CA Ashish Gupta
PH. 97292-61988
Chapter-1: Introduction to Auditing
1. General Purpose Financial Statements: - Financial Statements
consist the following:-
a) Balance Sheet: Shows position of assets and liabilities at a particular date.
b) Profit and Loss A/c: Indicates profit earned or loss incurred during a
particular financial year.
c) Cash Flow and Fund Flow Statement: Shows movement of cash/funds
during a particular financial year.
d) Notes to accounts: i.e. Disclosures or explanatory notes.
2. Users of Financial Statement:Users
Owner
Management
Lenders
Suppliers
Govt.
Employees
Research
analysts etc.
Purpose
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For evaluating performance of business
For evaluating profitability of business.
For making decisions and performance evaluation.
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For determining the financial position and strength of the
company.
For judging recoverability of their dues.
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For calculation of direct tax and indirect tax.
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For determining reasonableness of wages and salaries etc.
For creating demand for extra bonus.
For evaluating trends.
For judging investment opportunities in the business.
3. Definition of Auditing:
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Audit is an independent examination,
Of financial information,
Of any entity whether profit making or not, irrespective of its size & legal
structure,
When such an examination is conducted with a view to express an opinion
thereon.
S.R.G. COMMERCE INSTITUTE
A fine art of education for CA-CPT, IPCC; B.COM-M.COM
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CA Ashish Gupta
PH. 97292-61988
4. Features / Characteristics of Audit:-
1. Independent
Examination
2. Financial
Statements
3. Entity
4. Opinion
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Auditor should be unbiased in his approach
He should not be influenced by the client.
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Auditor’s opinion is on the financial statements
The preparation of the financial statement is the
responsibility of management of the entity.
His client can be any entity irrespective of its size and
legal structure i.e. it may be proprietorship, partnership,
trust or company etc.
The entity may be profit oriented or charitable one.
His opinion is on ‘true & fair view’ of the financial
statements of the entity.
For this, it is necessary that
a) Financial statement have been prepared using
acceptable policies which are consistently applied;
b) Financial statement have been prepared as per
relevant regulations; and
c) There is appropriate disclosure of all material items.
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5. Independent Audit:-
Meaning of
Independence
Auditor’s
Independence
Why
Independence
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Independent means that the judgement of a person is
not subordinate to wishes of another person.
Auditor should be unbiased in his approach.
He should not be influenced by the client.
The need for auditor’s independence is provided in
Standards on Auditing.
The Companies Act 1956 also contains specific
provision to ensure auditor’s independence.
Moreover, as per The Chartered Accountants Act,
1949 as amended by The Chartered Accountants
(Amendment) Act, 2006, independence of auditor is
required.
If auditor maintains high degree of independence,
credibility of financial statements is enhanced.
Independent audit report will be accepted &
respected by all the stakeholders.
S.R.G. COMMERCE INSTITUTE
A fine art of education for CA-CPT, IPCC; B.COM-M.COM
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CA Ashish Gupta
PH. 97292-61988
6. Advantage of Independent Audit: - the following are the main
advantage of independent audit:
(May 08, 12, RTP Nov13)
To Owners
To Management
To Lenders
To Insurer
To Govt.
To Employees
To Prospective
Investor

They get real picture of profit or loss earned.
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They can easily judge reasons for losses and try to control it.
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Audited Statement enhances the reliability for determining the
financial position and strength of the company.
In case of loss or damage to property by fire, theft etc., it
helps the insurer to settle the claim.
Audited Statement enhances the reliability for calculation of
direct tax and indirect tax.
For determining reasonableness of wages and salaries etc.
For creating demand for extra bonus.
On the basis of past year’s audited financial statements, they
can devise expected profit trends for deciding whether to
invest in the entity or not.
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Note: - Audit of accounts of a Sole Proprietor is not compulsory under
any statue. However, the above benefits would accrue to the Sole
Proprietor when he gets his accounts audited voluntarily.
7. Advantage of Independent Audit to the Partnership Firms: - In
addition to above the followings also the advantage of independent
audit to the partnership firms:
(May 07(5m))
To Settle
Accounts
On Retirement or
Death of a
Partner
On admission of a
new partner
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Audited accounts provide a reliable means of settling
accounts between the partners and thus the possibility of
occurrence of dispute among them is mitigated.
Audited accounts provide a reliable means for computing the
amounts due to retiring partner or to the representative of the
deceased partner in respect of his share of capital, profits and
capital.
Audited accounts provide a reliable means for negotiations
with the new partner.
S.R.G. COMMERCE INSTITUTE
A fine art of education for CA-CPT, IPCC; B.COM-M.COM
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CA Ashish Gupta
PH. 97292-61988
8. Qualities of Auditor: i)
Integrity: Auditor should be honest, sincere & straightforward while performing
his professional duties.
ii)
Objectivity: He should be unbiased in his approach.
iii)
Independence: The judgement of a auditor should not subordinate to wishes
of another person.
iv)
Knowledge: He should have the knowledge of client’s business, various laws like
Taxation Law, Partnership Act etc. He must continuously update his knowledge to
conduct audit efficiently.
v)
Communication Skills: During conduct of audit , he has to interact with
various officers & staff of organisation & third parties, thus he has to require goods
oral & written communication skills.
vi)
Tact: He must be able to deal with different person in different situation.
vii)
Logical Skills: He must be able to analyse & interpret problems so that he can
accordingly deal with the same.
viii)
Technical skills: He must have good hand on accounting & auditing etc.
Moreover he should be aware latest development in auditing standards so that he
can perform audit in effective manner.
ix)
Confidentiality:-He should not disclose the confidential information acquired
during the conduct of audit unless required by the law or permitted by the client.
S.R.G. COMMERCE INSTITUTE
A fine art of education for CA-CPT, IPCC; B.COM-M.COM
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CA Ashish Gupta
PH. 97292-61988
9. Basic Aspects to be covered by the Auditor/Auditor’s
Functions/Matters which the auditor should look into before
framing an opinion on accounts under audit : - the following are
the principal aspects to be covered in an audit are:
Internal Control
System
Arithmetical
Accuracy
Evidence
Assets
Liabilities
Statutory
Compliance
Accounting
Principles
True & Fair View
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Examination of the system of accounting and internal control
to ascertain whether it is appropriate for the business and
helps in proper recording of all transactions.
Check books of accounts to ensure their arithmetical accuracy
Examining documentary evidence to support the books of
accounts.
Verification of the title, existence and value of assets
appearing in the Balance Sheet.
Verification of liabilities in the Balance Sheet.
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In case of audit of Banks, General Insurance Companies etc.,
ensure compliance of financial statement with relevant statute.
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Ascertain that a proper distinction has been made between
items of capital and revenue nature.
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Check whether financial statements as a whole represent true
& fair view of profit/loss and of assets & liabilities in the
required form.
S.R.G. COMMERCE INSTITUTE
A fine art of education for CA-CPT, IPCC; B.COM-M.COM
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