Professional Documents
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Test Checking Routine Checking
Test Checking Routine Checking
Utility The term audit report is used when the The term certificate is used when the
auditor expresses his opinion on the auditor verifies certain exact fact e.g.
financial statements Royalty payment made to foreign
collaborators, value of
import/exports of a company during a
financial year.
Implication Audit report implies that the auditor A certificate implies that the Auditor
- Has examined relevant records in - Has verified certain precise figures;
accordance with generally accepted and
auditing standards; and - Is in a position to vouch their
- Is expressing an opinion whether or not accuracy as per the examination of
the financial statements representing a documents and books of account
true and fair view of the state of affairs
produced before him.
and of the working results of the
enterprise.
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
Accuracy The Auditor is responsible for The Auditor is responsible for the
ensuring that the report is based on factual accuracy of what is stated
factual data that therein.
his opinion is in accordance with
facts, and that it is
arrived at by application of due care &
Skill.
3.
Basis Audit Investigation
To Judge truthfulness and To establish a fact
Objective fairness offinancial statements
Scope Determined by laws and By term of engagement
Auditing Standards
Period Generally yearly As per requirements
Nature General Detailed
Inherent More because of test checking Less because of detailed checking
limitation
Evidence Persuasive Conclusive
Reporting General purpose i.e. to all Confidential i.e. only to needful
user of statements person
Approval No doubtful approach Doubtful approach
By whom CA-Chartered Accountants Expert team
RA- Registered Auditors
4.
Particulars Auditing Accounting
An independent examination of financial Accounting is the art of recording,
information of any entity when such classifying and summarizing
Meaning financial information, transaction
an examination is conducted with a view and events and preparation of
of expressing an opinion thereon reports thereon.
Verification of underlying vouchers and Recording of the transaction from
records and obtaining evidence on the underlying vouchers and
Objective true and fair view presented by financial preparation of financial statement.
Statement
Responsibility Auditor is appointed by the owners of It the responsibility of the
the entity. The responsibility is to be management to maintain and
reviewed the accounting and other implement an effective accounting
control and express the opinion system.
Independent examination of the financial Measurement and communication of
Deals with information prepared by the information to shareholders and
management of the entity others user of the financial
statement
Aspects of Auditing review the efficacy of Accounting involves recording
transaction recording financial information aspects of the financial information
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
Fraud Error
It is the deception or artifice with the It is inaccuracy or incompleteness in the
intention of cheating or injuring another. measurement or presentation of an act
It is intentional It is accidental and unintentional.
The person committing the fraud does so It may arise due to negligence or a
knowingly, willfully and with the motive genuine misunderstanding on the part of
of gaining advantage or benefit by cheating the persons committing them.
or causing loss or injury to
another person.
Answer
Prepaid Expenses: incurred in the course of regular operation of an enterprise.
Prepaid expenses are also treated as outstanding assets. Expenditure already incurred a part or whole
of which relates to a period subsequent to the date of the Balance Sheet. Some of the example of prepaid
expenses:
Insurance charges paid in advance;
Advertisement, etc.
Preliminary expenditure: incurred prior to the operation of an enterprise.
The expenditure incidental to the creation and floating of a company includes stamp duties, registration
fees, legal costs, accountant’s fee cost of printing etc. Preliminary expenses are both incurred by the
company or by the promoters and reimbursed them by the company. Normally, the preliminary
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
expenditures are disclosed in the prospectus, statutory report and the balance sheet. Expenditure in
connection with the preliminary expenses and not written off should be separately disclosed under the
head miscellaneous expenditure. Underwriting commission and brokerage paid for shares and
debentures should not be included under the head preliminary expenses.
