Concepts Auditing is a vital part of accounting.

Traditionally, audits were mainly associ ated with gaining information about financial systems and the financial records of a company or a business. Financial audits are performed to ascertain the validity and reliability of info rmation, as well as to provide an assessment of a system's internal control. The goal of an audit is to express an opinion of the person / organization / system (etc.) in question, under evaluation based on work done on a test basis.[citati on needed] Due to constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often a dopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements a con cept influenced by both quantitative (numerical) and qualitative factors. But re cently, the argument that auditing should go beyond just true and fair is gainin g momentum. And the US Public Company Accounting Oversight Board has come out w ith a concept release on the same.[4] Cost accounting is a process for verifying the cost of manufacturing or producin g of any article, on the basis of accounts measuring the use of material, labor or other items of cost. In simple words, the term, cost audit means a systematic and accurate verification of the cost accounts and records, and checking for ad herence to the cost accounting objectives. According to the Institute of Cost an d Management Accountants of Pakistan, a cost audit is "an examination of cost ac counting records and verification of facts to ascertain that the cost of the pro duct has been arrived at, in accordance with principles of cost accounting An audit must adhere to generally accepted standards established by governing bo dies. These standards assure third parties or external users that they can rely upon the auditor's opinion on the fairness of financial statements, or other sub jects on which the auditor expresses an opinion. The Definition for Audit and Assurance Standard AAS-1 by the Institute of Charte red Accountants of India(ICAI): "Auditing is the independent examination of fina ncial information of any entity, whether profit oriented or not, and irrespectiv e of its size or legal form, when such an examination is conducted with a view t o expressing an opinion thereon. Definitions: definitions: The general definition of an audit is an evaluation of a person, organisation, s ystem, process, enterprise, project or product. The term most commonly refers to audits in accounting, internal auditing, and government auditing, but similar c oncepts also exist in project management, quality management, water management, and energy conservation. Auditing is defined as a systematic and independent examination of data, stateme nts, records, operations and performances (financial or otherwise) of an enterpr ise for a stated purpose. In any auditing the auditor perceives and recognizes t he propositions before him for examination, collects evidence, evaluates the sam e and on this basis formulates his judgment which is communicated through his au dit report. Definition of 'Audit' 1. An unbiased examination and evaluation of the financial statements of an orga nization. It can be done internally (by employees of the organization) or extern ally (by an outside firm). 2. An IRS examination of a taxpayer's return or other transactions. The IRS perf orms this examination to verify the accuracy of these filings. Investopedia explains 'Audit' 1. Auditors ensure the fiscal accuracy and responsibility of organizations.

2. This is the ultimate fear of nearly every taxpayer. Financial Statements Definition of 'Financial Statements' Records that outline the financial activities of a business, an individual or an y other entity. Financial statements are meant to present the financial informat ion of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include: inc ome statements, balance sheet, statements of retained earnings and cash flows, a s well as other possible statements. Investopedia explains 'Financial Statements' It is a standard practice for businesses to present financial statements that ad here to generally accepted accounting principles (GAAP), to maintain continuity of information and presentation across international borders. As well, financial statements are often audited by government agencies, accountants, firms, etc. t o ensure accuracy and for tax, financing or investing purposes. Financial statem ents are integral to ensuring accurate and honest accounting for businesses and individuals alike. A financial statement (or financial report) is a formal record of the financial activities of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form easy to understand. They typically include basic financial statements, accompan ied by a management discussion and analysis:[1] Statement of financial position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time. Statement of comprehensive income: reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the processing state. Statement of cash flows: reports on a company's cash flow activities, particular ly its operating, investing and financing activities. For large corporations, these statements are often complex and may include an ex tensive set of notes to the financial statements and management discussion and a nalysis. The notes typically describe each item on the balance sheet, income sta tement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements. "The objective of financial statements is to provide information about the finan cial position, performance and changes in financial position of an enterprise th at is useful to a wide range of users in making economic decisions. Financial st atements should be understandable, relevant, reliable and comparable. Reported a ssets, liabilities, equity, income and expenses are directly related to an organ ization's financial position. Financial statements are intended to be understandable by readers who have "a re asonable knowledge of business and economic activities and accounting and who ar e willing to study the information diligently. Financial statements may be used by users for different purposes: Owners and managers require financial statements to make important business deci sions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual repo rt to the stockholders. Employees also need these reports in making collective bargaining agreements (CB A) with the management, in the case of labor unions or for individuals in discus sing their compensation, promotion and rankings. Prospective investors make use of financial statements to assess the viability o f investing in a business. Financial analyses are often used by investors and ar e prepared by professionals (financial analysts), thus providing them with the b

