Unit 1 3 analysis of financial statements accounts and audit -gfsu-mba-forensic-accounting

Financial Management & Homeland Security

Lecture Series Unit No. 1:Topic: (3) Accounting and Audit(Course: Forensic Accounting & Homeland Security, GFSU)

CA Vikram Shankar Mathur

BA (Eco) Hons, FCA, DISA (ICAI), FAFP (ICAI)

Contact No: +91-9998090111 or +91-8460890111.

Email: [email protected] or [email protected]

Website: http://vsmathur.co.in and http://ahmedabadfca.com

FB Profile(s): http://fb.me/vsmathurco or http://fb.me/vsm.ahmfca

FB Page: http://fb.me/fcavsmathur.faculty

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CA Vikram S. Mathur (GFSU - Lecture series) 2Fina

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Quick Recap of the last lecture (1/2)

Accounting is the principal means of measuring and reporting business condition and performance. It is a system for recording, summarizing, analyzing and reporting information about a firm in financial terms.

The framework of accounting is based on a number of principles. The important principles are (a) entity (b) money measurement (c) stable monetary unit (d) going concern (e) cost (f) conservatism (g) dual aspect (h) accounting period (i) realization (j) matching (k) accrual and (l) materiality.

The two principal financial statements are the balance sheet and the income statement.

The balance sheet shows the financial position of a business at a particular point of time, in terms of assets and liabilities, the format is as per the Companies Act, 2013 for a company.

Assets may be divided into (a) fixed assets (b) intangible assets (c) investments (d) current assets (e) loans and advances and (f) others.

Liabilities may be broadly classified as follows (a) share capital (b) reserves and surplus (c) secured loans (d) current liabilities and (e) provisions.

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Quick Recap of the last lecture (2/2)

Technically, the income statement is an adjunct of the balance sheet because it provides details relating to net income which represents the net change in owners equity. Yet it is sometimes considered more important because it sheds light on the performance of the company during the year.

Important items in the income statement are (a) net sales (b) cost of goods sold (c) gross profit (d) operating expenses (e) operating profit (f) non-operating surplus / deficit (g) profit before interest and tax (PBIT / EBIT) (h) interest (i) profit before tax (PBT / EBT) (j) tax and (k) profit after tax (PAT/ EAT).

Financial ratio analysis is the principal tool for analysis of financial statements

Financial ratios may be broadly divided into four types: liquidity, turnover, leverage and profitability.

Financial ratios have the predictive ability, particularly in signaling a business failure.

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Accounting and Audit

Introduction to Managerial Accounting

Accounting Mechanics: Basic Records

Accounting Mechanics: Preparation of Financial Statements

Some Complex Considerations in preparation of Financial Statements

Legal Requirements relating to Accounting and Auditing

Origin of Audit – Audit & Investigation – Detection of Frauds –Types of Audit – Conduct of Audit

Independence of Auditors – Professional Conduct and Ethics

Audit Methodology – Audit Programmes & Questionnaires

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Introduction to Managerial Accounting

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Accounting is commonly referred to as the “language of business”.

Defined as “the art of recording, classifying and summarizing on a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof”.

Book-Keeping and Accounting are sometimes used synonymously, however, difference is significant. Book-keeping is an activity complementary to Accounting, which is concerned with the recording of financial data relating to business in a significant and orderly manner.

Internal and External users of Accounting

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Accounting Mechanics: Basic Records

Generally speaking, mechanics of accounting can be said to follow sequentially:1. Business transaction takes place2. The transaction is recorded in a document (usually a voucher) providing details3. The transaction is analyzed to decide which accounts to debit and credit.4. The transaction is then recorded in one of the special journals like cash book,

sales day book, purchase day book or journal book.5. The respective account ledger is then posted with the transaction

Once the full year’s transactions are posted in the above manner, the result is reflected in the summarization of the General Ledger in the form of the “Trial Balance” of the organisation at the end of the financial period (March 31st, 20XX, usually).

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yAccounting Mechanics: Preparation of Financial Statements

From the “Trial Balance (TB)” the next logical step is preparation of the Financial Statements, namely (i) Balance Sheet, (ii) Profit and Loss Account, and (iii) The Cash Flow Statement.

After ensuring the arithmetical accuracy and matching the debit-credit summation(s) from the various daybooks to the TB, the following adjustments would be required to be made: Recording of accrued expense and revenue Allocating revenues received in advance Allocating expenses incurred in advance Adjusting Cost of Goods Sold Providing for bad debts Writing off bad debts Amortising Preliminary Expenses and other Deferred Expenses, if any. Providing for Depreciation Providing for Income-Tax & Dividend Retaining undistributed earnings to Reserves

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yLegal Requirements relating to Accounting and Auditing

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Some of the Accounting Standards that are mandatory in nature:Revenue Recognition methodMatching of Revenues and Expenditures – Inventory pricing and valuation

(See Next Slide)Fixed Assets & Depreciation AccountingTreatment of intangible assets (Goodwill and R&D Expenses)

Companies Act 2013 & CARO 2016 compliances (in the case of companies) – Statutory Books & Registers – Assets – Equities & Liabilities – Revenues – Expenses – Opening & Closing Stock

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Inventory Pricing & Valuation – Flow Diagram

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Origin of Audit

The word “Audit” is derived from the latin word “audire” which means “to hear”.