Continuous Audit is one in which the auditor's staff is engaged continuously in checking the accounts of
the client the whole year round or when for this purpose the staff attends at intervals, fixed or otherwise,
during the currency of the financial period. Strictly speaking, when auditor's staff attends the audit work at
fixed intervals it may be strictly called interim audit. This is when an audit is conducted up to a particular
date within the accounting period. The auditor may attend to audit the figures for a month or for a quarter,
as the work may require. It would differ distinctly from the final audit in the extent of the work carried out;
verification of assets, for example would be left until the final audit. In case of a continuous audit, the work
is conducted throughout the course of the financial year but is not taken to a specific accounting period, as
is an interim audit. It might be that during the course of the continuous work interim figures are being
audited, but the significant factor here is that the auditor will be engaged continuously on the audit
throughout the financial period. Staff may be in residence throughout the period or may come and go at
irregular intervals, but most of the time, the audit staff is present at the location. Thus, in case of continuous
audit, the audit staff is present at the client's premises almost during the entire accounting period.
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
Extraordinary items are incomes or expenses that arise from events or transactions that are clearly
distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently
or regularly.
Auditing around the computer involves arriving at an audit opinion through examining internal control
for computer installation and the input and output only for application systems. On the basisof quality
of input and output of application systems, the auditor infers the quality of processing carried out.
Application system processing is not examined directly. The auditor views the computer as a black
box.
Auditing through computer: The auditor can use the computer to test: (a) the logic and controls
existing within the system and (b) the records produced by the system. Depending upon the complexity
of application system being audited, the approach may be fairly simple or require extensive technical
competence on the part of the auditor.
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
Whereas, the techniques by which an auditor collects evidence are known as techniques of
auditing. These techniques are:
Inspection of documents and records
Physical inspection of tangible assets
Observation
Inquiry
Confirmation
Computation and re-tracing book-keeping procedures
Analytical procedures
Thus, auditing principles are of fundamental nature which underlie the conduct of the audit. These
principles are not liable to change frequently while audit techniques may vary according to the nature of
propositions to be tested. For instance, audit technique to test the existence of cash in hand will be different
from the method to verify recover ability of sundry debtors. Further audit techniques may vary from
organization to organization depending upon the nature of business but the principles of auditing will
remain the same irrespective of the nature of the organization.
Current audit files contain information relevant for the audit of a single period.
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
Copies of letters or notes concerning audit matters communicated to or discussed with the client,
including the terms of the engagement and material weaknesses in relevant internal controls.
Letters of representations or confirmation received from the client.
Conclusions reached by the auditor concerning significant aspects of the audit, including the
manner in which expectations and unusual matters, if any, disclosed by auditor‟s procedure where
resolved or treated.
Copies of the financial information being reported on and the related audit reports, etc.
15.
Basis Reasonable Assurance Limited
Level of A high (but not absolute 100%) A moderate level of assurance
Assurance level of assurance
Work Understanding of entities Understanding of entities business and
Environment business and environment by environment by General enquiries
General enquiries Basic analytical procedure
Basic and substantive analytical Test of control and substantive test of
procedure details generally not required in
Test of control Limited assurance
Substantive test of details engagement
Type of Positive form of Opinion Negative form of opinion
Opinion
16.
Basis Audit Plan Audit Program
Meaning Audit plan refers to the Audit programme is the list of steps,
strategies or guidelines which that are to be followed by audit staff to
are followed by the auditor obtain sufficient
for audit evidence.
conducting audit.
What is it? Basic principle of audit. Series of examination and
verification steps.
Step Audit plan is initial step of Audit program is setting up of
audit procedures that are needed to
implement the audit plan
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
17.
18.
Batch Processing On-Line Real Time (OLRT) system
♦ Transactions are accumulated ♦ Transactions are processed as on
and processed in group when they occur
♦ Two types of files are maintained
♦ Only master file is maintained. It
master file is updated when batch keeps updating
processing is
run
♦ Updating does not take place as
♦ Though updating takes place
quickly as in On-Line Real immediately the processing
time becomes complex.
system
♦ Not useful when instant and
updated results are required ♦ Useful for immediate reporting system
19.
Particulars Internal Evidence External Evidence
Meaning Internal Evidence i s o n e t h a t h a s External Evidence originates
been created, used and retained within outside the Client’s organization
the Client’s organization
Examples Duplicate copy of Sales Invoices, Payee’s Receipt, Purchase Invoice of
Employees’ Time Reports, Supplier, Lease Agreement, Bank
Inventory Reports, Wage Sheets, Statements, Insurance Policies,
Counterfoils of Receipts, Purchase Agreements, etc.
