AUDITING PART C – 15 MARKS

Audit report
The auditing of the accounts of a company is usually done by an independent external
auditor. An audit report is a letter from the auditor of a company that is the end result of the
audit process. It states the auditor’s opinion on whether the company’s financial statements
such as the balance sheet are in compliance with the generally accepted accounting
principles (GAAP) and if they are free from material misstatement.

The audit report is generally accompanied by the company’s annual report. The audit report
is required by banks, financial institutions, investors, creditors, and regulators. When the
auditor issues a clean report, it means that the company’s financial statements have been
found to be fully compliant with accounting standards. An unqualified report will tell you that
the financial statement could have some errors.

Audit reports are very important to a company. Investors rely on the audit report to assess
the financial health of the company and they base many important decisions on the audit
report. Regulatory bodies also read the audit report as it tells them how accurate the
financial information reported is. When an audit report is adverse it can seriously affect the
company’s status and reputation. It is essential to have good accounting practices so that
the audit of accounts goes well.

Audited Financial Statements Generally Accepted Auditing Standards (GAAS)

Tally makes it easy for the organization to accurately record all their transactions in
compliance with GAAP. If you are worried about how to prepare a balance sheet with no
errors, Tally is your answer. It also makes it more straightforward for auditors to access all
the information that they need in a very simple and transparent manner. Tally also makes it
easy for the internal accounting personnel to ensure that their accounts are in order even
before the external audit commences by generating balance sheet and trial balance etc.

Types of audit report

An auditor releases an audit report that states the auditor’s opinion on the financial
statements of the company. There are four common types of auditors reports:

Clean or unqualified report

This is the best type of report that a company can receive from an auditor. A clean report is
one that states that the financial statements of the company fully comply with GAAP and are
free of any material misstatement. It indicates that the auditors are satisfied with the
company’s financial reporting and that they comply with the governing principles and laws
applicable.  Most audits result in clean or unqualified audit reports.

Qualified opinion
There are two situations in which a qualified report would be issued by the auditor.

 If there are material misstatements in the financial statements but they are not
pervasive
 If there is insufficient evidence to base the audit opinion on but the possible effects
of any material misstatements are not pervasive

The problem areas where there has been some calculation mistake will usually be specified
by the auditors in the reports. This enables the company to fix the errors. When you use Tally
software for your accounting, you stay in compliance with regulations and there is no scope
for a calculation error in computing the reports.

Adverse opinion
An adverse opinion on an audit report is the worst possible report that you can get. An
adverse opinion means that the misstatements in the financial statements are both material
and pervasive. An adverse opinion can damage a company’s reputation and even have legal
ramifications unless the issues are corrected. There are chances that the errors could have
crept in by mistake, but they could also be the result of fraud. If there is an adverse opinion
on account of illegal activities in the company, the corporate officers may face criminal
charges. Investors and regulators will also reject the company’s financial statements as a
result of the adverse opinion in the audit report. If there are errors that were corrected, the
company will have to have their financial statements re-audited satisfied before the
statements are accepted.

Disclaimer of opinion
An auditor would issue a disclaimer of opinion if:

 The auditor was unable to get enough audit evidence to base an opinion on
 They did not get satisfactory answers to their questions
 The possible effects of the undetected misstatements could be material and
pervasive

This may happen if the auditor was denied access to certain financial information or if the
auditor is unable to be impartial. A disclaimer of opinion means that the financial status of
the company could not be ascertained.

Format or content of an audit report

 Section/Heading Description
Title Independent Auditor’s Report. The title of the audit report should be
simple and include the word “independent”. This indicates that the
audit was performed by an external, independent, and unbiased
third party.
Addressee The report will clearly state to whom it is addressed.  Example: To
The Shareholders Of Company Name or The Directors
Introduction This would be a statement that states the name of the company
that is being audited, the dates of the financial period that the audit
covers, which is usually the fiscal year.
Responsibilities of This section clearly states the responsibilities of the directors of
directors and auditors the company being audited, and the responsibilities of the auditor.
It states that the management and directors of the company
accept the duty of providing the auditor with all the financial
documentation required for the audit. It also states that the
documentation provided is true and accurate to the best of the
director’s knowledge. It is stated that the auditor’s role is to audit
the financial statements given by the company. It also states that
the auditor must form his opinion based on the information
provided.
Opinion This section clearly states the auditor’s opinion.
Basis of opinion The section states that the audit was conducted in compliance
with the standards and describes the audit process and resources.
This section may be longer than the rest.
Other reporting If there are any other reporting responsibilities such as legal or
responsibility regulatory requirements they are mentioned here.
Signature of the auditor Signed by the auditor
Date And place The date and city where the report was signed by the auditor.

