AAS 1 – BASIC PRINCIPLES AAS 1 – BASIC PRINCIPLES GOVERNING AN AUDITGOVERNING AN AUDIT

Integrity, objectivity, independenceIntegrity, objectivity, independence Confidentiality (exception- regulatory Confidentiality (exception- regulatory

requirement)requirement) Skills & CompetenceSkills & Competence Work performed by othersWork performed by others DocumentationDocumentation Planning-nature, timing & extent of audit Planning-nature, timing & extent of audit

proceduresprocedures Audit evidenceAudit evidence Accounting system & Internal controlAccounting system & Internal control Audit conclusions & reportingAudit conclusions & reporting

FUNDAMENTAL FUNDAMENTAL ACCOUTING ACCOUTING ASSUMPTIONSASSUMPTIONS

Going concernGoing concernConsistencyConsistencyAccrual Accrual systemsystem

ACCOUNTING ACCOUNTING POLICIES-POLICIES-CONSIDERATIONSCONSIDERATIONS

PrudencePrudenceSubstance over Substance over formformMaterialityMateriality

THE AUDIT PROCESS- PHASE ITHE AUDIT PROCESS- PHASE I

Audit ProposalAudit Proposal

Assessment of the ProposalAssessment of the Proposal

Acceptance of the Audit ProposalAcceptance of the Audit Proposal

Letter of AppointmentLetter of Appointment

Letter of Engagement Letter of Engagement

PHASE II – PLANNINGPHASE II – PLANNING

Gathering of Preliminary Information Gathering of Preliminary Information regarding nature of business, flow of regarding nature of business, flow of

activities of the entityactivities of the entity

Broad Planning of the AuditBroad Planning of the Audit

PHASE II – PLANNINGPHASE II – PLANNING

Evaluation of Accounting System and Evaluation of Accounting System and Internal Control Internal Control

Assessment of Audit RiskAssessment of Audit Risk

Framing of Audit ProgrammeFraming of Audit Programme

PHASE III – EXECUTION OF PHASE III – EXECUTION OF AUDITAUDIT

Compliance TestCompliance Test

DocumentationDocumentation

Modification of Audit Programme, if Modification of Audit Programme, if requiredrequired

PHASE III – EXECUTION OF PHASE III – EXECUTION OF AUDITAUDIT

Clarification, Explanation,ConformationClarification, Explanation,Conformation

Review of Financial StatementReview of Financial Statement

Management RepresentationManagement Representation

PHASE IV - REPORTINGPHASE IV - REPORTING

Formulating Audit ConclusionsFormulating Audit Conclusions

Preparation of Audit ReportPreparation of Audit Report

Discussion with the ManagementDiscussion with the Management

Dating of the Audit ReportDating of the Audit Report

Signing of the Audit ReportSigning of the Audit Report

COMPLIANCE & SUBSTANTIVE COMPLIANCE & SUBSTANTIVE PROCEDURESPROCEDURES

Tests of controlTests of control

Effectiveness of Effectiveness of design & design & effectiveness of effectiveness of operation of controls operation of controls upon which the upon which the auditor has placed auditor has placed reliancereliance

Tests of detailTests of detail

(analytical (analytical procedures)procedures)

Completeness, Completeness, validity & accuracy validity & accuracy of account balances of account balances & underlying classes & underlying classes of transactionof transaction

DOCUMENTATION

Audit programme•Detailed pan•Description of work to

be done•Specifying procedures

to be followed•Part of current audit file

Audit Working Papers• Planning and performing

audit• Supervision & review of

audit work• Evidence of audit• Permanent and current

files

Audit Note Book• Permanent record• Any matter observed• Evidence tool• Provision of MOA

& AOA• Error or fraud• Management

representations

AUDIT RISKAUDIT RISK

• INHERENT RISK

No internal controls

• CONTROL RISK

With the present accounting & internal control system, a particular misstatement will not be prevented/detected/corrected on timely basis

