READING OF COMPANY READING OF COMPANY ACCOUNTSACCOUNTS

Fundamentals of Auditing

Day 7

Session I to IV

Slide 7.1

Audit Objectives Relating To Audit Objectives Relating To PaymentsPayments

In carrying out an audit of payments, the auditor aims at collecting sufficient appropriate audit evidence to reasonably assure himself about the following assertions

1. Occurrence2. Completeness3. Measurement4. Presentations and Disclosure

Slide 7.1

AUDIT OBJECTIVES AUDIT OBJECTIVES RELATING TO RECEIPTSRELATING TO RECEIPTS

In carrying out an audit of receipts, the auditor aims at collecting sufficient appropriate audit evidence to reasonably assure himself about the following assertions.

1. Occurrence2. Completeness3. Measurement4. Presentations and Disclosure

Slide 7.1

AUDIT OBJECTIVES AUDIT OBJECTIVES RELATING TO SALESRELATING TO SALES

In carrying out an audit of sales, the auditor aims at collecting sufficient appropriate audit evidence to reasonably assure himself the following assertions

1. Occurrence2. Completeness3. Measurement4. Presentations and Disclosure

Slide 7.1

AUDIT OBJECTIVES AUDIT OBJECTIVES RELATING TO PURCHASESRELATING TO PURCHASES

In carrying out an audit of purchase, the auditor aims at collecting sufficient appropriate audit evidence to reasonably assure himself about the following assertions.

1. Occurrence2. Completeness3. Measurement4. Presentations and Disclosure

Slide 7.1

AUDIT OBJECTIVES RELATING TO AUDIT OBJECTIVES RELATING TO PERSONAL LEDGERSPERSONAL LEDGERS

In carrying out an audit of personal, the auditor aims at collecting sufficient appropriate audit evidence to reasonably assure himself regarding the following assertions.

1. Existence 2. Rights and Obligations3. Completeness 4. Valuation 5. Presentation and Disclosure

Slide 7.1

AUDIT OF DEBTORS’ LEDGERAUDIT OF DEBTORS’ LEDGER

The debtors’ ledger contains the accounts of customers to whom goods have been supplied, or services rendered, by the enterprise. Two stages are involved in the audit of debtors’ ledger:

(a) Study and evaluation of accounting system and related internal controls, and

(b) substantive procedures

Slide 7.1

Audit of Fixed AssetsAudit of Fixed Assets

Fixed assets constitute a significant proportion of the total assets of many enterprises, particularly those engaged in manufacturing activities. Audit of fixed assets is, therefore, generally an important part of an independent financial audit.

Slide 7.1

DISTINCTION BETWEEN CAPITAL DISTINCTION BETWEEN CAPITAL EXPENDITURE, REVENUE EXPENDITURE, REVENUE

EXPENDITURE AND DEFERRED EXPENDITURE AND DEFERRED REVENUE EXPENDITUREREVENUE EXPENDITURE

In the case of an item of machinery, beside the price paid for acquiring it, costs incurred for making it ready for use, such as initial delivery and handling cost, installation cost and cost of trial runs, will also form part of capital expenditure.

Slide 7.1

expenditure incurred on installation of an additional item of hardware in a computer, which increases its processing speed, is a capital expenditure. Similarly, expenditure resulting in additional capacity (e.g., replacement of a 40 MB hard disk of a computer by a 260 MB hard disk), or expenditure which results in a reduction in the cost of carrying out an activity (e.g., installation of an energy saving device which reduces the electricity consumption) is also a capital expenditure.

Slide 7.1

Revenue ExpenditureRevenue Expenditure

This refers to the expenditure incurred on carrying on operations during an accounting period, the benefits of which do not extend beyond that period. Examples of items of revenue expenditure are raw materials consumed, salaries and wages of the administrative staff, repairs and maintenance, legal expenses, losses due to fire, etc.

Slide 7.1

Deferred Revenue Deferred Revenue ExpenditureExpenditure

Sometimes, the expenditure incurred on an item is essentially in the nature of revenue expenditure, but it is treated as deferred revenue expenditure, i.e., it is carried forward in the balance sheet rather than being fully charged as an expenses in the profit and loss account for the period. The deferral of expenditure is appropriate only if a future accounting period is likely to receive benefit from the expenditure and the amount of such benefit is reasonably determinable.

Slide 7.1

Cont…Cont…

The test for determining whether the deferral of revenue expenditure is appropriate is whether a future period is likely to receive benefit from the outlay. The quantum of expenditure does not by itself justify its deferral.