Sample format Of audit report

Given below is an example of a clean audit report.

Independent Auditors' Report

To the Board of Directors and The Shareholders,

Company ABC,

Address.
Report On The Financial Statements

We XYX have audited the accompanying balance sheets of ABC Company as of December
31, 20X2, 20X1 and 20X0, and the related statements of income, earnings, and cash
flows for the years then ended, and the related notes to the financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for …

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our

audits. We conducted our audits in accordance with ...

Opinion

In our opinion, the financial statements referred to previously present justly, in all material
respects, the true financial position of ABC Company as of December 31, 20X2, 20X1 and
20X0, and the results of its operations and its cash flows for the years then ended in
conformity with the accounting principles that are generally accepted in the United States of
America.

(Signature)

(Date)
 

POWER AND LIABILITIES AND DUTIES OF

COMPANY AUDITOR

pOWER OR RIGHTS OF THE COMPANY AUDITOR:– Following are the rights of

company auditor:-

 Right to access at all the times to the books and accounts and vouchers of the
company whether kept in head office of the company or elsewhere and shall
be entitled to require from the office of the company such information and
explanation as the auditor may think necessary for the performance of his
duties as auditor.
  The auditor shall make a report to the members of the company on the
accounts audited by him and on every balance sheet or profit and loss
account which are laid before the company in general meeting. The said
accounts give the information required by the act in the manner so required
by and gives a true and fair view.
 Right to receive notice of and to attend every general meeting of the
company.
 Right to speak to such general meeting when the accounts are being
discussed.
 He has right to be indemnified for any liability incurred by him in defending
himself against civil and criminal proceedings by the company.
 Right to visit branches of the company to audit the accounts if no other
auditor has been appointed to audit branch accounts.
 Right to take legal and technical advice wherever necessary.
 Right to receive remuneration for the work done by him.
 Right to sign the report.
 Right to keep the working notes with him.

LIABILITIES OF AN AUDITOR:-  Following are the liabilities of an auditor:-

1. If an auditor is guilty of negligence in the execution of his duty, he may be

held liable to make good any damage resulting from that negligence.
2. An auditor is appointed to detect frauds, errors etc. He is responsible on
account of negligence in performance of his duties.
3. Any clause in the agreement between the company and the auditor whereby
the auditor is freed from liability has been declared void.
4. If in the course of the winding up of a company it appears that the auditor
has been guilty of any misfeasance or breach of trust in relation to the
company, he may be held liable as an officer of the company. The court may
examine into his conduct and compel him to contribute such sum to the
assets of the company by way of compensation in respect of the breach of
the trust as the court thinks fit.
5. If the dividends have been improperly declared and paid of the accounts
audited by him and which did not show a true and fair picture and were
incorrect and misleading, he will be liable to refund such an amount.
 6. Where a prospectus is issued inviting persons to subscribe for shares or
debentures of a company, an auditor is liable in respect of an untrue
statements which is made by him as an expert, to pay compensation t every
person who subscribes for any shares or debentures on the faith of the
prospectus for any loss or damages, he may have sustained by reason of
untrue statements included therein.
7. If an auditor makes a false statements, particularly knowing it to be false or
omits any material fact, knowing it to be material, he may be punishable with
imprisonment or a fine.
8. If an auditor is a party to a untrue statements in prospectus, he shall be
punishable with imprisonment or fine or both.
9. Under Indian Penal Code – whosoever issues or signs any certificate required
by law to be given or signed or relating to any fact which such certificate by
law, admissible by evidence. Knowing or believing that such certificate is false
in any material point, shall be punishable in the same manner as if he gives a
false evidence.

