FINANCIAL ATTEST AUDIT

Hari Prasad
Sr. Audit Officer/IS Audit
TYPES OF AUDIT

CAG carries out three types of

audit:
 Transactions audit/propriety audit
 Financial audit /certification audit

 Performance audit

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WHAT IS FINANCIAL ATTEST AUDIT ?
 FAA is a process of attestation of financial accountability
of the accountable entities involving examination and
evaluation of financial records and expression of
opinions on financial statements.

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WHAT IS THE MEANING OF ‘ATTEST’
The plain dictionary meaning :
 To attest: is to certify the validity.
 Hence Attestation is : certification.
 What does the certificate say in FAA?
 The certificate gives an opinion about the
correctness of the accounts
 Why only an opinion and not a firm
statement or assertion?
eg: conduct certificate

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DIFFERENCE BETWEEN REGULARITY AUDIT
AND FINANCIAL AUDIT

 Regularity or transaction audit does not aim at providing assurance

on transactions. It examines its propriety and regularity.
 Regularity audit is on the department as a whole and not on any
financial statements or accounts.
 Regularity audit may not cover the whole entity or all the units of
the entity. Financial audit is on the accounts for one financial year
and for the whole of the entity.
 The irregularity may not be material for financial audit.
 Regularity audit observations go to PAC/COPU but financial audit
report is placed in the legislature.

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FINANCIAL ATTEST
FUNCTION.
 FAA is concerned with expression of audit opinion on
the set of financial statements of the entity audited.
 It provides a positive assurance that the financial
statements are free from material misstatements.
 FAA is aimed at certification that that the financial
statements reflect a true and fair view of the state of
affairs of the entity.

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THE OPINION
 The opinion given is that the financial statements
are free from material misstatements and the
financial statements exhibit a true and fair view .
 Opinion is given on the basis of audit evidence.
 Opinion is expressed in the form of audit
 Only misstatements which are material or which
affect the true and fair view of the financial
statements are reported.
 certificate and/or an audit report.

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ASSURANCE
 The purpose of giving an opinion on the financial
statements is to give an assurance to the user or owner
that statements are free from material misstatements or
irregularities.
 Audit opinion is based on reasonable assurance as it is
not possible to give any absolute assurance.

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WHAT IS A MISSTATEMENT?
 Any error or omission in the financial statements is a
misstatement.
 Any statement which would mislead the reader of the
accounts is a misstatement.
 Any statement or amount which is not based on facts or
the books of accounts is a misstatement.
 Any statement which would give a wrong impression or
assessment of the entity is a misstatement.
 It will also influence or change the decision or lead to
wrong decisions.
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WHAT COULD BE A MISSTATEMENT?
 Government Accounts
 Misclassification of revenue and capital expenditure,
overpayment of salaries and pensions, expenditure
without approval, irregular payment of grants, mis-
classification of expenditure, investments without
value, overspending or surplus etc affect the fair view.
 Autonomous bodies and companies.
 Overstatement of assets or income or understatement of
liabilities or expenditure etc.
 Eg: exp on flood relief or tribal welfare etc.

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WINDOW DRESSING

 What is window dressing?

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WINDOW DRESSING -MEANING
 Window dressing is a skillful presentation of facts to
give a deceptively favorable impression.
 It amounts to misstatement of facts with an intention to
mislead.
 It will influence the decision of the authorities or give a
wrong impression to the public.

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WINDOW DRESSING-HOW IS IT DONE?
 Misstatements may be made deliberately to show better
working results – profits or to hide bad performance.
 Misstatements may be made by understating the
liabilities or overstating the assets.
 Misstatements may be made by not providing for
expenses and taking into account income not yet accrued
or actually earned.

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WHAT IS MATERIALITY
 Any misstatement to be worthy of reporting should be
material enough to affect the true and fair view of the
financial statements.
 The critical question is: “ will the level of error distort
the overall view given by the accounts?”
 If it has a serious effect on the view given by the
accounts, it would be regarded as material.
 Materiality depends on how much mistake can be
tolerated without vitiating the accounts. 1% or 5%?

