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Nature, Objective and Scope of Audit | CA Inter Audit Chapter 1 | CA Inter Audit New Scheme | ICAI

CA Intermediate Grooming Education・179 minutes read

The text delves into the nature, objective, and scope of auditing, emphasizing the importance of independence and the necessity for auditors to provide unbiased opinions. It highlights the key points of financial auditing, including the importance of financial statements, the auditing process, and the significance of adhering to accounting standards for accurate reporting.

Insights

Auditing focuses on the nature, objectives, and scope of auditing, delving into the audit process, objectives of auditors, and advantages of auditing.
Independence in auditing, both in appearance and mind, is crucial for unbiased opinions, emphasizing the importance of adhering to standards on auditing.
Financial statements must be clear, complete, and unambiguous, based on journal entries with sufficient evidence, and compliant with accounting standards for a true and fair view.
Auditors need a multidisciplinary knowledge base, including accounting principles, behavioral science, statistics, economics, and financial management, to effectively conduct audits.
Audits provide reasonable assurance about the absence of material misstatement due to fraud or error, with limitations stemming from the subjective nature of financial reporting and practical constraints faced by auditors.

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Recent questions

What is the purpose of auditing?
Ensuring clarity and accuracy of financial statements.
What are the key points for successful financial auditing?
Understanding and applying six crucial points.
Why is independence crucial in auditing?
To provide unbiased opinions and maintain integrity.
What is the scope of an audit?
Covering all areas of the entity for financial information reliability.
What are the limitations of audits?
Inherent constraints due to financial reporting nature.

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Summary

00:00

"Essence of Auditing: Nature, Objectives, and Independence"

The first chapter of the text focuses on the nature, objective, and scope of auditing.
It delves into the basics of auditing, including the origin of audit and the complete audit process.
The chapter covers the objectives of an auditor, the scope of audit, and the advantages of auditing.
It highlights the importance of standards on auditing, akin to accounting standards, in guiding auditors.
The text emphasizes the significance of audited financial statements in instilling confidence in shareholders.
The audit process is traced back to its roots, originating in independent India in 1949.
The definition of auditing is detailed as an independent examination of financial information of any entity, regardless of profit orientation, size, or legal form.
The concept of independence in auditing is crucial, focusing on being free from external influence to provide unbiased opinions.
Independence is divided into appearance and mind, with adherence to rules and regulations ensuring the former but true independence requiring freedom from internal influences.
The text underscores the necessity for auditors to maintain independence both in appearance and in their judgment, ensuring unbiased opinions in the audit process.

14:32

Key Points for Successful Financial Auditing

Financially oriented companies differ from NGOs due to their profit-oriented nature and the presence of audited financial statements.
The size and legal structure of a company do not impact the need for financial audits.
Auditors must maintain independence, be able to audit any entity, and express an opinion on financial statements.
The purpose of an audit is to ensure the clarity and accuracy of financial statements.
Auditors must ensure that financial statements are not confusing or misleading.
To avoid confusion, financial statements should be complete, clear, and unambiguous.
Accounts should be based on journal entries, supported by sufficient evidence, and free from omissions.
Financial statements should be appropriately classified, described, and disclosed in accordance with accounting standards or the applicable financial reporting framework.
The financial statement should present a true and fair view of the company's financial position and performance.
Understanding and applying these six key points is crucial for successful financial auditing.

30:05

"Essential Points for Effective Financial Statement Auditing"

The six points mentioned in the text are crucial for the summary.
These points are integral to the summary and should be noted down.
The six points are related to the form of the summary.
The points are derived from entries in the books of accounts.
The financial statements should be appropriately classified and disclosed according to AFRF.
The financial statement should provide a true and fair view of the enterprise's financial position and performance.
Auditing is an interdisciplinary field that draws from various subjects.
A chartered accountant is given audit rights due to expertise in multiple areas.
Knowledge of accounting principles and fundamentals is essential for auditors.
Auditors should also have knowledge of behavioral science, statistics, economics, and financial management.

43:32

"Human behavior knowledge essential for auditors"

Knowledge of human behavior is crucial for auditors to determine if individuals are truthful or hiding information during inquiries.
Experience, rather than formal education, is essential for gaining this knowledge of human behavior.
Interacting with people during articleship helps auditors develop a deeper understanding of human behavior.
Auditors must have a strong foundation in mathematics and statistics to conduct effective audits.
Sampling techniques in statistics are vital for auditors to ensure accurate audits.
Mathematics is essential for verifying inventory counts and conducting differential inventory counts.
Data processing is crucial for converting unstructured data into meaningful information for audits.
Auditors must understand the production costs and marketing systems of businesses to be effective.
The auditing process is divided into planning, execution, and reporting stages, each with specific objectives and tasks.
Auditors must express an opinion on financial statements' compliance with applicable financial reporting frameworks.

