Auditing लेखापरीक्षण

Quick summary

Auditing (लेखापरीक्षण) is an independent examination of the books, accounts and vouchers of a business to give an opinion on whether the financial statements show a true and fair view. This topic covers the meaning, objectives, advantages, limitations and basic principles of auditing.

Key points

• The word audit comes from the Latin "audire", meaning to hear. In the past, accounts were read aloud to the auditor.
• Spicer and Pegler: auditing is an examination of books, accounts and vouchers to report whether the balance sheet and P&L show a true and fair view.
• Accounting ends where auditing begins: the accountant prepares, the auditor examines.
• Primary objective: to express an opinion on whether the financial statements give a true and fair view (SA 200).
• Secondary objectives: detection and prevention of errors and frauds.
• Types of errors: errors of omission, commission, principle, and compensating errors.
• Frauds: misappropriation of cash or goods, and manipulation (window dressing) of accounts.
• Auditing is done according to Standards on Auditing (SAs) issued by the ICAI (Institute of Chartered Accountants of India).
• The auditor is "a watchdog, not a bloodhound" (Kingston Cotton Mill case, 1896): he must be careful but is not expected to suspect everything.
• Limitations: test checking, dependence on management's explanations, judgement-based opinion, cost and time limits.

Important terms

• True and fair view – accounts are free from material misstatement and follow accepted principles.
• Audit evidence – information used by the auditor to reach a conclusion (SA 500).
• Test checking – checking a sample of entries instead of all entries.
• Materiality – an item is material if its misstatement could change users' decisions (SA 320).
• Professional scepticism – a questioning mind, alert to possible misstatement.

Key facts

Basic principles of auditing: integrity, objectivity and independence; confidentiality; skill and competence; work done by others; documentation (SA 230); planning; audit evidence; internal control evaluation; reporting.

5 important questions

Q1. Define auditing.

Auditing is the independent examination of the books of account, vouchers and records of an organisation to enable the auditor to report whether the financial statements show a true and fair view of its affairs.

Q2. What is window dressing?

Window dressing is the deliberate manipulation of accounts to show a better (or sometimes worse) financial position than the real one, e.g. overvaluing closing stock to show higher profit.

Q3. Explain the objectives of auditing.

Outline: primary objective – reporting on true and fair view; secondary – detection and prevention of errors (four types, with examples) and frauds (misappropriation of cash and goods, manipulation of accounts); how the auditor's presence acts as a moral check.

Q4. Explain the advantages and limitations of auditing.

Outline: advantages to the business (errors found, reliable accounts, loans easier), to owners and shareholders (protection of interest), to government and tax authorities, to creditors; limitations – test checking, inherent limitations of internal control, reliance on management, opinion not a guarantee, time and cost.

Q5. Explain the basic principles governing an audit.

Outline: list from SA 200 and the ICAI Code of Ethics; explain integrity, independence, confidentiality, skill and competence, documentation, planning, evidence, reporting, each with one line of explanation.

Exam tip

Use the "watchdog, not a bloodhound" quote and the Latin word "audire" in theory answers; they show reading and earn presentation marks.

Quick summary

Audits can be classified by who requires them (statutory or voluntary), by who does them (external or internal), and by when and how they are done (continuous, periodical, interim, balance-sheet audit). Each type suits a different kind of organisation and purpose. This topic explains the main types with their merits and demerits.

Key points

• Statutory audit – compulsory under a law, e.g. companies (Companies Act 2013), co-operative societies, banks, public trusts, and tax audit (Sec 44AB of the Income-tax Act).
• Voluntary (private) audit – done by choice, e.g. audit of a sole trader's or partnership's accounts (unless a law requires it).
• Internal audit – a continuous review of operations and controls by the organisation's own staff or by an outside firm appointed by management. Compulsory for certain companies under Sec 138 of the Companies Act.
• External audit – by an independent auditor who reports to the owners or shareholders.
• Continuous audit – auditor checks the accounts regularly (weekly or monthly) throughout the year. Suitable for large concerns and banks.
• Periodical (final/annual) audit – done once, after the accounts are closed for the year. Suitable for small concerns.
• Interim audit – between two annual audits, often to declare an interim dividend.
• Balance sheet audit – focuses on verifying the items in the balance sheet; common in the USA.
• Government audit – by the Comptroller and Auditor General (CAG) under Article 148 of the Constitution.
• Other types: cost audit (Sec 148 of the Companies Act), management audit, social audit (e.g. MGNREGA works by Gram Sabha), performance audit, forensic audit and environmental audit.

