AUDITING

P.GURU PRASAD
FACULTY
INC GUNTUR
 Auditing
 Auditis the activity of examination
and verification of records and other
evidence by an individual or a body
of persons so as to confirm whether
these records and evidence present
a true and fair picture of whatever
they are supposed to reflect. Audits
are most commonly used in the
accounting and finance functions
 Categories Of Audits
Audit category Brief description
Gives an opinion on the accuracy of the
Financial financial statements
statement audit Ensures compliance with the relevant
accounting standards and reporting framework

An independent appraisal function

Internal audit established within an organization to examine
and evaluate its activities as a service to the
organization
Need not be limited to books of accounts and
related records
Deters, detects, investigates, and reports
Fraud auditing fraud
and forensic Forensic: related to the legal system,
especially issues of evidence
audit Audits operational aspects of the enterprise
Operational Quality audit, R&D audit, etc
audit
Audit category Brief description
Audit of computer systems
Information Checks whether the computer system
systems audit safeguards assets, maintains data integrity,
and contributes to organizational effectiveness
and efficiency

Audit of the management, as a tool for

Management evaluation and control of organizational
audit performance
Examines the conditions and provides a
diagnosis of deficiencies with
recommendations for correcting them

Audit of the enterprise's reported

Social audit performance in meeting its declared social ,
community, or environmental objectives

Environmental compliance audit: a checking

Environmental mechanism
audit Environmental management audit: an
evaluation mechanism
 The Sarbanes-Oxley Act
 The Sarbanes Oxley act 2002 aimed to improve
corporate governance and corporate
accountability. This improvement was brought
about by enhancing the internal checks within the
organization by incorporating a new control
systems which guaranteed complete disclosure in
financial reporting and total transparency in
corporate governance.
 The public organizations in the USA, international
companies registered with the securities and
exchange commission, and also the auditing firms
that assisted them were all bound by the
Sarbanes Oxley act
 The Sarbanes-Oxley Act
 Sec 302:-the financial reports should be
certified by signing officers. (Corporate
Responsibility)
 Sec 401:- the financial statements should
be accurate in that they should not have
wrong statements
 Sec 802:-this section talked about the
punishments that could be imposed if the
documents were altered or information
was fabricated in order to mislead the
stakeholders.
 10 years for auditors, 20 years for other
persons-imprisonment
Types of management Audits
 Complete management audit
 Compliance management audit
 Program management audit
 Functional management audit
 Efficiency audit
 Propriety audit
 Components of audit risk

Audit Risk Inherent Risk Control Risk Detection Risk

=
A.R IR * CR * DR
 Audit risk
 Audit risk of an auditor failing to
detect actual or potential material
losses or account misstatements at
the conclusion of the audit.
 Inherent risk:- is the risk of a material
misstatement assuming that there
are no related internal control
structure policies or procedures.
These risks arise due to various
factors that affect the entity’s
operations.
 Audit risk
Control risk:- is the risk that an
error occurring in an audit area,
which could be material,
individually or in combination
with other errors, will not be
prevented or detected and
corrected on a timely basis by
the internal control system
 Audit risk
Detection Risk:- is the risk that
the auditor’s substantive
procedures will not detect an
error which could be material,
individually or in combination
with other errors. Detection risk
is influenced by the procedures
that are used by the auditors to
audit the system and the way in
which they are applied.
 Audit risk
Audit risk is the product of the
three components just
mentioned above. The audit risk
should not be greater than the
acceptable audit risk-(the
maximum risk that the auditor
wishes to accept) (refer page no
114)
Certified fraud examiners (CFEs)
 Who are trained to detect,
investigate , and deter fraud. CFEs
are professionals who are
knowledgeable in four major areas-
fraud investigation, legal standards
regarding evidence of fraud, the
patters of fraudulent financial
transactions, and knowledge of the
criminal behavior associated with
fraudulent activities. CFEs can act as
forensic accountants.
 Various approaches of social
audit
 Inventory approach:- a simple listing
and short descriptions of programs which
a firm has developed to deal with social
problems.
 Program management approach:-
is more systematic effort to measure the
costs, benefits, and achievements
 Cost benefit approach:-to list all
social costs and benefits incurred by an
firm in terms of money
 Social indicator approach:-housing,
good health, and job opportunities
Types of scope
social audits
This kind of audit requires quantification of
Social balance social costs and income. It is conducted to
sheet and assess social costs in terms of money with
the ultimate objective of reducing such
income social costs
statements
Social This audit is conducted to assess the
performance of organizations with respect
performance to some area of social or public concern, for
example, it can assume the form of a
audit research based appraisal that is conducted
to find out the social impact of pollution
caused by an organization
This type of audit is conducted to evaluate
Macro-micro an organization's social performance in
social indicator terms of social indicators that signify public
interest. It evaluates the contribution of the
audit organization to the well being of the local
community
 This kind of audit is conducted to ascertain
Constituency how corporate actions affect employees or the
group general public in different ways. Depending on
the findings of the audit, the policies or
attitudes actions of the organizations are modified.
audit

Government This type of audit is conducted by

authorized government agencies to study
mandated an organization's performance in areas of
audits social concern , such as environmental
protection

Social This audit is limited to specific processes

and programs of an organization that
process or may have social implications. It aims to
program appraise a program which has already
been initiated by the organizations
audit
 The auditing process
 Staffingthe audit team
 Creating an audit project plan
 Laying the ground work
 Conducting the audit
 Analyzing audit results
 Sharing audit results
 Writing audit reports
 Dealing with resistance to audit
recommendations
 Building an ongoing audit program
Audit description
verification
procedures
Count Checking the accounting records of physical
assets by physically counting the assets

compare Identifying similarities or difference in the

characteristics of information obtained from
two or more sources

Scrutinizing documents or other records in order

Examine to detect errors or irregularities

Scrutinizing physical assets in order to detect

Inspecting errors or abnormalities
tangible
resources
 Audit verification procedures
Recompute Checking the mathematical calculations that
have been performed earlier
d
Matching two independent sets of records an
Reconcile showing mathematically, with the differences
between the two records

Confirm Obtaining information from an independent

source so as to verify the existing
information
Verifying recorded transitions or amounts by
vouch examining supporting documents.

Trace Tracing procedures that begin with the

original documents and are followed through
the processing cycles into summary
accounting records.
 Benefits of Auditing
 Identify opportunities for
improvement
 Identify outdated strategies
 Increase management’s ability to
address concerns
 Enhance teamwork
 Reality check
 Thank you
 It takes a minute to have a crush on
someone, an hour to like someone, and a
day to love someone -- but it takes a
lifetime to forget someone. – Unknown
 "Copy from one, it's plagiarism; copy from
many, it's research." -Wilson Mizner (1876-
1933)
 One tequila, two tequila, three tequila, flat
on floor – in front of a t - shirt
 I am a bomb technician. If you see me
running, try to keep up. -On the back of a
t-shirt