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AUDITING > MODULE 1 > Flashcards

MODULE 1 Flashcards

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1
Q

What is auditing?

A

Auditing is the independent examination of financial information of an entity to express an opinion on its accuracy and fairness.

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2
Q

What are the objectives of auditing?

A

To detect and prevent errors and frauds

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3
Q

Name two broad types of audits.

A

Statutory audit and Internal audit.

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4
Q

What is a statutory audit?

A

An audit required by law for certain companies and organizations.

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5
Q

What is an internal audit?

A

An independent

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6
Q

What is an audit programme?

A

A detailed plan outlining the audit procedures and steps to be followed during the audit process.

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7
Q

What is the purpose of an audit programme?

A

To ensure systematic

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8
Q

What is an audit note book?

A

A diary maintained by the auditor to record important observations

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9
Q

What are working papers in auditing?

A

Documents prepared and collected by the auditor during an audit to support their conclusions and opinion.

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10
Q

Why are audit working papers important?

A

They serve as evidence of work done and provide a basis for forming the auditor’s opinion.

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11
Q

What are audit evidences?

A

Information used by the auditor to determine whether financial statements are free of material misstatement.

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12
Q

Give two examples of audit evidences.

A

Invoices and confirmation letters from debtors.

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13
Q

What are the key considerations before commencing an audit?

A

Understanding the nature of business

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14
Q

What is routine checking?

A

A process of checking transactions that occur regularly like additions

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15
Q

What is test checking?

A

Auditing a sample of transactions instead of checking all to save time while ensuring reliability.

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16
Q

What is the difference between routine checking and test checking?

A

Routine checking involves checking all entries

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17
Q

What are the qualifications of an auditor?

A

Should be a Chartered Accountant (CA) or a firm of CAs as per the Companies Act

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18
Q

What are the civil liabilities of an auditor?

A

Liabilities arising from negligence

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19
Q

What is meant by auditor’s misfeasance?

A

It is the performance of a lawful act in an illegal or improper manner causing damage.

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20
Q

What is the criminal liability of an auditor?

A

When an auditor knowingly provides false statements or commits fraud

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21
Q

When is an auditor liable to third parties?

A

When a third party suffers loss due to the auditor’s negligence and relied on his audit report.

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22
Q

Name a landmark case related to auditor’s liability towards third parties.

A

Hedley Byrne & Co Ltd v. Heller & Partners Ltd.

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23
Q

Leeds estate building and investment Ltd. V shepherd

A

Omitted to examine AoA- dividend and bonus out of profits - out of capital

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24
Q

Irish woollen company Ltd v Tyson

A

Overvaluing stock in trade and book debts and by understanding the trade liabilities
Liable - he had not called for the statement of accounts from the creditors

