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Contents at a Glance

i, ;)itfJ

Introductionto Auditing

l-16 1 1- 2 5 26,43 44 .56 5 7- 6 2 63-80 8t ,89


\

t,hapter 2

Basic Concept Audit in

'ir

.,rt-i:t3

Preparationfor an Audit

Chapter 4

Intemal Controls

f] , til-f

E . D . P -A u d i t

i r . t 1 ; t e$ P '

Vouching

(lhante.r 7
' ' t ' t i f r t 0 f8

Verification

Some lmportantAccounting Concepts

90 -93 94 - lt3 l 14 130 l3l -t53 t54- 168 t69 - 173 r74- t80

r 'hllrter 9

Company Audit I

f'hrFter l 0 ( ihapterl l t..*ratriter t2 Chapterl 3 (lhapterl4 ( ihapter l5

Company Audit ll

Audit Repo(

SpecialAudits

Audit Of Govemment Entities \

Miscellaneous

Auditing & Assurance Standards

r 8 r- 2 0 6

l-7

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P
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D b
b
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I 19_h4ptel
lntnocluction Auditrng to

i, r.rr iLi{AL i)tjit POSE FIN A NCIAL STATEM ENTS


i I i i n a n c i : r lS t : r t e m e n t sn c l u d e t h e f o l l o * i n g : ;r (o) Profit .& Lns.r ,4ccount: Wlrich inilicates prolit earned or loss incurred ..Jrrring Lr;. o rl 1 f. li.,;'p . v) Yn<r..6{'l (!',.t parlicular financial year. T-r [.,r'.,," -it i. y ldi i i (h) Bulance Slrcet: Wlrich sho*,s position of assets&liabilities at a particulardate''t t-,t';{ l' (c) Cash flow & Jimds Jtow Stotement' Which slrorvsrnovenlent of cash/ funils ,:r.iiiffg" ,., ' lf ar p a r l i c r r l alrl r t a n c i a l ; e a r ( H o w e v e r l l t c s c c n o l O t " n " t " O , l ] , r ; e r r t i t l e s ) " ; \ .. r rIr' ' ' '' i \ I l o ( d ) N o t e s o u c ( ' o u t , l s : i . cD i s c l o s u r e s r e x l l l a t l a t o r yl o t e s . f " t . \r

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.',i. { ! n a n c i a l, Owner
Managemenl

q. I-A. :. , . '

olp-erfttrnnnce business For evaluatirtg g Forevaluatin profitthili4' of business. perfcrrtttancc. theirow_n For evaluating ',,,r,, For makingdecisitnrs, .,lr., I- . Forjtrdgingtn:r'liabilities
For eslinntirrg expectedfuture outconies.
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F F F
F F
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Lenders credilors Customers

&
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For judging credit wortltiness of the entity.

dues, r1couerubiliry Forjrydq11g 1f lfeir


For determining general consislency of the business. c of1fir e: t ri. Por .ut.,,iuiiro,r't For ler.ying excise duty, VAT. etc. etc. of For determiningreosottobleness wages & salaries For creatinedemartd for honus. For evaluatinglrends. For judginginvestnrcnt opportunities in the enti['.

Co,"'rliiliiro,i
t-

, Emplol,sgg '

Reseurch elc, onal_ysts

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F
F F
L-

ATJDITING
. ' . . Audit is an independenl exantirtotiort, Of frnancial irtformotion, profit makirrgor not- irrespectiveof its size & legal structure., Of any entity whelhter When such an eXaminationis conductedrvith a vierv to exprcssan opinion thereott.

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I;er t rrresi {lha ractt'ristics o1'Arrilit

S'i'.r/i,urolrc c& indeg,e71dgn1

. \ u t l i t i r a st , r b e c . n i l i r c G di i r a p r o p e r r u o u .

i\nr''r,u Autlitt:,rslroulclbe cornpletcll' otriective (unbiased) lii-, lrppr"r,a,-rh in F { e. l r o u l d i t o t b e i r r f l u e n c eld r t l i c c l i e n t . r

Iiitulrtc ial slulentents

, \ , , , . 1 i , , , - " l l i r r i t r r irs o n l l r r : r r r c i r isl t a t e m c r i tis r c l r r t l i l r s) v 1 r f i1 1 1 1 1 , ; i o r l 1 11 .tcc(-rrtnt. Iilrlancc slreet Notes to a(icounts. & J ' h c [ ' r c p r r r a t i o r r o f f i n a n c i a l s t a t e r n e n t si s t l r c r c s p o n s i b i l i t r o t nrariat:,t: rnerlt of-errtitl'.

Etiitl'

Opinitirt

t H i : , r : i i r ' r r c l r n [ r c a r r yc r r t i l r u l r ; t t c v e r i s t l r e l c g a l l - o n t ri e . . i l r l r ; r rf . , . p r o p r i e l o r s l r i pp a r t n e r s l r i pr.u s l c l r c o m p a n ye t c . , t 'Ihe e r r t i t vn r a v b e p i o f i to r i e n t e do r a c h a r i t a b l e n e . o ' I r a e& f i f i r t , i e * , ' o f F I i s , r l r i r t i t , ns o n i f n r t L r c i a it a r e r n c n t s s F o r t l r i s . i t i s r r e c e s s a r lyr a t t (i) (ii) (iii) Financial statement have bcerr preparedusing acceptable policrr., r v h i c l ra r e c o n s i s t e n t la p p l i e d . y Financial statements have r e g u l a t i o n s ,& been prepared as per relevant

Tlrcre is appropriate disclosure of all rnaterialiterns.

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I r r l n t l i a . a t r d i t i s t o b e c t ' r r r l r r c t c d y a p r o f c s s i o n a lh a v i n g g o o d u " . o u n t i n g & a u d i r r n u h background. A charteredaccourttanthavingcertillcateof practiceis eligible to conduct audil.

1.3

INDEPENDENTAUDIT

rn"i"t tnoiit,.i"Jg"nl.ni n D c r 5 o ni r n o t s u b o i d i r r a rte u ' i s l r e s l : a r r o t h ( . ' , of o o o f (oj l"arp"'raaiia" Meaning . Pcrson Independence
: (b) It requires that he should not act underany inl-luence. lnanner. , (c) Thus, lre carrwork in a conrplete rrnbiased -.:. , .^ --, (a) The necd for auditor independenceis provided in AAS.

au,fitoitt

I n d e p e n d e n c e i ( b ) 1 ' t { E C O M P A N I E S r \ C T . l 9 - 5 6 a l s o c o n t a i r r ss p e c i f i c p r o v i s i o n t o e n s u r e a u d i t o r ' .
, independence. by'fl{L ACCOLJNTANTS ACT, 1949as amended , (c) Morcover,as per Tl'lE,CIIAI{TE,RED I of Cl-IARTEREDACCOUNTAN'IS (AMENDMtlNl') ACT, 2006,independence auditor is required. . o t r y a ( a ) l f a r r c l i t orrn a i n r a i rlrrs g l l t l c g r c c l ' i n t l c P e r r , l c r r 'c e .d i b i l i ro f f i r r i r r r c i s l a l e n r e r;r\l s i r i ,. ,,r rl:r.\\o i., 1 p-o:ri'!,,' \t ;t r"i.ri",', 1l*o \{Sir ', : enha'ced. i,r& by auclit , (b; tnOepenclent report\!i'll be accepted respectecl all stakeholders.
i

