Auditing Unit 1 Notes 2024-25 PDF

Model College, Dombivli East M.COM (Banking and Finance) Semester III AUDITING OF BANKING AND FINANCIAL SECTOR The following notes are only for educational purposes. Do not share it outside the classroom. Unit 1: Introduction to Audit Concepts (Unit 1: Nature, scope and...

Model College, Dombivli East M.COM (Banking and Finance) Semester III AUDITING OF BANKING AND FINANCIAL SECTOR The following notes are only for educational purposes. Do not share it outside the classroom. Unit 1: Introduction to Audit Concepts (Unit 1: Nature, scope and significance of auditing, Audit Engagement, Audit Program, Audit Working Papers, Audit Note Book, Audit Evidence. ) IMPORTANT: The following are only the pointers. The learner is required to elaborate the points (through research and study) while writing the answer. Sources are given at the end. Introduction: The authenticity, reliability and trustworthiness of the financial information is critical in order to make sound economic decisions in a modern society. Stakeholders such as banks. and financial institutions, Government departments like the Income Tax department, and institutional and retail investors depend on the authenticity of the financial information provided by a business organization to make important business decisions. Unreliable information may lead to faulty decisions and economic and financial loss. As such, there is a need of a mechanism that can verify and certify that the information provided by a business organization is reliable, reasonably complete, accurate and unbiased. The auditing and assurance mechanism fulfils this crucial requirement of modern economic system.  EXTERNAL FINANCIAL AUDITOR STAKEHOLDERS BOOKS OF THE CONCERN BANKS & FIN Trust and INSTITUTIONS credibility, Reliability of GOVERNMENT AND information, REGULATORY Assurance AUTHORITIES mechanism INVESTORS / SHAREHOLDERS 1. Definitions of Auditing Spicer and Pegler defined audit as, "Audit is such an examination of the books, accounts and vouchers of a business, as shall enable the auditor to satisfy himself whether or not the balance sheet is properly drawn up, so as to exhibit a true and correct view of the state of affairs of the business according to the best of his information and explanations given to him and as shown by the books, and if not, in what respects it is untrue or incorrect." Prof. L.R.Dicksee defined auditing as, " Auditing is an examination of accounting records undertaken with the view to establish whether they correctly and completely reflect the transactions to which they relate." ICAI : AAS 1: " Auditing is the independent examination of financial information of any entity whether profit oriented or not and irrespective of size/legal form, when such an examination is conducted to express an opinion thereon." R. H. Montgomery, "Auditing is a systematic examination of the books and records of our business or other organization, in order to ascertain or verify and to report upon the facts regarding the financial operations and results thereof." ICAI (General Guidelines on Internal Auditing): " Auditing is a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for their stated purpose." 2. Origin and Evolution of Auditing a. The term audit is derived from the Latin term ‘audire’ which means to hear. In early days, an auditor used to listen to the accounts read over by an accountant to check them. Auditing is as old as accounting. There are references to audit in the texts of Vedic period. Historic records show that the Egyptians, the Greeks and the Romans used to get the public accounts scrutinise by an independent official. b. ‘Arthashastra’ by Kautilya contains detailed rules for accounting and auditing of public finances. “All undertakings depend on finance, Hence, foremost attention should be paid to the treasury.” c. Joint Stock Company: Auditing evolved and grew rapidly after the industrial revolution in 18th century with the growth of joint stock companies the ownership and management became distinct and different the shareholders who were the owners he did a report from an independent expert on the accounts of the company managed by the board of directors who are the employees. d. British Colonial Era: The modern auditing system in India began to take shape during British rule. The first Auditor General, Sir Edward Drummond, was appointed in 1860, and the Departments of Accounts and Audit were established in 1862. e. Early 20th Century: The Companies Act of 1913 made the audit of company accounts compulsory, marking a significant step towards formalizing auditing practices in India. f. Post-Independence Developments: After gaining independence in 1947, India continued to develop its auditing framework. The Comptroller and Auditor General (CAG) of India was established under the Constitution of India to audit all receipts and expenditures of the government. g. Earlier auditor had to give report regarding true and correctness of the financial statements of the entity where correctness implied ' verification of fact' or ' statement of fact', which was very onerous on the part of auditor. But