DUTIES OF COMPANY AUDITOR:-   Duties of an auditor are as under:-

1. To make the report to the members of the company on the accounts

examined by him which should contain all the matters as the companies act.
2. Auditor should perform his duties as per articles of association of the
company.
3. He should certify the statements included in prospectus whenever the same
is issued.
4. He should certify the contents of the statutory report.
5. To comment on all such material violations of the law or sound accounting
practices which can reasonably effect directly or indirectly the fortune of the
accounts of the company.
6. An auditor must know the provisions of memorandum and articles of
association of the company.
7. He not only should verify the arithmetic accuracy of the accounts but should
check the fairness of accounts as well.
 Breaking Down 9
Different Types of Audit
As a small business owner, you need to conduct regular audits to ensure your records are
accurate. Although many business owners dislike the idea of auditing, audits can be
beneficial to your company. Learn more about the different types of audit below.

Different types of audit

As a brief recap, an audit examines your financial records and transactions to verify they are
accurate. Typically, audits look at your financial statements and accounting books to compare
information.

You or your employees may conduct audits. Or, you might have a third party audit your
information (e.g., IRS audits).

Many business owners have routine audits, such as once per year. If you are not organized or
don’t keep thorough records, your audits might take more time to complete.

Types of auditing can vary from business to business. For example, a construction business
might conduct an audit to analyze how much they spent on a specific project (e.g., costs for
contractors or supplies).

Overall, audits help ensure your business is operating smoothly. So, what are the various
types of audit?
1. Internal audit
Internal audits take place within your business. As the business owner, you initiate the audit
while someone else in your business conducts it.

Businesses that have shareholders or board members may use internal audits as a way to
update them on their business’s finances. And, internal audits are a good way to check in on
financial goals.

Although there are many reasons you may conduct an internal audit, some common reasons
include to:

 Propose improvements
 Monitor effectiveness
 Make sure your business is compliant with laws and regulations
 Review and verify financial information
 Evaluate risk management policies and procedures
 Examine operation processes

2. External audit
An external audit is conducted by a third party, such as an accountant, the IRS, or a tax
agency. The external auditor has no connection to your business (e.g., not an employee). And,
external auditors must follow generally accepted auditing standards (GAAS).

Like internal audits, the main objective of an external audit is to determine the accuracy of
accounting records.

Investors and lenders typically require external audits to ensure the business’s financial
information and data is accurate and fair.

Audit reports
When your business is audited, external auditors usually give you an audit report. Audit
reports include details of the audit process and what was found. And, the report includes
whether your financial records are accurate, missing information, or inaccurate.

3. IRS tax audit

IRS tax audits are used to assess the accuracy of your company’s filed tax returns. Auditors
look for discrepancies in your business’s tax liabilities to make sure your company did not
overpay or underpay taxes. And, tax auditors review possible errors on your small business
tax return.

Auditors usually conduct IRS audits randomly. IRS audits can be conducted via mail or
through in-person interviews.

4. Financial audit
A financial audit is one of the most common types of audit. Most types of financial audits are
external.

During a financial audit, the auditor analyzes the fairness and accuracy of a business’s
financial statements.

Auditors review transactions, procedures, and balances to conduct a financial audit.

After the audit, the third party usually releases an audit opinion about your business to
lenders, creditors, and investors.

5. Operational audit
Operational audits are similar to internal audits. An operational audit analyzes your
company’s goals, planning processes, procedures, and operation results.

Generally, operational audits are conducted internally. However, an operational audit can be
external.

The goal of an operational audit is to fully evaluate your business’s operations and determine
ways to improve them.
6. Compliance audit
A compliance audit examines your business’s policies and procedures to see if they comply
with internal or external standards.

Compliance audits can help determine whether or not your business is compliant with paying
workers’ compensation or shareholder distributions. And, they can help determine if your
business is compliant with IRS regulations.

7. Information system audit

Information systems audits mostly impact software and IT companies. Business owners use
information system audits to detect issues relating to software development, data processing,
and computer systems.

This type of audit ensures the system provides accurate information to users and makes sure
unauthorized parties do not have access to private data.

Also, IT and non-software businesses should regularly conduct mini cybersecurity audits to
ensure their systems are secure from fraud and hackers.

8. Payroll audit
A payroll audit examines your business’s payroll processes to ensure they are accurate. When
conducting payroll audits, look at different payroll factors, such as pay rates, wages, tax
withholdings, and employee information.