Why i n d e p e n d en ce ;i A.f""tt"g;t ni intiepende audit

, Frtr nnnagemertt , (n) 1'lre1,can casilv judge reasorrs &. for lossesalong rvith thc reasons tr;r t o c o r r t r o li t . :' , For Enrployees . (a) lt discotrragcsthem fronr coinmitting fraudsas it acts as a moral check o r rt h c r t r . 'i '1 . \i .\ [,rl'
1 ,

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g:ne o.l sf'stem 1'he1' ensure ral relialllitV_ a.co_uljine can

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*:t o:n1t of n1v11e1ll t salary, h:t canjud_ge "1": leasolablerress \/

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iI i t tt rr ttIuction I o .'1ucl i rt,:

I:or Iendt:rs

" .

' [ ] a n k e r : , c a n p i a c e r < r i i : t r r t c( l r a u d i t e d f i r r a n , . : i i rs t a t e r n e n t sr ' h r 1 e l s r r i a k i r r :t i e ei - r i o ra b o t t tr ' . : t : i t \ \ ' ( ) r i l l l n e so l k ) a n l p J l l i c a n t s . r lriie L'-,r'cu r proviclingloait. lhc auclitedstatemcntsol'brtrrou'erheip tlre l en d c r t o j r r t l g er e c o v e r a [ . i i l i to f t h e i r f u n d s . v r \ u ( l i l r ' ( ls t r r t c r n e r ells t l r : r r r ct,h s r c l i a b i l i t )( r f e( \ t n p u t i r t i oo lr' l n c ( ' t r l c r r 'e c a r r r e d y e n t i t v .t h u s h el p s i r r c l e t c r n r i n i n ig c o n r et u s . b n A r r d i t o ra l s o c h e c : k c o r r r p u t a t i o n i - e x c i s e u t 1 , & s a l e st a x c t c . s o d f T l r c r r : c t t " . l p i . r u r l ' u l p r r r i l : & l o s s c .c a r r r c t l . t. I ; r o r r i s r , r c ls t a t e n r e r l t sh c r c o r n e t o k r r o u ' a b c r i rtth e i r s h a r ei n p r o i i l r ( a s i r r p a r t n e r s h i pi r n r s )a n ( l c a l r c x p e c tc l i v i d e n d . f

t"-

I;'or Trtr

Computing

. .

I:ttr ()wners

t ..

l:or orhitruliorr I'or insurer

sl a c I r rc a : e o l d i s p r r r e .t r , l i t c < t i r l c l l r c r ) ltrsc l pi r i s c t l l i n g l r r i r r r s . l e lo t I n c A , et r l ' l r ' : >t ' r d a r n a g c( ) t l r r ) l ) e l r l r r I l r c .t l r e R t . . i t l r c l p s h e i n s t r r e r -\ s e t l l et h e c l a i n .

r prnspi,iirit,o t ) n h a s i s o { - p a s l 1 ' . . . ' , , , , J i t c c l l r n l r r r c i a ls t a l c r r rre t s . l l r e r c a r r , l c v r s e Iiir rvltetherto invcst in the entit.v not. or exltectedprolit trendsfbr dccicline int,aslor

TO BE COVEITEDBY THE ATJDITOR/ AUDI'IORS FUNCTION-\ 1.,1 g.a::l{' ASPECTS


i':;l: , ,.,ii{rfii'

{b} i;,',rl'..r

-i . Of Accounting systenr& lnternal Controi systernto ensureabout their appropriateness. '' ' } '"tf , Chccking books oIaccounts to ensuretheir arithrneticalaccuracy. [o"',{i,,'1 , E,xaminirrg docunrentaryevidenceto supporl the books of accounts. .lChecking all entries i.l ,],?, book-s of Accounting havl been taken rvhile -rvhether : - p r e p a r i n gl r r a r t c i a ll a l e n l e n l s .( f r ' t T " { ' - " ' r - ] r t : ' : i t \ * ' v ' s l i [-.xaminingr.vhether is in in{brrnation corrtainecl financial.statentents proper and it docs not contain any crroneous or fraudulententl]'.
:

{c , : *_ " . .l , . . r { ( f . i, ' t , r r . lusion Ie) Pt'crFr'r'ness


t i.f i ig, '

i e , riq'afi1l11 of l C h e c k i n gt h e i r c o n r p l e t e n e s s ,x i s t e n c ev a l u a t i o n& d i s c l o s u r en f i n a n c i a ls t a t e n l e n t 5 . -ir.i. i-' !','-i . i ..' ,, ' I ,,L,,u{. tir, ' !i:rliilities " "1 , r 1.. i \'\ \1'* 11 \ .-_^ liri ,rfol-Y ''ilitpliAnce

etc., .ntur" io"ipiiiiii. ot ln case of audit of banks,GeneralInsuranceCompanies

(ht
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l)ist:losure
$ crrfil i':til atr:Ss

. relevant statute , financial statements "vith . Exarnining rvlretherthe information in financial statementsis disclosed propcrly as p accourrting rinciples. /\5 . r h o l e r e p r e s c n t r t t c & f a i r r l i e r vo f n r n t ' t a . $ C l r c e k i n g * . l r c t h e ri i n a n c i t l s t a t e m e n t s . a . / l o s s a n d o f A s s e t s& l i a b i l i t i e si n t h e r e q u i r e df r o r n .

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1.5

QtiAl,lTIES OF AUDITOR
n i , a l i " . i i r o i i O i r e h o n e s r ,s i n c e r e& s t r a i g h t f o t * " t O * t i i i " p e i f o " n i n g h i s p r o f e s s i t i n a i d u ti e s .
llv

(a; [ntegrity
.!

, H" ntuit aclopiunbiaserl& impersonit apprnr.t.r. ' ( r h H e s h o u l dr r o ts u h o r d i n a t e i s j u d g e m e u tt o t h e w i l l o f o t l r e r s c l i e n t o r o l h e rp . r t o n ; rd.'F)trlrpr.:ndence i'l : . any interestapparently as well as in reality. He should be fqee_of i' r n , r lf l X u \ q ' r : . He should audit the financial staiements prepared by the rratragementin unbiased " way.