• DETECTION RISK

An auditor’s substantive procedures will not detect an existing misstatement

RELATIONSHIP BETWEEN RELATIONSHIP BETWEEN DIFFERENT TYPES OF RISKDIFFERENT TYPES OF RISK

AUDITOR’S ASSESSMENT OF AUDITOR’S ASSESSMENT OF CONTROL RISKCONTROL RISK

HIGHHIGH MEDIUMMEDIUM LOWLOW

AUDITOR’S AUDITOR’S ASSESSMENT ASSESSMENT OF INHERENT OF INHERENT RISKRISK

HIGHHIGH LOWESTLOWEST LOWERLOWER MEDIUMMEDIUM

MEDIUMMEDIUM LOWERLOWER MEDIUMMEDIUM HIGHERHIGHER

LOWLOW MEDIUMMEDIUM HIGHERHIGHER HIGHESTHIGHEST

The shaded areas relate to Detection risk

AAS 28- AUDITOR’S REPORT ON AAS 28- AUDITOR’S REPORT ON FINANCIAL STATEMENTSFINANCIAL STATEMENTS

• Title- Auditor’s report

• Addressee – appointing authority

• Introductory para

• Scope para

• Opinion para

• Date of report

• Place of signature

• Auditor’s signature

• Unqualified opinion

• Qualified – ‘subject to’ or ‘except for’

• Disclaimer – not able to obtain sufficient appropriate audit evidence

• Adverse – misleading/incomplete nature of financial statements

GUIDANCE NOTE ON INDEPENDENCE OF GUIDANCE NOTE ON INDEPENDENCE OF AUDITORSAUDITORS

Independence of mind & Independence in Independence of mind & Independence in appearanceappearance

Independence of mind- acting with integrity, Independence of mind- acting with integrity, professional skepticism & exercise objectivityprofessional skepticism & exercise objectivity

Independence in appearance- avoidance of Independence in appearance- avoidance of facts & circumstancesfacts & circumstances

Self Interest threats-direct financial interestSelf Interest threats-direct financial interest Self Review threats- review of an earlier Self Review threats- review of an earlier

judgement or conclusionjudgement or conclusion Advocacy threats- promoting client’s opinionAdvocacy threats- promoting client’s opinion Familiarity threats- close relationshipFamiliarity threats- close relationship

GUIDANCE NOTE ON 227(3)(e) and GUIDANCE NOTE ON 227(3)(e) and (f) of the companies act, 1956(f) of the companies act, 1956

Clause (e) – the auditor’s report shall state in thick Clause (e) – the auditor’s report shall state in thick type or in italics the observations/comments of the type or in italics the observations/comments of the auditors which have any adverse effect on the auditors which have any adverse effect on the functioning of the company.functioning of the company.

Clause (f) – whether any director is disqualified from Clause (f) – whether any director is disqualified from being appointed as director u/s 274(1)(g)being appointed as director u/s 274(1)(g)

Defaulting company= public company has not Defaulting company= public company has not filed annual accounts and annual returns for any filed annual accounts and annual returns for any

continuous 3 financial years commencing on/after continuous 3 financial years commencing on/after 1/4/99 1/4/99 or or

Failed to Repay its deposit or interest thereon on due Failed to Repay its deposit or interest thereon on due date or redeem its debentures on due date or pay date or redeem its debentures on due date or pay any dividend and such failure continues for one year any dividend and such failure continues for one year or moreor more

DIVIDENDS-sec 205DIVIDENDS-sec 205

1.1. Can be declared out of – current yr Can be declared out of – current yr profits after depreciation; past yr profits profits after depreciation; past yr profits after depn; aggregate of the above; after depn; aggregate of the above; money provided by central/state govt in money provided by central/state govt in this behalfthis behalf

2.2. In view of public interest, the central In view of public interest, the central govt may exempt any company from govt may exempt any company from providing depn before declaring os providing depn before declaring os paying dividendspaying dividends

3.3. Past losses: amt equal to the loss or depn Past losses: amt equal to the loss or depn for the year of loss, whichever is less, is for the year of loss, whichever is less, is set off from the current yrset off from the current yr

RATE IF DIVIDEND PROPOSED TRANSFER TO RESERVESx > 10%, <= 12.5% atleast 2.5% of current profitsx > 12.5%, <= 15% atleast 5% of current profitsx > 15%, <= 20% atleast 7.5% of current profitsx > 20% atleast 10% of current profits

4.4. Only registered shareholders are Only registered shareholders are entitled to dividend; preference entitled to dividend; preference dividend is to be paid before euity dividend is to be paid before euity dividenddividend