asis for making investment decisions. Financial institutions (banks and other lending companies) use them to decide wh ether to grant a company with fresh working capital or extend debt securities (s uch as a long-term bank loan or debentures) to finance expansion and other signi ficant expenditures. Balance Sheet: In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partners hip, a corporation or other business organization, such as an LLC or an LLP. Ass ets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition".[1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and owners hip equity. The main categories of assets are usually listed first, and typicall y in order of liquidity.[2] Assets are followed by the liabilities. The differen ce between the assets and the liabilities is known as equity or the net assets o r the net worth or capital of the company and according to the accounting equati on, net worth must equal assets minus liabilities. Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financ ed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and li abilities and net worth in the other section with the two sections "balancing". A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, m any businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they cannot, even if they want to, immediately turn these into cash at the e nd of each period. Often, these businesses owe money to suppliers and to tax aut horities, and the proprietors do not withdraw all their original capital and pro fits at the end of each period. In other words businesses also have liabilities. Types[edit source | editbeta] A balance sheet summarizes an organization or individual's assets, equity and li abilities at a specific point in time. We have two forms of balance sheet. They are the report form and the account form. Individuals and small businesses tend to have simple balance sheets. Larger businesses tend to have more complex balan ce sheets, and these are presented in the organization's annual report.[5] Large businesses also may prepare balance sheets for segments of their businesses. A balance sheet is often presented alongside one for a different point in time (ty pically the previous year) for comparison.[7][8] Personal balance sheet A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, cur rent liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate val ues are listed at market value rather than at historical cost or cost basis. Per sonal net worth is the difference between an individual's total assets and total liabilities. US small business balance sheet A small business balance sheet lists current assets such as cash, accounts recei vable, and inventory, fixed assets such as land, buildings, and equipment, intan gible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are note d in the footnotes to the balance sheet. The small business's equity is the diff erence between total assets and total liabilities

Public Business Entities balance sheet structure[edit source | editbeta] Guidelines for balance sheets of public business entities are given by the Inter national Accounting Standards Board and numerous country-specific organizations/ companys. Balance sheet account names and usage depend on the organization's country and t he type of organization. Government organizations do not generally follow standa rds established for individuals or businesses. If applicable to the business, summary values for the following items should be included in the balance sheet: Assets are all the things the business owns, this will include property, tools, cars, etc. Assets Current assets Cash and cash equivalents Accounts receivable Inventories Prepaid expenses for future services that will be used within a year Non-current assets (Fixed assets) Property, plant and equipment Investment property, such as real estate held for investment purposes Intangible assets Financial assets (excluding investments accounted for using the equity method, a ccounts receivables, and cash and cash equivalents) Investments accounted for using the equity method Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool. Liabilities See Liability (accounting) Accounts payable Provisions for warranties or court decisions Financial liabilities (excluding provisions and accounts payable), such as promi ssory notes and corporate bonds Liabilities and assets for current tax Deferred tax liabilities and deferred tax assets Unearned revenue for services paid for by customers but not yet provided Definition of 'Profit and Loss Statement - P&L' A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These recor ds provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "st atement of profit and loss", an "income statement" or an "income and expense sta tement". Investopedia explains 'Profit and Loss Statement - P&L' The statement of profit and loss follows a general form as seen in this example. It begins with an entry for revenue and subtracts from revenue the costs of run ning the business, including cost of goods sold, operating expenses, tax expense and interest expense. The bottom line (literally and figuratively) is net incom e (profit). Many templates can be found online for free, that can be used in cre ating your profit and loss, or income statement. The balance sheet, income statement and statement of cash flows are the most imp ortant financial statements produced by a company. While each is important in it s own right, they are meant to be analyzed together. Profit & Loss

