PROFESSIONAL OMPETENCE - Yola
PROFESSIONAL COMPETENCE COURSESTUDY MATERIALAUDITING AND ASSURANCE
PAPER2Auditing And AssuranceBOARD OF STUDIESTHE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
This study material has been prepared by the faculty of the Board of Studies. Theobjective of the study material is to provide teaching material to the students to enablethem to obtain knowledge and skills in the subject. Students should also supplement theirstudy by reference to the recommended text books. In case students need anyclarifications or have any suggestions to make for further improvement of the materialcontained herein, they may write to the Director of Studies.All care has been taken to provide interpretations and discussions in a manner useful forthe students. However, the study material has not been specifically discussed by theCouncil of the Institute or any of its Committees and the views expressed herein may notbe taken to necessarily represent the views of the Council or any of its Committees.Permission of the Institute is essential for reproduction of any portion of this material. The Institute of Chartered Accountants of IndiaAll rights reserved. No part of this book may be reproduced, stored in a retrieval system,or transmitted, in any form, or by any means, electronic, mechanical, photocopying,recording, or otherwise, without prior permission, in writing, from the i.orgISBN No.:978-81-8441-045-7Published by:The Publication Department on behalf of CA. R. Devarajan,Additional Director of Studies (SG), The Institute ofChartered Accountants of India, A-94/4, Sector-58, NOIDA– 201 301, India.Printed by:Sahitya Bhawan Publications, Hospital Road, Agra 282 003.May/2008/25,000 Copies (Reprint)
PREFACEAuditing is, perhaps, one of the most practical-oriented subjects in the C.A. curriculum. Theinclusion of this subject at the Professional Competence Course (PCC) Level, aims to provideworking knowledge of generally accepted auditing procedures and of techniques and skills neededto apply them in audit and attestation engagements. A good knowledge of the subject would providea strong foundation to students while pursuing the chartered accountancy course. A goodunderstanding of the theoretical concepts, particularly, in the context of auditing standards wouldmake practical training an enriching and enjoying experience. While studying this paper, studentsare advised to integrate the knowledge acquired in other subjects, specifically, accounting andcorporate laws in a meaningful manner. Such a learning would only help a student to become abetter professional. In nutshell, it is a subject which involves application of theoretical knowledge ofother subjects included in the course curriculum. It is this practical aspect of the subject whichallows the individual students to exhibit their intelligence and ability upon which the scoring of themarks depends. A systematic study of the subject will not only help in securing good marks andpassing the examination but also enable one to become a good chartered accountant. A list ofsteps to be followed is given below:Familiarise yourself with the syllabus: You must know the exact scope of the syllabus. Divide theentire syllabus into broad topics. At the PCC level, the broad topics are – Nature and Objectives ofAuditing. Audit Planning, Internal Control, Vouching, Verification of assets and liabilities, CompanyAudit, Special Audits, etc. Such a division of syllabus would always provide a bench-mark to assessthe extent of preparation and, thus, infuse confidence.Read each topic thoroughly: One may read each topic thoroughly, understand and grasp thesame. This is not a subject where the student can exploit his intellect and commonsense withouthaving the requisite knowledge of the subject. A thorough preparation is pre-requisite for success inthis subject. If necessary, supplement the same with a standard text book. While reading througheach topic, take special note of Auditing and Assurance Standards (AASs), Accounting Standards(AS), relevant case laws, provisions of the Companies Act, 1956 or other special legislations, etc.As stated earlier, auditing should not be studied in isolation since it is related to other subjects. Inparticular, the knowledge of Accounting Standards; laws affecting business organisation, such aPartnership Act, 1932, Companies Act, 1956, etc. is pre-requisite for understanding of the subjectand to write a good answer. One must read the monthly publications of the Institute, viz., TheChartered Accountant and the Students’ Newsletter regularly to keep abreast of the latestdevelopments in the field.Prepare Notes: You will appreciate that normally mere reading a page from the book does not leadyou anywhere. It is very essential to comprehend the subject. Therefore, effective reading isessential to absorb the same. After reading each chapter, prepare comprehensive notes since theactual writing down of the matter helps not only in understanding but facilitates quick revision as