in the Royal Mail Stream Packet Companies case, emphasis in audit approach has been shifted from true and correctness to true and fairness of financial statements by implying meaning of fair as reasonably or materially correct. h. Modern Era: Today, auditing in India is governed by various laws and standards, including the Companies Act, 2013, Auditng and Assurance Standards (AAS) and the Indian Accounting Standards. The Institute of Chartered Accountants of India (ICAI), established in 1949, plays a crucial role in regulating the profession and setting auditing standards. i. There has been a steady evolution in the auditing approaches also. Greater importance and emphasis is given to robustness of internal control systems, Risk Based Auditing and Computer Assisted Audit Techniques.  j. Auditing in India has evolved significantly, adapting to changes in the economic landscape and technological advancements. It continues to play a vital role in ensuring transparency and accountability in both public and private sectors. 3. Nature and Features of Auditing (Write definitions as part of introduction) a. Audit is systematic and scientific examination of the books of account of a business or non-business entity. b. Audit is a verification of the results shown by the profit and loss account and the state of affairs as shown by balance sheet. c. Audit is a critical review of the system of accounting and Internal control. d. Audit is on site verification activity, such as inspection or examination of process our quality system to ensure compliance to regulatory and other laid down requirements. e. Documentation: Audit is done with the help of vouchers, documents, information and explanation received from authorities of our business or non-business entity. The documentation forms an important part of audit evidence. f. Satisfaction of the auditor: The auditor has to satisfy himself about the authenticity of the financial statements and report as to whether the same exhibits true and fair view of the state of affairs of the concern. g. The auditor has to inspect, compare, check, review, scrutinize the vouchers and examine correspondence for my minutes book, memorandum of association and articles of association, bylaws etc to establish correctness of the books of accounts. h. Responsibility: The auditor is responsible to various stakeholders such as banks and financial institutions, investors, government, regulatory authorities, creditors, client organisations etc. i. Independence: Audit is an independent examination of financial information. The independence of the auditor is of paramount importance. A person cannot be an auditor of a firm if he is a partner, holds significant shareholding or is indebted to that organization in any form. j. For profit and non-profit organisation: Audit is conducted for all types of organizations, both for profit and nonprofit, including different ownership structures such as sole trading, partnership firm, joint stock company, trust. MNC, Government departments, co-operative societies etc. k. Purpose: An auditor expresses opinion on financial statements with regards to: a. accuracy of the books of accounts, b. supporting evidence, c. no omissions, d. clear unambiguous information, e. Conforms to accounting standards, f. Presents true and fair picture. l. Interdisciplinary: The field of audit is interdisciplinary requiring knowledge of accountancy or for my statistics, finance change management, economics etc. 4. Scope of Auditing The 'scope of audit' refers to the range of activities or areas that comes under auditing. The scope of audit is increasing with the increase in the complexities of business. Scope of audit encompasses verification of accounts with their intention of giving opinion on its reliability. Hence it covers cost audit, management audit, financial audit etc. a. The purpose of audit is to enhance the degree of confidence of intended users of the financial statements who may be shareholders, employees, customers, Government, regulatory authorities, bankers etc. The auditor expresses their opinion on whether the financial statements have been prepared in accordance with all applicable financial reporting framework. b. Coverage of all aspects of entity. Audit of financial statements should be organised adequately to cover all aspects of the entity relevant to the financial statements being audited. c. Reliability and sufficiency of financial information. The auditor should be reasonably satisfied that the financial information provided he is reliable and sufficient and accurate. he reaches this conclusion by making a study and assessment of accounting systems and internal controls and by carrying out appropriate tests, enquiries and procedures. d. Proper disclosure of financial information. The auditor should decide whether relevant information is properly disclosed in financial statements as per the applicable statutory requirements. e. The auditor evaluates the selection and consistent application of accounting policies by the management; whether such a selection is proper and whether chosen policy has been applied consistently on a period to basis. f. The financial statements of an entity are prepared on historical financial information basis. Thus, the audit is based on historical financial information of past or previous time periods recorded in the books of accounts of the firm.  