Introduction to Auditing and Corporate Governance

These flashcards cover the fundamental vocabulary and legal concepts of auditing, including definitions, types of audits, error classifications, internal controls, and statutory requirements based on the lecture transcript.

AUDIRE

The Latin word meaning "to hear" from which the term audit is derived.

Kautaly

Author of the book "arthshastra" who stated that all undertakings depend on finance and treasury requires foremost attention.

Spicer and Peglar's Definition of Auditing

An examination of the books, accounts and vouchers of a business to enable the auditor to satisfy himself whether the balance sheet exhibits a true and correct view of the state of affairs.

Mautz's Definition of Auditing

Concerned with the verification of accounting data with determining the accuracy and reliability of accounting statements and reports.

Auditor as a Watchdog

A legal metaphor stating that an auditor is a watch dog but not a blood hound, meaning they evaluate authenticity without being expected to act as a detective unless suspicious.

Primary Objective of Auditing

For the auditor to report to the owners (shareholders) whether the accounts exhibit a true and fair view of the state of affairs of the business.

Errors of Omission

Errors arising when transactions are not recorded in the books of accounts either wholly or partially.

Errors of Commission

Errors where incorrect entries are made in the books, such as wrong entries, wrong calculations, postings, or carry forwards.

Compensating Errors

When two or more mistakes are committed which counter balance each other, such as wrongly debiting and crediting an account by the same amount like $Rs\,100$.

Error of Principle

Errors committed by not properly following accounting principles, such as treating revenue expenditure as capital expenditure.

Teaming and Lading

A fraud where cash received from the first customer is misused, and when the second customer pays, it is transferred to the first customer's account.

Windows Dressing

The manipulation of accounts by higher level management to intentionally mislead others, evade tax, or increase share price.

Statutory Audit

Any audit carried on as per the requirement of law, such as those required by the Companies Act of 1956.

Interim Audit

An audit conducted in the middle of the accounting year, between two financial audits, for objectives like declaring dividends.

Balance Sheet Audit

A kind of partial audit popular in the USA concerned with the verification of only those items appearing in the Balance Sheet.

Management Audit

A comprehensive examination of an organizational structure, plans, objectives, and use of human and physical facilities to evaluate efficiency.

Continuous Audit

An audit where the auditor visits the client's office at regular intervals throughout the year to verify accounts.

Audit Programme

A detailed plan of the auditing work to be performed, specifying the procedure for verification of each item and estimated time required.

Audit Note Book

A record maintained by the audit staff containing data on work done, comments, errors discovered, and explanations required.

Audit Working Papers

A file of analysis, summaries, comments, and correspondence built up by the auditor as supporting evidence for the audit report.

Auditor's Lien

The right of an auditor to keep the books of accounts and related documents in their possession until their audit fees have been paid.

Internal Check

An arrangement of book keeping routine where the work of one person is automatically checked by another to prevent errors and frauds.

Internal Control

The whole system of controls, financial and otherwise, established by management, including internal check and internal audit.

Internal Audit

A tool involving a continuous critical review of financial and operating activities by a staff of auditors who are full-time salaried employees.

Verification

A process carried out to confirm the ownership, valuation, existence, and possession of items as of the balance sheet date.

Valuation

The process of certifying the correct value of the asset at the date of the Balance Sheet based on accepted principles.

Inventory Valuation Principle

The objective of verifying stock to ensure it is valued at cost price or market price, whichever is lower.

Kingston Cotton Mills Co., Ltd Case

Legal case where the judge observed that it is not the auditor's duty to take stock and they are a watchdog, not a bloodhound.

Clean Report

Also known as an Unqualified Report, given when the auditor is satisfied with the fairness of the financial statements and supporting evidence.

Qualified Report

A report submitted when the auditor finds a discrepancy, such as improper valuation or inadequate depreciation, and cannot certify a true and fair view.

Section 224 (1-B) of the Companies Act

Mandates a ceiling on the number of audits, stating no individual or partner shall hold office as auditor of more than $20$ companies.

Certified Auditors

Persons who hold a certificate under the Restriction Auditors Certificate Rules 1956 and are qualified to act as company auditors.

Misfeasance

Breach of trust or duty imposed by law for negligence in the performance of duties, resulting in financial loss to the company.

Section 233 A of the Companies Act

Grants the Central Government power to direct a Special Audit if a company is not managed with sound business principles or faces insolvency.

Derry Vs Peek (1882)

A legal case deciding that an auditor is liable to third parties for fraud only if statements were materially untrue and intended to be acted upon.

Divisible Profits

Profits that can be legally distributed in the form of dividends to shareholders in accordance with Section 205.

Secret Reserves

Also called Internal or Hidden Reserves; reserves not shown on the face of the balance sheet, generally prohibited except for banking and insurance firms.

AAS 1

Accounting Assurance Standard governing Basic Principles, including Integrity, Objectivity, Independence, and Confidentiality.