well. You may make use of mnemonic while preparing notes. For example, assertions in respect ofan item appearing in the balance sheet to be verified may be remembered as VCREP in themnemonic form wherein V stands for Valuation, C stands for completeness, R stands forRights/obligation, E stands for existence and P stands for presentation and disclosure requirements.Check Your Progress: Perhaps, the best way to check your progress is to go through questionpapers of previous examinations. An element of introspection is necessary at this stage. In case astudent feels that he is not able to answer the requisite number of questions, he must ask himselfand ascertain reasons for the same. You must write answers under mock examination conditions toassess your writing capability and compare the same with suggested answers provided by theBoard of Studies. Having regard to the extent of changes, students may note that suggestedanswers to the questions set at the previous Intermediate Examinations would still be beneficialfrom the academic preparation view point. A word of caution. While going through “SuggestedAnswers” for previous examinations, no attempt should be made to memorise the answers as such.Rather a student may read them thoroughly to gain knowledge and improve understanding andspecifically as to how an answer should be written in the examination.Examination Approach: Having prepared thoroughly on the aforesaid lines, a student should notrush to write the answers the examination. Read the question carefully, understand its exact scope,plan the main headings and points to be covered and then write your answer. Answer should be tothe point and this can only be so if the question is understood by the students in proper perspective.Question should be read carefully to know its exact requirements. For instance, a question relatingto vouching may pertain to any entity or with specific reference to a company. The students shoulddiscuss the questions as exhaustively as it could be made remembering at the same time that noinsignificant and irrelevant matters are included in the answers. The students should cultivate thehabit of remembering all the important and relevant points relating to the question prepared by them.The suggested answers published by the Board stand as the best guide in this rect. Merely statingone or two points is not enough where the question calls for a number of points. All the importantand relevant points should either be discussed or at least stated depending upon the marksassigned to the question. Reference to relevant AASs, AS, provisions of the Companies Act, 1956,decided case laws, etc. enriches the quality of an answer. Command over standard English isabsolutely essential. You may divide or sub-divide descriptive questions with distinct paragraphheadings. In a professional examination a candidate must attempt all the required number ofquestions. For instance in Auditing, a candidate must attempt all questions (say, six) in a balancedmanner. Proper time management is thus, essential. It may so happen that a candidate is not in aposition to write all six answers and may be decided to write five answers in an excellent mannerand skip the sixth one. This approach is not advisable since in such a case a candidate would haveattempt questions of about 80 marks only. Keep in mind the golden principle that six averageanswers shall fetch more marks than five best answers.Read on and Best of Luck !
SYLLABUSPaper 2: Auditing and Assurance(One Paper- Three hours -100 Marks)Level of knowledge: Working KnowledgeObjective:To understand objective and concept of auditing and gain working knowledge of generally acceptedauditing procedures and of techniques and skills needed to apply them in audit and attestationengagements.Contents:1. Auditing Concepts Nature and limitations of Auditing, Basic Principles governing an audit,Ethical principles and concept of Auditor’s Independence, Relationship of auditing with other disciplines.2. Auditing and Assurance Standards and Guidance Notes Overview, Standard-settingprocess, Role of International Auditing and Assurance Standards Board, Auditing and AssuranceStandards issued by the ICAI AAS 1 – AAS 30 and AAS 34; Guidance Note(s) on Audit of FixedAssets, Audit of Inventories, Audit of Investments, Audit of Debtors, Loans and Advances, Audit of Cashand Bank Balances, Audit of Miscellaneous Expenditure, Audit of Liabilities, Audit of Revenue, Audit ofExpenses.3. Auditing engagement Audit planning, Audit programme, Control of quality of audit work Delegation and supervision of audit work.4. Documentation Audit working papers, Audit files:Ownership and custody of working papers.Permanent and current audit files,5. Audit evidence Audit procedures for obtaining evidence, Sources of evidence, Reliability ofaudit evidence, Methods of obtaining audit evidence Physical verification, Documentation, Directconfirmation, Re-computation, Analytical review techniques, Representation by management, Obtainingcertificate.6. Internal Control Elements of internal control, Review and documentation, Evaluation of internalcontrol system, Internal control questionnaire, Internal control check list, Tests of control, Application ofconcept of materiality and audit risk, Concept of internal audit.7.Internal Control and Computerized Environment, Approaches to Auditing in Computerised