Important terms

• Statutory auditor – auditor appointed under a law to audit accounts.
• Internal auditor – person who examines internal controls and operations for management.
• Cost audit – verification of cost records and cost statements.
• Social audit – review of how far an organisation or scheme meets its social duties.

Key facts

5 important questions

Q1. What is an interim audit?

An audit carried out between two annual audits, usually for half a year, often to help the directors declare an interim dividend.

Q2. What is a statutory audit? Give two examples.

An audit required by law. Examples: audit of a company under the Companies Act 2013 and tax audit under Section 44AB of the Income-tax Act.

Q3. Explain continuous audit with its merits and demerits.

Outline: meaning; merits – quick detection of errors and frauds, moral check on staff, interim accounts possible, auditor gets detailed knowledge; demerits – costly, alteration of checked figures, disturbance to staff, mechanical work, auditor may lose the link with work done earlier; precautions (special ticks, instructions not to alter checked figures).

Q4. Distinguish between internal audit and statutory audit.

Outline: use the table above and add points on independence, period, and the use of the internal auditor's work by the statutory auditor (SA 610).

Q5. Write notes on (a) cost audit (b) social audit (c) government audit.

Outline: cost audit under Sec 148 and the cost auditor (CMA); social audit – meaning, MGNREGA example, transparency; government audit by CAG under Articles 148–151, reports placed before Parliament and the State Legislature.

Exam tip

For "distinguish" questions, write at least 6 points in a two-column table; it is faster to write and easier for the examiner to mark.

Quick summary

Internal control (अंतर्गत नियंत्रण) is the whole system of checks that management sets up to run the business in an orderly way, protect assets and keep reliable records. Internal check is one part of it: work is divided so that one person's work is automatically checked by another. A good system reduces errors and frauds and lets the auditor rely on test checking.

Key points

• Internal control has three parts: internal check, internal audit and other controls (budgets, standard costing, physical controls).
• SA 315 requires the auditor to understand the entity and its internal control to judge the risk of misstatement.
• Objectives: orderly conduct of business, safeguarding assets, preventing and detecting fraud and error, accurate and complete records, timely financial information.
• Principles of internal check: division of work, no one person controls a whole transaction, rotation of staff, compulsory leave, physical checks, use of mechanical devices (cash registers, CCTV, software controls).
• Internal check for cash receipts: pre-numbered receipts, daily banking of cash, separate cashier and accountant.
• Internal check for cash payments: payments by cheque or electronic transfer, approval by an authorised person, supporting vouchers.
• Internal check for wages: separate staff for attendance, wage sheet preparation, checking, and payment.
• The auditor reviews internal control using an internal control questionnaire, flow charts and narrative notes.
• A good internal control system reduces the auditor's work but does not remove his responsibility.

Important terms

• Internal check – arrangement of staff duties so that work of one person is checked by another automatically.
• Internal audit – review of operations and records by a special staff during the year.
• Internal control questionnaire – list of questions about controls, answered "yes" or "no".
• Segregation of duties – custody, recording and authorisation done by different persons.

Key facts

5 important questions

Q1. Define internal check.

Internal check is the arrangement of book-keeping and staff duties in such a way that no single person can carry through a transaction from beginning to end, and the work of one is automatically checked by another.

Q2. What is an internal control questionnaire?

A standard list of questions about the controls in each area (cash, purchases, sales, wages, stock) that management answers. A "no" answer shows a weakness for the auditor to test further.

Q3. Explain the objectives and principles of a good internal check system.

Outline: objectives (prevent fraud, locate responsibility, quick detection, moral pressure, reliable records); principles (division of work, rotation, leave, physical control, self-balancing ledgers, mechanical devices, limits of authority).

