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AUDITING

ASSIGNMENT

Presented By

Vinitha. K 159

9/5/2011


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INTRODUCTION TOAUDITING

INTRODUCTION:

The term audit is derived from the Latin word audile, which means tohear. Initially, the team audit or auditing was taken to mean

examination of the books of accounts of a business to ascertain whether the

persons in charge of Receiving and paying cash and maintaining the books of

accounts had properly Accounted for all cash receipts and cash payments onbehalf of their principal(i.e., the owners of the business).

Definition:

According to L.R. Dicksee, Auditing can be understood as an examination ofAccounting records undertaken with a view to establishing whether they

correctly And completely reflect the transaction to which they purport to

relate. In some Instance, it may be necessary to ascertain whether thetransactions are supported

By authority.

Spicer and Pegler have defined audit as such an examination of the books,

accounts and vouchers of a business as will enable the auditor to satisfy

himself that the balance sheet is properly drawn up, so as to give a true andfair view of the state of affairs of the business and whether the profit and

loss account gives a true and fair view of the profit or loss for the financial

period, according to the best of his information and the explanations given

to him and as is shown by the books, and if not, in what respects he is notsatisfied.


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AUDIT PROGRAMME

It is a detailed listing of the steps to be taken by an auditor , such as aCertified Public Accountant (CPA) , when analyzing transactions to determinethe acceptability of financial statements. Major accounting firms may

prepare an audit program for each client and require the person who does

the work to sign or initial each step performed. It is the identification of theaudit procedures followed in an audit and outline and description of the steps

and work to be conducted in an audit engagement. Typically, it specifies the

name of the auditor responsible for a given job including the estimated time

to conduct the audit task. The audit program guides and controls the work ofstaff assistants. When a task is conducted, identification is made of who

performed it and the date.

Objectives:j To determine the reliability and integrity of key financial information;j To determine whether controls are adequate and effective in the

safeguarding of assets; and

j Determine whether internal control procedures are in place andfunctioning as intended.


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Program Steps

Audit Program Step InitialsandDate

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Referen

ceI. Background

1. Review departments responses to the Internal Control Questionnaire,completed by the appropriate departmental personnel, to determine ifadditional areas need to be addressed.

2. Determine if personnel have completed their required University trainingrequirements. (Handbook of Operating Procedures Part 3 Personnel Part1 Sec. 1.4)

3. Obtain and review the following information:y Mission Statement Best Practicey Goals and Objectives Best Practicey Current Policies and Procedures Manual Best Practicey Organizational Chart

4. Determine if any employees have outside employment.If yes determine if they have filled out the required Universitydocumentation (Handbook of Operating Procedures Part 3 Personnel Part 1 Sec. 10)

5. Select a sample of employees within the department and verify thatperformance evaluations have been performed as per Universityrequirements.

II. Reliability and Integrity of Key Financial Information

A. Expenditures

1. Obtain a listing of accounts under the Department Heads responsibility anddetermine signature authority on departmental accounts from theAccounting System (DEFINE). Document this information.

2. Select a sample of non-payroll expenditures (operating and Travel) fromDEFINE. The sample should include Operating and Travel expenses.Please include some Procured expenditure transactions. Document thepopulation and sampling procedures used. Determine:

y Were they properly approvedy Was adequate documentation maintainedy

Recalculate for mathematical accuracy (travel expenses have guidelinesfor mileage, lodging and meals)Remember 14 state funded travel. and19 local funded travel, different restrictions on travel

y Were expenditures appropriate as to account and object code3. Based on the testing performed in Steps 3 and 4, conclude whether non-

payroll expenditures are properly recorded and approved and that theexpenditures are reasonable and adequately supported.

B. Account Reconciliation


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W/P

Referen

ce

1. Obtain the Statements of Account and monthly reconciliations for a selectednumber of months covered in the audit scope and verify that:

y Both revenues and expenditures are correctly reconciled on a monthlybasis for all accounts with transaction activity, Best Practicey The person preparing the reconciliation signs and dates, Best Practicey The department head or designated person reviews the monthly

statements and reconciliations and signs and dates to document thereview. Best Practice

y Determine if department has petty cash, if yes review theirreconciliation procedures

2. Based on responses to the Internal Control Questionnaire and testingperformed conclude whether account reconciliations are being adequatelyperformed.