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MATERIALITY -2
 Materiality is a relative term- what is material or
important in one situation may not be material in
another.
 Information is material if its misstatement could
influence the economic decision of the users taken on
the basis of the financial information given in the
statements. E.g. bonus case.
 It is not just the value of the error or amount involved
but the materiality should be judged in relation to the
nature and context of the error.

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MATERIALITY-3
 Parliamentary interest or national interest will also
decide materiality –context.
 In short, information is considered material if its
misstatement or omission would influence or change the
decision of the intended user of the audit report or distort
the true and fair view of the financial affairs of the entity.

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FINANCIAL STATEMENTS
Entity Financial statements Owners and users

Union and State Finance Accounts and Peoples representatives-

Governments Appropriation accounts Parliament /State
Legislature and public

Autonomous Profit and Loss Accounts ---do---

bodies(Central and and Balance Sheets
State)
Public Sector Profit and Loss Accounts Shareholders/Governme
enterprises- Companies and Balance Sheet nt and Public
and Statutory
Corporations
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STATUTORY PROVISIONS FOR FAA
 Section 13 of DPC Act: audit of all expenditure from the
consolidated and contingency fund and the trading, profit
and loss accounts and Balance Sheets.
 Section 14 and 15: Grants in aid to authorities and societies.
 Section 19: Companies
 Section 20 : using the power to take up audit even where it is
not entrusted.
 Section 20(1) and (2) – Request audit. Request from the
President or Governor and proposal from CAG to take up
audit.
 Regulations for Audit and Accounts 2007 also provide for
financial audit in Chapter IV. 18
HOW DO WE DO FINANCIAL ATTEST
AUDIT.
 Examine and evaluate financial statements and records.
 Examine the systems for carrying out the transactions,
compliance with regulations and complexness of
recording of transactions.
 Examine and evaluate internal controls and procedures to
assess the audit risk.

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AUDITING TECHNIQUES IN FAA
 Confirmation of balances
 Inquiry –oral or written
 Observation or physical verification
 Analytical review procedures. Like comparison of
previous year figures for significant differences,
averages for expenditure, comparable industry
information(% waste etc.), ratios and percentages, study
of relationships with finacial and non-financial data,
predicitive analysis (interest would indicate approx.
loan amount, tax the purchase or sales etc) and trend
analysis.
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THE ASSERTIONS
 For expressing a positive opinion (assertion) we
should ensure or have evidence of the following
with regard to the financial statements:
 For income expenditure accounts or Profit and
Loss accounts:
 Completeness
 Occurrence
 Measurement
 Disclosure
 Regularity
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THE ASSERTIONS-2
 For balance sheet or assets and liabilities

 Completeness
 Existence

 Valuation

 Ownership

 Disclosure.

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CONCEPTS IN FAA
 Accounting standards and auditing standards
 Assurance
 Risk identification, assessment and mitigation.
 Materiality
 Testing and analytical procedures
 Sampling
 Audit evidence
 Cash and accrual basis
 Frauds and misappropriations
 Audit certificate
 Management Letter
 FAA in computerised environment
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AUDIT CERTIFICATE
 Audit opinion or the certificate if given in a standard
format.
 It is designed according to the legal framework taking
into account the duties and liabilities of the auditor.
 It could be a unqualified opinion indicating that there
are not MATERIAL mistakes in the accounts.
 Or it could be qualified opinion expressing
qualifications on certain items where the auditor has
either found some material mistakes or is not able to
ensure that such mistakes do not exist.

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END OF SESSION 1
Session 2 tomorrow will deal with:
 The concepts sampling, audit evidence etc
 risk based audit

 the detailed procedure for FAA

 Qualifications in the audit certificate

 FAA in computerised environment.

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Thank you

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