Course: Auditing (481)

Semester: Spring 2021

Level: B.A/B.Com , AD/ BS
ASSIGNMENT No.1

Q. 1 Define auditing and describe its various techniques?

Answer:

Auditing typically refers to financial statement audits or an objective examination and

evaluation of a company’s financial statements – usually performed by an external third
party.

Audits can be performed by internal parties and a government entity, such as the Internal
Revenue Service (IRS).

Importance of Auditing

Audit is an important term used in accounting that describes the examination and
verification of a company’s financial records. It is to ensure that financial information is
represented fairly and accurately.

Also, audits are performed to ensure that financial statements are prepared in accordance
with the relevant accounting standards. The three primary financial statements are:

1. Income statement

2. Balance sheet

3. Cash flow statement

Financial statements are prepared internally by management utilizing relevant accounting

standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted

Accounting Principles (GAAP). They are developed to provide useful information to the

following users:

 Shareholders

 Creditors

 Government entities
  Customers

 Suppliers

 Partners

Financial statements capture the operating, investing, and financing activities of a company
through various recorded transactions. Because the financial statements are developed

internally, there is a high risk of fraudulent behavior by the preparers of the statements.

Without proper regulations and standards, preparers can easily misrepresent their financial
positioning to make the company appear more profitable or successful than they actually
are.

Auditing is crucial to ensure that companies represent their financial positioning fairly and
accurately and in accordance with accounting standards.

Types of Audits

There are three main types of audits:

1. Internal audits

Internal audits are performed by the employees of a company or organization. These audits

are not distributed outside the company. Instead, they are prepared for the use of
management and other internal stakeholders.

Internal audits are used to improve decision-making within a company by providing

managers with actionable items to improve internal controls. They also ensure compliance
with laws and regulations and maintain timely, fair, and accurate financial reporting.

Management teams can also utilize internal audits to identify flaws or inefficiencies within
the company before allowing external auditors to review the financial statements.

2. External audits

Performed by external organizations and third parties, external audits provide an unbiased
opinion that internal auditors might not be able to give. External financial audits are utilized

to determine any material misstatements or errors in a company’s financial statements.

When an auditor provides an unqualified opinion or clean opinion, it reflects that the
auditor provides confidence that the financial statements are represented with accuracy and
completeness.

External audits are important for allowing various stakeholders to confidently make
decisions surrounding the company being audited.

The key difference between an external auditor and an internal auditor is that an external
auditor is independent. It means that they are able to provide a more unbiased opinion
rather than an internal auditor, whose independence may be compromised due to the
employer-employee relationship.

There are many well-established accounting firms that typically complete external audits for
various corporations. The most well-known are the Big Four – Deloitte, KPMG, Ernst &

Young (EY), and PricewaterhouseCoopers (PwC).

3. Government audits

Government audits are performed to ensure that financial statements have been prepared
accurately to not misrepresent the amount of taxable income of a company.

Within the U.S., the Internal Revenue Services (IRS) performs audits that verify the accuracy
of a taxpayer’s tax returns and transactions. The IRS’s Canadian counterpart is known as the
Canada Revenue Agency (CRA).

Audit selections are made to ensure that companies are not misrepresenting their taxable
income. Misstating taxable income, whether intentional or not, is considered tax fraud. The
IRS and CRA now use statistical formulas and machine learning to find taxpayers at high risk

of committing tax fraud.

Performing a government audit may result in a conclusion that there is:

1. No change in the tax return

2. A change that is accepted by the taxpayer

3. A change that is not accepted by the taxpayer

If a taxpayer ends up not accepting a change, the issue will go through a legal process of
mediation or appeal.

Various techniques:

Evidences are very important for an Auditor to form an opinion regarding financial
statements. If Auditor fails to collect proper evidence, it will reduce the reliability of audit

report. The method of collecting evidence is called audit technique. Following are a few
important audit techniques −

Vouching

When the Auditor verifies accounting transactions with documentary evidence, it is called
vouching. Through vouching, the Auditor verifies authority and authenticity of records.

