Amity School of BusinessBBA (All Programs), I Semester Business Accountancy Ms. Geetika Batra
Outline • Concept: Audit, significance, types and reports. • Basic legal requirements (retaining and submitting proper records). • Preparing and auditing financial reports. • Failure to comply with the legal requirements for maintaining and filing accounting records. • Concept of International accountancy as a profession.
Preparing Financial Statements Financial Statements Prepare Trial Balance Post Transactions Record Transactions Analyze Transactions Examine Source Documents
Companies summarize the results of their business activities in four financial statements: 1. Balance sheet 2. Income statement 3. Retained earnings statement (or statement of stockholders’ equity) 4. Statement of cash flows (statement of changes in financial position) Balance sheet and income statement are primary Retained earnings statement and statement of cash flows are derived from the balance sheet and the income statement Financial Statements
Audit and Auditing AUDITING is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested parties.
Prof. L.R. Dicksee. "auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate
FEATURES OF AUDITING a. Audit is a systematic and scientific examination of the books of accounts of a business; b. Audit is undertaken by an independent person or body of persons who are duly qualified for the job. c Audit is a verification of the results shown by the profit and loss account and the state of affairs as shown by the balance sheet. d. Audit is a critical review of the system of accounting and internal control. e. Audit is done with the help of vouchers, documents, information and explanation received from authorities.
Principle of an Auditor • Ethical • Professional • Fair
Objectives of Auditing Primary Objective (main objective) To produce a report by the auditor of his opinion of the truth and fairness of financial statements so that any person reading or using them can have belief in them. Secondary To detect errors and fraud ( Consider materiality) To prevent errors and fraud by the deterrent and moral effect of the audit To provide spin- off effects. The auditor will be able to assist his clients with accounting , systems, taxation , financial , and other problems.
Audit Objectives Validity Completeness Cutoff Ownership Accuracy Valuation Classification Disclosure
Types of Audit Statutory Audit, carried because the law requires them. Statutes include Companies Act Private audits, because of auditor’s desire and not because of law e.g. sole trader and partnership Internal audits, is the one conducted by an employee of a business into any aspect of its affairs. Management audit, an inquiry into efficiency and effectiveness of management Public sector audit, contract audit , computer audit etc
TYPES OF AUDITS-Financial statements audit -Compliance audits-Operational audits -Comprehensive audits-Forensic auditsTYPES OF AUDITORS-External auditors -Internal auditors-Government auditors -Forensic auditorsISSUES AFFECTING THE PROFESSION-Expanded services -Globalization-Litigation -Independence issues
The Relationship of evidential matter to the Audit Report Financial Statements Audit Report Management Assertions Audit Objectives Audit Procedures Evidence
Materiality. Audit Risk. Evidence. Three fundamental concepts in conducting an audit
Three Fundamental concepts in Conducting an Audit Materiality, is a misstatement or the aggregate of all misstatements in financial statements is considered to be material if, in light of surrounding circumstances, it is probable that the decision of a person who is relying on the financial statements, and who has a reasonable knowledge of business and economic activities ( the user), would be changed or influenced by such misstatement or the aggregate of all misstatements. Audit risk, is the risk that the auditor will fail to express a reservation in his or her opinion on financial statements that are materiality misstated. Evidence is the evidential matter supporting the financial statements consists of the underlying accounting records and all corroborating information available to the auditor.
The fact that audit is compulsory by law, in certain cases by itself should show that there must be some positive utility in it. The chief utility of audit lies in reliable financial statement on the basis of which the state of affairs may be easy to understand. Apart from this abvious utility, there are various advantage of audit. Some or all of these are of considerable value even to those enterprises and organization where audit is not compulsory, these advantages are given below: (a) It safeguards the financial interest of persons who are not associated with the management of the entity, whether they are partners or shareholders. (b) It acts as a moral check on the employees from committing defalcations or embezzlement. (c) Audited statements of account are helpful in setting liability for taxes, negotiating loans and for determining the purchase consideration for a business. (d) This are also use for settling trade disputes or higher wages or bonus as well as claims in respect of damage suffered by property, by fire or some other calamity. ADVANTAGES OF AN INDEPENDENT AUDIT
(e) An audit can also help in the detection of wastage and losses to show the different ways by which these might be checked, especially those that occur due to the absence of inadequacy of internal checks or internal control measures. (f) Audit ascertains whether the necessary books of accounts and allied records have been properly kept and helps the client in making good deficiencies or inadequacies in this respects. (g) As an appraisal function, audit reviews the existence and operations of various controls in the organizations and reports weakness, inadequacy, etc., in them. (h) Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner. (i) Government may require audited and certificated statement before it gives assistance or issues a licence for a particular trade.