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. - I i t ; I it t t : 4 t t t t r i . 1 . r ,L i ' , t r t t r '

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{rl'r E{rrot !..rlge


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,+

- l ',i t::' r 1 lr l l c s l t o i r l , l ; r r i ' r ' ,n r ; ' : , k r t n u l . , l , , . 'r l ' r 1 ! 1 ' 1 1l y '1 :' 5 . : : : 1 , : i ;,r t ) . i' : - . - . : ; , ' - . : - : r : ; - . . i t , ; i ; . -l'ar.rttir.,rt . l l r r r s & C r ) n l r i i { r i , \ \ - ) { . } ' : r t i n c r - c l r iA c t . p l 1\\\,areneslrb<lir:.aws likc s ,,"-,f-lonrpanies requirecl. Act ctr. is alsr-, I + r ' ^\ r l 1 . \ ! r r ' , ' r r lr l l o n r u s tc o n l i r r r r c r r r sLv p t l a tl ei sk r r t r r v l c t i g it:o c o r t t l t t ci t u d i t c l i c c t i r ' el r . r\ ol n l ) u r i r r g e o r r c l u c l r r t l i tl.r cl i a st o i i t l c r i r c t ' . r i lrl;tt r i , r u s , t l f i c . <s l : t l r l l ' , ,, f, tj ; r n i s a t i , r t t , \ uh o t l t i r d p a r t i c st,l r r r sh e r c q u i r c sg o o d s r a l & u r i t t c r tc o n u t t t t t t i e a l i , . ' r rr l i t i c s . ti l t l I e r n r r s b e a t . l el o t l : t r l w i t h C i f f e r e np c r s o t l i r r t l i l ] ' e r c rs t t t r l r l ! , , rlrl.c l r ; , :t , , t l i r e c l& 11-11 staf'ta'srvell,lhushe sltortld bc tactful. supen iselri.s l I - { e s l r o u l db e c a p a b l c t o t a k i n e f i r r n i u d g e r r r u n ta s t o n ' l t i c h i t c t i r : ;l t t r : t o b c c h e c k o c& u , h a t s h o u l db e t h e s a n r p l es i z c . ' p s l l c r n r r s l r t a h l c t ' , i l l i t l y s ( . & i r r t e r p r e tr r , [ t l c t t rs o t l t l t l r c c r l t t, q . ' 1 - , ' ; , l i r 1 lscl i-l' r r r t l r' l r , sarne. r r' ) g a i t l l c r n r r sltr l v e g . , , r t l l r r r t lt r r r c _ c o r r r r t&t tig t r , l i t i l r c t c .N l o r r - o r c rl,t t s i i , r t r l ld c ; l \ \ , . 1 1 i t t s l u t e s td e v e l o p n e n ti n a u d i t i n gs t a n d a r ds o t h a t h e c a n p e r l i r r r ra t r d i t i n e { ' l c c t i v en a n r r o t . r n l l c s l r r . r r l d o t r l i s c l t r s c .c o r r l r d c r t l i ai ln l i , r ' r n a t i o ra c q u i r c d d r t r i r r g c u n d t t c to f t h i rvltctt duties, t(.)illtv third par11'erccpt prot'essional Permiftedby client or b Rcqrrired y lau

I t I t I I

(e) ('rrttuuunictllion

sliills
li 1Li' (f)Tlltl Q ', V "'.r.1. -Lr' \'1' {!.:) trdgc rnc.Pt "(h) l,cgical skillq

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( i ) ' l - e c h n i c a ls k i l l s
l\1., l\ ., | \ ,!.tt.L\

r ri r r ' o r i f i d c n t i a l i t v u
t.,

(k) Caution

Whatever he does, he rnttsi do rvith proper skill & care.

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1.6
L\/,

RELATIONSHIP OF AUDITING WITH OTHER DISCIPLINES

.)

statemenls. A".ounting , t;l ,,r.taitoipi""iOei"piniorron linancial :) ^ statements. the rlrr.*l:(b) For this, lrehasto revierv& elaluate firraltcial ['\.r;t,\-.v\r
tbi 'I'6trs

e
I

about Accountrng principles& form and he s|ould have thorough & soundkrrowle<lge

L ri l, .l)'

statelllents' of contents fi nancial concepts: o..f e^rpertise agcountirrg (d) It requile_s 991ql9te in that & ligures arnout.tts appear financialstatements. with financial M : r f h e r n a t i c s (a) AuAiioi tjeals for variousitcms e.g', involvedin comptrting procedure of knowledge calculation ! (b) It requires tx\r 'r

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'I nn .' ,r. - 1 r t "

Statistics .t

Econo-micrs

deprecation,provisiorrfor tax etc. is ( c ) lle 6as to make comparisons & perform ratio analysis.Thus. a good lrand on maths req u i red. c ( a ) S a r n p l i n g i s a n i r n p o r l a n ta r r c l i t i ntg c h n i q u * (b) fror clral,ing random sarnple,he requiresknou'ledge of probabilitv theory'& rarit'rr-rs statistical concepts. & regarding business economic knorvledge g"foi" to iuaitoineeds obtairr u.''itit,

t I t

f"j

. (b) : (c)

"o"o,i.ii"g etrvirotrmentaffecting tlre cl ient. sales. Moreover, accountingrccords the data regarding economicactivities (e.g., purchases, c income, payments tc). 'fhus to economiccolrceptsare required perfonn audltllg, in a rneaningirrl way'

Law
v

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: (b) : ,

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has been For example, in audit of partnershipfirnr. he has to check if interest on capital in paftnership deed' If it is so" he of provided in u."ount, even in absence such a provision lras to menticn this in audit report(as it is itt ccntraventionof The PartnerslripAct). - r i .. . , ,,(,c ,, Thus. he shouldhave sound knowiedgeof laws affecting the client )
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C C C

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t

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b b
b

lt:lro,luclii.trt to Awlitirtg

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i a c e o t r t r i s i t l e o r r t p r l t e rp t b r l r l a t i o t t s y s t e t n ' ( a ) N r , . , v a t i a i . s . r n o s t o f t l l c . : l i c r r t t l l a i r t t a i t tt l t e i r

in en is reqtlircd lor audltors ttl cotrtlttct atrdit r i ) ) I hus \\,orKlllg Iino\\.,lerl{cr)ll conlputer cff'ectivc waY.
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i t of variott:rrpcrlttiotts ftttlctit'tt:;;11s'rlltrrrll' ; l r r l r r r : r r rie r l s t S t c i l t c l )t t, l e l i c r r l . l q i t t l t s p e r s o t r t r e(lp a y r o l l ) e t c ' { b ) I r t r r e r a t t t p l e f l n a n c e - p r t r c l t a s e -s a l e , o p c - r a t i o r r sl,r e c a l l t t o l , i l r d , q tt:h e i r f i n a n q i a l (c) tj'til arrdit.r lias kno*,ic6g.e airout basicbusiness r ( : t l l t i i r r c t - l c c t i r c\ \ a \ '

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(al

r , . \ r r J i t t , r l' r a s l o t l c l r l r r i l l l t l t i t r t l ' [ ) u 1 5 t - r l l l ) c l '