57:43

"Essential Communication: Auditing for Financial Statement Assurance"

Reports are essential for communication in accordance with audit findings.
Communication is required to convey audit findings to management, governance, shareholders, or regulatory bodies.
Reasonable assurance is sought to ensure financial statements are free from material misstatement due to fraud and error.
Reasonable assurance is a high level of assurance but not an absolute guarantee.
Auditors aim to provide reasonable assurance to shareholders regarding the absence of fraud or error in financial statements.
Audit procedures are conducted in accordance with auditing standards to collect evidence and form conclusions.
Misstatements in financial statements can result from fraud or error, requiring auditors to assess their impact.
Obtaining reasonable assurance enables auditors to express an opinion on the financial statements.
The scope of an audit includes covering all areas of the entity and determining the reliability and sufficiency of financial information.
Reliability involves verifying the ownership of assets through original invoices and payment records, while sufficiency ensures that the evidence gathered is adequate.

01:11:44

Ensuring Reliable Financial Statements: Key Considerations

Verification of authorization is crucial for financial statements preparation
Accounting should be done from original invoices for reliability
The auditor must ensure information in accounting records is reliable and sufficient
Study on the reliability of accounting systems and internal controls is necessary
Proper disclosure of financial information in financial statements is essential
Accounting transactions should be objective and recorded accurately
Management's judgments in financial statement preparation must be evaluated
Selection and consistency of accounting policies by management should be assessed
Historical financial information is based on past events and transactions
The scope of audit covers financial information reliability, accounting system assessment, and internal control evaluation
Auditors are not expected to perform duties beyond their expertise, such as document authentication
The difference between audit and investigation lies in the objective of obtaining accurate financial statements without fraud detection.

01:26:47

Investigations vs Audits: Powers and Scope

The investigator has special powers to audit and can break closed doors to enter.
The investigator can seize closed doors with documents and conduct interrogations.
Auditing is not an official investigation and does not have specific legal powers like search and seizure.
Examination under oath is a significant power in investigations, not in audits.
Audits aim to provide reasonable assurance about financial statements, while investigations focus on detecting fraud.
Audits have a general and broad scope, while investigations are specific and narrow in detecting fraud.
Audits create a base for investigations if fraud is suspected during the audit process.
Audited financial statements do not provide absolute assurance to investors, as share prices can be influenced by various factors.
Environmental regulation violations and monetary penalties fall within the scope of audit and must be properly disclosed in financial statements.
Insurance claims for losses due to events like fires involve assessments by insurance surveyors and verification of financial records by appointed professionals.

01:41:00

Audit Reveals Financial Concerns and Limitations

A CA was informed that he was off the books and was asked to verify financial accounts.
The CA was requested to submit an early report by the nature of an audit.
The audit report raised questions about financial circumstances and a fire incident.
The purpose of the audit was to analyze profit loss and check financial statements.
The audit was more of an investigation than a traditional audit due to critical examination.
The inherent limitations of audits prevent absolute assurance due to the nature of financial reporting.
The first limitation arises from the subjective nature of financial reporting and the uncertainty in judgments and estimates.
The second limitation stems from the responsibility of management in preparing financial statements and establishing internal control systems.
Practical limitations in audits include not testing all transactions and balances and management not providing complete information.
Legal limitations in audits involve the inability to force management to provide complete information, leading to potential fraud concealment.

01:56:32

Detecting Fraud: Challenges Faced by Auditors

Top-level management, including CEOs, can hide fraud through sophisticated schemes, making it hard for auditors to detect.
Fabricated documents can mislead auditors into believing that fraud has not occurred.
Auditors may lack expertise in authenticating documents, making it challenging to detect fraud.
Transactions with related parties can be misrepresented, leading to false information being presented to auditors.
Auditors face limitations in conducting investigations, unlike investigators who have more authority.
Timeliness in financial reporting is crucial, as delays can impact the reliability of information.
Balancing the cost of obtaining information with its reliability is essential for auditors.
Relying on outdated or irrelevant information can compromise the accuracy of audit reports.
Future events, such as disasters or market changes, can affect a company's ability to continue operating.
Auditors have inherent limitations due to the nature of financial reporting and the practical constraints they face.