Confirmation

Confirmation is a technique used by an Auditor to validate the correctness of the

transactions; for example, an Auditor obtains written statement directly from debtors to

confirm the debtors balance as appeared in the books of client.

Reconciliation

Reconciliation is a technique used by an Auditor to know the reason of differences in

balances. For example, to know the difference in the bank book of the client and the bank
balance as appeared in the bank statement or pass book, the Auditor prepares the
reconciliation statement. The same method may be used for debtors, creditors, etc.

Testing

Testing is a technique of selecting representative transactions out of whole accounting data

to draw a conclusion about all items.

Physical Examination

Physical examination requires verification and confirmation of the physical existence of

tangible assets as appears in the Balance Sheet like cash in hand, land and building, plant

and machinery, etc.

Analysis

Analysis is technique used by an Auditor to segregate important facts and to further study
their relationship.

Scanning

By scanning of books of accounts, an experienced Auditor can identify those entries which

would require his attention. It is also called scrutiny of accounts.

Inquiry

This method is used to collect in-depth information about any transaction.

Verification of Posting

To verify posting from books of original entry to ledger account and confirm the balance, an
Auditor is required to verify the postings; for example, to verify a sale book, an Auditor may
verify postings from the sale register to the sale ledger. He may further calculate balances of
the sale register and the sale book.

Flow Chart

The Flow Chart technique is used by an Auditor to determine the stages of transaction and

the generation of documents at all levels of transactions.

Observations

Through observation, an Auditor get an idea about reliability of the process and the
procedure of an organization.

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Q. 2 What do you know about audit program? Describe the characteristics of an

audit program?

Answer:

An audit program is a set of directions that the auditor and its team members need to
follow for the proper execution of the audit. After preparing an audit plan, the auditor
allocates the work and prepares a program which contains steps that the audit team needs
to follow while conducting an audit. Thus, an auditor prepares a program that contains
detailed information about various steps and audit procedures to be followed by the audit.

An audit program, also called an audit plan, is an action plan that documents what

procedures an auditor will follow to validate that an organization is in conformance

with compliance regulations.

The goal of an audit program is to create a framework that is detailed enough for any
outside auditor to understand what official examinations have been completed, what
conclusions have been reached and what the reasoning is behind each
conclusion. The framework should explain the audit's objectives, its scope and its timeline.
The audit program should also describe how working papers -- the documented evidence
of the audit -- will be collected, reviewed and reported.

Objectives of audit programs

When developing an audit program, the internal auditor and its associated audit team

should start with outlining the audit's objectives, goals and obligations.

Audit program objectives help direct planning of the audit report and are based on the
policies, procedures and guidelines unique to the company. These objectives may relate to
and outline how the auditors will maintain efficiency, professionalism and a specific code of
conduct during audit procedure.

In addition to relevant regulatory compliance mandates, objectives for audit programs

should consider aspects such as management priorities, business intentions, system
requirements, business structure, legal and contractual mandates, the expectations of

customers and other interested parties, potential risk management vulnerabilities, and any
corrective action taken based on previous audits.

Advantages of the Audit Programme

1. An audit program helps in ensuring that all-important areas are considered while
conducting the audit.
 2. An audit program helps an auditor in the allocation of work among its team
members according to their skills and competency.

3. It enhances the accountability of audit team members towards work performed by

them

4. An audit program also reduces the scope for misunderstanding among team

members regarding the performance of audit work.

5. It helps the auditor in checking the status of audit work, its progress, how much it is
left for performance while conducting the audit.

6. Auditor prepares audit working papers which contains a record of various audit
procedure applied which serves as evidence against the charge of negligence.

7. Audit program enables the auditor to keep a record of useful information specifically
for future audit and references.

Disadvantages of Audit Programme

1. Rigidity: There is no set standard audit program that can be applied in the case of
every entity. However, programs differ for different types of entities. Every entity has

its own problems. Therefore, we cannot apply for a single audit program in the case
of all business entities.

2. Reduces the Initiative of Efficient Staff: – A program reduces the initiatives of

efficient and competent staff. Thus, staff members cannot make changes in the audit
plan and cannot make suggestions to it.

3. Audit Work becomes Mechanical: The program becomes mechanical when it

ignores other aspects like internal control.