":::111!s'-

s t a f f& t l l a n a g e n r e n t ' t (b) l l e l t a s t o o b t a i ne x p l a t t i ' t i t r ni o r l r c l i e n t ' s his orvn auclit staff' (c) lr'lrlrettver.lte ltasto riirect & supervise -l-6rrs, people' a h c s l o u l d I a y e t a r . to 1 ' g e t t i n g l o n gw i t h id) florvs anal;'sti Vtis'--ftrn'tls tiirt t.-n',iqtrL:slike, ' ( a ) t t" ,ir,r.,t,t lr.rveknowlc.'i::l.t:]i t ' [,irrtlttial t ]'\ 1$ilt:lf t- ' & r v o r k i n g c a p i t a ll n a l l r g c l l l e l l tc l I ril:l tl [i li:{.': !l i' i; t In 'l'his the tlnancial staternent a t)etterwa\'' ' & \1,ill lrclp hinr to rrttclerrstantl evaluate (b) & (oj Auditirlg is a systernatic logical process' [,ogic_ .rhrrs. rnust bc rogicalaccording to given situation. proceclrrres arrclitor,s (c.) rcp'''rt --. h , t ' t u J l a s i n r v r i t i t l g( p r e p n r i r l ga u d i t ( a ) A u d i t . r i s r e q u i r e t la ' . . r n r n , u ' . , i c u t e " o r a l l y ,:;,'"t' i.tlttg,il e t c .) . 'fhus, ovel language' rvhiclr is irt generalusc he should liave goocl conttnancl (b)

AND ACCOUNTING
Ilasis :

N'!c'.r,:ring

ino"ptiio"ni Examination of financial il tle o.t or n.io..ti,ig, l iilJ ^;;,;;** an : of art entity to express opinion lt"""li"t , informatio' : Classifying & sun-'n..o.i)itgItt ftrrtnat trltt thereon :

l r ' u r . r . : '!r l t l (

by a chartered ,-stat"towoiait "un onryui conducted Any perso. havrnggood knjlledge ,ot 't'rN no'C tli' tr liom accounting .' , ,j Jt -fJ P r i n ei p X e s iti'Oii iti un eff'ective way is the fiait't -resp.rnsibirir;ir"i"t"i" ,i"Co.int.*. preparcfina'cial i" of Itt ltii ll'\ of , responsibility auditor statenlents is there:iEiGttsibilit-Y mrnarlejl]cfil -A;orlirtirig : & iuaiti"g Eipertise(both)
' : :i

iiiec.xclsn"""ii^ii,p."tio|e,ii.qv:'lil:"1"*'tneic1ouniing,y't"n

Erpertise 'I'ime ;i {r(:cttrrence

Accotrntitrg exPertlse

iG-A;iiii,igii;iontinatiorroffinaniiafi"iot*^r;oii" are PreParetl bY Accounts priorto accounting i tl us carit be conducted to get tlrcm audited' prior rnanagetnetrt

; ir

.-.^-*".-_

-*-

l rrAS _ tsffiaIpLE--,RNINcFTuntr

Dlsco fAtp-

ItJ I Il l"sg'I l.' Integiity, ' oUlectivitY

+t ^T- W*' T pr*,* I/ LffiFL I 5;,, .1 .Jr,'ir I Fr--f r..."ffi, T' ,^ fh"'T wn,^^r:1;uur, F f

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J*k{^ry 1r^{Mry M, til***
'{,$duv R{.1n7 1h,,,

o" inairlta'l i"l iniepenoence *:nou'rd l:ll""li]i"-:'l:il:"ic ffi:ffi":l'

- '-- t honest iitr U" straightfonvard' (a) luo',tot:'l:t . ,- ^.-r -rrrci bebiased' .nt hehiased. be fair and mustnot and I (b) He should

<

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Auditing utd ,7ssiu iitri i,

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{ l h a p "i {r) l l c s h o r r l d n a i t r t z r it :ro r r l l r l t r r t i a l i to f , i r r f i r t r n r t i i ; ra r : u r r i r c r l r r r i r r ll r i . r , . o r k t r -'

3. Skilt and
competence 4. Work pcrfornled by others

( t r ) l l e s l t o L r l d o t d i s c l o s c a n ' u s t t c h i n l i r r r n a t i o r tL r a t h i r c l p i u ' t \ ' \ \ i t l r o u t s p e l r i f i c n tlrrtr clf . qerurlss!on clierrt or legal or prrof'cssiorral to disclose ( a ) l l e s h o u l dp e r l b n r t r v o r k u , i t ht l r r cp r o { c ' s s i o r r c n r c . al ( b ) A u d i t s h o u l d b e p e r l b r r n e db y ' p c r s o r t s l r a v i n r la c l e q u a t er a i n i r r g . , : . x p c n c n ca n t l t c con)netcnce. -l'lre (a) o a u d i t o rc a n d c l e g a t er v o r kl o a s s i s t a n t s r t r s e* ' o r k p c r { i r r r n c d l , o t h e r a u d i t r r r s [ and experts. (b) (c) t t I l u t h c r v i l l c o n t i n L r eo b e r c s p o n s i b l c o r l r i s o p i n i o r ro n f i r r a n c i a li r r l o n r r a i i r - - r r 'fhe by' Auditor is entitlcd to relv on rvork perforrrrcd others.provirft:il . . l{e exercisesacle<ruate skills arrd care atrd T h e r ei s n o t h i n g t o d o u b t .

I I I I I I

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5. Documentation 1\''- l \y: r,,.,,').\,1


tr': , 1 . , . . . r ' , t ' . ^ - 1 , ; , . 11 1 , 9 , ' . . 1 t
I I l .r. 1., AilI " '

( i r r t (a) I l e s l r o u l c tl o c u m c r rnt l u l [ e r sc l r r t i n go t l r ee r t i l i t r r r r r i n t a sro r k i r r g p a p c r s ) . c ( t r ) Working papers are maintaineclto denrorrstratcthat the arrdil u'as carrisd cut iri
t rl

t ?...i d'..,,t

w a c c o r d a n c e i t h t h e b a s i cp r i n c i p l e s . u o r k t o c o n t l r r ca r r d i ri i r c l f r : t t i i c a r r dl i r r r c l r r n i u l l l c r . t

6.rPlhnning"'
'

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'r{

.",1r..;\,\'-fr :ri ,cl-: 7. Audit Evidence .. I 1'\ *i. '' :'t t' Q ,l',,u t
I)tir,', iiJ', "t'*\'i"i;ur.