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25
London oil storage ltd. V sear Hasluck
Failed to verify existence of petty cash- company suffered loss
26
Arther E Green co v The central Advance and Discount corporation
Provision for bad debt insufficient. It was held. That an auditor is guilty of negligence if he accepts the statements given by the officials of the company if there are circumstances which call for enquiry.
27
Misfeasance
Breach of trust or breach of duty imposed by law Doing of a lawful act in unlawful manner
28
London and General Bank Ltd- misfeasance
Auditor failed to give specific information to shareholders regarding condition of the loan though he knew that the securities against the loan though we're insufficient
29
Westminster Road construction and engineering co. Ltd
Auditor held liable for misfeasance as he failed to detect over valuation of work in progress and understatement of liabilities
30
Kingston cotton mills Co Ltd
Overvaluation of stock in trade Held it was not part of the auditor's duty to take stock and that in the absence of suspicious circumstances he could not be regarded guilty of negligence for having accepted the certificate of a responsible official of the company
31
Criminal liability - important section
False statement - sec 447 Mistatement or inclusion or omission- sec 34 If he is party to the issue of prospectus but not interested in the formation of company -sec 26 Induces a person to fraudulently to invest money ( sec 36 and 447) Wilfully makes a default report( sec 147) Found guilty of destruction. False or fraudulent entry(sec 336) Prosecuted by liquidator as an delinquent officer( sec 342) False evidence intentionally ( sec 449) Fails to help an inspector Fails to assist any prosecution proceeedings
32
Deputy Secretary of the government of India, ministry of finance v S N Das Gupta
Auditor's failure to perform his duty is not excused by giving information of the omission to the shareholders Guilty of misconduct and suspension from ICAI
33
Dumbell's Banking co. LTd
Auditor's drew the attention of management regarding false Balance sheet but not in the report to shareholders. Directors and Auditors held liable
34
Professional misconduct
Any act or omission specified in the First and second schedule of the Chartered Accountants Act
35
Guilty of professional conduct if
If he fails to disclose material fact Fails to report a mistatement Grossly negligent in professional duties Failed to obtain sufficient information Failed to invite attention to a material departure from GAAP
36
Candler v crane christmas
Held that auditor has no duty to care anybody except his client. He cannot be held responsible for any loss suffered by third parties even though negligence may be proved
37
Hedley Bryne and co v . Hellen partners
Auditors can be held liable for negligent statements
38
Important steps to take before commencement of new Audit
Obtaining the letter of appointment Ascertaining the scope of duties Ascertaining the nature of business Knowledge of the organisation structure Knowledge of accounting system Information about principal officials Knowledge about technical details Knowledge of internal audit and internal check Study of the important documents Study of the py financial statements Enquiry about the reasons for change in the previous auditor Giving instruction to the client Preparation of audit programme
39
Audit programme
Set of procedures specially designed for each audit Written plan Plan of action Flexible planned procedure of examination
40
Features of audit programme
Drawn by auditor himself In writing Prepared before commencement of audit Separate audit programme Full details and procedures of audit Indicate distribution of work among audit staff Indicate responsibility of client's staff Duration of time Flexible
41
Objectives of audit programme
No part of audit work omitted Clear instructions Fix responsibility Auditing works simultaneously Proper distribution of work Proper control
42
Types of audit programme
Planned or pre determined - tailor made Progressive or skeleton
43
Advantages of audit programme
Relief to auditor Assistance Systematic manner Uniformity in audit work Guidelines Guide Proper distribution of work Continuity of work Evidence Completeness Progress of the work Simultaneous audit work
44
Disadvantages of audit programme
Rigidity Mechanical No complete checking Adoption of unsuitable procedure Concealing the weakness of inefficient auditors
45
46
Audit notebook
Book, register or diary maintained by audit clerk during the course of audit for recording observations,points to be discussed with the auditor, the points which require further clarification Exhaustive record of enquiries made,replies received Definite record of work performed at each audit
47
Contents of audit notebook
Record of general information Recording special points
48
General information
Name of client year of audit Nature of business Important documents List of books of accounts Technical details Particulars of principal officials Particulars of internal check system Accounting and financial system and policies Copy of audit programme
49
Special matters
Routine queries Mistakes and errors Date of commencement and completion of audit Points to attention Points to be included in audit report Imp matters for future references Balances and totals of important account Special points to consider at checking final accounts Particulars of missing vouchers and receipts Extracts of minute book
50
Advantages of audit note book
Record of important points Assessing the efficiency ability sincerity of audit staff Evidence in court Future help Preparation of audit report
51
Disadvantages of audit notebook
Fault finding attitude of audit staff Reliance on client's staff Misunderstanding among audit staff and clients staff
52
Audit working papers
Papers and documents which contain details about accounts which are under audit Notes of important facts and details Cy wp are used as base in the next year True picture of the accounts
53
Contents of audit working ppaer
Schedule of debtors and creditors Correspondence between auditor and debt. / Cr. Tough trial balance Draft final accounts Particulars of investment
54
Importance of working paper
Planning and performance of audit Evidence of audit work Suspension and review of audit work
55
Essentials of a good working paper
Organised and arranged Clarity in thought and expression Essential and relevant data Reflect the information desires Self explanatory Properly filed and numbered
56
Purpose of working papers
Represent the volume of work Preparing audit report Show the extent of GAAP & SA are followed Evidence in court Evidence of work Assist in coordinating and organizing the work of clerks To know the weakness of ICS Guide
57
Audit procedure
Method of work to be adopted by a particular auditor based on his individual training and experience and with circumstances of each case
58
Points of audit procedure
Use of special ticks Routine checking Test checking Surprise checks Audit in depth
59
Routine checking
Checking of common books and records by an auditor as a matter of routine To test arithmetical accuracy Find out certain clerical errors and simple frauds
60
61
Importance of routine checking
Thorough checking of books of original entry Preparation of trial balance Postings are completely checked Arithmetical accuracy Clerical errors and ordinary frauds Basis of entire audit No alterations after ticked
62
Test checking
Select and examine a representative sample from a large number of similar items
63
Advantages of test checking
Saves time and energy Useful Different audits easily and simultaneously Arrive at definite conclusion Reduce cost of audit
64
Disadvantages of test checking
Fail to detect errors and frauds Increases responsibility of the auditor Client's staff become careless
65
Surprise checks
A system under which an auditor makes a surprise checking of the important items
66
Coverage of surprise check
Verification of cash Verification of investment Verification of records relating to stocks and stores Verification of books of original entry and statutory registers
67
Advantages of surprise check
Moral check Alert and cautious Efficiency of audit Bring to light weaknesses of ICD
68
Audit in depth
Examination of selected items in depth and in detail from the origin of the transactions to their conclusion To ascertain soundness and efficiency of ICS Check errors and frauds
69
Advantages of audit in depth
Gives overall picture of procedures Contribute to success of test checking Saves time and energy Moral check and pressure Detecting well designed frauds
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Objectives of auditing
Primary objective Secondary objective: Detection of error, detection of fraud, prevention of error and fraud
73
Primary objective
Main object verify accounts and to report truea and fair view Internal check Arithmetical accuracy Authenticity and validity Capital and revenue Verify and value System of accounting followed Statutory requirements
74
75
Fraud
Intentionally created mistake committed to defraud the proprietors of the concern .it is the wilful misrepresentation or deliberate concealment of a material fact with a view to deceive , cheat or mislead somebody.
76
Duties in relation to Detection and prevention of fraud
Check the ICS Preparation of accounts Ensure how far accounting principles have been followed Checking of Balance sheet
77
Qualities of an auditor
Well-versed with the principles of accounting Thorough knowledge of cost accounts Aware of technical and minute details Thorough knowledge of Company act banking regulation act mrtp act FERA Company and mercantile law Principles of economics Audit case laws Industrial management financial adminstration business organisation Honest impartial not to be influenced Cautious vigilant methodical hardworking accurate in judgement High moral standards Seek clarification on the matter Necessary courage ability to write report Integrity and independence Not attitude of suspicion Don't disclose secrets Commonsrnse

AUDITING (5 decks)

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