4. Overlooking New Areas: A program may overlook the new areas. With the change

in time and technology, new problems may arise which an audit program may not
consider.

Characteristics of an audit program:

The essential features of Auditing are explained below;

 1. Systematic process

Auditing is a systematic and scientific process that follows a sequence of activities,

which are logical, structured, and organized.

2. Three-party relationship

The audit process involves three parties, that is, shareholders, managers, and auditors.

3. Subject matter

Auditors give assurance on a specific subject matter. However, the subject matter may differ

considerably, such as – data, systems or processes and behavior.

4. Evidence

The auditing process requires collecting the evidence, that is, financial and non-financial
data, and examining thereof.

5. Established criteria

The evidence must be evaluated regarding established criteria, which include International
Accounting Standards, International Financial Reporting Standards, Generally Accepted
Accounting Principles, industry practices, etc.

6. Opinion

The auditor has to express an opinion as to the reasonable assurance on the financial

statements of the entity.

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Q. 3 Define vouching, also explain the techniques and objectives of vouching?

Answer:

Vouching is the act of reviewing documentary evidence to see if it properly supports entries
made in the accounting records. For example, an auditor is engaged in vouching when
examining a shipping document to see if it supports the amount of a sale recorded in the
sales journal. Vouching can work in two directions. For example, an auditor can trace actual
inventory items back to the accounting records to see if the items are properly documented,
or start with the inventory records and trace back to the warehouse shelves to see if the
inventory exists.

When engaged in vouching, an auditor is looking for any errors in the amount recorded in

the accounting records, as well as ensuring that the transactions are recorded in the correct
accounts. The auditor is also verifying that transactions have been properly authorized.

When vouching uncovers an error, the auditor may need to increase the sample size being
audited in order to gain assurance that a system operates properly. An alternative is to
engage in different auditing procedures.

Principles or Techniques of Vouching:

At the time of vouching auditor should keep in view the following important principles in
his mind :

1. Arranged Vouchers:

First of all auditor should check all the vouchers provided by the client are properly

arranged. These are in the same order as the entries are made in the books.

2. Checking Of Date:

The auditor should compare the date of the voucher with he date recorded in the cash
book.

3. Compare The Words And Figures :

The auditor should satisfy himself amount written numbered consecutively. All the vouchers
should be properly filed. On the vouchers, its figures and words are same or not.

4. Checking Of Authority:

The auditor should examine that all the vouchers are passed by the authorized officer. If the
voucher is passed by unauthorized person it will not be correct.

5. Cutting Or Change:

If there is any cutting or change on the receipts and vouchers figures it should be signed by

the authorized officer. The auditor should satisfy himself by inquiring about it.
6. Transaction Must Relate To Business:

The auditor should carefully examine that the entries must relate to the business.

7. Case Of Personal Vouchers:

The auditor should not accept the voucher in personal name. There is a chance that an
officer of the company has purchased any item in his personal capacity.

8. Checking Of Account Head:

Auditor must be satisfied about the head of account on which cash is deposited and drawn.

He should examine the documentary evidence in this regard.

9. Revenue Stamp:

The auditor should also check that voucher bears a required revenue stamp or not?

10. Case Of Cancelled Voucher:

The auditor should not accept the cancelled voucher. Because it has already served the
purpose of payment. There will be a danger of double payment if it is accepted.

Objectives:

Main objective of vouching is to find out the regularity or irregularity of transactions, frauds
and errors. Regularity means maintaining record and performing the work compliance with
the rules, regulation and law. But irregularity means doing the work crossing to the line of

rules, regulation and laws. Some of the major objectives of vouching are given below:

1. To Detect Errors And Frauds

All transactions are to be supported by evidence. Each document should be proved

by authorized authority. With the help of vouching we can detect errors and frauds by
verifying each transaction. Planned fraud can be detected through vouching.

2. To Know The Truth Of Account

Each and every transaction is checked and ratified on the basis of support document. So, we
can easily know the truth of account.
3. To Find The Unrecorded Transactions

Each and every transaction is checked and ratified on the basis of document. Vouching
helps to find out the unrecorded or missing transactions. If any voucher is found

unrecorded, auditor can suggest to record such transactions.