What the scope of audit does not cover: g. Outside area of competence: Auditor is not expected to perform duties that is outside his area our domain of competence. example physical condition of sophisticated machinery cannot be verified by him; Suitability and life of civil structures like buildings etcetera. h. An auditor is not an expert in authentication of documents. The genuineness of documents cannot be authenticated by him as he is not an expert in this field. i. An auditor is not an official investigator into alleged wrongdoing. He does not have any legal powers of search or recording statements of witnesses on oath that is required to carry out an official investigation. j. The objective of the audit is to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion. 5. Significance/Need / (Benefits) of Auditing a. High quality information: Audited accounts provide high quality information which gives confidence to users that the information on which they are relying relying is qualitative and it is an outcome of an exercise carried out by following recognized auditing standards. b. In case of joint stock companies, the ownership and management are distinct and separate the financial accounts or statements are prepared by the management of the company. Shareholders who are the owners of the company need an independent assurance mechanism that the financial information provided to them is qualitative and reliable. Their interest is safeguarded by audit. c. Audit acts as a moral check on employees from committing frauds for the fear of being discovered by audit. d. Audited financial statements are helpful to government authorities to determine tax liability. e. Audited financial information can be relied upon by lenders, bankers and financial institutions for making their credit decisions. I.e. whether or not to lend money to a particular entity. f. An audit may also detect fraud or error or both. g. An audit helps to review the existence and robustness of various internal controls operating in an entity. h. It is a statutory requirement under various acts such as Companies Act, 2013, Tax laws etc. which require the financial statements to be audited by an independent auditor. Auditing ensures compliance with legal and regulatory requirements. Organizations must adhere to accounting standards, tax laws, and industry-specific regulations. Auditors verify this compliance. i. Corporate governance: Auditing contributes to effective corporate governance. Independent auditors evaluate the board’s oversight, internal controls, and ethical practices, promoting accountability. Audited financial information helps to ensure that corporate governance principles and practices are followed in the organization. j. Audit ensures that the financial statements are robust, reliable, accurate and complete thus protecting the interest of the shareholders and investors as well as ensuring that the stakeholders receive accurate and complete financial information. (Also see Objectives of Auditing) 6. Objective of Auditing SA 200 (overall objectives of independent auditors) issued by the ICAI states that the objective of an audit of financial statements is to enable an auditor to express an opinion on such financial statements. Basic or Primary object - True and Fair View The basic or primary object of financial audit is to express an opinion on the financial statements. Auditors opinion helps in the determination of true and fair view of the financial position and operating results often enterprise. The auditor gives an opinion on whether the financial accounts give a true and fair view of the affairs of the concern i.e. whether, a. the balance sheet gives a true and fair view of the financial position of the concern as on year end and b. the profit and loss account you said true and fair view of the profit or loss for the year. c. all material items are disclosed. d. final accounts comply with the requirements of law. e. final accounts are made according to the recognized accounting principles and auditing standards issued by professional bodies like the institute of Chartered Accountants of India etc. Incidental object – Detection of Errors and Frauds If the accounts are to be true and fair, they must be free from errors and frauds which is the incidental objective of audit. The main objective of financial audit is to report on the truth and fairness of the final accounts. While conducting the audit the auditor must vouch the transactions, verify the assets and liabilities and study the internal control. During this process an auditor may come across errors or frauds he must then take proper action. He should ensure that the accounts are free from errors and frauds in order to give a true and fair picture of the affairs of the concern. Not object  It is not the object of audit to give a guarantee that all is well with the concern. Also, it