5.5. Dividend in abeyance- sec 206ADividend in abeyance- sec 206A

6.6. Dividend is payable only in cashDividend is payable only in cash

7.7. Must be paid within 30 days from Must be paid within 30 days from the date of declarationthe date of declaration

QUALIFIED OPINIONQUALIFIED OPINIONWe have audited….. We have audited….. Except as discussed in the following paragraph. Except as discussed in the following paragraph. We conducted our audit in accordance with……We conducted our audit in accordance with……We did not observe the counting of the physical We did not observe the counting of the physical inventories as at 31inventories as at 31stst march,2008 since that date march,2008 since that date was prior to the time we were appointed as was prior to the time we were appointed as auditors of X ltd. Owing to the nature of the auditors of X ltd. Owing to the nature of the entity’s records, we were unable to satisfy entity’s records, we were unable to satisfy ourselves as to inventory quantities by other ourselves as to inventory quantities by other audit procedures.audit procedures.In our opinion and to the best of our information In our opinion and to the best of our information and according to the explanations given to us, and according to the explanations given to us, subject to the effects of such adjustments, if any, subject to the effects of such adjustments, if any, as might have been determined to be necessary as might have been determined to be necessary had we been able to satisfy ourselves as to had we been able to satisfy ourselves as to physical inventory quantities. The financial physical inventory quantities. The financial statements give a……… statements give a………

ADVERSE OPINIONADVERSE OPINIONWe have audited the attached B/S of…, as at 31We have audited the attached B/S of…, as at 31stst march…, and also the P & L a/c for the year ended on that march…, and also the P & L a/c for the year ended on that date annexed thereto. These financial statements are the date annexed thereto. These financial statements are the responsibility of the mgnt. Our responsibility is to express responsibility of the mgnt. Our responsibility is to express an opinion on these financial statements based on our an opinion on these financial statements based on our audit.audit.We conducted our audit in accordance with…We conducted our audit in accordance with…In our opinion and to the best of our information and In our opinion and to the best of our information and according to the explanations given to us, because of the according to the explanations given to us, because of the effects of the matters discussed in the preceding para(s), effects of the matters discussed in the preceding para(s), the financial statements do not give a true and fair view the financial statements do not give a true and fair view in conformity with the accounting principles generally in conformity with the accounting principles generally accepted in India:accepted in India:In the case of B/S, of the state of affairs of the company In the case of B/S, of the state of affairs of the company as atas atIn the case of P&L a/c, of the profit/loss for the year ended In the case of P&L a/c, of the profit/loss for the year ended on that date.on that date.

DISCLAIMER OF OPINIONDISCLAIMER OF OPINIONWe were engaged to audit the attached B/S of … We were engaged to audit the attached B/S of … as at 31as at 31stst march,…. And also P & L a/c for the year march,…. And also P & L a/c for the year ended on that date annexed thereto. These ended on that date annexed thereto. These financial statements are the responsibility of the financial statements are the responsibility of the entity’s management. (entity’s management. (Omit the sentence stating Omit the sentence stating the responsibility of the auditor).the responsibility of the auditor).(the para discussing the scope of the audit would (the para discussing the scope of the audit would either be omitted or amended according to the either be omitted or amended according to the circumstances)circumstances)(add a para discussing the limitation)(add a para discussing the limitation)We were not able to observe all physical We were not able to observe all physical inventories and confirm accounts receivable due inventories and confirm accounts receivable due to limitations placed on the scope of our work by to limitations placed on the scope of our work by the entity. Because of the significance of the the entity. Because of the significance of the matters discussed in the preceding para, we did matters discussed in the preceding para, we did not express an opinion on the financial not express an opinion on the financial statementsstatements

SPECIMEN AUDIT PROGRAMMESPECIMEN AUDIT PROGRAMME

Type of audit Staff involved

Particulars Remarks Time Takenobtain management lettercash bookbank statementsbank reconciliation statementpurchase booksales bookbills registerjournalfixed assets registerdebtors/creditors confirmations etc

Signature of Audit Head

Statutory Audit/Tax Audit/Internal Audit etcMr A (head)

Mr B (Audit Assistant)

M/S XYZ PVT LTD AUDIT PROGRAMME FOR THE MONTH/FINANCIAL YEAR

Q 1Q 1C is partner in ABC Associates, Chartered C is partner in ABC Associates, Chartered

Accountants. Analyse whether disqualification Accountants. Analyse whether disqualification provisions are attracted in the following cases:provisions are attracted in the following cases:

C is indebted for an amount exceeding Rs C is indebted for an amount exceeding Rs 1000. Can C be appointed as an auditor in his 1000. Can C be appointed as an auditor in his individual name?individual name?

