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Chapter One

 The term ‘’Audit’’ is derived from Latin word ‘’Audire’’. In Latin word Audire means ‘’to
hear’’, ‘’ Listen’’.
 The literal/ simple meaning of audit is to hear the explanation of persons who examine the
 Such person is known as Auditor.
 Definition
 Audit is a systematic examination of accounting records to establish whether they
correctly & completely reflect the transactions to which they aimed to relate.
 Audit is examination of records to establish the reliability of financial statements drawn
from them.
 From this definitions you can understand that,
1. Audit is a systematic examination of accounting records, vouchers etc
2. The purpose of examining this accounting records is to ascertain how far they
present/reflect the business affaires
3. The auditor may satisfy himself/ herself, if
 The books must drawn up properly
 They gives a true & fair view of the organization.
4. The report of the auditor pertains to a particular financial period.
Objective of audit
1. Primary objective
2. Secondary objective
Primary objective
 Expression of independent opinion on accounts. This can be done through:-
 Verification of financial statements- in line with auditing principles.
 Ensure the financial statements made /drawn up represent a true & fair view of
the business.
Secondary objective
 Detection & prevention of frauds & errors.
 Frauds & errors can be found out by examination /vouching &verification/ of all
 Detection of frauds & errors leads to prevention.
 By introducing/ improving the internal controlling system of the organization, it
is possible to detect & prevent frauds & errors.
 N.B. introducing internal controlling system of the organization, is the
responsibility of the management. Why?
 B/c controlling is one of the management tasks/ functions.
 N.B. internal controlling systems reduce but not eliminate the possibility of
errors & frauds.
 Responsibility- the auditor is responsible if s/he fail to exercise reasonable care &
skill. If conditions show the possibility of errors & fraud the auditor must find
Advantage of audit
1. Detection & prevention of frauds & errors.
2. Increase the trust of users of information –e.g. members
Type of errors
1. Error of omission –not recording

- Occur b/c of omitting to record transactions fully/partially from the book/ account.
a. Partial Omission- recording only one aspect of the transaction.
 It affects the balance of the trail balance. So it can easily detected.
b. Complete Omission – not affect the balance of the trail balance.
2. Error of Commission –wrongly recording. It occurs due to
 Recording transaction incorrectly ,either partially/ wholly
a. Partial Commission- affects the balance of the trail balance.
b. Complete Commission- do not affects the balance of the trail balance.
3. Error of Principle –occurs b/c of failure to follow/ apply fundamental principles of
 do not affects the balance of the trail balance.
 Affect the true & fair view of financial statements.
4. Error of duplication- occurs b/c of recording transaction twice, and posting it also
 do not affects the balance of the trail balance.
5. Compensating errors - occurs b/c of to compensate /offset the previous error.
 do not affects the balance of the trail balance
Limitation of Audit
1. Audit may not trace out all type of errors & frauds.
2. Influence of management (for internal auditor)
Deference b/n accounting & auditing
 Accounting
- Mostly concerned with - recording of transaction, preparation & reporting of
financial statements.
 Auditing
- Mostly concerned with- examination/ vouching & verification/ of transactions as
well as financial statements.
- Focus on examining the accuracy & reliability of transactions / financial statements.
- NOTE:- Auditing begins when accounting ends.
- Auditor shall have more knowledge & experience.
Classification of Audit
 Audit can be classified on different basses
a. According to organization
b. According to practice
c. On the basis of method of approach to work
a. According to organization
1. Statutory/ compulsory audit – is a mandatory by law.
E.g. audit in cooperatives - article 36
2. Private/voluntary audit- – is not mandatory by law.
o E.g. audit in sole proprietor-not forced to be audited
o The benefit of audit motivate/force the sole proprietor to be audited.
3. Government Audit – Applicable in government/ public organizations.
o Every public organization must be audited – e.g. finance office.
b. According to practice
1. Internal Audit – Auditor came from within the organization.
 Is employee of the organization.
 It is a part of the whole internal controlling system.

2. External audit
c. On the On the basis of method of approach to work
1. Final audit/complete audit -
- Means auditing all the none audited transactions
- No entry, source of document is left un audited.
- Mostly it is made at the end of accounting period.
2. Interim audit
- Conducted in b/n two final audit.
- The transactions to be audited are : final transaction from previous audit up to
today transaction
- It decrease the work of final audit
3. Partial audit
- It scope is limited
- Auditing only a part/single/ of book of accounts/records.
- E.g. cash audit
- NOTE. It is done after getting clear written agreement/ permission. If no the auditor
is liable for none audited transactions.
4. Test audit
- Conduct to test the correctness of final audit
- Is a re-audit process
- N.B. It is not simply re-examination of accounts.

Chapter 2