Q4. Describe the internal check system for cash receipts and cash payments.

Outline: receipts – cash sales through counter with cash memos, pre-numbered receipt books, daily bank deposit, separate cashier, regular bank reconciliation; payments – authorisation, payments by cheque/electronic mode, petty cash on imprest system, cancelling vouchers after payment.

Q5. What is internal control? Explain the auditor's duty regarding internal control.

Outline: meaning and parts; auditor's duty under SA 315 – understand, document (flow chart, questionnaire), test, evaluate weaknesses; report weaknesses to management (SA 265); on reporting on Internal Financial Controls under Sec 143(3)(i) of the Companies Act.

Exam tip

Draw the three-column table to show the difference between internal check, internal audit and internal control; this is a favourite exam question.

Quick summary

Vouching (प्रमाणन) means checking the entries in the books with the documentary evidence (vouchers) behind them. It is called "the backbone (essence) of auditing" because it proves that transactions really happened, were authorised, and were correctly recorded. This topic explains vouchers, the vouching of common transactions, and the auditor's care points.

Key points

• A voucher is any document that supports an entry: invoice, cash memo, receipt, bank statement, agreement, minutes book, wage sheet.
• Vouchers are primary (original, e.g. supplier's receipt) or collateral (secondary, e.g. copy of invoice, correspondence) when the primary is missing.
• Objectives of vouching: to check that the transaction is genuine, properly authorised, relates to the business, is of a revenue or capital nature as shown, and is recorded in the right period and account.
• Points to check on a voucher: date, name of the business, amount in words and figures, authorised signature, revenue stamp where required, and that it is not altered.
• Vouching of cash sales: cash memos, cash register rolls, daily summary, bank deposit on the same or next day.
• Vouching of credit purchases: purchase order, goods received note, supplier's invoice, approval for payment.
• Vouching of wages: attendance records, wage rates approved, wage sheet arithmetic, statutory deductions (PF, ESI), payment by bank transfer.
• Vouching of capital expenditure (e.g. machinery): board resolution, supplier's invoice, installation charges capitalised, asset register.
• Cut-off: transactions near the year end must be recorded in the correct year.
• Routine checking (casting, posting, balancing) is different from vouching.

Important terms

• Voucher – documentary evidence supporting a transaction.
• Routine checking – checking totals, posting and carry-forward of figures.
• Test checking – vouching a sample of transactions instead of all.
• Teeming and lading – a fraud where cash from one debtor is used to cover cash stolen from another debtor's payment.

Key facts

5 important questions

Q1. What is a voucher?

A voucher is documentary evidence in support of an entry in the books of account, such as an invoice, receipt, wage sheet or agreement.

Q2. Why is vouching called the backbone of auditing?

Because the reliability of all the accounts depends on whether each entry is genuine and authorised; without vouching the auditor cannot give an opinion on the true and fair view.

Q3. Explain the points the auditor should keep in mind while vouching.

Outline: arrangement of vouchers; date, name, amount, authority; capital vs revenue; correct period (cut-off); proper account head; altered vouchers; missing vouchers and collateral evidence; mark vouchers to prevent reuse.

Q4. How will you vouch (a) cash sales (b) wages?

Outline: (a) system of cash sales, cash memos and their serial numbers, counter cash register, daily summary, banking; teeming and lading risk; (b) attendance and job cards, rates, wage sheet calculation, deductions, approval, payment by bank, unclaimed wages.

Q5. Distinguish between vouching and verification.

Outline: vouching checks entries with documents (transactions of the year, mainly P&L items, done during the year); verification confirms existence, ownership and value of assets and liabilities on the balance sheet date; vouching comes first, verification later.

Exam tip

For any "how will you vouch" question, list the documents first, then the checks, then one fraud risk. This three-step answer fits every transaction.

Quick summary

Verification (सत्यापन) means confirming the existence, ownership, title, value and proper disclosure of assets and liabilities on the balance sheet date. Valuation (मूल्यांकन) means checking that each asset and liability is shown at a proper value according to accepted accounting principles. Vouching checks transactions; verification checks the final position.