4. To Know That All The Transactions Are Authorized

If the transactions are made on the consent of concerned authority, such transactions are
known as authorized transactions. If transactions are not authorized, such transactions can
be fictitious transactions. So, such fictitious transactions ca be found with the help of
vouching.

5. To Know That Only The Business Transactions Are Recorded

Sometimes, transactions are performed for individual purpose but payment is made out of
business. Such transactions should not be recorded in account of business. If such
transactions are recorded, we can find it with the help of vouching. To know the real profit

or loss of business, such transactions are to be separated.

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Q. 4 Differentiate internal control, internal check, and internal audit. Also, explain
the major responsibilities of an internal auditor?

Answer:

An internal check is the splitting of work tasks so that one person is not accountable for
every step in a transaction. The splitting of tasks allows for the confirmation of work by a
second person, thereby reducing the risk of fraud. Auditor employed by individual
companies, partnership, Govt., agencies, individual and other entities are called internal
auditors. These auditors may review employee performance, compliance with company

regulations and financial and accounting systems. Internal control is an efficient system of
control is established by the management in the conduct of mousiness including internal
cheek, internal audit, and other forms of control.

Internal Check
  Definition: Internal Check is an arrangement of staff duties of a business in such a
way that work is automatically checked by the next staff while performing their
duties.

 Relationship: Internal check is a part of internal control.

 Objective: Internal Check is a system or method introduced with defined instructions

given to staff as to their sphere of work with a view to controlling and verification of
their work and also maintenance of accurate records as the ultimate aim.

Internal Audit

 Definition: An internal audit is conducted by the permanent staff of the office to

detect weakness in system, procedures and for the improvement

 Relationship: Internal audit is an independent audit performance.

 Objective: It helps an organization accomplish its objectives by bringing a

systematic, disciplined approach to evaluate and improve the effectiveness of risk

management, control, and governance processes.

Internal Control

 Definition: A sufficient understanding of the internal control structure is to be

obtained to plan the audit and to determine the nature, timing, and extent of tests to
be performed.

 Relationship: Internal control is a part of the internal audit.

 Objective: It as a process affected by an organization’s structure, work and authority

flow, people and management information systems, designed to help the
organization accomplish specific goals or objective.

Major responsibilities of an internal auditor:

There are also several differences between an internal auditor and an external auditor, for
example:
  Internal auditors are generally internal company employees while external auditors
are always a third-party to the organization and their clients.

 Internal auditors generally do not perform a single comprehensive annual audit, but

rather conduct a number of smaller focused internal audits throughout the year.

 Internal auditors generate reports for the use of management, while external audit

reports are prepared for use by external entities (e.g., investors, clients, lenders, and
other stakeholders).

 Internal auditors can also serve as internal consultants. Whereas external auditors are
prohibited from providing attestation and consultative services to the same
organization.

The Duties of an Internal Auditor

What are the duties of an internal auditor? That depends on the company, the particular
role of an internal auditor, and what they are auditing… but at a very high level you can

expect an internal auditor to:

 Objectively assess a company’s IT and/or business processes

 Assess the company’s risks and the efficacy of its risk management efforts

 Ensure that the organization is complying with relevant laws and statutes

 Evaluate internal control and make recommendations on how to improve

 Identifying shortfalls or gaps in processes

 Promote ethics and help identify improper conduct

 Assure safeguards

 Investigate fraud

 Communicate the findings and recommendations

 Provide an opinion (Unqualified, qualified, adverse, or disclaim)

How Can an Internal Auditor be Impartial and Objective?

An internal auditor must remain objective and impartial when conducting internal audits.
This may be difficult at times with internal politics or biases that can impair an internal
auditor or auditing team’s objectivity. When this occurs, it limits the team’s effectiveness

and reduces their value to the company. An organization can reduce this risk by making
sure internal auditing does not audit their own work. Internal audit should not report to an
individual or group that they are auditing. The internal audit function should report to the
organization’s audit committee or a board member who has oversight authority. While
internal auditors strive to remain impartial, organizational leadership must realize that
internal auditors need to remain impartial. Accordingly, leadership should strive to not

influence or push internal audits into a particular conclusion. For example, leadership should
not impose assumptions on an internal audit in order to come to manipulate a conclusion.