Requisitions,
Minutes Books, etc.
Use for These may not always constitute a These documents are generally prepared
accounting direct accounting source document, in the ordinary course of business
e.g. purchase Requisitions, Minutes activities and form part of its records,
Books whether of accounting or
non- accounting nature.
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
20.
SN Internal Check SN Internal Audit
1 Internal check is not a specific check, 1 Internal audit is specifically done to
but the duties of different persons are check that the accounts are properly
so arranged that a person‘s work is maintained and the systems are in
automatically checked by another control.
person while carrying out the normal
duty.
2 Internal check does the preventive job 2 Internal audit does the detective job
i.e. internal check is derived so that of identifying frauds and errors and
frauds and errors are prevented. rectifying them.
3 It is more of process in a day to day 3 It is specific defined job.
functioning of the business.
4 All the persons in the organization are 4 Specific persons are appointed to the
involved to maintain the internal internal audit.
check system.
5 It is required in all organization in 5 Carrying out internal audit is not
formal or informal. compulsory.
It is done based on management
decision.
6 It does not include internal audit. 6 It includes internal check.
21.
Particulars Internal Audit External Audit
Appointing Management of the entity Owner of the entity
Authority
Scope Defined by the appointing authority Defined by the law
Approach To ensure adherence to management, To collect sufficient and
safeguard ofassets, completeness and reliable audit evidence as to
accuracy of accounting records express, “true and fair” view on
financial statement
Independence Less independent Complete independent
Reporting To management or to Audit committee To shareholder of the owner
Responsibility
Conducted by Employee or outsourced consultancy firm Member holding Certificate
of practice
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
22.
Vouching and Verification:
1. Meaning: The act of examining the vouchers is known as vouching. A voucher is any
documentary evidence in support of a TRANSACTION entered in the books of account.
Verification and be explained as establishing the truth or securing some kind of confirmation
with respect to the ASSETS AND LIABILITIES appearing in the balance Sheet of a concern.
2. Nature & Purpose: Vouching involves establishing the arithmetical accuracy and the
authenticity of the transactions of a concern. Vouching proves that an asset ought to exist.
Verification goes beyond vouching. It seeks to establish that assets as stated in the Balance
Sheet of a concern exist in fact and that the liabilities are properly disclosed. Verification
proves that an asset does exist.
3. Time: Vouching is done during the whole year Verification is done on specific date
mostly at the end of the year.
4. Utility: Vouching Certifies correctness of records whereas Verification Certifies
correctness of assets and liabilities.
5. Personnel: Vouching is done by the junior staff of the auditor under the supervision of
a senior person. Verification is done by the auditor himself assisted by senior.
Traditionally, auditors have carried out Whereas, Statistical sampling means any
selective checking by what is popularly approach having characteristics of random
called the test checking or judgmental selection of a sample and use of
sampling approach. It consists of selecting probability theory to evaluate sample
and checking a predetermined proportion results, including measurement of
of transactions on the basis of the sampling risk.
Auditor’s own judgement and without
using statistical procedures. Any sampling
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
It is not used mechanically. This approach It helps the auditor in determining the size
should involve a careful consideration of of the sample scientifically, reduces the
the circumstances of each case, on the basis chance of biasness in selection of the
of which the auditor shoulddetermine the sample and can give results with a
items to be test checked, select sample, calculated degree of risk.
examine them and evaluate the results in
the light of his knowledge ofthe business of
the enterprise.
