Auditing

B.B.A. VI semester

Unit 01: - Introduction: Meaning and objectives of Auditing, Types of Audit, Internal Audit,
Audit Programme, Audit Notebook, Routine Checking and Test Checking.

➢ Meaning of Auditing:

Auditing is a systematic and independent examination of financial records, statements, and

related operations to ensure accuracy, fairness, and compliance with accounting standards
and laws.

Auditing is a systematic, critical, and independent examination of books of accounts,

documents, and vouchers of a business to ascertain whether the financial statements reflect a
true and fair view of the organization’s financial position and performance.

Definition by Spicer & Pegler:

“Auditing is such an examination of the books of accounts and vouchers of a business as will
enable the auditor to satisfy himself that the Balance Sheet is properly drawn up.”

Lawrence R. Dicksee:
"An audit is an examination of accounting records undertaken with a view to establishing
whether they correctly and completely reflect the transactions to which they relate."

➢ Characteristics of Auditing

1. Systematic Process – Auditing follows a structured and pre-defined methodology.

2. Independent Examination – The auditor should be impartial and not influenced by

management.

3. Evidence-Based – Relies on sufficient and appropriate evidence for forming an

opinion.

4. Judgment-Based – Involves professional scepticism and auditor’s judgment.

5. Objective-Oriented – Aims at verifying the truthfulness and fairness of financial

information.

6. Legal Recognition – In some cases, such as statutory audits, auditing is required by

law.
Objectives of Auditing

Primary Objectives:

• To verify the accuracy of financial statements.

• To ensure compliance with accounting principles and statutory requirements.

• To detect and prevent frauds and errors.

• To give an audit opinion on the true and fair view of the financial position.

Secondary Objectives:

• Detect technical errors like wrong totalling, mis postings.

• Detect frauds like manipulation of accounts, misappropriation.

• Help in valuation of assets and liabilities.

• Act as a moral check on employees.

➢ Types of Audit

Type of Audit Description Example

Statutory Compulsory under law for certain Audit of a public company.
Audit companies (e.g., companies under
Companies Act).
Internal Audit Conducted by the internal team to check Monthly internal audit by
internal controls. the accounts department.
External Audit Done by an external, independent Annual audit by a chartered
auditor. accountant.
Cost Audit Verifies cost accounting records. Audit of a manufacturing
company’s cost structure.
Management Evaluates efficiency and effectiveness of Review of departmental
Audit management. productivity.
Tax Audit Conducted to comply with tax laws. Audit under Income Tax
Act.
Operational Assesses operational processes. Audit of logistics efficiency.
Audit

➢ Internal Audit

An independent appraisal function established within an organization to examine and evaluate

internal controls.
Internal audit is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.

Purpose: To improve organizational operations and governance.

Characteristics:

1. Independence – Though part of the organization, internal auditors must operate

without influence.

2. Continuous Process – Unlike statutory audit, internal audits may be ongoing.

3. Advisory Role – Helps in improving processes and efficiencies.

4. Preventive Tool – Helps in identifying issues before they become serious.

5. Flexible Scope – Covers financial, operational, compliance, and system audits.

Example:
A bank's internal auditor may regularly check teller cash balances, loan documentation, and
compliance with RBI guidelines.

➢ Audit Programme

A detailed plan of the auditing work to be performed by the auditor.

An Audit Programme is a written plan of action that outlines the audit procedures to be
followed during an audit. It lists what is to be done, who will do it, and when it will be done.

Characteristics:

1. Structured – Clearly outlines each audit task.

2. Comprehensive – Covers all areas of the audit.

3. Customizable – Can be adapted based on the client’s operations and needs.

4. Time-bound – Includes timelines for each task.

5. Documentation-Oriented – Forms a part of audit evidence.

Types:

• Fixed Audit Programme: Rigid, used for routine work.

• Flexible Audit Programme: Can be modified based on changing conditions.

Benefits:

• Ensures systematic working.

• Avoids duplication of work.

• Facilitates delegation and monitoring.

Example:
An audit programme might specify tasks like “verify all cash receipts for December” or
“reconcile bank statements.”

➢ Audit Notebook

A notebook maintained by audit staff to record observations, doubts, and important points
during the audit.

An Audit Notebook is a diary or journal used by auditors to record important observations,

unresolved queries, irregularities, and points needing clarification during the audit process.

Characteristics:

1. Maintained by Junior Staff – Usually by audit assistants or clerks.

2. Record of Audit Trail – Contains the chronology of checks performed.

3. Supports Final Report – Assists in drafting the audit report.

4. Legal Evidence – May serve as legal proof in case of disputes.

5. Permanent Record – Retained as part of audit documentation.

• Contents:

o Queries and explanations from management.

o Unusual transactions.
o Checklist of documents verified.
o Work performed and pending issues.
Purpose:

• Acts as a reference for audit reporting.

• Useful for future audits and evidence.

Example:
If there's a large unverified transaction, the auditor may note:
“₹10 lakh invoice from ABC Ltd. pending confirmation – to be verified with management.”

➢ Routine Checking
Checking of regular accounting entries and arithmetical accuracy in day-to-day
transactions.
Routine Checking refers to the process of verifying the arithmetic accuracy and correct
recording of day-to-day business transactions.
Characteristics:
1. Regular Activity – Performed as part of the standard audit procedure.
2. Covers Basic Verifications – Includes checking postings, calculations, and vouchers.
3. Detects Clerical Errors – Helpful in identifying unintentional mistakes.
4. Foundation for Detailed Checks – Prepares ground for further audit work.

Involves:
o Checking ledger postings.
o Verifying totals and balances.
o Cross-checking vouchers and receipts.

Purpose:

• Detect clerical errors or mis postings.

Example:
Verifying that a sales invoice of ₹15,000 is posted correctly to the customer’s account and
sales ledger.

➢ Test Checking

Technique where the auditor checks a representative sample of transactions instead of

checking every entry.

Test Checking is an audit sampling technique where only a representative portion of the
total transactions is checked instead of verifying all entries.
Characteristics:

1. Selective – Based on random or risk-based selection.

2. Efficient – Saves time and effort in large organizations.

3. Relies on Internal Controls – Assumes that internal systems are effective.

4. Statistically Driven – May involve sampling theory or models.

5. Risk-Oriented – Focuses more on transactions prone to errors or frauds.

Used When:

▪ Internal controls are strong.

▪ Volume of transactions is very high.

Advantages:

• Saves time and effort.

• Focuses on risk-prone areas.

Example:
Out of 1,000 purchase invoices, only 100 are checked based on random sampling or risk-
based selection.
 Summary Table

Topic Definition Key Characteristics

Auditing Systematic, independent review of Objective, evidence-based, legally

financial data to ensure truth and recognized, systematic, judgmental.
fairness.

Internal In-house review of internal Independent, ongoing, preventive,

Audit processes and controls. value-adding.

Audit A written schedule of audit work. Structured, time-bound, detailed,

Programme customizable.

Audit Diary of audit findings and issues. Maintained by staff, used in final
Notebook reporting, can serve as evidence.

Routine Checking accuracy of routine Basic, clerical, regular, foundation

Checking transactions. work.

Test Checking Sample-based verification Selective, efficient, based on

technique. controls, risk-oriented.