Payroll audits are typically internal. Conducting internal payroll audits helps prevent possible
external audits in the future.

Businesses should conduct internal payroll audits annually to check for errors in their payroll
processes and remain compliant.

9. Pay audit
Pay audits allow you to identify pay discrepancies among your employees.

A pay audit can help you spot unequal pay at your company. During a pay audit, analyze
things like disparities due to race, religion, age, and gender.

Pay audits can also help you ensure workers are paid fairly based on your business’s industry
and location.

Importance of audits
You must conduct audits regularly to understand different aspects of your business. And,
audits can help catch issues early on before they snowball into big mistakes. If you don’t
conduct audits, you may find yourself reviewing inaccurate information, which can impact
your business later.

Before you kick the idea of audits to the curb, think about how they can benefit your small
business. Audits can help you:

 Find financial problems

 Catch errors
 Boost your business’s bottom line
 Stay organized
 Make better business decisions

Verification: Meaning, Definition, Objectives

Meaning
Verification means the act of assuring the correctness of value of assets and
liabilities in the organization. It refers to the examination of proof of title and
their existence or confirmation of assets and liabilities on the date of Balance
Sheet. It usually indicates verification of assets of any organization, which can
be done by examination of values, ownership, existence, possession of any
assets and also ensures that the assets are free from any charge. In simple words,
verification means, ‘proving the truth or confirmation’.
 

Definition
Spicer and Pegler defines Verification as, “An inquiry into the value,
ownership and title, existence and possession and the presence of any charge on
the asset”.
J. R. Batliboi defines it as, “The auditor must satisfy himself that assets really
existed at the date of the Balance Sheet and were free from any charge and that
they have been properly valued”.
The Institute of Chartered Accountants of  India  defines  verification  as, 
“It aims   at   establishing   (a)   existence, (b)    ownership,    (c)    possession,
(d) freedom   from   encumbrances, (e) proper recording, (f) proper valuation”.
 

Objectives
The objectives of verification are as follows:
1.        To show the correct value of assets and liabilities.
2.        To know whether the Balance Sheet exhibits a true and fair view of the
state of affairs of the business.
3.        To find out the ownership, possession and title of the assets appearing in
the Balance Sheet.
4.        To find out whether assets are in existence.
5.        To detect frauds and errors, if any while recording assets in the books of the
concern.
6.        To find out whether there is an adequate internal control regarding
acquisition, utilization and disposal of assets.
7.        To verify the arithmetic accuracy of the accounts.
8.        To ensure that the assets have been properly recorded.
 

Auditor’s Duty Regarding Verification

The auditor of a business is required to report in concrete terms that the Balance
Sheet exhibits a true and fair view of the state of its affairs. In other words, he
has to examine and ascertain the correctness of the money value of assets and
liabilities appearing in the Balance Sheet and this examination is known as
verification of assets and liabilities. Therefore, an auditor has to keep in mind
the following points while verifying the assets:
·     Ensuring the existence of assets.
·     Acquiring the assets for business.
·     Legal ownership and possession of the assets.
·     Ensuring the proper valuation of assets.
·           Ensuring that the assets are free from any charge.
 

Audit of Insurance
Companies
Insurance auditors while conducting insurance audits will review credit policy
and procedures, tax records, risk assessments, and other financial records of
insurance. This is done to ensure that appropriate insurance standards and
premiums are applied and that insurance companies adhere to the rules.
Some of the key areas to be considered during insurance audits are claims
and commissions. In addition, insurance auditors must also maintain quality
control between insurance companies and policyholders. This article will
discuss the audit of insurance companies.

Meaning of Indian Insurance Company

The Companies Act, 2013 requires the registration of an Indian insurance
company. A foreign company’s overall holdings of equity shares, whether held
directly or through subsidiary companies or nominees, shall not exceed 26%
of the insurance company’s paid-up equity capital. The major purpose of an
Indian Insurance Company is to do life insurance, general insurance, or
reinsurance operations.

While conducting insurance audits, insurance auditors must evaluate policy

and liability processes, tax papers, risk appraisal, and other financial records
of insurance. This is done to guarantee that suitable insurance rates and
premiums are imposed and that insurance businesses adhere to regulatory
requirements. Claims and commissions are two of the most important areas
to verify during insurance audits. Additionally, insurance auditors must
maintain quality control between insurance companies and policyholders.