Key points

• Objectives of verification: to confirm that assets exist, are owned by the business, are free from charge (or the charge is disclosed), are properly valued, and that all liabilities are recorded.
• The auditor is not a valuer; he relies on management, experts and accounting standards, but must use reasonable care (Kingston Cotton Mill case).
• Fixed assets are shown at cost less depreciation (or revalued amount if revalued).
• Inventory (stock) is valued at cost or net realisable value, whichever is lower (AS 2 / Ind AS 2).
• Investments: long-term at cost less permanent decline; current investments at lower of cost and fair value (AS 13).
• Trade receivables (debtors) are shown net of provision for doubtful debts; the auditor may send balance confirmation letters (SA 505).
• Cash in hand is counted physically on the balance sheet date; cash at bank is confirmed with a bank certificate and bank reconciliation statement.
• Liabilities: creditors (confirmation, cut-off), loans (agreements, charges registered with the Registrar of Companies), outstanding expenses, and contingent liabilities (disclosed in notes).
• Window dressing is checked by examining transactions just before and after the year end.

Important terms

• Existence – the asset is physically present or the right exists.
• Net realisable value (NRV) – estimated selling price less costs to complete and sell.
• Charge – a right of a lender over an asset as security (mortgage, hypothecation, pledge).
• Contingent liability – a possible obligation that depends on a future event, e.g. a pending court case.

Key facts

5 important questions

Q1. What is verification?

Verification is the process of confirming the existence, ownership, title, valuation and correct disclosure of assets and liabilities appearing in the balance sheet as on its date.

Q2. How is inventory valued?

At cost or net realisable value, whichever is lower, as per AS 2. Cost includes purchase cost, conversion cost and other costs of bringing the stock to its present place and condition.

Q3. Explain the auditor's duty regarding verification of inventory.

Outline: attend physical count (SA 501), test counts, check cut-off, examine stock sheets, compare with records, check valuation method and consistency, look for slow-moving and damaged stock, obtain management representation; Kingston Cotton Mill and McKesson & Robbins cases.

Q4. How will you verify (a) land and buildings (b) investments (c) debtors?

Outline: documents and procedures for each from the table; valuation basis; disclosure in the balance sheet.

Q5. Distinguish between vouching, verification and valuation.

Outline: meaning of each; object; time; evidence; who does it; how they connect – vouching proves the record, verification proves the existence, valuation proves the amount.

Exam tip

Remember the six words: existence, ownership, possession, charge, valuation and disclosure. Use them as a checklist for any "how will you verify" question.

Quick summary

Every company must have its accounts audited by a Chartered Accountant under the Companies Act, 2013. Sections 139 to 148 deal with the appointment, qualifications, disqualifications, removal, remuneration, rights and duties of the company auditor. These rules keep the auditor independent from the management he checks.

Key points

• First auditor (Sec 139(6)): appointed by the Board within 30 days of registration; if the Board fails, by members within 90 days at an EGM. Holds office till the end of the first AGM.
• Subsequent auditor (Sec 139(1)): appointed at the first AGM to hold office from the end of that meeting till the end of the sixth AGM (5 years).
• Government company: auditor appointed by the Comptroller and Auditor General (CAG) — first auditor within 60 days, later within 180 days of the start of the year.
• Rotation (Sec 139(2)) for listed and prescribed companies: an individual for one term of 5 years; an audit firm for two terms of 5 years; then a cooling-off period of 5 years.
• Casual vacancy (Sec 139(8)): filled by the Board within 30 days; if caused by resignation, the Board's appointment must be approved by members within 3 months.
• Qualification (Sec 141): a practising Chartered Accountant, or a firm where the majority of partners are CAs.
• Disqualifications: body corporate (except LLP), officer or employee of the company, partner or employee of such officer, person holding securities of the company, person indebted to the company above the prescribed limit, relative of a director, person auditing more than 20 companies, person convicted of fraud in the last 10 years.
• Removal before term (Sec 140(1)): by special resolution with prior approval of the Central Government, after giving the auditor a hearing.
• Resignation (Sec 140(2)): file Form ADT-3 within 30 days with the company and the Registrar.
• Remuneration (Sec 142): fixed by members in the general meeting (or as decided by them).