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t ' ' \ a d ( h ) Plansshould be basedon knorvlcdgeof the clients bttsiness.

l , ( a ) lle shoultplan his

7 I I I
I

:, a : (a) A u d i t o r s h o u l d o b t a i n s u f f i c i e n t a n d : r p p r o p r i a t e u c l i t e v i d c r r c c b v p e r l o r m r r r g
procedtrres. complianceand substantive conclusion. . (b) Evidencesenable the auditor to drarv reasonalrle
,t"'
i

require Plansshould be further developed :rnd reviseclcluringaudit if circrrnrstanccs so.

that to Compliance proceduresmean the tests designecl obtain reasonableassurance been properly designed & operating eflectil'ely throughout intemal controls l',-ave the year. are Substantive'Procedures performed to obtain ev'idenccas to the conrpleteness,

a
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. (d)
: (a) 8. Accounting sYstemand -f ,' : internal control . (b) :: t 1 lt-1 1'lll {,r , r J \ (r,u\u.q\l N f i , l i r , { it (c)
I i

by sl1stern, produced llreaccountils ol_da1a vali_ditV T::i1"I 1nd


Internal control system ensuresthat the accountingsysteni is adequateand that all the accounting infbrrnationhas been duly recorded. the accounting systernand related intemal controls The auditor should understand adoptedby the management. He should study and evaluate internal controls systenr to determir,e the nature, timllg aqd e1t3nt of other audit prdCedures. T h e a u d i t o r s l r o u k l r e v i e u a n d a s s e s s t l r c c o r r c l u s i o n st l r a r v t t f r o m t h e a u d i r obtained through performanceof procedures. evidences The audit report slrould containclear rvritten expressiono1-opirrionon the financial statements.

(a) 9. Audit and . conclusions ',(b) reporting lr'r ''"' Lr $:i1:rt o r ? l\ ,L\i ,Nu'lt (c)

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b i i / , b c " , ' i , ' r i \ i t " { I \i , .!.' , " a \ , ' . ,r,- ; '" . \ , , . i . 1 l t ' ;
L

His report is on whether: The financial infonnation has been prepared using accei;iable irccounting , . policies which havc beenconsistentlyapplied; ' ' The financial information cornplies rvith relevant regulation and statutory requirements;and There is adequatedisclosure of all material matters-

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(d) The report shouid be as per legal requirement. When other than clean opinion is given, tlre audit report should state the reasonsthereof-

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{ is.r[,L't-IVES O F .\UDI'[
t sp e r A A S - l ' I tp t r , , l A S - 2 Ileporlittl4ttrr *,ltttt? T'rtitc & JuiirLI errtri tr14
Autlit is condtrctcd to express illl ()llltllorl o r t f i t u t t t c i l r l s l a f t n l c n t s . l . l t t r s p r i r r t a r l ' , r b i c r li v c i : R c p o r l i r r 3 .

t0 t i t T h e o b i e c t i v e o 1 - a u d io f f i n a n c i a ls t a t e l l l r : r l t s t o e r l a t r l e i r e lru<litor er:prc'ss l i a n o p i r t i t ' r.tr t t s r t c l t i n r n c i l l s t a l el t c l l t s . represcltttrrtc & f air r ierr' llnancial statcnlents fh. i.rait"t repons rvhcther bv It ciri tre exarrrinecl coniideririg rvhetircr: ( a ) F i r r a p c i a l . s t i i t e n l e n !a l e t r c e t r p r c p a r e du s i n g c o n s i s t e r r t& a c c c p ! a b l c h & accountirrg olicics P & t ( b ) F i r r a n c i a ls t a t e r n e n cs r n p l l 'r v i t l t r e l e v a nr t r l e s& r c g t r l a t i o p s to qontain isclosuleof'all rttaterialrnatters (c) Financial stat-enlents_ f llnarrci;rl t is fil A.i,ait.',r: c*pectea o providc opirion on true & lrrir r'ie*'of . statenlent as above. : ( b ) l l e c a n r r o t i r a r n es u c h o p i n i o n i l - h e i s n o t a b l e t t i c o n l l r t n / d i s p e lt h e cif possibility of existence fraud & error in financial statellrents. it ( c ) T h u s i p c i d e n t a l i s e c o t r d a r yo l r j e c t i v e i s d c t e c t i o n o f r t l i s s t a t e t t t e rr it fi ttancial staternents.

Scr:olrd:rrY ; , ! ;I ' - ., i , ' t

Detec'tion d rrtisstulenrcnl

,rsp"i iA'i-t

en<l of & : (if pii,riit i;td'iaibitiry;{'t;ventiori. detection correction frauil


, error is that of management. are d<lubtftrl situationthat sotne matcrial pis5lsleillernl ; (b) Horvevcr, if there . doubt. I'f (due to inherent Iirnitations Audit may not revealall the ntisstatement audit). If eruditor performs his rvork in accordance with basic prineiples <-;f governing an audit, he cannot be held liable for non-detection misstatenrentin financialstatementsof clicnt' ; from fraucl' hc i G) ljowcver. if he notices material misstatementresultirlg ' level of tnanagement. the same at appropriate should communicate : he should ensuretheir appropriatedisclosure are : to If rnisstaterneltts found. report' or by either in financialstatements tlie managenlcnl in his audit

: t.l : ' : (d) ;'

in ' uuiiiotis totaliyluitiiieO r"tyi"g ii" iltuuiioni tt.,er", : i"i U"f"r, AouUit"f As pr,, c:useof ' / u p o n t h e m a n a g e m e n te m p l o y e e so f t h ec l i e n t ' "Kittgslon cotton : no! mills t:omPanY" : (b) He is a watclidog_ a blood hor,rnd,

_JDIT OF FINANCIAT,STATEMENTS I . I O AA S ' - OB JE C T IV E A N D S COPE OF THE AT .'-.

oni""ti". oruii
t uclil

. 6i

ort financial statenetlts the objective is to enablethe atrditor to expressart opiniorr by prepared managementof entiw' are prepared as pcr the recognized statements . (b) For this, it is essentialthat financial requiremeitt atrdthey should and relevant statutory accountingpolicies and practice discloseall material matters. of a s l o future viability the ( c ') H o w e v c r ,h i s o p i n i o n d o e sn o t c o n s t i l t l t ea n a s s u r a n c e ' !tas rvith rvhich its management enterprise or tire efficiency or effectiveness : the affairs ofthe enterprtse' ; conducted

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tht lrnttnctal
(e) (b) ; (c)
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t s t a t c n t e ns

t l i I i t e r n a r r l r g c n r c n t s l c ' s p t , r r s i b l c o r t t t a i r r t a i r t i i r g r i r r r t r t o t l a l c ; r r r t ip r ' , r p r r . r r \ r ) ! i n t i l ' , s r I . , , : l ; l i i . r ir . i i l , i . , i l , t r { Jl / ' L t r . r t . ,i l r , . r , ei . r i s t i i t u l t \ : r t \ . 'l rl l i c a u , l i t o r i s r c s p r . n s i t ' t l fr, r r f b r u r i r t r :a n d c r p r c s s i r t t u n q 1 ' i 1 1 i 1 , 1r1 r i r , , i i l i l r r r c i i i i su.llc nl.-'r)t:i. l I t r e a r r d i t r t l - t h c f l i r a n c i a l s l i r l e n r c n t t k r c s n o l r c l i e v e l h c n r i r r r r r g , , ' i r i L roif i t s ) \ r c s l r ( i l s i l ) i l i t -.

