Introduction to Auditing

Lecture Overview

• Instructor greeted the students and checked if audio and video were clear.
• Asked students to participate and confirm their presence by writing 'Present Sir' in the chat box.

Key Topics Covered

1. Definition of Financial Audit

   • Roles: Shareholders, Auditor, Management.
   • Purpose: Independent examination of financial information to express an opinion on financial statements.
   • Non-discriminatory: Applies irrespective of size and legal form (profit-oriented, non-profit, LLP, partnership firm).

2. Objective of an Independent Auditor (SA 200)

   • Overall Objective: Conduct audit as per Standards on Auditing (SAs) to achieve reasonableness and express an opinion.
   • Reasonable Assurance: Ensure financial statements are free from material misstatements (due to error or fraud).
   • Three-step Process: Obtain reasonable assurance → Form opinion → Report and communicate.

3. Material Misstatement

   • Definition: Difference between reported and required amount, classification, presentation, and disclosure as per applicable FRF.
   • Causes: Can arise due to error or fraud.

4. Role of Those Charged with Governance (TCWG)

   • Function: Oversee entity’s direction, manage accountability, and address management’s deficiencies.

5. Mandatory vs. Voluntary Audit

   • Mandatory: As per Section 139 for companies.
   • Voluntary: Entities may opt for audit due to advantages like tax laws, government grants, and better control.

6. Appointment of Auditor

   • Companies: Appointed by shareholders in AGM or by C&AG in case of government companies.
   • Firms: Appointed by partners.

7. Benefits of Audit

   • Detects deficiencies and misstatements
   • Acts as a moral check on employees
   • Provides high-quality information
   • Benefits shareholders, government, and creditors/lenders

8. Professional Skepticism

   • Attributes: Being alert, questioning mind, critical assessment.
   • Risk Reduction: Helps in reducing audit risk by avoiding overlooking unusual circumstances and inappropriate judgments.
   • Maintaining Skepticism: Necessary even if past experiences were positive.

9. Reasonable Assurance vs. Absolute Assurance

   • Inherent Limitations: Nature of financial reporting, audit procedures, and investigation limitations.
   • Nature of Judgment: Subjectivity and uncertainty in financial estimates and controls.
   • Practical and Legal Limitations: Sample testing, reliance on management’s complete information, and potential concealment by management.

10. Assurance Engagement

    • Definition: Engagement where practitioner provides a conclusion to enhance user confidence about the evaluation of subject matter against criteria.
    • Types: Audits, reviews, other assurance engagements.
    • Elements: Practitioner, responsible party, intended user, subject matter, criteria, sufficient and appropriate evidence.

11. Standards on Auditing (SAs)

    • Need: Provides benchmarks, improves audit and financial reporting quality, equips accountants with knowledge and skill, ensures uniformity.
    • Compliance: Mandatory for company audits; alternative procedures and reporting when regular procedures are ineffective.

12. Engagement and Quality Control Standards

    • SAE: Standards on Assurance Engagements.
    • SRE: Standards on Review Engagements.
    • SRS: Standards on Related Services (where assurance is not provided).

Conclusion

• Revision Video: Recap of Reasonable Assurance, Professional Skepticism, and Assurance Engagements.