C. Revenue and Cash Receipts1. Review all revenue accounts and determine what types of revenues are

received (document). If the department collects cash/checks (this includesany money that may accidentally come into the department on a regularbasis). Verify that all receipts are being recorded in some sort of log.

y Document the departments cash handling procedures, and determine ifthey have been recorded and placed in their policies and proceduresmanual. Best Practice

y Determine if deposits are made daily as perManagementResponsibilities Handbookp.16 #4

y Determine if adequate segregation of duties has been established withcash handling procedures. Best Practice

2. Based on the testing performed, conclude whether receipts are beingproperly recorded and deposited. AllBest Practice

y Select a sample of cash received from the departments logy Vouch cash received to supporting documentationy Trace cash received to deposit slip (from accounting department) and to

monthly statement of account

y Verify that the income was recorded in the correct account and with thecorrect object code

Document population and sampling procedures

3. Based on testing determine whether controls over cash are adequate.D. Time Reporting


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W/P

Referen

ce

1. For exempt payroll expenses (recorded in the 09 & 10 accounts), select asample of employees for testing. The sample should include any employees

with the ability to influence payroll information.y Obtain payroll records for a sample month from DEFINE and determine

the gross monthly salary paid to each employee in the sample.

y Compare actual salary to the authorized salary listed in the appropriatefiscal year budget (Budget Salary Roster). If there were changes madeduring the fiscal year, verify approvals and changes on the employeesPersonnel Action Form (PAF).

y Verify the any longevity pay or other additional pay is accurate. fy Investigate and document any exceptions.

2. For non-exempt employees (recorded in the 20 account), select a sampleand perform the following procedures:

y Examine the personnel records for each employee in the sample todetermine the authorized hourly rate.

y Select a sample of pay periods, and compare employee time card withpay rate found in personnel to the employees actual payment seen onthe departments statement of account. Ensure the payment was for thecorrect amount.

y Determine if time cards have been signed by employee and supervisory Recalculate any overtime pay . If the employee received compensatory

time off, verify tracking procedures and that the employee is receiving1 times the hours worked as time off. Compare the amount to payrollrecords to verify that employees were accurately paid.

3. Document the departments procedures for the reporting and recording ofemployee vacation and sick leave.

y Determine if department procedures agree with Universityprocedures

y Select a sample of months Determine if employees reported sickleave agrees to what is found on payroll records.

4. Based on the testing performed in Steps 1 through 6, conclude whetherpayroll expenditures are being properly recorded.

E. Segregation of Duties

1. Based on the testing performed in Parts A through D, conclude whetheradequate segregation of duties exist to ensure the reliability and integrity ofkey financial information.


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W/P

Referen

ce

III. Safeguarding of Assets

1. Obtain a copy of the most current inventory listing from the departmentunder review, Information Resources and Inventory departments andperform the following:

y Compare listings and note any discrepancies, determine reasons fordiscrepancies.

y Select a sample of capital assets from the departmental listing of capitalinventory and verify the assets existence, location, and tag number.

y Select a sample of capital assets located within the department and traceeach item to inventory records to verify location, description, and tagnumber.

(Note: All items costing $5,000 or more and all weapons, computers, FAXmachines and selected other items, regardless of cost, must be included on

the inventory listing.)y Document population and sampling procedures.y Determine if department has flash drives, if yes then determine if they

keep inventory of these. Best Practice

2. Determine that when inventory (laptops, projectors etc.) is taken off campusthat it is adequately tracked and that the proper University documentation iscompleted.

3. Determine whether university property for phone bills (including cellular),fax machines, etc. is monitored for personal use. Best Practice

4. Obtain an understanding of the departments process for records retention.Determine if the process is in line with UTPB Policy and other state

regulations where applicable.Handbook of Operating Procedures Part 6 Sec 11

5. Based on responses to Internal Control Questionnaire and testing, concludewhether assets are properly safeguarded.

IV. Information Technology

1. Identify Unique Software:Determine if there are any applications that are unique to the department andhave an impact on the reliability and accuracy of its financialinformation, its overall control environment or the safekeeping of its assets.If so, document and understanding of the system and key controls related tothe audit objectives. The understanding should include information about

user access, security, backup of data and system maintenance.

y Test key controls over unique applications, as applicable.2. Determine whether user access to all software applications for any

terminated employee within the last three years and the departing departmenthead has been taken away.

