A

PROJECT ON

AUDIT AND AUDITORS

Submitted towards the partial fulfilment of grading for the FIFTH semester of
BA LLB [Hons.] course for the subject

CORPORATE LAW

Submitted To:
Ms. Anusmita Chanda

Submitted By:
Ajitabh Goel
13gsol102069

CONTENTS

Chapter 1 INTRODUCTION OF

AUDITING

Meaning and Definition of Auditing

Origing of Auditing
Relation ofAuding with Accounting
Aspects to be covered in Auditing
Basic concepts of Auditing
Functions
and
Objectives
of
Auditing
Principles Governing an Audit
Advantages and Limitations of
Auditing

Chapter 2- AUDITOR

Meaning
Types of Auditor
Power of Auditor
Duties of Auditor

MEANING OF AUDITING
The word audit is derived from Latin word audire which means to
hear. It is an important tool of management. It is concerned with
making an analytical and critical analysis of the books of
accounts, checking and verification of evidence in support of
enteries appearing in books of accounts, and ascertaining the
authenticity of the financial statements. It is also concerned with
the examination of accounting data to determine the extent of an
audit examination is too made on the basis of evidential
document such as invoice, money receipts and other records by
the authorized representative of the client. Auditor has used to
send for the accountants and hear whatever they had to say in
connections with the accounts. The has to look into the facts
behind figures and he must certify their accuracy. Auditing is to
Ascertain the balance sheet and profit and loss account that they
show a true and fair view of the financial sate affairs of a concern.

DEFINITION OF AUDITING
According to DICKSEE, An audit maybe said to be 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 exhibit a true and fair value of state
of the affairs of business, whether the profit and loss gives a true
and fair value of the profit and loss for the financial year.

ORIGIN OF AUDITING

Auditing has its origin in the necessity in the development of

some system to put a check on the persons whose duty were to
record receipts and disbursements of money on behalf of owners.
In ancient days auditing was confined to public accounts only .
With the development of trade and commerce, the need for
recording transactions was felt by businessman. This has
necessitated the development of some system of check upon the
persons who recorded such transactions on the behalf of
businessman.
The audit in its presnt shape is the result of large scleproduction
in consequence of Industrial Revolution during the 18 th century.
With the development banking facilities, communication and
transport means the concept of corporate management has taken
birth. It necessitated the investors to know whether their
investment is safe or not. Shareholders need an independent
person having expert knowledge of accounts to report on working
of the company and the truthfulness of Profit and Loss account
and financial position disclosed by the management.

RELATION OF ACCOUNTING AND AUDITING

Both accounting and auditing are closely related to each other as

auditing reviews the financial statements which are nothing but
overall accounting process. It naturally calls on the part of the
auditor to have a thorough and sound knowledge of GAAP before
he can review the financial statements.
In fact, auditing as a discipline is also related with various other
disciplines as there is lot of linkages in the work which is done by
auditor in his day to day activities. To begin with, it may be noted
that the discipline of auditing itself is a logical construct and

everything done in auditing must be bound by rules of logic. The

knowledge of language is also considered essential in the field of
auditing as the auditor shall be required to communicate, both in
writing as well as orally in day to day work. For example , if the
business has really earned a profit but because of wrong
accounting, the annual account show a loss , the proprietor may
take the decision to sell the business at a loss. Thus from the
point of view of the management itself , authenticity of financial
statements is essential. It is more essential for those whohave
invested their money in the business but cannot take part cannot
take part in the management. For example , shareholders in a
company , such persons certainlyneed an assurance that the
annual statements of accounts sent to them are fully reliable. It is
auditing which ensures that the accounting statements are
authentic. In todays economic environment, information and
accountability have assumed a larger role than ever before. As a
result, the independent audit of an entitys financial statements is
a vital service to investors, creditors and other participants in
economic exchange.

ASPECTS TO BE COVERED IN AUDIT

The principle aspects to be covered in an audit concerning final
statements of accounts are as follows -:
An examination of the system of accounting and
integral controls to ascertain whether it is appropriate
for the business and helps in properly recording all
transactions.
Reviewing the systems and procedures to find out
whether they are adequate and comprehensive.

 Check the arithmetical accuracy of books of accounts

by the verification postings, balances etc.
Examine the documentary evidence to estabilish the
accuracy, authenticity and validity of the transactions
recorded.
Verifying that a proper distinction is made between
capital and revenue items.
Verification of the title, existence and valuation of
assets appearing in the balance sheet.
Examination that the statutory requirements are
complied with.
Verifications of the liabilities stated in the balance
sheet.
Comparison of balance sheet and profit and loss
account and other statements with underlying records
in order to see that they are in accordance there with.

FUNCTIONS OF AUDITING
Important functions of auditing can be summed up as
follows-:
Reviewing systems and procedures of business.
Examining documentary evidence to establish the accuracy
of recorded transactions.
Reviewing the mathematical accuracy of accounting
statements.
To see whether statutory requirements have been complied
with.
Reporting as to what extent, accounts exhibit true and
fairness.
To make recommendations for improvement in internal
Control and Accounting System.

 To verify the distinction between capital and revenue items.

OBJECTIVES OF AUDITING
a) Verification of accounts and financial statements.
The main objective of an audit is to verify and establish
that at a given date balance sheet presents true and fare
view of financial position of the business and the profit
and the loss account gives the true and fare value of the
profit or loss for the accounting period.
The auditor must: Verify the accuracy of posting, balancing etc.
Conform the validity of transitions with supporting
documents.
Conform existence of assets and liabilities.
Assess the system of internal control.
Ascertain whether distinction has been made
between capital and revenue items.
b) Fraud
Fraud is the word used to mean intentional error. This is
done deliberately which implies that there is intent to
deceive, to mislead. These are more serious than
intentional errors. A great variety of errors may be found.
Intentional errors are the most difficult to detect and
auditors generally devote greater attention to this type.
Auditors while studying the possibility and nature of fraud
must keep this always in mind and should not take any
exception for those who held high officers. This things
generally start in a non-consequential way after a
subordinate staff member first borrow small amount from
the cash box to meet his temporary difficulty and
gradually it becomes his habit to borrow in such a manner.