This is a list of the audit procedures to be Audit note book is a bound book
applied in an audit in the given containing the audit program, significant
circumstances along with proper audit observations, objections, queries etc.
instructions. Thus, an audit program
contains the description of the specific
audit procedures to be performed in
respect of different aspects to be covered,
the extent to which those tests will be
performed and timing of such tests. It also
lays down the responsibilities of various
members of the audit team for carrying
i. Faster and efficient in processing of information in computerized system and no such faster
and efficient in processing of information in manual system
ii. Automatic generation of accounting documents like invoices, cheques and statement of
account which manual system cannot produce.
iii. With the larger reductions in the cost of hardware and software and availability of user-
friendly accounting software package, it is relatively cheaper like maintaining a manual
accounting system;
iv. More timely information can be produced than manual system
v. No more manual processing of the data- all automatically posted to the various
ledgers/accounts and many types of useful reports can be automatically generated for
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
management to make decisions where as such reports cannot generated on manual system
vi. Power failure, computer viruses and hackers are the inherent problems of using computerized
systems, such risk not remain in manual system
vii. Once data been input into the system, automatically the output are obtained hence the data
being input needs to be validated for accuracy and completeness, we should not forget concept
of GIGO (Garbage In (Input) Garbage out (Output) where validation in manual system can be
checked on inception
viii. Accounting system not properly set up to meet the requirement of the business due to badly
programmed or inappropriate software or hardware or personnel problems can caused more
havoc, where manual system does not have such problem.
ix. Danger of computer fraud if proper level of control and security whether internal and external.
26. compliance procedure and substantial procedures as Audit methods of collectingevidences for forming an
audit opinion.
Answer:
Auditor should obtain sufficient and appropriate audit evidences and test them beforeframing an opinion about
the assertions the financial statements reveal. For this, the auditor checks evidences through
Compliance procedures are tests designed to obtain reasonable assurance that those internal
controlon which audit reliance is to be placed are in effect. It seeks to test that
there exists internal control,
the existing internal control is effective and
the internal control is working without break or lacunae during the period under review.
When internal control is found to be to an acceptable level, the accounting entries generated in such a
system is more reliable than in one where the control is weak.
Mere satisfaction about the existence of internal control may not be sufficient for auditors to express
opinion about the assertions the financial data in the form of balances and transactions.
These i.e. transactions and balances need to be tested. This is done by audit procedure calledsubstantive
checking. Substantive procedures are designed to obtain audit evidence as to the completeness,
accuracy and validity of the data produced by the accounting system.
The checking of transaction and balances involves vouching of sales, purchases, payments, receipts
and scrutiny of ledgers. The analytical procedure involves critically examining the accounts in an
overall manner and it may entail computation of ratios, trend analysis so as to dwell in length for
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
CA FINAL (CAP III)
Traditionally, auditors have carried out Whereas, Statistical sampling means any
selective checking by what is popularly approach having characteristics of random
called the test checking or judgmental selection of a sample and use of
sampling approach. It consists of selecting probability theory to evaluate sample
and checking a predetermined proportion results, including measurement of
of transactions on the basis of the sampling risk.
Auditor’s own judgement and without
using statistical procedures. Any sampling
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30 Important Distinguish between of Audit (CAP II) Prepared by Kisan Joshi,
CA Final (CAP III)
It is not used mechanically. This approach It helps the auditor in determining the size
should involve a careful consideration of of the sample scientifically, reduces the
the circumstances of each case, on the basis chance of biasness in selection of the
of which the auditor shoulddetermine the sample and can give results with a
items to be test checked, select sample, calculated degree of risk.
examine them and evaluate the results in
the light of his knowledge ofthe business of
the enterprise.
Detection risk is the risk that an auditor's procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material, individually or when aggregated with
misstatements in other balances or classes. The level of detection risk relates directly to the auditor's
procedures. Some detection risk would always be present even if an auditor were to examine 100
percent of the account balance or class of transaction because, for example, the auditor may select an
inappropriate audit procedure, misapply an appropriate audit procedure or misinterpret the audit
results.
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30 Important Distinguish between of Audit (CAP II) Prepared by Kisan Joshi,
CA Final (CAP III)
Revenue expenditure is the expenditure, the benefit of which is immediately (within one year)
expended or exhausted in the process of earning revenue. For example, expenditure on purchase
of goods for sale, on their movement from one place to another, on maintaining assets, on
keeping a business organization going etc.
If any expenditure of a revenue nature is treated as capital, it would have the effect of inflating
the profit of the year. If the expenditure of a capital nature is charged to a revenue head, the
amount of profit would be reduced.
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