Concept • The term internal audit has been defined as "an independent appraisal of activity” within an organisation for review of operations as a basis of service to management. It is a managerial control which functions by measuring and evaluating the effectiveness of other controIs. • Internal Audit is a thorough examination of the accounting transactions as well as that of the system according to which these have been recorded, with a view to reassuring that management that the accounts are properly maintained and the system contains adequate safeguard to checks any leakage of revenue or misappropriation of property or assets and the operations have been carried out in conformity with the plans of the management.
Concept • Internal Audit is an independent management function which involves a continuous an critical appraisal of the functioning of an identity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity’s risk management and function.
The main objectives of internal audit are as under:- To verify the correctness and authenticity of the financial records and statistical records presented to the management. To ensure that the standard accounting practices are strictly followed in the organisation. To facilitate early detection of errors and frauds. To ensure that all the transactions have been carried out under a proper authority and by persons authorised for the same in the business. To review the system of internal check from time to time to advice the management on improvement of the system and to undertake special investigation of management. Objectives of internal audit
Internal Auditing There are four major areas of importance for internal audit that are addressed Corporate governance Risk management Organizational control Corporate objectives
Value Addition by Internal Audit • Monitoring of Internal Control: The internal audit function is assigned specific responsibility for reviews controls, monitors their operations and recommends improvements • Examination of financial and operating information: To identify, classify and report financial and operating information and to make specific enquiry of individual items. • Review of operating activities: It review the economy, efficiency and effectiveness of operating activities including non financial activities of an entity. • Review of compliance with rules and regulations: It review the compliance with rules and regulations and other external requirements and with management policies and objectives. • Risk Management: It identifies and evaluate significant exposure to risk and contributing to significant improvements of risk management and control systems. • Governance: It assesses the governance process on accomplishment of objectives on ethics and values, performance measurement and accountability with communicating the risk involved.
Significance Internal auditing activity is primarily directed at evaluating internal controlwhich includes: • Effectiveness and efficiency of operations. • Reliability of financial and management reporting. • Compliance with laws and regulations. • Safeguarding of Assets
Difference between Internal and External Audit • Internal auditors who are members of a professional organization would be subject to the same code of ethics and professional code of conduct as applicable to external auditors, however they differ primarily in the relationship to the entity they audit. • Internal auditors are part of the organization they audit and report to management. Typically, internal auditors are employees of the entity. • Whereas an external auditor is an audit professional who performs an audit in accordance with specific laws or rules on the financial statements of a company and who is independent of the entity being audited.
Auditor’s Report on Financial Statements • Unqualified opinion • Qualified – ‘subject to’ or ‘except for’ • Disclaimer – not able to obtain sufficient appropriate audit evidence • Adverse – misleading/incomplete nature of financial statements • Title- Auditor’s report • Addressee – appointing authority • Introductory para • Scope para • Opinion para • Date of report • Place of signature • Auditor’s signature
Audit Documentation • This Standard on Auditing (SA) deals with the auditor’s responsibility to prepare audit documentation for an audit of financial statements. • Necessary in the circumstances when applied to audits of other historical financial information. • Laws or regulations may establish additional documentation requirements. • The record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “workpapers” are also sometimes used).
Nature and Purposes of Audit Documentation • Evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor; • Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory requirements. • Assisting the engagement team to plan and perform the audit. • Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with SA. • Enabling the engagement team to be accountable for its work.
Nature and Purposes of Audit Documentation • Retaining a record of matters of continuing significance to future audits. • Enabling the conduct of quality control reviews and inspections • Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.
Requirements in Audit Documentation • Timely Preparation: The auditor shall prepare audit documentation on a timely basis. • Form, Content and Extent of Audit Documentation:The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand. • The nature, timing, and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements • The results of the audit procedures performed, and the audit evidence obtained; and • Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those • conclusions.
