INTRODUCTION OF AUDITING
Q-1. Meaning of Audit:
Auditing is as old as accounting.
It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. and India.
The Vedas contain reference to accounts and auditing.
Arthasashthra by Kautilya detailed rules for accounting and
auditing of public finances.
The original objective of auditing was to detect and prevent
errors and frauds
Auditing evolved and grew rapidly after the industrial revolution
in the 18th century.
With the growth of the joint stock companies the ownership and
management became separate. The shareholders who were the
owners needed a report from an independent expert on the
accounts of the company managed by the board of directors
who were the employees.
Definition:
Spicer and Peglar define auditing as An examination of the
books, accounts and vouchers of a businesss shall enable the
auditor to satisfy himself whether or not the balance sheet is
properly drawn up so as to exhibit a true and correct view of the
state of affairs of the business according to his best of the
information given to him and as shown by the book.
Mautz: defines auditing as being Concerned with the
verification of accounting data with determining the accuracy and
reliability of accounting statements and reports.
Prof. L.R.Dicksee. "Auditing is an examination of accounting
records undertaken with a view to establish whether they correctly
and completely reflect the transactions to which they relate.
Q-2. FEATURES OF AUDITING
Audit is a systematic and scientific examination of the books of
accounts of a business;
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Auditing
Auditing is the act of
examination of books of
accounts and evidential
documents, so as to prove the
true and fair view of profitability
and financial position.
Its a one time activity after the
closure of accounting year.
He must be the member of
Institute of Chartered
Accountants of India to become
an auditor.
An auditor is an independent
professional.
He gets remuneration for his
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salary for his work.
6. Accounting is concerned with
recording of business
transactions systematically.
7. Accounting precedes,
auditing.
2.
3.
4.
5.
6.
7.
Advantages of Auditing
Assurance of true and fair accounts An audit provides an
assurance to the investors, government, lenders, creditors, owners,
management etc. That the final account presented shows the true
and fair picture of the profit and losses and financial position of the
concern
True and fair balance sheet The user of final accounts can
be sure that the assets and liabilities disclose true and fair view of
financial position of the concern, its neither more nor less, and its
free from window dressing or secret reserve.
True and fair profit and loss account The user of final
accounts should be sure that the profit and loss account show true
amount of profit or less as it is.
Tally with books of accounts The audited final accounts
should tally with the books of accounts of the concern. So it can be
easy to calculate the taxable income without checking all the
transactions.
Disclose all material facts The audited final accounts
should disclose all material facts, thus users can rely on them for
making useful decisions of lending, investing etc.
As per law The audited final accounts should be prepared as
per the rules and guidelines laid down by law.
Detection of errors and frauds It is assumed that the
audited final accounts are free from errors and frauds, the auditor
with his expertise knowledge would detect the errors and fraud so as
to show the true figure of final accounts.
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8.
3.
4.
5.
Investigation
Investigation means
an inquiry, or is the
act of detail
examination of
activities so as to
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system, process,
enterprise, project or
product.
achieve certain
objectives.
Owners
Audit is conducted
on behalf of owners
only and they make
the appointment.
Investigation may be
conducted either by
owner of the
undertaking or by an
outsider.
Purpose
To determine the
true and fair view.
Process
Routine process
Investigation is not a
regular process
Scope
It includes only an
examination of the
accounts of a
business
It covers an
examination of the
accounts bur also
covers an inquiry
into other matter
that are connected
with the purpose for
which it is
undertaken
Period
Employees
May examine
personally
Sequence
Usually conducted
before investigation
of accounts
Usually conducted
after the audit of
accounts
Person performing
work
Audit is to be
Investigation may be
conducted by a
take on even by a
chartered accountant non-chartered
accountant
Legal Obligations
Audit is mandatory
There is no such
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under law
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7. Computer Expert:The auditor must be able to operate the computer. Today the
business organizations are using computers. If auditor does not know
to use computer, he cannot work efficiently.
8. Knowledge Of management System:The auditor must have the knowledge of management information
system. It helps him to understand the internal set up of the
business concern and its operation.
9. Preparation Of Budget:The auditor must know that how the organization prepares the
budget. If he does not know then it will be not possible for him to
audit the various heads of the budget.
10. Intelligent:It is also important quality of an auditor that he should be intelligent.
He must be able to understand the technical details of any business.
11. Qualification:For a professional auditor it is necessary that he should be charted
accountant. According to companies ordinance it is essential
qualification for auditor.
12. Tactful:In a particular situation auditor should deal tactfully. He should ask
the questions in such a manner that it does not show about his
ignorance or weakness.
13. Maintain Secrecy:The auditors nature of work is confidential. He should maintain
secrecy from others about the affairs of his client.