An income statement or profit and loss account (also referred to as a profit a nd loss statement (P&L), revenue statement, statement of financial performance, earnings statement, operating statement, or statement of operations) is one of t he financial statements of a company and shows the company's revenues and expens es during a particular period. It indicates how the revenues (money received fro m the sale of products and services before expenses are taken out, also known as the "top line") are transformed into the net income (the result after all reven ues and expenses have been accounted for, also known as "net profit" or the "bot tom line"). It displays the revenues recognized for a specific period, and the c ost and expenses charged against these revenues, including write-offs (e.g., dep reciation and amortization of various assets) and taxes. The purpose of the inco me statement is to show managers and investors whether the company made or lost money during the period being reported. One important thing to remember about an income statement is that it represents a period of time like the cash flow statement. This contrasts with the balance s heet, which represents a single moment in time. Charitable organizations that are required to publish financial statements do no t produce an income statement. Instead, they produce a similar statement that re flects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the s tatement of activities. Revenues and expenses are further categorized in the sta tement of activities by the donor restrictions on the funds received and expende d. The income statement can be prepared in one of two methods. The Single Step inco me statement takes a simpler approach, totaling revenues and subtracting expense s to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gro ss profit. It then calculates operating expenses and, when deducted from the gro ss profit, yields income from operations. Adding to income from operations is th e difference of other revenues and other expenses. When combined with income fro m operations, this yields income before taxes. The final step is to deduct taxes , which finally produces the net income for the period measured. Importance of Ledgers in Audit: The accounting general ledger is a report that provides a detailed description o f every general ledger account and the transactions that make up the balance in that account. The general ledger holds all the financial information used to cre ate the income statement and balance sheet reports, and serves several main purp oses in the financial operation of the business. 1. Ledger account keeps a permanent record of all financial transactions in a cl assified manner. 2. Ledger account shows detailed financial information of a business regarding d ebtors and creditors, assets, and incomes and expenses. 3. Ledger account helps to prepare a trial balance in order to check the arithme tical accuracy of the recording of the financial transactions of the business. 4. Ledger account helps to prepare profit and loss account so as to ascertain th e profit or loss of the business. 5. Ledger account helps to prepare the balance sheet with a view to show the fin ancial position of the business. Uses of Ledgers in Audit: When reviewing financial statements, accountants may find fluctuation in financi al activity outside the normal scope of operations. In addition, while preparing balance sheet reconciliations, accountants may discover an out-of-balance condi tion between the ending balance in a balance sheet account and the external sour ce the account balance should equal. In both those cases, the accountant refers to the detailed transactions in the general ledger to identify activity that has been improperly recorded or has been recorded to the incorrect general ledger a

