Auditing

Introduction
 Let’s get started

• Background

• External Audits of Financial Statements - Video &

Lesson Transcript | Study.com
 What is Auditing

The Institute of Chartered Accountants of India in its

publication, General Guidelines on Internal
Auditing, gives its definition. According to it
• “Auditing is a systematic and independent
examination of data, statements, records,
operations and performance (financial or
otherwise) of an enterprise for a stated purpose. In
any auditing situation, the auditor perceives and
recognises the propositions before him for
examination, collects evidence, evaluates the same
and on this basis, formulates his judgment which is
communicated through his audit report.”
 Objectives of Auditing

• Expression of opinion
• Section 129(1)
• SA 700 Forming an Opinion and Reporting on Financial
Statements

• Detection of frauds and errors

• Evolution
• Types of errors and frauds
• Auditor’s duty – Legal cases and SA 240 Auditor’s
Responsibility to Consider Fraud and Error in an Audit of
Financial Statements
Audit Planning and Documentation
 Stages of the Auditing Process

• Sheena and Reena’s story

• ABC & Co
• FS – true & fair view
• Relevant information
• Communication with previous auditor
• Letter of Engagement
• Preliminary Review
• Field-work
• Audit Report
 Audit Documentation

Audit • Blueprint of audit plan

Programme

Audit • Written record maintained by audit assistants

Notebook
• Written record of audit procedures performed,
Working evidence obtained and conclusions reached
• Ownership and Retention
Papers • https://skodaminotti.com/blog/secrets-excellent-
audit-documentation/
Fraud Examination
 Purpose & Process

• Fraud examination is defined as the process of

tracing and resolving fraud from inception to
disposition.

• Purpose of Fraud Examination

o To know who committed it
o To stop any further instances of attempted fraud
o To recover any losses
o To strengthen the weaknesses in (internal) controls.
o To meet legal requirements
 Purpose & Process

• Obtain evidence
• Document any known evidence.

• Report evidence.
• Prepare fraud examination report

• Testify
• Makes the fraud examiner accountable for the
validity of all evidence.

• Assist in fraud detection and prevention

• Steps needed to detect any future fraud and prevent
it.
 Financial Statement Fraud

• Definition of financial statement

• Reliability of financial statements is threatened

by financial statement fraud.
 Financial Statement Fraud in Business

Improper cash flow presentation Premature recognition of revenues

6 1

Income smoothing 5 2 Recognition of fictitious

revenues

4 3

Non-disclosure of liabilities in the Improper recognition of expenses

balance sheet
 Big Accounting Frauds in History

1. Enron

2. WorldCom

3. Tyco

4. Satyam
 FS Fraud and the Sarbanes-Oxley Act of
2002
• This legislation enhanced the reliability and
transparency of FS.

• This law has prescribed new financial reporting

guidelines for public companies, expanded
requirements on management and public
accounting firms, and imposed certain provisions
for privately-held companies.
Donald Cressey ’s Theory
ICFR (Internal Controls over Financial
Reporting) in India
• It is mandatory for auditors to comment over
design and operative effectiveness of the controls
in case of listed and unlisted companies.
• Requirement is broadly similar to what is mandated
by US Sarbanes Oxley Act, 2002.
ICFR (Internal Controls over Financial
Reporting) in India

The Companies Act,2013

• Section 134 (5) (e)
• Section 143 (3) (i)
• Section 177 (4) (vii)
• Section 177 (5)
• Schedule IV – II (4)
(Code for Independent
Director)
Reporting On Fraud By Auditors
U/S 143(12) Of The Companies Act
2013
 Definition of Fraud
• Section 447 (Punishment for fraud) explains fraud as:
“fraud” in relation to affairs of a company or any body
corporate and includes:

• Any act, omission, concealment of any fact or abuse of position ,

• Committed by any person or any other person with the connivance

in any manner,

• With intent to deceive to gain undue advantage from or to injure

the interests of,

• The company or its shareholders or its creditors or any other

person, whether or not there is any wrongful gain or wrongful loss.
 Definition of Fraud

• As per SA 240 : An intentional act by one or more

individuals among management , those charged with
governance, employees , or third parties , involving the use
of deception to obtain an unjust or illegal advantage
Overview of Section 143(12)
• Section 143(12) requires that:
• If an auditor of a company
• in the course of the performance of his duties as an auditor
• has reason to believe
• that an offence involving fraud is being or has been
committed against the company
• by officers or employees of the company
• shall immediately report the matter to the Central
Government within such time and in manner as prescribed
considering threshold limit
• If fraud is less than specified amount, report to ACM/Board
Persons covered under Sec 143(12)