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Q. 5 Differentiate accounting from auditing. Describe the desired qualities of an

auditor?

Answer:

Accounting and Auditing are two very important processes related to the financial activities
and records of an organization.

Definition of Accounting:

Accounting refers to the process of capturing, classifying, summarizing, analyzing and

presenting the financial transactions, records, statements, profitability and financial position
of an organization or entity. Accounting is the specialized language of business.

Accounting work for an organization is done usually by its own employees. Accounting is
carried out almost continuously. Accounting is categorized in various branches like cost
accounting, management accounting, financial accounting, etc.

Definition of Auditing:
Auditing refers to the critical examination of the financial records or statements of a
business or an organization. It is obligatory for all separate legal entities. Auditing is carried
out after the final preparation of the financial statements and accounts.

Auditing involves carrying out the inspection and statutory audit of the financial statements,
and giving a fair and unbiased opinion on whether the financial statements and records
provide a true and fair reflection of the actual financial position of the firm. The auditors,
usually external, carry out the task of auditing under the provisions of the applicable laws on
behalf of shareholders or regulators. The scope of auditing work is determined by the
applicable laws.

Auditing has two main categories viz. internal audit and external audit. Internal audit is
conducted by an internal auditor, usually an employee of the organization. External audit is

conducted by an external auditor, appointed by the shareholders.

Similarities between Accounting and Auditing:

Many of the basic processes of both accounting and auditing are similar. Both need a
thorough knowledge of accounting basics and principles. Both are generally done by the
persons with an accounting degree. Both use essential procedures and techniques of book-
keeping, computation and analysis.

Both accounting and auditing strive to ensure that the financial statements and records
provide a fair reflection of the actual financial position of an organization.

Difference between Accounting and Auditing:

In terms of

 Definition:

Accounting is keeping records of the financial transactions and preparing financial

statements; but auditing is critical examination of the financial statements to give an

opinion on their fairness.

 Timing:
Accounting is carried out on continuous basis with daily recording of financial transactions;
while auditing is basically a periodic process and carried out after the preparation of final
accounts and financial statements, usually on yearly basis.

 Beginning:

Accounting starts usually where book-keeping ends; while auditing always starts where

accounting ends.

 Period:

Accounting mainly concentrates on the current financial transactions and activities; while
auditing concentrates on the past financial statements.

 Coverage:

Accounting covers all transactions, records and statements having financial implications;
while auditing mainly covers final financial statements and records.

 Level of Detail:

Accounting is very detailed and captures all details related to financial transactions, records
and statements; while auditing generally uses financial statements and records on sample

basis.

 Type of Checking:

Accounting involves checking and verifying details related with all financial statements and
records; while auditing may be carried out through test checking or sample checking.

 Focus:

The primary focus of accounting is to accurately record and present all financial transactions
and statements; while the primary focus of auditing is to verify the accuracy and reliability of
the financial statements, and to judge whether the financial statements provide a true
picture of the actual financial position of the entity.

 Objective:
Objective of accounting is to determine the financial position, profitability and performance;
while objective of auditing is to add credibility to the financial statements and reports of the
company.

 Legal Status:

Accounting is governed by Accounting Standards with some degree of discretion; but

auditing is governed by Standards on Auditing and does not provide much flexibility.

 Performed by:

accounting is performed by accountants; while auditing is performed generally by qualified

auditors.

 Status:

Accounting is usually carried out by an internal employee of the company; but auditing is
carried out by an external person or independent agency.

 Appointment:

Accountant is appointed by the management of the company; while the auditor is

appointed by the shareholders of the company, or a regulator.

 Qualification:

Any specific qualification is not compulsory for an accountant; but some specific

qualification is compulsory for an auditor.

 Remuneration Type:

Accounting is carried out by a company employee who gets a salary; while a specific
auditing fee is paid to the auditor.

 Remuneration Fixation:

Accountant’s remuneration, i.e., salary is fixed by the management; while auditor’s fee is
fixed by the shareholders.