14. Patience:There should be a quality of patience in the auditor. Before signing
on any paper he should check the evidence and then sign it. He
never checks the papers in hurry.
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15. Critical Attitude:It is also very essential quality of the auditor. He should examine the
statements critically. He should ask the various questions from the
client and try to find contradictions.
16. Bold And Courageous:Auditor should be bold and courageous person. He should not be
influenced by any authority. He should possess the courage to face
the difference of opinion between him and client on any issue.
17. Courteous:It is an important quality which the auditor should possess. His
attitude towards the staff of client should be very humble and polite.
He should also stress on his own staff to be courteous with the client.
18. Independent:The auditor should be impartial. He should not have such relations
with the organization which may affect his independence. He should
give his opinion independently.
19. Common Sense:The auditor must have the quality of common sense and judgement.
He may be able to assess the value of depreciation and bad debts.
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Chapter -2
OBJECTS OF AUDIT
Q-1Discuss the Objectives of Auditing.
Auditors are basically concerned with verifying whether the account
exhibit true and fair view of the business. The objectives of auditing
depends upon the purpose of his appointment.
Primary Objectives.
The primary objectives of an auditor is
to respect to the owners of his business expressing his opinion
whether account exhibits true and fair view of the state of
affairs of the business.
It should be remembered that in case of a company, he reports
to the shareholders who are the owners of the company and not
tot the director.
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b.
c.
d.
e.
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recorded, the trial balance will not agree and hence it can be
easily detected.
Errors of Commission: When incorrect entries are made in
the books of accounts either wholly, partially such errors are
known as errors of commission. Eg: wrong entries, wrong
Calculations, postings, carry forwards etc such errors can be
located while verifying.
Compensating Errors: when two/more mistakes are
committed which counter balances each other. Such an error is
know an Compensating Error. Eg: if the amount is wrongly
debited by Rs 100 less and Wrongly Credited by Rs 100 such a
mistake is known as compensating error.
Error of Principle: These are the errors committed by not
properly following the accounting principles. These arise mainly
due to the lack of knowledge of accounting. Eg: Revenue
expenditure may be treated as Capital Expenditure.
Clerical Errors; A clerical error is one which arises on account
of ignorance, carelessness, negligence etc.
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TYPES OF AUDIT
I. CONTINUOUS AUDIT:
Meaning:
Continuous audit is defined by R.C. Williams as one
where the auditor is constantly or at (regular or irregular)
intervals engaged in checking the accounts during the period.
Continuous Audit means an audit at regular intervals
throughout the accounting year. Generally, the audit work
begins after the accounting year is over. But in case of
Continuous Audit, the work begins the accounting year itself.
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Late
Dividends
to
Shareholders:
The
shareholders would be unhappy as they receive dividends
long after the end of the financial year. It would be difficult
for a Company to prepare interim accounts and pay interim
dividends to the shareholders during the financial year.
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Meaning:
Interim Audit is an audit conducted in between the
annual audits. It is conducted to find out the interim profit
and know the financial position at the end of a part of the
accounting year. For example, an audit of accounts prepared
for the period of six months from 1 st April to 30th September,
would be Interim Audit.
When Conducted:
Interim Audit is conducted in the following cases
Quarterly Results: Public Limited Companies listed on the
stock exchange has to declare their quarterly results. It is
preferable, though not compulsory, to declare such results on
the basis of interim audit.
Interim Dividends: Interim audit is also advisable when a
company intends to pay interim dividends. Interim audit
would ensure that there are enough profits to justify
payment of interim dividends.
Sale of Business: In case of a sole partnership firm, interim
audit becomes necessary on admission, retirement or death
of a partner, dissolution of partnership, sale of a firm to a
company, valuation of goodwill etc.
Changes in Firm: In case of a proprietor, interim audit may
be conducted when the business is proposed to be sold, to fix
the purchase consideration.
Changes in Firm: In case of a partnership firm, interim
audit becomes necessary on admission, retirement or death
of a partner, dissolution of partnership, sale of firm to a
company, valuation of goodwill etc.
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How Conducted:
An interim audit should be done as if it is the final audit
for the concerned period. Thus, it would involve not only
vouching but also verification of assets and liabilities,
valuation of closing stock, computation of depreciation,
confirmation from parties and so on. Once an interim audit is
done, at the time of the final audit, the auditor has to
concentrate only on the remaining period. Thus, interim audit
helps in timely completion of final audit. The auditor at the
time of final audit, however, should ensure that there are no
alterations in the books previously checked by him. He
should carefully compare the final accounts with the interim
accounts to find out if they are consistent.
Advantages
Interim audit is similar to Continuous Audit and enjoys similar
advantages:
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