Environment.8.9.Auditing Sampling Types of sampling, Test checking, Techniques of test checks.Analytical review procedures.10. Audit of payments General considerations, Wages, Capital expenditure, Other payments andexpenses, Petty cash payments, Bank payments, Bank reconciliation.11. Audit of receipts General considerations, Cash sales, Receipts from debtors, Other Receipts.12. Audit of Purchases Vouching cash and credit purchases, Forward purchases, Purchasereturns, Allowance received from suppliers.13. Audit of Sales Vouching of cash and credit sales, Goods on consignment, Sale on approvalbasis, Sale under hire-purchase agreement, Returnable containers, Various types of allowances givento customers, Sale returns.14. Audit of suppliers' ledger and the debtors' ledger Self-balancing and the sectional balancingsystem, Total or control accounts, Confirmatory statements from credit customers and suppliers,Provision for bad and doubtful debts, Writing off of bad debts.15. Audit of impersonal ledger Capital expenditure, deferred revenue expenditure and revenueexpenditure, Outstanding expenses and income, Repairs and renewals, Distinction between reservesand provisions, Implications of change in the basis of accounting.16. Audit of assets and liabilities.17. Company Audit Audit of Shares, Qualifications and Disqualifications of Auditors, Appointmentof auditors, Removal of auditors, Powers and duties of auditors, Branch audit , Joint audit , Specialaudit, Reporting requirements under the Companies Act, 1956.18. Audit Report Qualifications, Disclaimers, Adverse opinion, Disclosures, Reports andcertificates.19. Special points in audit of different types of undertakings, i.e., Educational institutions, Hotels,Clubs, Hospitals, Hire-purchase and leasing companies (excluding banks, electricity companies,cooperative societies, and insurance companies).20. Features and basic principles of government audit, Local bodies and not-for-profitorganizations, Comptroller and Auditor General and its constitutional role.
CONTENTSPrefaceSyllabusChapter 1 - Nature of Auditing1.1Introduction. 1.11.2Nature and Purpose of Financial Statements . 1.21.3Auditing and Assurance Standards . 1.31.3.1 International Auditing and Assurance Standards Board. 1.31.3.2 Auditing and Assurance Standards Board . 1.41.4Definition of Auditing. 1.71.5The Auditor. 1.71.5.1 Functional Classification of Auditors : Internal Audit vs. External Audit. 1.91.5.2 Qualities of an Auditor . 1.91.6Objectives of Audit. 1.101.6.1 Expression of opinion . 1.101.6.2 Errors and Frauds. 1.121.6.3 Detection of Fraud and Error : Duty of an Auditor . 1.191.7Aspects to be covered in Audit . 1.251.8Basic principles governing an Audit. 1.261.9Scope of Audit . 1.291.10Inherent Limitations of Audit . 1.261.11Auditing and Investigation . 1.271.12Types of Audit . 1.271.13Advantages of an Independent Audit . 1.281.1Relationship of Auditing with other Disciplines . 1.291.14.1 Auditing and Accounting . 1.291.14.2 Auditing and Law . 1.341.14.3 Auditing and Economics. 1.34
1.14.4 Auditing and Behavioural Science . 1.351.14.5 Auditing and Statistics & Mathematics . 1.351.14.6 Auditing and Data Processing. 1.351.14.7 Auditing and Financial Management. 1.351.14.8 Auditing and Production . 1.36Self-Examination Questions. 1.36Chapter 2 - Basic Concepts in Auditing2.1Concept of Auditor’s Independence . 2.12.2Audit Evidence . 2.42.2.1 Introduction. 2.42.2.2 Audit Procedures to Obtain Audit Evidence. 2.52.2.3 Types of Audit Evidence. 2.82.2.4 Reliability of Audit Evidence . 2.82.2.5 Methods to Obtain Audit Evidence . 2.82.3Concept of Materiality. 2.102.4Concept of True and Fair. 2.122.5Disclosure of Accounting Policies. 2.132.5.1 Nature of Accounting Policies. 2.132.5.2 Areas in which Different Accounting Policies are Encountered . 2.132.5.3 Disclosure of Accounting Policies. 2.142.5.4 Fundamental Accounting Assumptions . 2.14Self-Examination Questions. 2.15Chapter 3 - Preparation for an Audit3.1Auditor’s Engagement . 3.13.2Audit process. 3.33.3Audit techniques. 3.43.4Audit Procedure. 3.53.5Audit Planning . 3.63.5.1 Knowledge of the Client's Business. 3.73.5.2 Development of an Overall Plan. 3.83.5.3 Developing the Audit Programme. 3.93.6Audit Programme. 3.103.6.1 Advantages and Disadvantages of the use of an Audit Programme . 3.13ii
3.7Methods of work .
1. Auditing Concepts Nature and limitations of Auditing, Basic Principles governing an audit, Ethical principles and concept of Auditor’s Independence, Relationship of auditing with other disciplines. 2. Auditing and Assurance
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