is not the objective of an audit to give an opinion on the future prospects of business or on the efficiency or effectiveness of the management. (Also see significance of auditing) 7. Audit Engagement a. Meaning: Formal agreement engagement means arrangement to do something. Audit engagement is a formal agreement between the auditor and the responsible party (client company ) under which auditor agrees to provide auditing services. It involves systematic review of financial records, internal control and processes. b. Purpose: The primary goal of an audit engagement is to provide an independent and objective assessment of the accuracy, completeness, and reliability of financial information. The purpose of external audit engagements is to enhance the degree of confidence of intended users of financial statements. such engagements are also called as assurance engagements. c. Audit engagement letter: It is a formal document outlining the engagement terms between an auditor and a client. It is a contractual agreement that sets out the scope, objectives, and responsibilities of the auditor and the client. The auditor and the client typically sign the letter. It is a contractual agreement between the parties and outlines the terms and conditions. d. Three party relationship: Audit engagement is a three-party relationship comprising of the practitioner, responsible party and the users. The practitioner is the auditor who under the terms of engagement, audits and verifies the financial information that is prepared by the responsible party ( management of the organization) for the benefit of the ultimate intended users ( shareholders and other stakeholders). e. Subject matter: The information to be examined by the auditor comprises the subject matter. Example: Financial information. f. Evidence: The audit engagement process results in the collection of audit evidence on the basis of which, the auditor gives his opinion on the reliability, accuracy and completion of financial information. The evidence should be sufficient ( quantity of the evidence), as well as appropriate ( quality of the evidence). g. The auditor will examine the company's financial records, transactions, and accounting systems to ensure no errors, fraud, or irregularities. They will also assess the company's internal controls and risk management processes. This is to identify any weaknesses or areas of improvement that can help the company prevent financial misstatements or losses. h. PROCEDURE OF AUDIT ENGAGEMENT 1. Planning: The auditor will first understand the company's business, risks, and objectives under audit engagement planning. They will also assess the materiality of the financial statements and identify areas that require special attention during the audit. 2. Risk Assessment: The auditor will assess the risks associated with the company's financial statements, including fraud risks and other potential misstatements. 3. Testing: The auditor will conduct testing of the company's financial records, transactions, and systems to ensure that they are accurate, complete, and in compliance with relevant accounting standards and regulations. This may involve gathering evidence through various methods, such as sampling and analytical procedures. 4. Evaluation of Internal Controls: The auditor will evaluate the company's internal controls and risk management processes to ensure they effectively prevent financial misstatements or losses. 5. Communication: Throughout the process, the auditor will communicate with the company's management and other stakeholders to provide updates and discuss any findings or concerns. 6. Reporting: At the end of it, the auditor will prepare a written report that includes their opinion on the accuracy and completeness of the company's financial statements and any significant findings or recommendations for improvement. The information will be distributed to the company's management and stakeholders, including shareholders and regulatory bodies. 8. Audit Planning SA 300 Planning an audit of financial statements - deals with auditors responsibility to plan an audit for financial statements. It states that objective of auditor is to plan the audit so that it can be performed in an effective manner. a. Aim: Planning an audit is necessary to carry it out effectively in a timely manner. besides ensuring compliance with professional standards, it helps in performing audit engagement effectively. b. Coverage/Objectives: Audit plan should cover among other things: a. acquiring knowledge of the clients accounting systems, policies and internal control procedures; b. establishing the expected degree of reliance to be placed on internal control; c. determining and programming the nature timing, and extent of audit procedures to be performed; d. coordinating the work to be performed. c. Continuous and repetitive process: Audit planning starts from the completion of previous previous audit and continues till the completion of current audit. it is a continuous, iterative, repetitive process. Plans should be developed and revised as necessary during the course of audit. d. Planning includes