After the introduction of large-scale production in consequence to the Industrial Revolution during the 18th century, audit in the present sense were introduced.

The first treatise “Double Entry System of Book-Keeping” was published by Italian, Loca Pacialo in the year 1494.

Spicer and Pegler have defined auditing as “such an examination of the books, accounts and vouchers of a business, as will enable the auditor to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business, and whether the Profit and Loss for the financial period, according to the best of his information and the explanations given to him and as shown in the books; and if not, in what respect his is not satisfied.”

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yAudit & Investigation – Detection & Prevention of Fraud

Investigation means a searching enquiry into the profit earning capacity of the financial position of a concern or to find out the extent of the fraud if there is a suspicion about it, etc. Audit, on the other hand, is conducted to find out whether the balance sheet is properly drawn up and exhibits a true and fair view of the state of affairs of the concern. These two terms are therefore, not to be used interchangeably.

Detection and Prevention of Fraud: A fraud is said to take place when a false representation or entry made intentionally or without belief in it’s truth with the view to misappropriate the funds. Following are the main methods by which frauds may be committed (a) Embezzlement of Cash (b) Misappropriation of Goods, and (c) Fraudulent manipulation of the accounts

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Types of Audit – Conduct of Audit

TYPES OF AUDIT Audit of a Sole Proprietary concern Audit of a Partnership concern Audit of a Joint Stock Company Audit of Trust Accounts Audit of Government Accounts

CONDUCT OF AUDIT Continuous Audit Periodic Audit Interim Audit Occasional Audit Partial Audit Standard Audit Balance Sheet Audit

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Accounting vs Auditing

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Accounting Auditing1. It’s a continuous process carried out

throughout the year.1.It’s a one time activity after the closure of

accounting year.

1. No prescribed qualification is required to be an accountant.

2. He must be the member of Institute of Chartered Accountants of India to become an auditor.

1. An accountant is a employee of the company.

3. An auditor is an independent professional.

1. An accountant gets regular salary for his work.

4. He gets remuneration for his professional work. Audit fees.

1. Accounting is concerned with recording of business transactions systematically.

2. Accounting precedes, auditing.

5. Its concerned with verification of accounts prepared by the accountant.

6. Auditing succeeds accounting.

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Qualities of an auditor

Professionally competent

Honest

Extensive Knowledge

Accounting Expert

Conversant with Business Laws

Conversant with Taxation Laws

Management Systems

Technical abilities

Proper Qualifications

Tact and Diplomacy

Secrecy & Confidentiality

Patience & Perseverance

Critical, yet not impractical

Bold & Courageous

Courteous and Independent

Common Sense with intelligence

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yIndependence of Auditors – Professional Conduct and Ethics

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Various laws govern the concept of the independence of auditors, because there are a number of third party organizations, like creditors, stock exchanges, banks and financial institutions that depend upon the results published about the concerned organization.

At the same time, the Institute of Chartered Accountants of India (ICAI) have laid down a set of Professional Code Conduct and Ethics that have to be followed by the members of the ICAI.

Some of the salient features of the above are: No person who is indebted to the concern for a sum exceeding Rs. 1,000/- can

become it’s auditor; The incoming auditor is duty bound to take a no-objection certificate from the

outgoing auditor before expressing any opinion of the accounts of the concern, etc.

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yAudit Programmes & Internal Control Questionnaires (ICQ)

Audit methodology, or the way an audit should be carried out, differs from region to region. Broadly speaking there are only two methods that are currently being followed (a) Audit Programmes and (b) Internal Control Questionnaires (ICQ).

While in the case of an Audit Programme, the auditor studies the functioning of the organisation to be audited and draws up the detailed steps to be carried out in case of each of the functional areas of the concerned organisation, in terms of the frequency and the quantum of the checking or vouching to be carried out by him or his staff. Each year, the same are scrutinized for any additional work to be carried out, if any.

In the case of ICQ’s, there are various levels of the checking that are carried out during different times of the year, i.e. monthly, quarterly and annually, and they are also based on the flow-charts and flow diagrams of the concerned organisation – but additionally, the risks involved in the various areas are also quantified and accordingly the ICQ’s are drawn up. These ICQ’s are reviewed on a periodic basis, for example three years or more, as appropriate.

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Financial Management & Homeland SecurityThank you for your patience!!CA Vikram Shankar Mathur+91-9998090111 / +91-8460890111(Available on WhatsApp on both numbers, anytime)[email protected] [email protected] Page: http://fb.me/fcavsmathur.facultyWebsite: http://fcavsmathurfaculty.wordpress.com

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Unit 1 3 analysis of financial statements accounts and audit -gfsu-mba-forensic-accounting