ccount. Whether a business owner conducts an internal audit or pays an accounting firm t o conduct an external audit, the accounting general ledger is one of the most im portant items used to review the financial operations of the business. Auditors use the general ledger to see the detailed explanation of income and expenses to ensure everything has been properly classified. Auditors also use the general l edger detail to select items for further review. For example, an auditor may sel ect a general ledger expense for office supplies and ask to see the invoice that created the expense item. Auditors compare the total general ledger activity for income and expenses to th e total activity on the income statement. The ending balance in asset, liability and owner equity accounts should equal the amounts reflected on the balance she et. Objectives of Ledgers in Audit: An annual budget is an important tool to help monitor and control the financial operations of a business. During the latter part of the accounting year, busines s owners begin preparation of an operating budget for the upcoming year. The ope rating budget is a forecast of all income and expense expected to take place dur ing the upcoming year. While a business owner could create a budget simply by in flating the total income and expense of the current year by a preset inflationar y factor, that method would not take into account extraordinary and one-time exp enses that have been reported during the current year. The best method for creat ing a budget is using current income and expense in conjunction with a thorough review of the general ledger detail to identify one-time and uncommon income and expense transactions, so that those figures do not artificially inflate the upc oming year’s budget. Objectives of studying Auditing: When auditing a company s financial statements, there are eight general balance-re lated audit objectives for the audit of any balance sheet account. These eight a re categorized as existence, completeness, accuracy, classification, cutoff, det ail tie-in, realizable value, and rights and obligations. The balance-related a udit objectives assist auditors with accumulating sufficient appropriate evidenc e related to account balances. These objectives are also usually applied to the ending balances of accounts on the company s balance sheet. The first general balance-related audit objective is existence, which concerns w hether the amount included on the balance sheet account should actually exist; t herefore, this objective is concerned with overstatements. When applying this ob jective to a company s property, plant, and equipment a specific balance related o bject concerning existence would be making sure all of the fixed assets physical ly exist and are being used for the purpose intended. Next, the general balance -related audit objective is completeness, which deals with whether all amounts t hat should have been included are actually included in the financial statements. This objective is concerned with any understatements. A specific balance-relate d audit objective would consist of verifying that there are no unrecorded fixed assets in use. The objective of accuracy concerns the amounts being included on the company s boo ks at the correct arithmetic amounts. This objective is part of the valuation an d allocation assertion for account balances. An example of this objective being applied to specific accounts such as property, plant equipment would be verifyin g that these assets are recorded at their correct amounts. Classification is the objective that concerns whether items included on a client s listing are included in the correct general ledger accounts. This objective is also another part of the valuation and is closely related to the presentation and disclosure objectiv e since the general ledger account balances are the accounts presented and discl osed in the financial statements. For example, a specific classification balance -related objective would consist of verifying that expense accounts do not conta

in amounts that should have been capitalized. If no capitalized items are expens ed then they will be classified correctly and will effect the financial statemen ts correctly. Purpose of studying Auditing: The cutoff objective involves testing for the cutoff date of account balances, t hus determining whether the transactions are recorded and included in account ba lances in the proper accounting period. Account balances are most likely misstat ed by transactions recorded near the end of the accounting period, since the cut off date is the date of the balance sheet of an annual audit. This objective is also part of valuation. A specific balance-related objective for the cutoff obj ective would be making sure cash disbursements or accrual transactions for prope rty, plant, and equipment items are recorded in the proper accounting period. Th e detail tie-in objective, which is another part of valuation, deals with whethe r or not summary amounts from sub-ledger accounts are accurately prepared, corre ctly added, and agree with the total in the general ledger. A specific detail ti e-in balance related objective for an auditor for example could be tying sub-led ger accounts for property, plant, and equipment to the general ledger and verify ing that the figure agree with one another. Another part of the valuation assertion is the realizable value objective, which concerns whether an account balance has been reduced for declines from historic al cost to the net realizable value. This objective only applies to asset accoun ts. Two specific balance-related objectives for the realizable value objective i nclude confirming that depreciation has been determined in accordance with an ac ceptable method and is computed correctly or confirming that fixed asset account s have been properly adjusted for declines in historical cost on the company s boo ks. Most assets must be owned before they are considered to be acceptable to be incl uded in a company s financial statements; therefore, the last balance-related audi t objective is the rights and obligation objective. This concerns liabilities as well, since they also must belong to the entity to be included in their financi al statements. For example a specific balance-related audit objective would be verifying that a company has a valid title or the contractual rights for the use of equipment owned or leased on their financial statements. All of the balance-related audit objectives, except valuation, have a one-on-one relationship with management s assertions; valuation is more complex and is broke n down into five separate audit objectives. The balance-related audit objects al l directly correspond to the related specific balance-related objectives, thus m eaning that once general balance-related objectives are developed the related sp ecific balance-related objectives for each account balance on the financial stat ements can then be developed.