consideration of matters such as obtaining knowledge about legal framework in which entity is operating for example telecom companies and banks operate in different legal and regulatory frameworks. ( TRAI and RBI are regulators for telecom and banking industry respectively. e. Determination of materiality: planning also includes need to consider determination of material or significant matters. f. Planning also includes considering whether expert persons need to be involved taking into account the complexity of the business. further it also involves considering need to perform risk assessment procedures for identifying and assessing risks of material misstatement. g. Involvement of key engagement team members: The engagement partner and other key members of the engagement team shall be involved in planning the audit. the involvement of the engagement partners and other key members in planning the audit draws on their experience hand insight, thereby enhancing the effectiveness and efficiency of the planning process. h. The auditor may decide to discuss elements of planning with the entity’s management to facilitate the smooth conduct and management of the audit engagement. However when discussing such matters care should be taken not to compromise the overall effectiveness of the audit. i. Planning activities would involve a. establishing the overall audit strategy; and b. developing an audit plan. The following matters helped the auditor in developing the overall audit plan: The terms of his engagement and any statutory responsibilities. The nature and timing of reports and other communication Accounting policies adopted by the client and changes in those policies. Identification of significant audit areas. The setting of materiality levels for audit purpose. The possibility of material error or fraud or numerous related party transactions. The degree of reliance to be placed on accounting system and internal control. The nature and extent of audit evidence to be obtained. Emphasis on specific audit areas. 9. Audit Programme Prof. Meigs defines an Audit Programme as, “a detailed plan of the audit work to be performed, specifying the procedures to be followed in verification of each item in the financial statements, and giving the estimated time period.” a. Meaning: Audit program is an outline of how the audit is to be conducted by the audit staff, who is to do what work and within what time. It is a detailed program outlining the specific procedures and steps the auditors will follow during an audit. b. Purpose: a. Guidance to audit team members. b. Consistency: Ensuring that all areas are covered and audit is performed consistently. d. Accountability of the audit team by documenting the work performed. e. Efficiency: Ensuring the audit is completed in an efficient manner. c. Utilising one audit programme for all businesses and all years is not possible or feasible. The audit program will change and will be unique for each audit engagement. d. Flexibility: The auditor needs to keep an open mind with regards to the flexibility of audit programme. As experience is gained by actually carrying out the work, the program may be altered to take care of situations which were left out originally, but found relevant for the particular concern later on. Similarly significant matters coming to the notice of the auditor maybe subjected to further examination. e. Periodic review of the audit programme: There should be periodic review of the audit programme to assess whether it continues to be relevant and adequate for obtaining the required knowledge and evidence. Periodic review ensures that inadequacies or redundancies of the program may be removed. f. Constructing an audit programme: a. Stay within the scope of assignment; b. Written audit program with specific procedures; c. Determine the best evidence needed for necessary satisfaction; d. Include audit objectives for each area in sufficient details including set of instructions for audit assistants. E. Consider all possibilities of error.  g. Audit program is designed to provide audit evidence. Evidence is the basis for formulation of opinion and audit program he designed to provide audit evidence by prescribing procedures and techniques this is the primary task before the auditor when he draws up the audit programme. h. Contents of audit programme. Name of client and accounting year; Audit procedures - detailed instructions regarding how the audit is to be conducted right from the first step of evaluation of internal controls to the last step of submission of the audit report. This is the main part of audit programme. Distribution of audit work: the audit program shows against each audit procedure the name of the person expected to perform it, and review it. Timetable: Schedule of audit work. 10. Advantages and Limitations of Audit Programme An audit programme has the following advantages: a. Guidance to audit assistants. b. No omission or repetition of work. c. Checklist of Procedures d. Exact procedures to be followed for Audit Evidence e. Delegation and supervision of audit work f. Distribution of work: Routine work, joint work