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Basic concepts in auditing
Definition: Audit is an independent examination,Of financial information,Of any entity whether profit making or not, irrespective of its size & legal structure, When such an examination is conducted with a view to express an opinion thereon.
MEANING:
Audit Evidence refers to any information obtained by the auditor so that he can draw conclusions & express opinion on the financial statement
Factors to determine sufficiency & appropriateness
Degree of risk of misstatement.The result of audit procedure i.e., any fraud &error detected by auditor.Materiality of item.Type of information available.Experience gained during previous audit.Trend shown by accounting ratios etc.
Difference b/w Internal &External Evidence
BASIS INTERNAL EXTERNAL
MEANING Created & retained within client’s organization
Originates outside client’s organization
EXAMPLE Copies of sales invoice, wage sheet
Purchase invoice , bank statements
SOURCE Inside the entity Outside the entity
RELIABILITY Less reliable More reliable
Compliance procedures are performed to
check designing, operating effectiveness and
continuity of I.C. system. Auditor performs
compliance procedures in respect of the
following assertions relating to internal
control system:
EXISTENCE:that the internal control exists.
OPERATING EFFECTIVENESS: that the I.C.
system is operating effectively.
CONTINUITY:that the internal control has
been so operated
throughout the period.
Substantive procedures are performed to check completeness,
accuracy and validity of transactions and balances. Auditor
performs substantive procedures in respect of following
assertions relating to data produced by accounting system:
MEASAUREMENT: that a transaction is recorded in the proper
period at proper amount.
PRESENTATION AND DISCLOSURE: an item is disclosed, classified
and described as per recognized accounting policies and
relevant statutory requirements, if any.
EXISTENCE: that an asset or liability exists at a given date.
VALUATION: that an asset or liability is recorded at an appropriate
carrying value.
Methods to obtain evidence
Inspection Observation Inquiry and
confirmationComputation
Analytical review
Reperformance