3. Determine if employees have appropriate access as per their job description.


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CLASSIFICATION OF AUDITS

A. On the basis of scope:

i. Generalii. Specific

B. On the basis of nature of activity:

i. Commercialii. Non commercial

C. On the basis of form of organization:i. Privateii. Government

D. On the basis of who conducts the audit:

i. Independent (external)ii. Internal

E. On the basis of legal necessity:i. Statutoryii. Non statutory

F. On the basis of method of examination:

i. Continuous auditii. Periodical/ completed/ annual auditiii. Balance sheet audit


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A. On the basis of scope: an audit examination can be general specific. A

general audit will cover all the areas of business. The audit can be

Independent or internal. On the other hand specific audit concentrates onParticular areas object or may be period.

On the basis of emphasis it can be further classified as:

i. Partial auditii. Occasional auditiii. Interim auditiv. Cost auditv. Management auditvi. Performance auditvii. Standard auditviii. Audit in depthix. Post and vouch auditx. Operational auditxi. Cash audit

B. On the basis of nature of activity: the activity which are the subject

matter Of the audit may be commercial or non commercial. The nature of

activity Will determine the scope and approach of the audit. While the auditof profit Motive organizations can be called commercial audit, the audit of

nonprofit Organizations will fall under non commercial audit.

E.g.:- government audit, audit of organization involved in promotion ofEducation, health or environment etc. on non profit basis.

C. On the basis of organization: on the basis of form of organization the

audit may be classified as private and government. The method ofappointment and reporting will differ considerably these two types of audit.

private audit When the audit is not a statutory requirement, but is conducted

at the Owners, such audit are a private audit. The audit is conducted

primarily for their own interest.

1. Audit of sole traders accounts;

2. Audit of accounts of partnership firm;

3. Audit of accounts of individuals;4. Audit of institutions not covered by statutory audit.


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1. Audit of sole traders account: 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 auditingwork will depend upon the agreement of audit and the specific instruction

given by the proprietor.

Advantages of Audit to a sole trader:-

i. He is assured of his accounts being properly prepared and hisexpenditureProperly vouched.

ii. He can come to know any frauds by his employees and agents.iii. Audited accounts are considered reliable by income tax

authorities.

2. Audit of accounts of partnership firm: to avoid any

misunderstanding and doubt, Partnership firms recognize the advantage ofaudit of financial statements. Partnership deed on mutual agreement

between the partners, may avoid for audit of final statements. Auditors are

appointed by the mutual concern of the partners.

Rights, duties and liabilities of the auditor are defined in the mutualagreement Can be modified by the partners. It will be in the interest of the

auditors to get in Writing the natural and scope of his work, to avoid any

dispute later on. He should obtain a copy of such deed certified by one of thepartners.

Advantages of audit of partnership firm:-

i. If the accounts of the firm are audited ,it facilitates settlement ofaccounts and valuation of goodwill on retirement, death or

admission of a partner.

ii. Audit is advisable to avoid any financial dispute among thepartners.iii. The firm can avail the benefit of audit for purposes of taxation orimprovements in operation.


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3. Audit of accounts of individuals: many of the individuals derive

income from property, shares, investments and other sources. They may be

incurring heavy expenses for earning such income:

1. Audited accounts are generally taken as correct by income-tax

authorities. In the way, it helps in the assessment of income for income-taxpurposes.

2. Individual is assured of accuracy of accounts without any error or

fraud by Accountants or agents.

b. Government audit: Audit of government office and department is coveredunder this heading. A separate department is maintained by the government

of India, known as account and audit department. This department is

headed by comptroller and auditor general of India. This department worksonly for government offices and departments. Its working is strictly

according to government rules and regulations.

Objectives of government Audit:-

i. To ensure every payment is made as per the rules andregulations.

ii. Payments have been sanctioned by the proper authority.iii. To see that the expenditure is incurred by the right person.

D. On the basis of who conducts the Audit:

1. Independent / external audit:- It refers to the audit of an organization

undertaken independently by a qualified auditor. In other words, it is the

audit of an organization undertaken by a professionally qualified auditor.who is independent of the organization hiring his services for the purpos of

audit.

Objective:-

i. To render an opinions to whether the financial statements havebeen prepared in conformity with the generally occurring

accounting principles &legal requirements.ii. Whether the financial statements give a true & fair response of

the profit & the financial position of the center price.


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2. Internal Audit:-it implies the audit of accounts by the staff of the

business. The staff may or may not have professional qualification for audit

of accounts. The internal staff audit is permanent in nature and helps thebusiness in early detention of errors and frauds.