Fraud also takes place in forms other than cash

defalcations.
Fraud may be divided in following categories.
Misappropriation of goods.
In these types businessman appropriates the goods
to wrong accounts for committing frauds and
escaping from tax liabilities. Misappropriation of
goods can be detected by through checking of
records and physical verification of stock as well as
purchase and sale.
Misappropriation of cash.
This system can be done by theft of cash receipts,
petty cash cheques, creditiors, purchasers, etc.
The transaction relating to the receipt of cash
omitted from the from the records or recorded with
lesser amount in the cash book.
Some of the examples are as follow.
Cash sale may not be recorded at all omitting credit
not received from supplier and discount allowed to
them.
Manipulation of accounts
These frauds may be committed by manipulated
wrong statement and accounts. These are made only
to give fraud to the higher authorities. This type of
fraud is committed by manager, director or board of
directors.
c) Detection and prevention of errors
Accounting is the device for collecting and presenting
useful information in financial terms about a business
enterprise. It should as well be recognized that accounting
data may contain errors for a variety of reasons. Even
today human element is the most important element of
recording and processing the accounting data. It is the

management that is responsible for prevention of error

and fraud.

PRINCIPLES GOVERNING AN AUDIT

a) Principal of independence
The audit work should be independent from
accountancy and the auditor shold examine the books
of accounts in differently and independently. He should
be free from any such interest which may effect his
integrity and objectivity.
b) Principle of objectivity
The audit work should be based on evidence and should
be done impartially and in an unbiased way
c) Principle of Materiality
This principle is and has always being fundamental to
whole process of counting. An auditor has also to be
quite concerned regarding the concept of materiality.
The auditor has to analyze and take decisions regarding
various items whether they are material are not during
the course of audit. In case the auditor finds that an
item is quite material in nature he would have to give
careful consideration to its checking and would care for
more evidence in support.
d) Confidentiality
The auditor should maintain the confidentiality of the
clients information it is well said that the auditor keeps
his ears and eyes open and mouth shut. He should
disclose the information only when: He has obtained permission of his client.
There is legal or professional duty to do so.

ADVANTAGES AND LIMITATION OF AUDITING:ADVANTAGES:The fact that audit compulsory by law , in certain cases by itself
should show that there must be some positive utility in it. The
chief utility of audit lies in reliable financial statements on the
basis of which the states of affairs may be easy to understand.
Apart from this obvious utility, there are other advantages of
audit. Some of these are of considerable value even to those
enterprises and organizations where audit not compulsory, these
advantages are give below:a) It safeguards the financial interest of persons who are not
associated with the management of the entity, whether they
are parents or shareholders.
b) It acts as a moral check on the employees from committing
defalcations or embezzlement.

c) Audited statements of accounts are helpful in setting liability

for taxes, negotiating loans and for determining the
purchase consideration for a business.
d) These are also useful for setting trade disputes for higher
wages or bonus as well as claims in respect of damage
suffered by property, by fire or some other calamity.
e) An audit can also help in the detection of wastages and
losses to show the different or inadequacy of internal checks
or internal control measures.
f) Audit ascertains whether the necessary books of account
and allied records have been properly kept and helps the
client in making good deficiencies inadequacies in this
respect.
g) As an appraisal function, audit reviews their existence and
operations of various controls in the organizations and report
weaknesses, inadequacies, etc., in them.

LIMITATIONS OF AUDIT
At this stage, it must be clear that the objective of an audit
of financial statements is to enable an auditor to express an
opinion on such financial statements.
In fact, it is the auditors opinion which helps determination
of true and fair view of the financial position and operating
results of an enterprise. It is very significant to note that the
AAS-2 makes it a subtle point that such an opinion expressed
by the auditor is neither an assurance as to the future
viability of the enterprise nor the enterprise. Father, the
process of auditing is such that it suffers from certain
inherent limitations of an audit since understanding of the
same would only provide clarity as to the overall objectives
of an audit. The inherent limitations are:-

a) First of all, auditors work involves exercise of judgment,

for example, in deciding the extent of audit procedures
and in preparing the financial statements. Further much of
the evidence available to the auditor can enable him to
draw only reasonable conclusions there from. the audit
evidence obtained by an auditor is generally persuasive in
nature rather than conclusive in nature, because of these
factors, the auditor can only express an opinion.
Therefore, absolute certainty in auditing is rarely
attainable. There is also likelihood that some material
misstatements of the financial information resulting from
fraud or error, if rather exists, may not be detected.

AUDITOR

Meaning of auditor:The person conducting audit is known as the auditor,

He makes a report to the person appointing him after due
examination of the accounting records and the accounting
statement in the form of an opinion on the financial statements
.the opinion that he is called upon to express is whether the
financial statement reflect a true and Fair view. Auditing specially

of companies and for public purposes has become the preserve of

persons having recognized professional training and qualification.
In India, under the authority of the companies act 1956, only
charter accountant are in position to undertake auditing of almost
any accounting aspect, unlike cost accountants whose sphere
has been restricted to audit of the cost accounting records and
statement. It is C.A or a firm whose all partners are CA whose act
as auditors in India.

Types of Auditors
External Auditors:These are those persons who practice the profession
of accountancy having qualified in the professional
examination and are external vis--vis the
organizational which they audit the accounts.
Internal Auditors