Table Of ContentAUDITING
PRINCIPLES AND TECHNIQUES
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AUDITING
PRINCIPLES AND TECHNIQUES
S. K. Basu
Senior Lecturer
St. Xavier’s College,
Kolkata, India
Copyright © 2006 Dorling Kindersley (India) Pvt. Ltd.
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PREFACE
The development of modern accountancy and the growth of auditing profession in India and,
indeed, in the world as a whole must be seen in the context of the enormous expansion of industry,
trade and commerce which has taken place in the last decade. The auditing profession is now going
beyond the duties prescribed by the Companies Act. It is initiating its own accounting standards,
and auditing regulations and guidelines. At present, it has sought to standardise the accounting
procedure by issuing mandatory accounting standards and also issuing standardised auditing
guidelines for conducting audit work. In addition to that, auditing in its modern form has adopted
a multidimensional approach. At present, the scope of auditing is not restricted to only financial
audit under the Companies Act but has been extended to cost accounts, managerial policies,
operational efficiencies, system applications, social implications of business organisations and
environmental aspects too.
In the light of the above changes, Auditing: Principles and Techniques has been written in order to
describe the modern tools and techniques of auditing. Written in a student-friendly manner, this
book is intended for commerce students of all the universities in India as well as for different profes-
sional examinations.
This book aims to assist the readers to develop, in a systematic way, a thorough understanding
of the concepts and techniques underlying auditing. Simplicity and brevity are the twin
characteristics of this book. The contents of the syllabus have been lucidly explained point-wise
with charts, examples and illustrations, where necessary, and the subject matter has been
summarised at the end of each chapter for quick reference. The book has 20 chapters covering all the
important and latest aspects of auditing including bank and insurance audit, audit in a
computerised environment, new areas of auditing etc. A separate annexure has been added at the
end of the book discussing some important case decisions. Two other annexures include model
answers to questions, both subjective and objective.
My endeavour has been to make this book strictly syllabus oriented. I hope my sincere efforts to
present the text of the syllabus analytically and methodically is appreciated by students as well as
teachers.
I express my deep gratitude to the renowned authors on this subject from whom references
have been taken in writing this book. I am also grateful to Pearson Education for publishing this
book. If my work is appreciated by the readers, I will consider it as my best reward.
S. K. BASU
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CONTENTS
Preface v 2.2 Classification of Audit 24
2.3 Classification on the Basis of
Organisation 26
1 2.4 Classification on the Basis of
Function 28
2.5 Classification on the Basis of Practical
Nature of Auditing 1
Approach 30
1.1 Introduction 2 2.6 Classification on the Basis of Audit
1.2 Origin of the Word ‘Audit’ 2 Dimension 38
1.3 Early History of Audit 2 Points to Ponder 41
1.4 Auditing Defined 3 Review Questions 42
1.5 Essential Features of Auditing 4
1.6 Why Is There a Need for an Audit? 5
3
1.7 Objective of an Audit 5
1.8 Errors and Frauds in Accounting 7
1.9 Role of Auditors in Detecting Errors and Techniques and Procedu-
Frauds 9 res of Auditing 43
1.10 Relation between Book-keeping,
3.1 Introduction 44
Accountancy and Auditing 9
3.2 Preparatory Steps before Commence-
1.11 Basic Principles Governing an Audit 10
ment of Audit 44
1.12 Postulates of Auditng 12
3.3 Preparation by the Auditor 46
1.13 Scope and Procedures of Audit 13
1.14 Changes in the Concept of Auditing 14 3.4 Principles and Techniques of Audit-
ing 56
1.15 Social Objectives of Audit 15
1.16 Advantages of Auditing 16 3.5 Procedures Followed in Course of
Audit 57
1.17 Limitations of Auditing 17
