Auditing

The word audit is derived form the Latin word AUDIRE which means To
Hear. In the past whatever the owner of the business suspected fraud, they
appoint certain persons to check the accounts. Such persons would hear the
accountants what ever they had to say in the connection with the accounts.
The international standards of auditing (ISA) has defined as An
audit is the independent examination of financial statements or related
information of an entity whether profit oriented or not, and irrespective of its
size, or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.

Spicer & Pegler have defined the audit as such an examination

of the books, accounts and vouchers of a business, which 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 the affairs of the business, and
whether the profit and loss account gives true and fair view of the profit and
loss for the financial period, according to the best of information and
explanation given to him and as shown by the books, and it not, in what
respect he is not satisfies.
A leading American Account Montgomery define it as Auditing is a
systematic examination of the books and records of a business or other
organization, in order to ascertain or verify, and to report upon the facts
regarding its financial operations and the results thereof,

From the above definition it as clear that an auditor has not only to
see the arithmetical accuracy of the books of account but also has to go
further and find out whether the transactions entered in the books of the
original entry are correct or not, how is he to find out?
He can do this by inspecting comparing, checking reviewing the
vouchers supporting the transaction in the books of account and examining

the correspondence minute book of the shareholders and directions

memorandum of association and articles of association etc

Objectives Of Audit

Basic objective of auditing is to prove true and fairness of results presented by profit and loss
account and financial position presented by balance sheet. Its objectives are classified
into twogroups which are given below:

A. Primary Objectives Of Audit

The main objectives of audit are known as primary objectives of audit. They are as follows:
i. Examining the system of internal check.
ii. Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing etc.
iii. Verifying the authenticity and validity of transactions.
iv. Checking the proper distinction of capital and revenue nature of transactions.
v. Confirming the existence and value of assets and liabilities.
vi. Verifying whether all the statutory requirements are fulfilled or not.
vii. Proving true and fairness of operating results presented by income statement and financial
position presented by balance sheet.

B. Subsidiary Objectives Of Audit

These are such objectives which are set up to help in attaining primary objectives. They are as
follows:
i. Detection and prevention of errors
Errors are those mistakes which are committed due to carelessness or negligence or lack of
knowledge or without having vested interest. Errors may be committed without or with any vested
interest. So, they are to be checked carefully. Errors are of various types. Some of them are:
* Errors of principle
* Errors of omission
* Errors of commission
* Compensating errors

ii. Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested interest on the
direction of top level management. Management commits frauds to deceive tax, to show the
effectiveness of management, to get more commission, to sell share in the market or to maintain
market price of share etc. Detection of fraud is the main job of an auditor. Such frauds are as follows:
* Misappropriation of cash
* Misappropriation of goods
* Manipulation of accounts or falsification of accounts without any misappropriation

iii. Under or over valuation of stock

Normally such frauds are committed by the top level executives of the business. So, the explanation
given to the auditor also remains false. So, an auditor should detect such frauds using skill,
knowledge and facts.

iv. Other objectives

* To provide information to income tax authority.
* To satisfy the provision of company Act.
* To have moral effect

Types of Audits :
1) Internal Audit :
Internal audit is a function that, although operating independently from other departments and
reports directly to the audit committee, resides within an organisation (i.e. they are company
employees). It is responsible for performing audits (both financial and non-financial) within a wide
range of areas within a business, as directed by the annual audit plan. Internal audit look at key risks
facing the business and what is being done to manage those risks effectively, to help the
organisation achieve its objectives. For example, they may look at risks to the companys reputation
such as the use of cheap labour in foreign countries, or strategic risks such as producing too many
products in comparison to resources available etc.

2) External Audit :

External audit is an independent body which resides outside of the organisation which it is auditing.
They are focused on the financial accounts or risks associated with finance and are appointed by the
company shareholders. The main responsibility of external audit is to perform the annual statutory
audit of the financial accounts, providing an opinion on whether they are a true and fair reflection of
the companys financial position. As part of this, external auditors often examine and evaluate
internal controls put in place to manage the risks which could affect the financial accounts, to
determine if they are working as intended.

Auditor's report
The auditor's report is a formal opinion, or disclaimer thereof, issued by either an internal

auditor or

an

independent external

auditor as

result

of

an

internal

or

external audit or evaluation performed on a legal entity or subdivision thereof (called an

"auditee"). The report is subsequently provided to a "user" (such as an individual, a group of
persons, a company, a government, or even the general public, among others) as
an assurance service in order for the user to make decisions based on the results of the audit.
An auditor's report is considered an essential tool when reporting financial information to users,
particularly in business. Since many third-party users prefer, or even require financial information to
be certified by an independent external auditor, many auditees rely on auditor reports to certify their
information in order to attract investors, obtain loans, and improve public appearance. Some have
even stated that financial information without an auditor's report is "essentially worthless" for
investing purposes.