S c o p co f a n a r r d i t

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r l c l r r . ' l r r r d i t ttrlr c i t l c r t l r r : e , , g ' . , , r 1 r i s l r t r , l i ll u n ' i r t r : e r : l t r t l r ' : 'l l r e r e q i r i r c n r e n tc J l - l h ct ' r l e v a t t t l e g i s l l r t i o n .Iire ( rr> p r ' l r r t . r t t t l c e l : r c t l tf s l i c i r l s t i t u t e I C A I ) n t 'l-errrts r :) ol'e ngagcttte tt I I o . u v g v ' e rt.l t c t c n r r s o l ' t ' r i I r { e r r r c r i I t i e r r t t o t s t t p e r s c t i ct h c p r o n o t t n c ] g n r . l i t , i ' t ] r c i r t s t i t t r t t : r i r l l t c p r r' r i si (' l l s ( )I r c l c r l l r l l t ' .i t l l l i t ' t t.

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I n h c r e n t l i r n i t a t i o n sr, I. Test c'hecking (a) i\r,rditor uses sarnplitrg during pe rfirrrttattcc erf lnrtlit, u,.. t lLr;': t fcr (t.,) lts not ptlssiblc lirr hirn to condrrct detailetl clrcckiirg r.hrr: 6 f a u t l i l . W h a t a r c Ltfrr.rAr\ \t') """.t. Urr\\t";\ . . a r r do t h c r p r a c t i c a lp r o b l e n t s . t i n r ec o n s t r a i n t s thts',:'.f o li',^il tl'(.)
/u

r,,".,.,\. !

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of 2. lYotura evidenccs

f;, 1."ot.ue
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tr. i,:,'."d}'

u r r,'{'J{*" 'P,ri ' "'t (


-1.Involvenrcnt of judgement

( 9rl,itr,n tr

: 4. Inherent ', Iimitutiorrs of , [,imitation on on scope-eff'ect alrdit repgrt internul controls iiJ lf tlrere uny
audit reporl-

l e A s l r c d o e sn o t c h t - ' c k a c l r& e v e r y i t e r n ,i t ' s i n t p o s s i t r l ci r r l t i r r r to dctect all fl'aud & errors. i (a) l l r c e r i t l c n c e so b t a i n c t l l r r t l t e r r u r l i t o rl l r r : / , ( ' r . T l l r Jv e r u ! l t e , thon t'ouclusive. I he1'can't ensurcthe auditor in a certain \\'a)'- ' 1O)'l'he;-'can enable auditor to drarv onlv reasottableconclusiotts (c) I therc from (not absolutecortclusiorrs), judgernent irr evaluating tlte reasonablertc's'i (a) Auclitor exercises of -iudgernent & estitnates made by the lllatlilgcrlrerrl itl preparingthe fi nancial staternents. 'l-he jLrdgenrent auditor rnay 1ot always bc correct(b) by ( a ) Internal controls sufler frorn limitetion suclt as collusion arnottLl cmployeesor wrong use of authority by managelnentetc. (b) lf internal controls are rveak,auditor may not be in a positiorttu clbtainassurance.

t 1

"onitiuintr,,t

of i"gi.dr tire scope audit,lte shouldntentionthenrin his

tirgunitingan auJii

l2. i.

Auclitor should coniluct audit irr suclr a way that he rvould be able to obtairl it aLrd el' idettces. sufflc ient and appropriate f s a l I l e s h g u l dc o v e r a l l - i n r p o r t a na s p e c t s f f - e c t i n gi n a n c i a ls t a t e t l r e n to f - t h ec l i e n t . a t r d i tp r o c c d u r c s . l . c l f t h e r ei s i n c l i c a t i o u i f n t i s s r . a t e m e ntte s i r o u l de x t e r t dh i s

l.1l

OF T"YPT],S ERRORS
(,l tritl r"iirt'liiig errors p."potutiot.' aCcounts. of (o) 1-n"r" npp"ii ..tuii'ig
lt is deposited not shorvn. becomes if (b) For example, a clreqtre appareltduring Bf.S,, 'fhey (a) do not appear themselvesduring preparationof
accounts.

As per nature

lb Nii,,,-i"i
reveaiing errors

(b) :fhesecan be krtown only by detailed analysis. (c) For e g: capital expenditure shown as revenue expe1l{-itui9,

Inli'i xl uct ion t o A ud i t ittg

(t,)

L,nirttentiottul crror

(d)

Intentionsl errors

'l ( a , \ l r c s e r e n o t d c l i L r c i u t er i i s t a k i : i a l ( b ) I t n r a yb e d u e t o i g l l . , r r r r c : . / i ) \ c r s i { l ) 1 rri-flrcts. ( c ) [ " o r e x a r n p l e . l P e t t r c a s r r i e r i r r g c t st o i rccorij licigrrr,-ri'r(s l0i- in petty cash bool,. ( a ) D c l i b c r a t e n i s t a k e s . e. f r a u d s . r i (b) Bad debts rccovercd rrot recr.lrrletl ui hooks, tlrir..; m i s a p p r o p r i l r t i ntg r e n l o n e v s < ,r.. e e r i v e d y e n r p l o y e e l c b oi tlre entity. " by pe11on conrrnitting , . , , , it. (a) Wliereby per-son tlre ioriirnitting tlre *'avsto hideit. S a n r ea s u n i n t e n t i n n a i . N o e f f i r r l su r , . , r a r l et o l r i , . l ch e r r r . r ' r n i

(e)

Unconcealecl

_ (l) c> *

_Ery9p
concesled Error

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ilCCOdir:lrlg

ASpeCt

' (;i ct". iia"a (g) Error ro u,hich l.aluncc trial a.,"-. i,nirutt". affecting trial . ( b ) F o r e x a r n"iroi..l,,. s o l c lt o . A ' p l eg o o d s : e r r t e r e riln s a l c sl : r r t r k r r t n o r L bulance , A_1 i'l_ ac9oL111!, , | (h) Errors not ' (a) Two sided tir.li ir .oiiip"n.t"tirrg eir.r ,rr i.,i,1,r,r,,. '. offecting triol o m i s s i o n f t".roi a cilr ) n . o rans ', balance . ( b ) folelgqnf el No provision lbr bad delrrs. ': ', (, Ercor of . ("i RecordingAn erltry in ft,nArirrrentally, ilrcorreCtn,nn,,"r" ' principle : i ( b ) F o r e x a m p l e C a p i t a l . . x p e i r d i t t r r e a r g e ctl o r e v e n u e . ch
.
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, (b) These anbe ascerlairred c o n l - v t d e i i r i l e cc h e c k i r r g . b l

, (ii) ,

\ rlr' i , g.\l "" , . ^ ^ . r \ . \ . r\ - \ r ,r , \ Irl r r. .1 I , / / rr ' ., ,\ " . r , y \ ' t'{Vl";*

Compensating : Errors :
o'i'-G"r-\

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(iii)
'Omission 't {- t n'.'1 '--:"

: i , :

i (;i--Wn"i;;;;;i6;
. (b) : , (c) : , (.d)

( c ) No effecton trial balance. (d) B_y1 n1a.y profit. 1!ey 9ll_"-c! (a) Which nultifiedy iire are t i,npait inotiiei oi "iior. ( b ) For example.: expenses amounting to Rs. 6000 u,re.rrgiv recorded Rs. 8000 rvhilc anotherexpense arnourrling il.s. at to 2000 not recordedat all. (c) No effecton Trial Balance. (d) But may affect prolits if one error arises in revenue A/c & other in a balance sheet item.

lil:\

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, (iv) Error of , (a) '. commissian ; (b) ],\ I


\t ' r ' l ' e . r \r..tr fl\\"i (; t

is 'ioi-i*coid"d ai",,iiti. w h o l l y o r i; PartlY. For exarnple, Sales of 1000to A eiiher not recordedwhollv or shown in salesAccounts but not postecl o A ' s a c c o u n t t Full onrission does not affect trial balance but partial omission oes. d May affect profit. Incorrectr..oidit,g ofi trinsiirion Maybe of follorr,,ingt-r,pes: ,. Postingerror: - wr-ongAccounL/AntounV Side.