1.18 Qualities of an Auditor 18 Points to Ponder 67
1.19 Auditing and Other Services 19 Review Questions 69
Points to Ponder 20 4
Review Questions 21
2
Internal Control, Internal
Check and Internal
Audit 71
Classification of Audit-
ing 23 4.1 Introduction 72
2.1 Introduction 24 4.2 Internal Control 72
¿
Contents
viii
4.3 Internal Check 84 6.6 Importance of Valuation of Assets 139
4.4 Internal Audit 94 6.7 General Principles for Verification and
Valuation of Assets 140
4.5 Auditor’s Independence 102
6.8 Problems in Verification 141
4.6 Distinction between Internal Control and
Internal Audit 103 6.9 Problems in Valuation 141
4.7 Distinction between Internal Check, 6.10 Window Dressing—A Challenge to
Internal Audit and Internal Verification 142
Control 104 6.11 Verification and Valuation of
Points to Ponder 106 Assets 142
Review Questions 108 6.12 Verification and Valuation of Intangible
Assets 143
6.13 Verification and Valuation of Fixed
5 Assets 146
6.14 Verification and Valuation of
Investments 150
Vouching 109 6.15 Verification and Valuation of Current
Assets 152
5.1 Introduction 110
6.16 Verification and Valuation of Fictitious
5.2 Concept of Vouching 112
Assets 157
5.3 Objectives of Vouching 112
6.17 Verification and Valuation of Contingent
5.4 Importance of Vouching 113
Assets 158
5.5 Vouching and Verification 113
6.18 Verification and Valuation of
5.6 Vouching and Routine Checking 114 Liabilities 158
5.7 Concept of Voucher 115 6.19 Verification and Valuation of Fixed or
5.8 Internal and External Evidence 116 Long Term Liabilities 159
5.9 General Principles of Vouching 116 6.20 Verification and Valuation of Current
5.10 Teeming and Lading: A Challenge to Liabilities 160
Vouching 117 6.21 Verification and Valuation of Contin-
5.11 Vouching of Different Types of gent Liabilities 163
Transactions 118 6.22 Events Occurring after the Balance Sheet
Points to Ponder 133 Date 164
Review Questions 134 6.23 Prior Period and Extraordinary Items
and Changes in Accounting
6 Policies 165
Points to Ponder 165
Review Questions 166
Verification and
Valuation of Assets and
Liabilities 137
7
6.1 Introduction 138
6.2 Meaning of Verification of Assets 138
6.3 Meaning of Valuation of Assets 138 Depreciation 169
6.4 Difference between Verification and
7.1 Definition of Depreciation 170
Valuation 138
7.2 Purposes of Providing
6.5 Importance of Verification of
Assets 139 Depreciation 170
¿
Contents
ix
7.3 Causes of Depreciation 171
7.4 Basis of Charging Depreciation 171
9
7.5 Quantum of Depreciation 172
7.6 Distinction between Depreciation and
Company Audit 199
Amortisation 174
7.7 Different Methods of Depreciation 174 9.1 Introduction 200
7.8 Depreciation Accounting as per 9.2 Preliminaries before Commencement of
Company Audit 200
AS-6 177
9.3 Audit of Share Capital
7.9 Accounting Disclosure
Transactions 202
Requirement 179
9.4 Audit of Debentures 215
7.10 Legal Necessity of Provision for
9.5 Audit of Holding Company 218
Depreciation 179
9.6 Audit of Pre-incorporation Profit 221
7.11 Provision for Depreciation for Past
9.7 Specific Provisions for Accounts in the
Years 180 Companies Act 222
7.12 Depreciation on Low Value Items 181 9.8 Payment of Interest Out of Capital 223
7.13 Depreciation on Wasting Assets 181 9.9 Special Requirements of Company
Audit 224
7.14 Change in the Method of
9.10 Company Auditor 226
Depreciation 181
9.11 Special Auditor 242
7.15 Auditor’s Duty as Regards
9.12 Branch Auditor 242
Depreciation 182
9.13 Joint Auditor 243
7.16 Legal Views as Regards
9.14 Legal Views on Auditor’s Liability 244
Depreciation 183
Points to Ponder 248
Points to Ponder 184
Review Questions 250
Review Questions 185 Annexure 252
8 10
Reserves and Divisible Profits and
Provisions 186 Dividends 267
8.1 Concept of Reserves 187 10.1 Meaning of Divisible Profit 268
8.2 Concept of Provisions 187 10.2 Meaning of Dividend 268
8.3 Difference between Reserves and 10.3 Concept of Profit 268
Provisions 187 10.4 Profit vs Divisible Profit 269
8.4 Classification of Reserves 187 10.5 Principal Determinants of Divisible
Profit 269
Points to Ponder 197
10.6 Companies Act Relating to Payment of
Review Questions 197
Dividend 272