02:10:31

Understanding Audit Engagement in Financial Reporting

Engagement is not about exchanging rings but refers to being hired to perform a job.
An engagement in auditing is a formal agreement between an auditor and a client for auditing services.
Audit engagement involves the auditor agreeing to provide services as per the terms in the engagement letter.
Statute audit, also known as external audit, is required by law for certain entities.
The purpose of external audit engagement is to enhance confidence in financial statements for users.
An appointed auditor, not part of the entity being audited, is crucial for external audit engagement.
Audited accounts provide high-quality information, instilling confidence in users and ensuring accuracy.
Audits act as a moral check on employees, deterring fraud due to the fear of being caught.
Audited financial statements help government authorities determine tax liabilities and assist lenders in making credit decisions.
Audits also detect fraud and errors, review internal controls, and can be mandatory or voluntary based on entity type and turnover.

02:24:43

"Friends Prepare for CA Intermediate Exam"

The person making the appointment is a shareholder in the company.
The government is a partner in partner firms CNH in the company.
Case studies will be discussed in the next video.
Questions will be based on study material and multiple choices.
The case study is about friends who cleared the CA Foundation exams and plan to appear for the CA Intermediate Examination.
They regularly keep track of business news, even on social media.
Attending live coaching classes conducted by the Board of Studies of ICI.
Goretti has not been able to join live coaching classes due to a holiday.
A discussion centered around the new subject of auditing reveals various perspectives on the topic.
The limitations of auditing, including the nature of audit procedures and the scope of an audit, are discussed among the friends.

02:39:23

"Essential Tips for Effective Auditing Practices"

Reading questions thoroughly is crucial for understanding and answering them correctly.
Auditing is connected to future events, and audited information can be relied upon by users.
Going concern is a significant aspect in auditing, as auditors cannot predict future events.
Audited information is not connected to future events, as audit focuses on historical financial data.
Fraud may be discovered during audits, and auditors must report any discrepancies.
Government authorities utilize audited accounts for various purposes, such as economic policies and awarding contracts.
Fabricated documents can mislead auditors, and it is essential to authenticate documentation.
Auditors must rely on professional skills and conduct thorough inquiries during audits.
Lack of internal control systems can lead to fraud, and auditors cannot be blamed for such occurrences.
Auditing is a type of assurance engagement where auditors provide an opinion on the accuracy of financial statements.

02:53:35

Boosting Confidence: Assurance Engagements in Audits

Assurance engagement involves the practitioner expressing a conclusion to boost the confidence of the intended user, such as a bank, other than the responsible party, usually the company's management.
The subject matter in stock audits pertains to the evaluation and measurement of normal stock, while in full financial audits, it refers to the financial statements themselves.
The practitioner evaluates the financial statements against the applicable financial reporting framework (AFRF) criteria to ensure their accuracy and compliance.
Intended users of the financial statements include shareholders, banks, government entities, and the responsible party, which is typically the company's management.
The responsible party is responsible for preparing the subject matter, while the intended user benefits from the assurance report prepared by the practitioner.
Subject matter in audits, like stock, is examined against criteria, which are the standards or benchmarks used to evaluate the subject matter.
The practitioner's role in assurance engagements involves providing opinions on specific information to help users make confident decisions based on accurate information.
Assurance engagements encompass various types beyond audits, including property, plant, and equipment audits, as well as reviews and other forms of assurance.
The elements of an assurance engagement include the three-party relationship involving the practitioner, responsible party, and intended user, as well as appropriating subject matter and ensuring sufficient and appropriate evidence.
The assurance report provided by the practitioner conveys conclusions that assure the intended user about the subject matter, enhancing confidence in the information provided.

03:09:56

Levels of Assurance in Financial Engagements

Assurance is categorized into three levels: absolute assurance (100%), reasonable assurance (greater than 75%), and limited assurance (greater than 50% but less than 75%).
Reasonable assurance is akin to an audit, providing a high level of assurance, while limited assurance, like a review, offers a moderate level of assurance.
Assurance engagements can vary in the degree of assurance provided, with reasonable assurance giving more confidence than limited assurance.
Historical financial information is reviewed through audits for assurance, while reviews focus on financial information.
Another type of assurance engagement pertains to matters beyond historical financial information, such as prospective financial information.
Prospective financial information involves forecasting future events and actions by an entity, distinct from historical financial information.

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