. .'- **\i

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,. CastingError:- Wrong totalling/balancing. . Duplicationerror: - entry recorded , twice . . Carry forw,arderror:- Wrong arnounlr side. , (c) For example: - Sales amounting to Rs. 1000i- recordedas 100/- or page totai of rvage sheets 500/- carried f'orr"varr.l ris: (d)

Rs.5500/-. May cr may noi affect triai balance.Same ts impact profit. on

lhe r,.:irsc lr{

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l0
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A s p e r n :rtu re

As pcr accoun{ing aspect


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Seit-rer ealing
inclt,qcltrevealing

Unintentional/ irrtentional

U rrconcea d/ le corrcealed

Alibcting'l'.ll inot atTecrting'l-.R.

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Error of' prirrciple
Conrpensating error

I
Erroro{' cornmission

Error of omission

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Conditions rvhich increasethe risk of misstatement in financial statement 'I ( W e a k n e s si n i n t e r n a c o n t r o l s y s t e m . l t. 2" 34 5. Doubt about competenceand integrityof managernent. within entity e.g.,entify facing problerrs in gettingfinance. Unusual pressure w U n u s u a l t r a n s a c t i o ne . 9 . . t r a n s a c t i o n i t h r e l a t e dp a f t i e s . s Problems in obtainirrgsufficient & appropriateatrdit evidence.For exarnple. managenlent deliberately not c<-rope rating with the auditcir.

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AAS-4 - THE AUDITOR'S RESPONSIBILITYTO CONSIDER FRAUD AND ERROR IN AN AUDIT OF FINANCIAL STA'IEMENTS
Nature : BJ whom* : Intetrtiorral

Fraud

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Ernployees, or Management, or rvithgovernance, or Thosecharged


-l-hird parlies

Example-

Falsificationofaccounts of lvlisappropriation assets Suppressionof transactions of Omissiorr of ef'fects transactions Wrong accountingProcedures Misapplication of accgunting Policies

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it

l,rror

Nrtlttrt B-1,*,ltottt Exumplt

I I t ti t r i , i l l t i , r l l lIi Sante ti.r . r . '*n[ri:rvc

l r ' l a t h e r r t a t i c an r i s t a k c s . l ( ) r c r . i S l l tt ' l ' l l r e t s . i r , l i s a f p l i c a t i 6 r rg t ' A c c r r u t r t i r r g I ' t t l i c i e s . Prcvcnlion & detcction of liarrtl & errciris tlreir resllr.rnsibilit! I;or this- rnanagetnetlt cstlblishes stritablc intc-nlal 'io!l1I()l

Responsibilitv

On port o.ftfutse Chorgedwilh antl Oovarnonce Manayement 0n purt ttf rl udilors

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s\ slell-I.

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l,r Ilc ltlrist \\'ork irt accordance ith AAS' iri:; . I f t h e r e i s i n d i c a t i o n o f n r i s s t a t e t l l e l l th c s h o u l i l c x t c n t i to proce(lttres corrllrrn/clispelthe cloubt' d I l e s h o u l dl l l o i t l l a i r l o c u m c t t t a t i t t r t But he can't be held responsiblefbr preventionof fiaud & error. 11' auclitor u,orks in accordancervith AAS, he can llof bc heid of responsiblefor tron-detection fraud or error'

lnhel't,nt lrnrltations of audit due to whith detection of is :rl! rrlis:rtatements n0i tlossible
flis;'nlssion rnqtlIr"!es

'fest of nature Audit lSngPlye)j,&nglt Prol'essiorral of ,\uditor' thanconclusive rather of nature Audit eJ1dep-qe Perstrasive ' confol system7 { of l-irrritations internal statements' of Probability Fraudand Error in financial contro!ttt,"-:, and acc3untrn8 internal Itegarding fraudby managementILegarding

members of audit vy1fl', llith , teqtn : -. : ', H/ilh motrtgernenl : ', With those charged witlt : SOvernarl('e
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Managcment representation letters that auditor obtain *ho'*!r1 .,. .J\t\

prevent and detect & for responsibiliry* accounting and l'C' systenl to N4anagement correct Fraud & Errorare immaterial lbr finarlcial rrltbrrnatiorrrn ( b ) Aggregate uncorrected tttisstlttetnents opirrionof nlanagement(c) It has disclosedthe auditor all lacts regarding . ' Known frauds & frauds. Suspected

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continue perform arrdit. irrg and Discuss all factsrvith nrarragcrnent those chargcd with governarrce C o n s i d e r w i t h d r a w a lf r o r t t e n g a g c m e l t t . towardsappointing authority. Consider his responsibilities towardsregulatoryauthority. Consider his responsibilities If lre resigns due to misstatements, he should estate the facts regarding these nratters to incomins auditor. / |

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adoptedby entrty, & ln preparation presentationoffinancial statenrents. 'flrcrc'is i i p t n o s i n g l el i s i o f A c c o u n t i n g o l i c i e s l r a tc a n b c a p p l i c a b l cr rx l l 5 i 1 1 1 x ,rri ' Vr ,i tr,cltlsltrc is (a) accounting policy. choosesthe appropriate ( b ) Management ,'I i' il, t il '., (c) F-ore.g.,depreciationcan be chargedas per rvritlen dorvnvalue method or straightt-' rvay.s, differentpolices may' be adoptedfor fbllou'ing:San.re tine rnethod. Jl^ 'J{ tr'i"J'u \r:*[u-a]'*"r r Valuation of inventor;' t-i 'ahtuI ; o,l \ 1'l 1r' q r Treatment experrditureduringconstruction of "tr.-"li. 1,
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Valuationof fixed assets of Conversion foreign currencyitems Valuationof investtnents Treatmentof researclr & developmentexpenditure