Important terms

• AGM – Annual General Meeting of shareholders.
• Special resolution – passed by at least three times as many votes in favour as against.
• Cooling-off period – gap during which the rotated auditor cannot be reappointed.
• Branch auditor (Sec 143(8)) – auditor of a company's branch office.

Key facts

5 important questions

Q1. Who appoints the first auditor of a company?

The Board of Directors within 30 days of registration; if it fails, the members at an extraordinary general meeting within 90 days. For a government company, the CAG within 60 days.

Q2. What is rotation of auditors?

For listed and prescribed companies, an individual auditor cannot be appointed for more than one term of 5 years and a firm for more than two terms of 5 years; then a 5-year cooling-off follows.

Q3. Explain the provisions regarding the appointment of a company auditor.

Outline: first auditor, subsequent auditor at AGM for 5 years, consent and certificate of eligibility, intimation to ROC in ADT-1 within 15 days, government companies, rotation, casual vacancy.

Q4. Explain the qualifications and disqualifications of a company auditor.

Outline: Sec 141(1)–(2) qualifications; list of disqualifications under Sec 141(3) with short reasons (independence); consequence of becoming disqualified after appointment (vacates office).

Q5. Explain the rights and duties of a company auditor.

Outline: use the table above; add services an auditor cannot provide under Sec 144 (accounting, internal audit, design of information systems, actuarial, investment advisory, management services); punishments under Sec 147.

Exam tip

Learn the time limits as a set: 30 days (Board), 90 days (members), 60 days (CAG), 5 years (term), 20 companies (ceiling). Most short questions come from these numbers.

Quick summary

The audit report (लेखापरीक्षण अहवाल) is the final product of an audit. In it the auditor gives his opinion on whether the financial statements show a true and fair view. For companies it is made under Section 143 of the Companies Act, 2013, and in the form required by SA 700, SA 705 and SA 706. The opinion may be clean (unmodified) or modified.

Key points

• The report is addressed to the members (shareholders) of the company, not to the directors.
• SA 700 – forming an opinion and reporting; SA 705 – modified opinions; SA 706 – Emphasis of Matter and Other Matter paragraphs; SA 701 – Key Audit Matters (for listed companies).
• Unmodified (clean) opinion: the statements give a true and fair view in all material respects.
• Qualified opinion: true and fair "except for" a material, but not pervasive, misstatement or limitation.
• Adverse opinion: the statements do not give a true and fair view; misstatement is material and pervasive.
• Disclaimer of opinion: the auditor cannot form an opinion because he could not get sufficient evidence, and the possible effect is material and pervasive.
• Emphasis of Matter paragraph draws attention to an important matter already disclosed (e.g. uncertainty of a lawsuit) without modifying the opinion.
• Sec 143(3) matters: all information obtained, proper books kept, agreement with books, compliance with accounting standards, director disqualification, adequacy of internal financial controls, pending litigations, etc.
• CARO 2020 (Companies (Auditor's Report) Order) requires extra statements on fixed assets, inventory, loans, deposits, statutory dues, frauds, and more. It does not apply to banks, insurance companies, OPCs, small companies and certain private companies.
• The report must be signed by the auditor (Sec 145), with membership number, firm registration number, UDIN, place and date.

Important terms

• Material – large or important enough to change users' decisions.
• Pervasive – affecting many items or the statements as a whole.
• Key Audit Matters (KAM) – matters of most significance in the audit, reported for listed companies.
• UDIN – Unique Document Identification Number generated for every certificate signed by a CA.

Key facts

Contents of an auditor's report (SA 700): title; addressee; opinion section; basis for opinion; key audit matters (listed); other information; responsibilities of management; auditor's responsibilities; report on other legal and regulatory requirements; signature, place, date, UDIN.

5 important questions

Q1. What is a clean audit report?

A report with an unmodified opinion, stating that the financial statements give a true and fair view in all material respects without any reservation.

Q2. What is a disclaimer of opinion?

A report in which the auditor states that he does not express an opinion because he could not obtain sufficient appropriate evidence, and the possible effects are material and pervasive.