Insurance Audit and Role of Insurance

Auditor
Every insurer’s financial accounts must be yearly audited by an auditor as
required by Section 12 of the Insurance Act, 1938. By the regulations
established by the IRDA after each financial year, every insurer is required to
prepare a balance sheet, a profit and loss account, a separate account of
receipts and payments, and a revenue account concerning the insurance
business he transacts and the funds of his shareholders.

An insurance company’s central and branch auditors are chosen at the annual

general meeting of the business, with the consent of the C & AG needed
before the appointment is made. The Insurance Act of 1938 and the
Companies Act, 2013 have recently been amended, and the Insurance
Regulatory and Development Authority of India (IRDAI) has released updated
recommendations requiring insurers to adhere to the Companies
Act, 2013 provisions regarding the appointment of auditors. In addition,
insurers must follow the rules outlined in these recommendations. The Board
will designate the statutory auditors by the Audit Committee’s proposal,
subject to the approval of the shareholders at the annual meeting of an Indian
insurance company.

The statutory auditors to whom they are required to submit their report have
the same rights and duties as the branch auditors authorized to undertake the
audit of the divisions. However, the branch auditors at the divisional level
attested that the financial statements of the branches within the divisions
were properly included in the division’s trial balance.

An insurer cannot remove its statutory auditor without the Authority’s prior
consent. More than three insurers (life, nonlife, health, and reinsurer) cannot
have their audits accepted by the same auditing company at once. If it is
discovered that the insurers’ appointment of auditors does not follow the
rules, the appointment may be canceled.

Meaning of an Insurance Audit

In terms of Section 12 of the Insurance Act, 1938, the financial statements of
all insurers must be audited annually by the auditor. As determined by IRDA,
1999, all insurers in respect of their insurance business and shareholders’
funds must provide:

 Balance Sheet
 Profit and Loss Account
 Different Receipts Account
 Payments and Income Account
All of this must be done following IRDA rules at the end of each financial year.
An insurance audit is an independent audit of accounting records that reflects
the expert’s opinion on its accuracy.

Audit Testing
The auditor will spend time in the field of financial data testing to ensure the
accuracy and completeness of the financial statements. For example, this
could include a CPA who collects a random sample of fifty disbursements and
then checks them to make sure checks are paid to the right seller and that
they are recorded at the right price. The main types of tests are:

 Controlling Test: Related to the audit procedures performed

based on the automated procedures and hands that contribute to the
completeness and accuracy of the financial statements. An example
of such a control is the monthly reconciliation of bank accounts. The
auditor may inspect this control by examining a reconciliation sample.
The Auditor-General will assess the effectiveness of these controls
and their ability to prevent and reduce the risk of fraud.
 Substantive Test: In addition to testing controls, the auditor will
perform other procedures to gather valid audit evidence. This may
include inspecting or auditing assets, obtaining certificates from third
parties that conduct business with the company, or evaluating aspects
of the financial statements and comparing them with relevant external
information.

Key Points examined during the audit of

Insurance Companies
The following are the points that are needed to be considered during the Audit
of Insurance Companies:
Premium Verification: In a separate bank account, premium collections are
credited. No withdrawals are usually allowed on that account for general
expenses.

 As stated in the insurance company policy, the collection is

forwarded to the Regional Office or Head Office.
 In terms of Section 64VB of the Insurance Act, 1938, the insurer
will not take the risk without receiving a premium.
 The auditor needs to confirm the premium because the insurance
premium is collected when the policies are issued.
 It is a consideration to bear the risk of the insurance company.
The Auditor-General will apply the following procedures:

 Before initiating the payment of revenue, the auditor must

consider internal controls and compliance rules, which are set for the
collection and recording of premiums.
 Cover notes should be numbered sequentially.
 The auditor needs to check how the premium registers are
maintained chronologically, providing full details including the GST
charged in terms of daily admission advice.
 The auditor must verify that he or she has received the amount
stated in the register and those indicated in the general record.
 The auditor shall also ensure that the installments payable on or
before the date of receipt of the balance are calculated as revenue for
the year under review.
Claims Verification: The auditor of each division or branch should have
access to information for all categories of business. The Auditor-General shall
determine the total number of documents to be inspected, giving due
consideration to high-value claims.
The claim account is deducted from all payments including repair costs,
survey fees, photographic costs, etc. The Auditor-General will:

 Check the provision of non-adjustable claims.