etc. g. Evidence in court h. Timely completion of audit Limitations of audit programme are as follows: a. Mechanical work b. Work to rule – no initiative c. Defence against deficiencies by ineffective audit assistants d. Evidence only for quantitative aspects e. Rigid time table f. Fixed audit programme 11. Features of Audit Working Papers Meaning: Audit working papers are crucial component of statutory audit process. They contain written record of audit plan, audit procedures performed and conclusions reached by the auditor. standard on auditing SA 230 , " audit documentation" sets out the principles that the auditors should follow when preparing audit documentation. Audit working papers are the documents prepared by auditors during an audit engagement. These papers contain the evidence obtained and the procedures followed by the auditors in performing their work. Its purpose is to record the audit process and provide a basis for the auditor’s conclusions and opinions. Purpose of audit working papers: a. maintaining quality and integrity of audit. B. Providing detailed trail of auditors work. C. Document evidence obtained and procedures followed. D. Basis for auditors opinions. E. Evidence of auditor's work. Contents of audit working papers: audit plan, client information, risk assessment, internal control evaluations, correspondence with client, review notes and comments etc. Permanent Audit File: A permanent audit file is an audit file that auditors keep for continuing audit engagements. This file usually includes documents that auditors use continuously. The information within this file rarely changes. Eg: engagement letters, foundational documents like memorandum of association, articles of association, by laws of the company etc. long term contracts, relevant board meeting minutes, history of client side business, accounting policy and manuals etc. Current Audit File: A current audit file is a file that stores information related to a specific engagement. Current audit files usually include information that varies from one year to another. This information does not involve permanent or long-term information about the client. It also consists of records related to audit planning and audit programs for each year. Example audit plan, current year board meeting minutes, financial statements, documentation of key audit findings, adjusting entries, reconciliation, correspondence, bank confirmations etcetera. Documentation of evidence: audit working papers record evidence obtained during the audit that supports the auditor's opinion. Audit working papers are essential for maintaining the quality and integrity of the audit process. They provide a detailed trail of the auditor’s work, which can be used to demonstrate compliance with professional standards and regulatory requirements. The working papers are confidential and are not intended for distribution outside the audit team or the client’s management. Audit Procedures: They detail the nature, timing, and extent of the audit procedures performed. Compliance: They ensure that the audit complies with relevant laws, regulations, and auditing standards. Review and Supervision: They provide a basis for reviewing the work performed and for supervising the audit team. Future Audits: They serve as a reference for future audits, helping to understand past audit procedures and findings. Support for Auditor’s Opinion: They provide the foundation for the auditor’s opinion on the financial statements, demonstrating that the audit was thorough and competent. Accountability: They serve as evidence of the auditor’s accountability, showing that the audit was conducted in accordance with professional standards. Facilitate Reviews and Inspections: They allow for internal and external reviews, including regulatory inspections, to verify the quality and compliance of the audit. Ownership, Custody, and Access of Audit Working Papers Ownership: Audit working papers are generally considered the property of the auditor or the audit firm. This is because they are created by the auditor during the audit process and contain the auditor’s work, findings, and conclusions. Custody : The auditor is responsible for maintaining the custody of the audit working papers. They must ensure that these documents are stored securely and are protected from unauthorized access. This includes both physical and electronic storage. Access Client Access: Clients do not have an automatic right to access the audit working papers. However, auditors may choose to share certain information with the client if it is deemed appropriate and does not compromise the audit’s integrity.  Third-Party Access: Third parties, including regulators and successor auditors, may request access to the audit working papers. Such access is typically granted only under specific circumstances, such as regulatory reviews or legal requirements 12. Contents of Audit Working Papers Audit working papers are comprehensive documents that record the audit process, evidence obtained, and conclusions reached. Here’s a detailed breakdown of their typical contents: 1. Audit Plan Details: Strategy, scope, objectives, and procedures for the audit. Purpose: Guides the audit process and ensures all necessary areas are covered. 