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& ( l c r t a i r r{ i r r r i l l r r r i c n t a ic c o r r n t i r ra s s r t n r l ' r t i i t tttrs d e r l i ci l r c p r c p a r a t i o r r p r e s ; c r n t a l r ( ) t l n g i o f l l r t l r t cl i l ' ' t a t c l n c r l t s . 'l'hcir . t t s ci : - , t s s i t t r t e t l . ll oP r ( l t ! n g ( ' r r n c t ' l : I l r e c r r l c r l r i : .i.s r i c r r , ' , 1t s s o i t t gt..o t t c L ' t t r . r r r t s .c o r r t i r l r r i n g C r 3 t i r ) l l s ; n ta) t l 1 } r a t h e e t r t e r p r i s cr a s r t c i t l r e r l r c i n t e n t i o nn o r t h c { r l h r r t l r e1 i , 1 3 5 ; g g l r f lic1 r ; r et. i s : i " s r r n r c t l . r r e c e s s i to l c l o s c . l t t * t t . v p j ( b ) C o n s i s t c l c 1 ; I t i s a s s r r r n et' i r a t a c c o L r n t i n g o l i c i e s a r e c o t r s i s t c n tf r o n l o t t e p e r i < l d1 o i r t t o t h ep c r i , r r ! . r a ( c ) A c c r u a l : l { e r c r r r r e sa r r d c o s t s a r e u c c r t t c c l ,t h a t i s , r c c o g n i z . e d s t h e l a r e e a r t t c d o r s ir ) i s r c c r i v c d o r ' p ; r i c l a t r dr e c o r t l e < l r t h e f i n a n c i a ls t a t e n l c n t t ' f i n c r r r r e i( a 6 d l r o t i l s n l o n e v t l r c p c r i o dt o u h i c h t h e l r e l a ' , c . n r ns ( u ) l l ' a l l t I r t . r l i r r r t l : r r r r c r rilrl c lu r r u r r l i r trs s s t r r t t p t i o a r e h e i n g f , t l l o w e d i n p r e p i r r n t i o & r i d p s t a i e n r e n t s . c c - i f i c i s c l o s u r es n o t n e e d e d c p r e s e r r t a t i o r,rf f l n a n c i a l is a ( b ) l l o r v c v e r .i f ' a r r y l i r n c l e r n c n t a lc c o r r n l i n ga s s t r t t t p t i o n r r o t f t l l i o u ' e d t h e f a c l l r a s t o b c l d i s c l o s e tilt t t l r c f i r t a r t c i as t a t e n t c n t s . 'l'lrus d i s c l o s r r r ei s n c e d e d o n l l , i r r c a s e o f n o n - c o r r p l i a n c c r v i t h t l t e f u n d a n r c r r t a l (c) il l c c ( ' r u l ittl l c ; t s s t t l t t po t t .

N'[e:rrring

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OI]JECTIVE TYPE QUESTIONS


Clomment alongrvith reasonsrvhether follo$'ing are'frue or Fllse. (l) not notes to nccortnts' I i i n * n c i a l s t a t e m e n t si n c l u t l e P . t L a c c o u n t i n ga n d B a l a n c e S h e e tb u t including P&L account, Balance sheet and Financial staternentsrnean rvlrole set of accouttts FAt,Sll + s . d i s c l o s t r r ie c . . t r t > t c t o a c c ( r t t n i s . managemcnt' (2) Audit is inrlcpendent examination of operations conductcd by express opinion Arrtlit is indepcrrrlcrrtexarnination ol-finont'iol slatemurls of arr cntity to FALsill + o i r r f o r r n a t i o nn o t o p e r a t i o n s f ' e n t i t y . , f I thercon. t is thusexarninitts inancial i F'air vierv of financial stltements. (3) . Autlitor,s opinion is on True & applied, are consistelrtl.v For reporting()n lrue & fairvierv, it is seen whether acceptablepolicics + TRUI,, *ha.,,e lrave beetr nrade in financial t,ee,r observecl& appropriate disclosures regul"tion, nts. staten':i (4) J Auditor needs to be indepentlcnt' juclgernent a llerson is not subortlirtatcto rvishesof any pers'()nof c) rncalrs that Independcnce TRtjE, of of credibilit-v firtancial statcrnellts clicrrt' audit enhances Indepenclent Audited financial statementshclp the lenders' making dccision abotrtcredit r'vofthitress + Lenderscan rcly on atrditedfinancial statemcntsr,vlrile TR{lE of tlreir lunds. of loan applicant& later on, they can judge recoverability concerned only with financial information' Arrdi{or does not need communication skills, as he is oft-rcers and staff of client & third During concluct of audit, he has to interact with various 4, FAL5E skills' col.nmunication partiei rvhich requires good rvritten& orai

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in [ ] u e u r ! r { . } t r i . r t i os r c t l u i r e d 1 o b e k e p t l t v a u d i t o r ' relating to tlre audit (niaintain u'orking papers)"Working1x,t1t':r'';lr'; Inatters A He shotrld cl<tcutnent TRUE witlt thc basic pritt':tli-"' rnaintainedt9 |erlopstrlte that the atrclitrvascarriedout itcctlrdance ^l i t f i I 1 , ^ .l i r fi ( r 4 , i s r e s p o n s i b l c o r p r e v e n t i o n & d e t e c t i o n o f n r i s s t a t e n , . , t t r . primary reslt,llsibilitl,of prevcntion, detection & correttion of fraud and error rs ihl:i i'il i,Al,SF- + r s m a n a g e l l e l t . ' f I g s i f a u d i t o rp e r f c r r n ' rh i s r v o r k i n a c c o r d a n c e v i t h b a s i cp r i n c i p l c s 1 4 r " " : t r l n ' - ' flti. in of nrisstatentent financial staterne on ou,lit, hc czrnnotbe held liable for non-detection a { } . } ' r l r ; : r " . t t c i l l ls t a t e m e n t s r e r c s p o n s i b i l i t y o f m a n a g c t n e n t ' ,ntliF: for maintaining an upto clatc and properaccounting t''f'rarir--us malagenrent is responsible * The entered into during the course ofthe ycar' transactions f 14! $unrpling is a major inherent limitrtion o[audit' Auditor uses sampling cluring perfonnattce of audit. It is nct pcssible fbr hirrr ttr cr:ttdr.lcl i.[{.tif,], .+ <:heck detailed clreckirrg clue to time constraints and other practical probiems.As he doesn't all fraud & errors. each& evcrJ: itetn. it is impossiblelbr hirll to detect {iS} statements,is not required' l)isclosure of accounting policv, rvhich is adoptcd in preparation of financiai policies.Thus. by .9 The profit gr Iqss can be significantly aff-ectcd adopting difl'erentaccounting FAl,liF: policies follorved becontesnecessary so that readers of financral disclosgre of- accounting the vie"v prcsented' carr properly understand statemenls is needed whether these are followed or ql{',1 rrs ;lcr AS -1 disclosure of lirntlarlental accounting assunrptions no{in preparatrrn &. lf all threc lLndarnental accounting assuntptionsare bering follorved F"ALSE + Tlrus' disclosure is presentation of financial statements, specilic disclosure is not needcd. rvith the fundarnentalaccountingassurnptiort" neededonl1, i1 case of pon-cornpliance

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