Q3. Explain the different types of audit reports.

Outline: unmodified, qualified, adverse, disclaimer – meaning, circumstances, wording ("except for", "do not give", "we do not express"); include the matrix above; Emphasis of Matter paragraph.

Q4. Explain the contents of the auditor's report under SA 700 and Section 143.

Outline: list the elements in order with one line each; Sec 143(3) matters; reference to CARO 2020 annexure and internal financial controls annexure.

Q5. Distinguish between an audit report and an audit certificate.

Outline: report is an opinion, certificate confirms exact facts; report used for financial statements, certificate for specific figures (e.g. export turnover); report covers judgement, certificate covers verified facts; liability differs.

Exam tip

Draw the 2 × 2 table of opinions. It answers most questions on modified reports in one glance and shows clear understanding.

Quick summary

A tax audit under Section 44AB of the Income-tax Act, 1961 is a compulsory audit of the accounts of businesses and professionals whose turnover or receipts cross a limit. It helps the tax department check that income is correctly reported. Audit in a computerised environment (CIS / IT audit) is auditing when accounts are kept in software such as Tally or ERP systems.

Key points

• Tax audit applies to: a business with turnover above ₹1 crore, raised to ₹10 crore if cash receipts and cash payments are each not more than 5%; a profession with gross receipts above ₹50 lakh; persons under presumptive schemes (44AD, 44ADA etc.) who declare lower profit than prescribed and whose income exceeds the basic exemption limit.
• Done by a Chartered Accountant in practice.
• Form 3CA – when accounts are already audited under another law (e.g. a company). Form 3CB – when no other audit is required (e.g. a sole trader or firm). Form 3CD – statement of particulars attached to both (about 44 clauses).
• Due date for furnishing the tax audit report: generally 30 September of the assessment year (one month before the return due date).
• Penalty (Sec 271B): 0.5% of turnover or ₹1,50,000, whichever is less, for not getting the audit done.
• A CA can sign a limited number of tax audit reports in a year (ICAI limit of 60).
• Computerised accounting brings speed and accuracy, but also new risks: loss of audit trail, unauthorised access, data corruption, virus, program errors.
• The auditor may audit around the computer (check input and output only) or through the computer (test the programs and controls), or with the computer using CAATs.
• CAATs (Computer-Assisted Audit Techniques): test data, generalised audit software, embedded audit modules, data analytics for sampling and finding unusual entries.
• Audit trail: since 1 April 2023, companies must use accounting software that records an edit log of every change that cannot be disabled.

Important terms

• Turnover – total sales or gross receipts of the business in the year.
• Audit trail (edit log) – record showing who changed which entry and when.
• General IT controls – controls over access, data backup, program changes and operations.
• Application controls – input, processing and output controls within a particular software.

Key facts

5 important questions

Q1. Who must get a tax audit done?

A business with turnover above ₹1 crore (₹10 crore if cash transactions are within 5%), a professional with receipts above ₹50 lakh, and certain presumptive-scheme taxpayers who declare lower profits. Check the current year's figures.

Q2. What are CAATs?

Computer-Assisted Audit Techniques: the use of software, such as audit software and test data, by the auditor to test records and controls in a computerised system.

Q3. Explain the provisions of tax audit under Section 44AB.

Outline: objective, applicability limits, who can conduct, Forms 3CA, 3CB and 3CD, due date, penalty under 271B and reasonable cause (Sec 273B), limit on number of audits.

Q4. Explain the special problems of auditing in a computerised environment and how the auditor deals with them.

Outline: problems – loss of visible trail, concentration of duties, unauthorised access, errors repeated in all transactions, data loss; approach – understand IT controls, test general and application controls, use CAATs, check backups and access logs, rely on edit log.

Q5. Distinguish between auditing around the computer and auditing through the computer.

Outline: use the table above; add the third approach (auditing with the computer using CAATs); conclusion that modern audits need "through" and "with" approaches.

Exam tip

Learn the three forms: 3CA (already audited), 3CB (not audited), 3CD (particulars). This is a common 2-mark question.