2. Client Information Details: Background information, organizational structure, financial statements, and prior audit reports. Purpose: Provides context and understanding of the client’s business. 3. Risk Assessments Details: Identified risks and their potential impact on financial statements. Purpose: Helps in planning audit procedures and focusing on high-risk areas. 4. Audit Programs Details: Detailed steps and procedures to be followed during the audit. Purpose: Ensures systematic and thorough examination of financial records. 5. Evidence Details: Copies of documents, confirmations, and other evidence obtained. Purpose: Supports the auditor’s findings and conclusions. 6. Working Trial Balance Details: Summary of the client’s financial statements, adjusted for audit findings. Purpose: Provides a snapshot of the financial position after adjustments. 7. Adjusting Entries Details: Proposed adjustments to the financial statements based on audit findings. Purpose: Corrects any identified errors or misstatements. 8. Reconciliations Details: Reconciliations of account balances and transactions. Purpose: Ensures accuracy and completeness of financial records. 9. Analytical Procedures Details: Analysis and comparisons of financial data to identify unusual trends or discrepancies. Purpose: Detects potential issues that require further investigation. 10. Internal Control Evaluations Details: Assessments of the client’s internal control systems and any identified weaknesses. Purpose: Evaluates the effectiveness of internal controls in preventing and detecting errors. 11. Correspondence Details: Communication with the client, including management letters and responses to audit queries. Purpose: Documents interactions and agreements with the client. 12. Review Notes Details: Notes and comments from the audit team and reviewers. Purpose: Provides feedback and ensures quality control. 13. Conclusion and Opinion Details: The auditor’s final conclusions and opinions based on the audit findings. Purpose: Summarizes the overall results of the audit and forms the basis for the audit report. 14. Significant Audit Findings Details: Documentation of key findings and issues identified during the audit. Purpose: Highlights important matters that need attention. 15. Compliance Reports Details: Reports related to regulatory compliance for the current year. Purpose: Ensures the client adheres to relevant laws and regulations. 16. Original Documents Details: Original bank confirmations, cash count sheets, and other primary documents. Purpose: Provides primary evidence for audit conclusions. These documents ensure that the audit is thorough, well-documented, and compliant with auditing standards. They also provide a basis for review and future audits. 13. Audit Notebook Meaning: An audit notebook is a detailed diary or register maintained by auditors to record all critical aspects of the audit process. It serves as a comprehensive record of the auditor’s observations, queries, and findings during the audit. The audit notebook is essential for preparing the final audit report and serves as a valuable reference for future audits. Part of current audit file. Notes made by audit team for recording special points and observations. Contents: the audit programme, analysis of transactions and balances, timing of audit procedures performed and results of such procedures, queries raised, how the queries were resolved, clarifications, adjustments, discussions with management, conclusion reached by the auditor etc. Copies of letters or file notes concerning audit matters communicated to or discussed with client. Evidence that the work performed by assistants were supervised and reviewed. Identification: while making entries in audit notebook, audit teams should carefully identify the item being checked. ( Eg: purchase invoice number and date, details about sample selection etc.) Queries raised during the audit is recorded in audit notebook. it should be elaborate self- explanatory and detailed. record of clients replies to the queries. meeting between auditor and client related to queries etc. Adjusting journal entries: if the query is valid auditor must make sure that the journal entry is is passed adjusting the error identified in the query. reference number of such adjusting journal entry should be mentioned in the audit notebook. Importance of audit notes. it is used for recording various queries raised in the of course of work and their disposal including explanation obtained and evidence seen. the audit notes constitute important evidence of matters considered by the auditor during the course of the audit. It is an evidence in the court of law. Working papers versus audit notebook: Audit notebook is more narrative and detailed. working papers are broader in scope. audit notebook is part of current file of working papers. Audit notebook contains observations and queries by the auditor whereas audit working papers document the entire audit process. The source for audit notebook is the auditor whereas the source for audit working papers may be client, external parties or the auditor. 