 Check whether the provision is made for those applications that
the company is legally responsible for.
 Check that the provision is not higher than the insured amount.
 Check out Co-insurance programs; the company has made
provisions in respect of its expected credit allocation.
Verification of Commission: The agent’s salary is determined by the
commission. Remuneration is calculated using the percentage of the
proceeds collected by the agent.
The commission is paid to the agents of the purchased business and is
deducted from the commission in the Direct Business Account. Insurance
agents usually ask for an insurance business. The Auditor-General will verify:

 Vouchers’ entries in respect of payment vouchers and copies of

commission bills and statements.
 Check that vouchers are authorized by law enforcement officers
and that income tax is deducted at the point of origin.
 Check the amount of commission allowed.
 Check commission calculation time.
Operating Cost verification: The auditor must assess the following operating
costs:

 Cost over Rs. 5 lakhs or 1% of the total amount payable,

depending on the maximum. This should be shown separately.
 Costs that are not directly related to the insurance business
should be shown separately, for example, costs incurred by the
investment department or bank charges, etc.

Final words
An audit of a financial statement is a transaction made with an independent
accountant, designed to show that the financial statements of an organization
are prepared under generally accepted accounting principles (GAAP) or other
recognized entities. While each audit is customized to meet the specific needs
of each organization, the entire audit process is consistent, focusing on risk
assessment, financial data analysis, and providing a final opinion. It is also
important to note that when choosing a CPA company to conduct research,
not all CPAs do research. Insurance agencies should seek to protect the
company with its valuable audit experience and companies with a proven
track record in the same industry and size range.

Audit of Educational Institutions

The auditor may thoroughly study the trust deed of the trust to
which the school or the college belongs and in the case of the
audit of an University, he may study the Act of Legislature and
the rules that are applicable to that university.

The institution may receive the following:

1. Grant from government, local authority or governing bodies.

2. Legacies.

3. Donation in cash and in kind.

4. Income from Investments.

5. Admission fees, Tuition fees, Hostel fees etc.

6. Fines and penalties.

7. Contribution towards specific fund.

8. Rental income etc.

Records to be verified by Auditor in Educational

Institutions
To verify the above, the auditor may examine the following
books and records:

1. Minutes of the managing committee.

2. Students’ fees Register.

3. Cash Book and counterfoils of receipts for fees, caution

deposit, fine etc.

4. Rental and Lease agreements.

5. Correspondence and other documents relating to legacies,
grants etc.

Role of an Auditor in Audit of Educational

Institutions
While examining the above records, the auditor has to ensure
the following:

1. He shall evaluate and confirm the effectiveness of internal

check system of accounting of the receipts.

2. He should verify that the fees are collected from all the
students and if there is any concession, the same is granted by a
person who is so authorized.

3. He should also ensure that the fees received in advance and

fees receivable are properly accounted and irrecoverable fees
are written off under the authorization of the appropriate
person.

An auditor may ensure the following while

verifying records of Educational Institutions:
1. that the admission fees are credited to capital fund A/c.

2. that the fines and penalties are collected after due

authorization and accounted properly.

3. that a separate register is maintained for caution deposit

received from students and the refund due out of caution
deposit is refunded to the students.
4. that long outstanding tuition fees, hostel fees etc., are
periodically reviewed and reported to the management for
further action.

5. that the funds created for specific purpose are maintained

separately, the investments representing such funds are kept
separately and the surplus income from such funds are
accumulated and invested along with the capital fund
maintained for the purpose.

6. that the amounts that are refundable to the students are

shown as liability in the Balance sheet.
7. that all the capital expenditure are approved by the managing
committee.
8. that the internal control procedure relating to purchase of
stationery, provisions, clothing and other items are effective
and chances of pilferage and fraud are minimum.
The auditor may verify all the expenditure in the usual manner
and examine the payment out of funds created for specific
purpose thoroughly and ensure that the receipts and payments
out of this funds are accounted and presented separately in the
Balance Sheet.