. The auditor exercises control over the quality of the audit by effectively supervising the work of his assistants, coordinating work performed by others, and adequately documenting the audit matters.

The auditor should develop and document an audit plan that includes a description of:

1. The planned nature, timing, and extent of the risk assessment procedures;
2. The planned nature, timing, and extent of tests of controls and substantive procedures; and
3. Other planned audit procedures must be performed so that the engagement complies with PCAOB standards. Role and Timing of Planning Adequate planning benefits the audit of financial statements in several ways, including the following:
4. Helping the auditor to devote appropriate attention to important areas of the audit.
5. 3. Helping the auditor identify and resolve potential problems on a timely basis.Helping the auditor organize and manage the audit engagement is performed effectively and efficiently.