14. Audit Evidence (See ICAI Link- chapter on Audit Evidence) Audit Evidence: Very core of the basis of which conclusions are drawn and opinion is expressed by the auditor. Audit work – Obtaining and evaluating audit evidence Audit evidence may be defined as the information used by the auditor in arriving at the conclusions on which auditor's opinion is based. Includes: a. Information contained in the accounting records - acounting entries, cheques, electronic fund transfers, invoices, ledgers, journal entries, adjustments, reconciliations etc. and b. other information. : minutes of meetings, written confirmations, manuals of internal control etc. CLASIFICATION OF AUDIT EVIDENCE A. Depending upon nature 1. Visual – Physical verification of inventory 2.Oral - Discussion with management/officers 3. Documentary – FD certificate, lean agreement, sales invoice B. Depending upon source 1. Internal evidence : Bulk of evidence Sales invoice, challan, bills, inspection note, goods received note, cash memo, debit note, credit note, wage sheets, minute books, etc. 2. External evidence : Outside clients organisation (Quality – higher reliance), difficult to manipulate. Purchase invoice, banker's certificate, confirmations, quotations, payee receipt, bank statement, insurance policies, mortgage deeds Etc. Auditor should try to match internal and external evidence. Essentials of good evidence: Relevance, reliability and Sufficiency of audit evidence. Relevance: Logical connection with the purpose of audit procedure. (Must be relevant to the matter being checked). Eg: Stock book transactions - (Goods received notes, delivery challans), (Closing stock – physical inventory checking) Reliability: Influenced by its source and nature, circumstances in which it is prepared, controls over preparation. External independent sources, Internal sources with effective Internal Control, Original docs vs photocopies. Sufficient Evidence: sufficient appropriate audit evidence Sufficiency – quantity of audit evidence – Based on auditor's risk assessment and quality of evidence Appropriateness – Quality of audit evidence. Evidence about internal control a. Existence: Eg: Purchase above certain limit – approval b. Effective: Segregation of duties c. Operative: Evidence of operation during the year. Reconciliation statements. Evidence about transactions during the year a. Occurrence : Transaction actually took place. (dummy salary) b. Complete: No unrecorded transactions. c. Amount: Evidence of right amount at right cut-off date d. Disclosure: Disclosed in accounting books as per recognised accounting policies Evidence about year end balances of assets and liabilities a. Existence: Eg: Existence of assets and liabilities b. Rights and obligations: legally owned/owed at year end c. Valuation: Right valuation d. Disclosure: As per accounting conventions Evidence about year end balances of assets and liabilities a. Existence: Eg: Existence of assets and liabilities b. Rights and obligations: legally owned/owed at year end c. Valuation: Right valuation d. Disclosure: As per accounting conventions 15. Sources of Audit Evidence (See any textbook of auditing) Audit procedures for obtaining audit evidence: a. Inspection: Examining records, documents, (any media), physical verification of asset. Inspection of records, inventory etc.  b. Observation: looking at a process or procedure performed by others. (Exam- Observer), Internal control. c. External confirmation: Direct written response to the auditor from the third party. (Terms of agreement with third parties. d. Recalculation: Checking the mathematical accuracy. e. Reperformance: Independent execution of procedures. Eg: reconciling bank reconciliation records f. Analytical procedures: Evaluation of financial information. Eg: Selection of ratios and comparison with industry standards. g. Inquiry: Seeking info from knowledgeable persons. (Internal/external, formal, informal) Eg: management override of controls. Test of controls: Audit procedures to evaluate the operating effectiveness of controls. Substantive procedures: To detect material misstatements – at assertion level (Representations made by the management) (Vouching – critical examination of vouchers, documentary evidence, Posting checking, casting checking, ledger scrutiny, verification- check balances of assets and liabilities at end of year, grouping and disclosure). --------------------------------------------------------------------------------------------------------------- Sources: ICAI: https://boslive.icai.org/sm_chapter_details.php?p_id=10&m_id=21 Bankers’ Handbook on Auditing – Indian Institute of Banking and Finance Auditing textbook by Ainapure, Ainapure Auditing – CA Kamlesh Singh Chauhan. https://www.wallstreetmojo.com/audit-engagement/ https://accountinginsights.org/understanding-audit-engagements-phases-types-and-key- concepts/ https://www.accountinghub-online.com/audit-working-papers/ https://www.wallstreetmojo.com/audit-working-papers/ https://www.wikiaccounting.com/audit-working-papers/