The objective and function of internal audit depends upon the nature of

operations and business.

a) To evaluated the working of accounting, and operational

control.

b) To determine the level of adherence of pre-determined policies,plans and Procedure of accounting

c) To determine the extent to which assets are accounted forsafeguard from Loses.

Features:-

1) Internal audit is undertaken by concerns which are2) It is not compulsory; it is purely optional or voluntary.3)The scope of internal audit may vary, depending upon nature

&size of concern.

4) Internal audit is carried on continuously through out the year.Internal auditors audit the accounts & others.

5) Internal audit may be in addition to independent auditing ofstatuary audit.

6) Internal audit is usually, conducted by the staff or employ of theconcern ,specially appoc ted for the purpose, sometimes

determined by independent persons , i.e. professional C.Aappointed for auditing.

7)The staff engaged in internal audit is appointed by the mgt &so,they are responsible to the management.

8)The techniques & methods of auditing employed in internal auditare the same as those in independent audit.

9) Internal audit are conducted to ascertain whether an effectiveinternal control system exists to prevent errors & fraud, &whether

the accounting systems and procedures are adequate.

E. On the basis of legal necessity: An audit by qualified person which is

Compulsory requirement under law is known as statutory audit. The qualified

Chartered accountants, who are not connected with the preparation of theaccounts or management of the concern, can be appointed as auditors. The

various matters relating to conduct of audit, appointment, duties, and rights,


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liabilities of auditors and presentation of reports are provided in the

concerned statue.

Essential characteristics of statutory audit

1. It is compulsory audit2. Statutory audit must be complete audit, it cant be partial audit.3. The Act allows provide for norms regarding the appointment of an auditor.

4. The Auditor must be qualified accountant

5. The auditor must not be disqualified as per the provision of law.6. Auditors in an independent person. Management has no control over hiswork.

F. On the basis of method of examination:

1. Continuous Audit As against periodical audit, the continuous audit is

conducted throughout the year at the regular short intervals of time. Under

this audit, auditor visits his clients regularly and each and every transaction

is checked.

DEFINITION by R.C WILLIAMS-

A continuous audit is one where the auditor or his staff is constantly

engaged in checking the accounts during the whole period or where theauditor or his staff attends at regular or irregular intervals during the period

2. Annual or periodical audit Annual or periodical means when the auditwork is conducted after the financial year the auditor visits the client andcompletes audits in one sitting. After the accounts are finalized the auditor isinvited to audit the accounts.

3. Balance Sheet audit balance sheet audit relates to the verification of

various items of balance sheet such as assets , liabilities, reserves andsurplus , provision and profit and loss account .


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Vouchers

Introduction:-

An auditor vouches the transaction recorded in the books of accounts with

the help of vouchers.

Meaning:-

A voucher refers to an documentary evidence in support of an entry in the

books of accounts ,say , the receipt obtained from the payee, the counterfoilof the receipt issued to a payee , invoice,etc..

Examples of vouchers

The following are some of the examples of vouchers:

a) Receipt obtained from the payee for the payment to him.

b) Counterfoil or the receipt or an carbon copy of a receipt issued to apayee.

c) Inward invoice or purchase invoice.

d) Outward invoice or sales invoice.

e) Cash memo.

f) Banking pay-in-slip.g) A contract or an agreement.

h) A resolution passed at the meeting of board of director or shareholders.

i) Minutes of the meeting.j) Correspondence with the parties.

k) Bills.

l) Bought notes.

m) Sold notes.n) Debit notes.o) Credit notes.

p) Demand notes.q) Wage sheet or books.

r) Salary registers.s) Copies of orders placed for goods.

t) Goods inward book.

u) Order received for sales.

v) Goods inward book.


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Types of vouchers

Vouchers are of two types they are: 1. Primary voucher

2. Collateral or secondary vouchers

1. Primary vouchers- It is written evidence in original. In otherwords it is an original evidence of transaction or an entry. Purchase invoices,

cash memo for goods purchased, statement prepared by the bank, written

responses to confirmation request as to debtors or creditors account etc are

the examples of primary vouchers.

2. Collateral or secondary vouchers- When evidence inoriginal (i.e., original vouchers) is not available, copies of the original

evidence are produced in support. Again, sometimes, subsidiary evidenceare also produced for the purpose of audit. Such vouchers (i.e. copies of the

original evidence or secondary evidence) are usually known as collateral or

secondary vouchers. Carbon copies of sale invoice, copies of receipt issued

to debtors, copies of resolution passed at the meetings of the board orshareholders etc.. Are the examples of secondary vouchers.

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