The firm is indebted for > 1000. Can C be The firm is indebted for > 1000. Can C be appointed as an auditor in his individual appointed as an auditor in his individual name?name?

Ans• When a firm is appointed as auditor, each

partner is deemed to be so indebted• When a firm is indebted, each partner is

deemed to be so indebted• In both the cases disqualification will apply

Q 2 Q 2 At the AGM of navkar ltd, Om is At the AGM of navkar ltd, Om is appointed as the auditor. Om appointed as the auditor. Om refuses to accept the audit. The refuses to accept the audit. The company holds another general company holds another general meeting and appoints a new auditormeeting and appoints a new auditor

Ans

Refusal to accept appointment in the first AGM implies that no auditor has been appointed at the AGM. Therefore central govt has the power to appoint an auditor u/s 224(3)

Q 3Q 3The company recorded on 31.3.04 The company recorded on 31.3.04 a sale of goods to the tune of Rs a sale of goods to the tune of Rs

10000 to A & Co ltd, a sister 10000 to A & Co ltd, a sister concern and recognized a profit of concern and recognized a profit of

Rs 2500. On April 1,2004 a Rs 2500. On April 1,2004 a purchase of the goods of the same purchase of the goods of the same description amounting to Rs 10000 description amounting to Rs 10000

from A co was found to be from A co was found to be recorded.recorded.

AnsAns

The auditor should enquire whether The auditor should enquire whether such transactions are merely book such transactions are merely book entries and whether such entries are entries and whether such entries are prejudicial to the interests of the prejudicial to the interests of the company.company.

In this case the sale and purchase are In this case the sale and purchase are intended to boost up the profits.intended to boost up the profits.

The auditor should report the matter to The auditor should report the matter to the membersthe members

Q 4 which of the following will you include Q 4 which of the following will you include for the purpose of calculation u/s 224(1)(B)?for the purpose of calculation u/s 224(1)(B)?government companiesgovernment companies

Sec 25 companiesSec 25 companies

Unlimited liability companyUnlimited liability company

Special auditSpecial audit

Tax auditTax audit

Joint auditJoint audit

Foreign company auditForeign company audit

Internal auditInternal audit

Private company auditPrivate company audit

Branch auditBranch audit

Audit of Statutory corporationAudit of Statutory corporation

InvestigationInvestigation

Guarantee companies having no share capitalGuarantee companies having no share capital

YesYesYesYesYesYesNoNoNoNoYesYesNoNoNoNoNoNoNoNoNoNoNoNonono

Q 5Q 5A newly set up pvt ltd manufacturing A newly set up pvt ltd manufacturing company has incurred the following company has incurred the following expenditure during its construction expenditure during its construction period. It intends to capitalize the period. It intends to capitalize the expenses. Commentexpenses. Comment Foreign tour expenses of directors for purchasing plant and machineryForeign tour expenses of directors for purchasing plant and machinery

Expenditure incurred for acquisiton of an asset should be capitalised as a part of the cost of the asset. But if they fail to pruchase the Plant & Machinery it has to be treated as deferred revenue expense and shown under miscellaneous expenses

• Non technical staff’s salary during Non technical staff’s salary during the period of installation of Plant & the period of installation of Plant & MachineryMachinery

It represents indirect expenditure It represents indirect expenditure related to related to acquisition/construction and is acquisition/construction and is incidental thereto and should be incidental thereto and should be capitalised as part of capitalised as part of acquistion/construction cost.acquistion/construction cost.

• Other sundry expenses such as Other sundry expenses such as Stationery, printing, postage, Stationery, printing, postage, telephones etctelephones etc

Such expenses are also Such expenses are also indirectly related the indirectly related the construction and are incidental construction and are incidental thereto and therefore it is thereto and therefore it is recommended that the same be recommended that the same be capitalised as a part of capitalised as a part of construction costconstruction cost..