Requirements in Audit Documentation • The auditor shall document discussions of significant matters with management, those charged with governance, and others, including the nature of the significant matters discussed and when and with whom the discussions took place. • If the auditor identified information that is inconsistent with the auditor’s final conclusion regarding a significant matter, the auditor shall document how the auditor addressed the inconsistency. • Departure from a Relevant Requirement: If, in exceptional circumstances, the auditor judges it necessary to depart from a relevant requirement in a SA, the auditor shall document how the alternative audit procedures performed achieve the aim of that requirement, and the reasons for the departure.
Assembly of the Final Audit File • The auditor shall assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report. • After the assembly of the final audit file has been completed, the auditor shall not delete or discard audit documentation of any nature before the end of its retention period. • In circumstances other than those envisaged in paragraph where the auditor finds it necessary to modify existing audit documentation or add new audit documentation after the assembly of the final audit file has been completed, the auditor shall, regardless of the nature of the modifications or additions, document
PENALTY FOR FRAUD BY OFFICERS (SECTION 337) • If any person, being at the time of the commission of the alleged offence an officer of a company,— • (a) has, by false pretences or by means of any other fraud, induced any person to give credit to the company; or • (b) with intent to defraud creditors of the company or any other person, has made or caused to be made any gift or transfer of, or charge on, or has caused or connived at the levying of any execution against, the property of the company; or • (c) with intent to defraud creditors of the company, has concealed or removed any part of the property of the company since the date of any unsatisfied judgment or order for payment of money obtained against the company or within two months before that date, • he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.
LIABILITY FOR PROPER ACCOUNT NOT KEPT (SECTION 338): • Where a company proper books of account were not kept by the company throughout the period of two years immediately preceding the commencement of the winding up, or the period between the incorporation of the company and the commencement of the winding up, whichever is shorter, • EVERY OFFICER of the company who is in default shall, unless he shows that he acted honestly and that in the circumstances in which the business of the company was carried on, the default was excusable, be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees.
Liability for Fraudulent Conduct of Business (section 339): • If, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.
POWER OF TRIBUNAL TO ASSESS DAMAGES AGAINST DELINQUENT DIRECTORS, ETC. (SECTION 340): • If, it appears that any person who has taken part in the promotion or formation of the company, or any person, who is or has been a director, manager, Company Liquidator or officer of the company— • (a) has misapplied, or retained, or become liable or accountable for, any money or property of the company; or • (b) has been guilty of any breach of trust in relation to the company, • the Tribunal may, made within the period specified, inquire into the conduct of the person, director, manager, Company Liquidator or officer aforesaid, and order him to repay or restore the money or property or any part thereof respectively, with interest at such rate as the Tribunal considers just and proper, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust, as the Tribunal considers just and proper.
An application shall be made within five years from the date of the winding up order, or of the first appointment of the Company Liquidator in the winding up, or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever is longer.
LIABILITY UNDER SECTIONS 339 AND 340 TO EXTEND TO PARTNERS OR DIRECTORS IN FIRMS OR COMPANIES (SECTION 341): • Where a declaration under section 339 or an order under section 340 is made in respect of a firm or body corporate, the Tribunal shall also have power to make a declaration under section 339, or pass an order under section 340, as the case may be, in respect of any person who was at the relevant time a partner in that firm or a director of that body corporate.
Disclosures in Annual Return – Section 92 (i) registered office, principal business activities, particulars of its holding, subsidiary and associate companies; (ii) shares, debentures and other securities and shareholding pattern; (iii) indebtedness; (iv) members and debenture-holders along with changes therein since the close of the previous financial year; (v) promoters, directors, key managerial personnel along with changes therein since the close of the last financial year; (vi) meetings of members or a class thereof, Board and its various committees along with attendance details; (vii) remuneration of directors and key managerial personnel; (viii) penalties imposed on the company, its directors or officers and details of compounding of offences; (ix) matters related to certification of compliances, disclosures as may be prescribed; (x) details in respect of shares held by foreign institutional investors;
Signing of Annual Return : (i) A director and the Company Secretary, or where there is no Company Secretary, by a Company Secretary in whole-time practice. (ii) in addition to the above, the annual return, filed by a listed company or by a company having such paid-up capital and turnover as may be prescribed, shall be certified by a company secretary in practice that the annual return discloses the facts correctly and adequately and that the Company has complied with all the provisions of the Act.
TAX RATES Companies - For the assessment years 2013-14 and 2014-15 the following rates of income-tax are applicable: