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Earlier, the term 'audit' referred only to financial audit with a limited
scope (narrow concept). Now, it includes any evaluation process
undertaken to establish adherence to certain norms for accomplishing a
stated object (broad view). Different individuals and associations have
defined auditing in either a narrow or a broad sense. A few of the
important definitions have been taken up for discussion below.
Definitions of Auditing
Objectives of auditing
The object of audit depends on the type of audit to be conducted. This in
turn, depends on the nature of propositions which an auditor is required to
review. For example, an auditor may be called upon to evaluate the
efficiency of operations (in case of operational audit) or to ascertain the
propriety of transactions (in case of propriety audit).
A 'true and fair' view cannot be expressed by the auditor on the basis of
ERROR
(c) Compensating errors - Compensating errors are those errors that result
in compensating the effect of other errors. For example, if a
person's account was to be debited by Rs. 100, he is debited
instead by Rs. 200 and other person who was to be debited by
Rs. 200, is debited by Rs. 100. These errors do not affect trial
balance and can be located by checking the totals,
postings and castings.
(d) Errors of duplication - These errors occur when the same transaction is
recorded twice in the books of original entry and, hence, also
posted twice in ledger accounts. These do not affect trial
balance. In order to prevent them, clerks should distinctly mark
the invoices and other vouchers after having entered them in the
books of original entry and duplicate invoices should be
maintained in separate files and should be stamped 'duplicate'.
FRAUD
'Fraud' refers to intentional misstatement which is material to the financial
statements. Management, employees or third parties may get involved in
committing frauds to obtain an illegal advantage or personal gain.
(b) Unlike a blood hound the duty of the auditor is verification and not
detection. If he discovers something suspicious, during the course of
audit, he should probe the matter thoroughly and apprise the
shareholders about it. In the absence of such suspicious circumstances,
he is fully justified in believing and relying on representations made by
the 'tried servants' of the company. In short, in case of frauds and
errors, the auditor has a duty of 'reasonable care' only.
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(I) Serves as a basis for establishment of and improvement in the
control system - Managers at various levels of management use
financial data produced by firm's accounting system to make
decisions on questions such as budgeting, pricing of the
products or services and so on. An important tool for ensuring
reliability of the figures generated by the accounting system and
its efficient operation is internal audit, which is performed by
the employees of the entity. The external auditor also evaluates
the internal control system before placing reliance on it and
may suggest improvements in it.
(ii) Helps in dealing with lenders, insurers, Government and such
other third parties - Audited statements can help the
management in establishing and settling claims against the
insurers in case of loss or damage to business property by way
of fire, theft, burglary and other unforeseen events. It can also
serve as a basis for obtaining loans from banks and financial
institutions, for preparation of tax returns and various similar
purposes.
(iii) Ensures compliance with legal requirements in certain
situations -
Audited statements are necessary to fulfil certain legal
obligations, for example, for raising capital in primary market,
for fulfilling listing requirements on stock exchanges, etc.
(iv) Serves as a basis for determining amount receivable or
payable in certain circumstances - In order to determine
amount receivable or payable in case of - bonus based on profits
to workers, cost- plus contracts and other such decisions.
(v) Settlement of disputes - Audited financial statements are useful
for settling trade disputes with workers and settling disputes by
arbitration.
6. Planning: The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. Plans should be based on
knowledge of client's business. They should be further developed and
revised, if required, during the course of audit.
7. Audit evidence: The auditor should obtain sufficient appropriate audit
evidence through the performance of compliance and substantive test
procedure. It will enable him to draw reasonable conclusions there from on
which he has to base his opinion on the financial information.
9. Audit conclusions and reporting: The auditor should review and assess the
conclusions drawn from the audit evidence obtained and from his knowledge
of business of the entity as the basis for the expression of his opinion on the
financial information.
(I) Potential conflict of interest exists between the auditors and the
preparers of financial information.
(ii) When examining financial data for the purpose of expressing an
independent opinion thereon, the auditor should act exclusively as
auditor.
(iii) The auditor adheres to identifiable professional obligation.
(iv) Financial statements and data are verifiable.
(v) The existence of a satisfactory system of internal control increases
the reliability of financial information.
(VI) In the absence of clear evidence to the contrary, what was held true
in the past for the enterprise under audit, will hold true for the future
as well.
(Vii) Application of recognised accounting principles would result in fair
presentation.
Concepts/Principles
Principles are abstractions necessary to perform the audit. They provide
the framework within which the auditor should work. In case these are
not followed, the reliability of auditor's work would be doubtful.
Standards
Standards are quality of performance criterion that the auditor must meet
in performing an audit. Concepts provide the primary framework within
which standard audit practices should be designed. Professional bodies
all over the world have set forth the rules of the practice for accountants
and auditors. In India, the Institute of Chartered Accountants of India
(ICAl) issues Auditing and Assurance Standards (AASs) from time to
time to ensure that the audit work is carried out in accordance with
established standards. To align them with international
standards these are now called Standards on Auditing.
Procedures
In the context of audit, procedures refer to specific acts to be performed to
ensure adherence to quality of performance criterion i.e., auditing standards.
They are summarised in an audit programme and vary depending upon
situation specific factors.
Techniques
Techniques refer to the methods used for carrying out a procedure. An
auditor obtains evidence by using various audit techniques. For example,
inspection, observation and enquiry are some of the audit techniques.
(ii) Standards are applied uniformly for all audits whereas procedures vary
depending on the type of business (whether manufacturing, trading
or services).
(iii) Standards remain the same through time while procedures are
affected by factors such as technology, legal requirements, etc. For
example, audit for a computerized accounting system and a manual
accounting system may require different procedures but standards do
not differ for them.
Accountancy
Accountancy begins, where book-keeping ends. According to Prixley, "the
foundation of accountancy is the theory and practice of book-keeping.
This implies that work of an accountant starts after the book-keeper has
completed his accounts. It involves:
(a) Preparation of trial balance
(b) Preparation of trading and profit and loss account
(c) Preparation of balance sheet, and
(d) Making rectification and adjustment entries.
Auditing
Auditing begins, where accountancy ends. An auditor examines the financial
statements prepared by the accountant and verifies the items therein with the
help of relevant documentary evidence and explanations and information
given to him. In other words, he examines analytically and critically the
accounts and financial statements prepared by the accountant. In the absence
of auditing, such statements would not be reliable and would be of little use
Relationship with Accounting
Although auditing and accounting are closely related, they are distinct to the
disciplines. Accounting is the process of recording, classifying and interes
summarising the economic events and transactions that affect an ted
entity. The result of this process is the parties.
availability of financial information contained in the financial
statements or in any other manner which enables the management and
others to take decisions. Auditing uses the theory of evidence to verify
the financial information made available by accountancy. on the
truthfulness and available by accountancy. The auditor expresses his
opinion on the truthfulness and fairness of financial statements