 Scope Determination:
The scope of accounting is determined by the management of the company; while the
scope of auditing is determined by the relevant laws or regulations.

 Necessity:

Accounting is necessary for all organizations in the day-to-day or routine operations; while
auditing is not necessary in the day-to-day operations.

 Deliverables:

Accounting prepares financial statements e.g. Income Statement or P/L, Balance Sheet, Cash
Flow Statement, etc.; while auditing provides Audit Report.

 Report Submission:

Accounts are submitted to the management of the organization; while audit report is
submitted to the shareholders.

 Guidance:

Accountants may make suggestions for the improvement of accounting and related
activities to the management; whereas auditor usually does not make suggestions, except in
some cases with specific requirements, e.g. improvement in internal controls.

 Liability:

Accountant’s liability generally ends with the preparation of the accounts; while auditor has

liability after preparation and submission of the audit report.

 Shareholders’ Meetings:

Accountant does not attend the shareholders’ meeting; while an auditor may attend the
shareholders’ meeting.

 Professional Misconduct:

An Accountant is not usually prosecuted for professional misconduct; whereas an auditor

can be prosecuted for professional misconduct as per the applicable legal procedure.

 Removal:
Accountant can be removed by the management; while an auditor can be removed by the
shareholders.

Qualities of an auditor:

The work of an auditor is to check the financial records of a company and ensure all cash
related operations are running smoothly. Auditing can be done by an internal auditor,

external or independent auditor. The internal auditor is an employee of the company who
on a regular basis checks cash activities in the firm. An independent auditor works for a
company he does not have any personal attachment. Here are five characteristics of an
auditor that are vital in the trade.

1. Have the Required Experience

Certifications are key academic qualifications for an auditor. An auditor should have the
required knowledge on accounting, business and taxation law. It is also necessary that he or
she has computer operation skills because most of the operations will require one.

Knowledge of management systems will also be an added advantage. Skills are not enough
because experience is what makes one knowledgeable in the field. The more audits he has
completed, the sharper he gets in the field.

2. Ability to Make Independent Decisions

An auditor’s decision should not be wavered or influenced by anyone. Their actions,

decisions, and reports should be as a result of careful analysis of the company’s operations.
They should not have any personal interests or favoritism. Even when he or she has to
unearth sensitive information, they should do this and table the results confidently without

fear. When some findings are not clear, they should not settle until they gets to the bottom
of the issue. Where they need to ask questions or have points clarified, they can face the
authorities without shame. This is a key characteristic of an auditor.

3. Auditors Have the Ability to Understand Different Business Needs

Another characteristic of an auditor is the ability to work with different company setups. To
come up with a successful audit, they must first understand what the business entails. An
auditor can quickly analyze a company set up and find a working strategy no matter how
big the organization is. If they have people working under them, their organization skills
help them to work smoothly and lead their team confidently.

4. Dependable

Can the auditor keep to the designated schedule? Can they attend meetings on time and
offer prompt feedback on the work progress? These are important auditor characteristics to

look for. The work of the auditor may affect some inside operations, therefore, following the
set guidelines and ensuring the work is complete on time is important. On the same note,
an auditor should be trustworthy and decisive. They should not share company information
with third parties. Sometimes, auditors come across sensitive information. They should only
disclose this to the concerned parties.

5. Effective Communication Skills

An auditor cannot be effective if they have not mastered excellent communication skills.
They should be assertive and at the same time have people skills. They can be a skilled

auditor when it comes to compiling reports, but if they cannot convincingly communicate
when called upon to present their work, the effort will be futile. They should be patient and
have skills to elaborate points to the satisfaction of the auditee.

Also, their goal should not only be to compile reports for their auditee, but they should also
strive to solve some of the business problems they might be facing. They can do this by
offering suggestions and recommendations.

The work of an auditor sometimes is complex and demanding, but these qualities can help
you deliver quality work that is not biased or compromised. If you have an interest in

accounting, business and taxation laws, learning how to become a dependable auditor
becomes easier. Also, a strong character will ensure you remain competitive and your skills
highly sort in the market.

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