As a measure of prudence, deferred revenue expenditure is generally written-off over a period of 3-5 years.

Slide 7.1

AUDIT OBJECTIVES RELATING TO AUDIT OBJECTIVES RELATING TO FIXED ASSETSFIXED ASSETS

A fixed asset is “an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business”.

Slide 7.1

In carrying out an audit of fixed assets, the auditor aims at collecting sufficient appropriate audit evidence to reasonably assure himself regarding the following assertions.

1. Existence 2. Rights and Obligations3. Completeness 4. Valuation 5. Presentation and Disclosure

6. Slide 7.1

SPECIAL FEATURES OF SPECIAL FEATURES OF FIXED ASSETSFIXED ASSETS

Fixed assets are more permanent than other assets of an enterprise and their value are carried over form year to year.

   The auditors has to, therefore, examine whether these assets have been properly brought forward in the books of account. Similarly, he has to examine whether proper records of fixed assets acquired in previous years (as also in the current year) are available with the enterprise.

Slide 7.1

Audit of InvestmentsAudit of Investments

In carrying out an audit of investments, the auditor aims at collecting sufficient appropriate audit evidence to reasonably assure himself about the following assertions.

1. Existence 2. Rights and Obligations3. Completeness 4. Valuation 5. Presentation and Disclosure

6. Slide 7.1

AUDIT OBJECTIVES RELATING TO AUDIT OBJECTIVES RELATING TO INVENTORIESINVENTORIES

  

In carrying out an audit of inventories, the auditor aims at obtaining sufficient appropriate audit evidence to reasonably assure himself regarding the following assertions.

1. Existence 2. Rights and Obligations3. Completeness 4. Valuation 5. Presentation and Disclosure 

6. Slide 7.1

Audit of Other Assets and Audit of Other Assets and Miscellaneous ExpenditureMiscellaneous Expenditure

Cash and bank balances, advances and bills receivable are important constituents of current assets of an enterprise. Loans given to other enterprises or individuals are also significant in some cases. Besides the above, a number of items appear on the assets side of the balance sheet of many enterprise, under the head “Miscellaneous Expenditure” (or other similar heading).

Slide 7.1

Cont…Cont…

The general approach to audit of all the above items is to- Study and evaluate the accounting system and internal

controls; and Carry out appropriate substantive procedures, i.e.,

examination of records and documents, obtaining confirmation from independent third parties, examination of valuation and disclosure, analytical procedures and obtaining appropriate representations from the management

Slide 7.1

AUDIT OBJECTIVESAUDIT OBJECTIVES

As in the case of other assets, in carrying out an audit of cash and bank balances, bills receivable and loans and advances, the auditors aims at collecting sufficient appropriate audit evidence to reasonable assure himself regarding their existence, rights and obligations, completeness, valuation,

and presentation and disclosure. Besides the above, in an independent financial audit carried out in pursuance of a legal requirement, the auditor may also be required to examine certain other specified aspects

Slide 7.1

AUDIT OBJECTIVES RELATING TO AUDIT OBJECTIVES RELATING TO CAPITAL AND RESERVESCAPITAL AND RESERVES

In an audit of capital and reserves, the auditor seeks to obtain sufficient appropriate audit evidence to reasonably assure himself in respect of the following assertions.

1. Existence 2. Rights and Obligations3. Completeness 4. Valuation 5. Presentation and Disclosure 

6. Slide 7.1

  AUDIT OBJECTIVES RELATING TO AUDIT OBJECTIVES RELATING TO

LIABILITIESLIABILITIES Liabilities represent the financial obligations of an enterprise other than the owners’ funds. The liabilities of an enterprise are of various kinds. Form an auditing perspective; liabilities can be classified as below.

(a)  Loans and borrowings (including debentures and deposits)(b)  Trade creditors (i.e., creditors for goods/services

purchased/received by the enterprise).(c)  Other current liabilities such as wages payable, etc.(d)  Provisions.

Slide 7.1

AUDIT OBJECTIVES AUDIT OBJECTIVES RELATING TO LIABILITIESRELATING TO LIABILITIES

In carrying out an audit of liabilities, the auditor seeks to obtain sufficient appropriate audit evidence to reasonably assure himself in respect of the following assertions.

1. Existence 2. Rights and Obligations3. Completeness 4. Valuation 5. Presentation and Disclosure 

6. Slide 7.1