Beruflich Dokumente
Kultur Dokumente
Prepared by,
Prof. Abhilasha .N
Mcom, Mphil, SET, (PhD)
Assistant Professor
Mulund College of Commerce
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Introduction & Evolution of Auditing
The term “Audit” has been derived from the Latin word “Audire” which means to “hear”. Auditing
gained importance after the introduction of Double entry system of book keeping in 1494. Under
double entry system it became possible to record not only cash transactions but also all sort of non-
cash business transactions. This increased the importance of auditors.
Later, industrial revolution resulted in expansion of industries and commerce which gave rise to
various types of business organisation. Joint stock companies were one of them in which
management was different from the owners ie., directors manage these companies but the real
owners are the shareholder.
Since management is completely in hands of director, they started adopting fraudulent accounting
principles to conceal their inefficiencies and even to make personal profit. Therefore, government
made legal provisions whereby every company required to be checked and reported upon by an
independent person who is not part of organisation or management. This person is called as Auditors.
In general term, auditing means an examinations of the accounting records and expressing his opinion
on the true & fair view of financial statements.
Thus, auditing is required established the reliability of financial statements. In other words, an audit is
an attempt to determine whether financial statements reflects true and fair financial positions of the
entity.
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Definition of Auditing
According to SA-700 given by ICAI define Auditing as “Auditing is an independent examination
of financial information of any entity whether profit oriented or not and irrespective of size or
legal form when such examination is conducted with a view to expressing opinion thereon”.
According to General Guidelines on Internal Auditing issued by ICAI, “Auditing is defined as a
systematic and independent examination of data, statements, records, operations and
performance (financial or otherwise) of an enterprise for a stated purpose”.
According to Prof. L.R.Dicksee, “Auditing is an examination of accounting records undertaken
with a view to establish whether they correctly and completely reflect the transactions to
which they relate”
Thus, auditing refers the critical and systematic examination of books of accounts maintained
by the company and expression his true & fair view of it.
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Need/Advantages of Auditing
■ True & Fair view of balance sheet
■ True & Fair view of profit and loss account
■ Compliance with laws
■ As per standard accounting and auditing practices
■ Tally with books of accounts
■ Disclose all material facts
■ Detection of errors and frauds
■ Moral check on employees
■ Loan from bank
■ Valuation of assets and liabilities
■ Calculation of purchase consideration
■ Facilitates taxation
■ Evidence in the court
■ Listing of shares
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Basic Principles of Auditing
■ Integrity
■ Objectivity and independence
■ Skill and competence
■ Confidentiality
■ Work performed by others
■ Planning
■ Documentation/working papers
■ Audit evidence
■ Accounting system and internal control
■ Audit conclusion and reporting
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Disadvantages of Auditing
■ Test check
■ Problems of deeply laid frauds
■ No assurance about future profitability, efficiency and prospects
of the company
■ Dependence on others
■ Conflict with others
■ May not be independent
■ Effect of inflation
■ Inherent limitation of financial statements
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Qualities of an auditor
■ Chartered accountant
■ Skills and competence
■ Honest
■ Knowledge of the business
■ Confidential
■ Watchdog but not bloodhound
■ Independent
■ Judgement
■ Systematic
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Differences between Accounting & Auditing
BASIS FOR COMPARISON ACCOUNTING AUDITING
Meaning Accounting means systematically Auditing means inspection of the books of
keeping the records of the accounts of account and financial statements of an
an organization and preparation of organization.
financial statements at the end of the
financial year.
Start Accounting starts where bookkeeping Auditing starts where accounting ends.
ends.
Period Accounting is a continuous process, i.e. Auditing is a periodic process.
day to day recording of transactions
are done.
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BASIS FOR COMPARISON ACCOUNTING AUDITING
Form of payment Accountant will get salary as he is an Auditor will get remuneration for
employees of the organization examining the books of accounts and
expressing an opinion on it.
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Differences between Accounting & Investigation
BASIS FOR
AUDITING INVESTIGATION
COMPARISON
Meaning The process of inspecting the An inquiry conducted, for
books of accounts of an entity establishing a specific fact or
and reporting on it, is known as truth is known as Investigation.
Auditing.
NOTE:
True and Fair view relating to : 1. Disclosing of material facts 2. Compliance with statutory requirements
c. Adhere to basic accounting principles, standards and rules d. No window dressing and secret reserves
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Window Dressing
■ It refers to the skill of arranging the goods attractively in the shop window and in accounting
language, it means showing the books of accounting in attractive way by manipulating the figures.
“When books of accounts are made in such a way to show much better condition than the actual
condition is called Window dressing – the amount of profits and net-worth are overstated in the
accounts”. This can be done by overstating assets & incomes and understating liabilities & expense.
Example:
a. Overstatement of assets : Recording purchase of new fixed assets at a higher cost
b. Understatement of liabilities: Recording a liability in the books at a lower amount.
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Harms of Window Dressing:
Auditors report: Section 143 of Companies act, 2013, the main objective of any auditor is to report
true & fair view of financial statement
Verification of income
Verification of assets and liabilities
Verification of provisions
Valuation of closing stock
Changes in the method of accounting
Omission of liabilities 14
Secret Reserve
Reserve means part of the profits kept aside for future use. Secret reserve means part of the profits
secretly kept aside for future use. It is exactly opposite f window dressing. In window dressing,
financial position is shown as better than actual whereas in secret reserve it is shown as worse than
the actual.
“When books of accounts are made in such a way to show much worse condition than the actual
condition it is called as Secret reserves. Amount of profits and new worth are understated in the
accounts”. This can be done by understating assets & Income and Overstating liabilities & expenses.
Example:
a. Understatement of assets - Recording purchase of new fixed assets at a lower cost
b. Overstatement of liabilities: Recording a liability in the books at a higher amount
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Harms of Secret Reserves:
No true & fair view
Harmful to investors
Undue benefits to management
Withdrawal of profits
No check on assets
Against the Law
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MEANING OF ERROR
1. Error of omission
2. Error of Commission
3. Compensating error
4. Error of duplication
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ERROR OF PRINCIPLE
An error of principle occurs when the transactions is not recorded according to the basic
principles of accounting. The debit or credit is given to the wrong head of account. The error do
not affect the trial balance, but they affect the true and fair view of accounts. Thus, due to
such errors the accounts shows a misleading facts and figures of the assets, liabilities, profits
or loss of the concern.
This kind of error can be detected only by vouching of all material transactions, verification of
assets and liabilities, scrutiny of ledgers, overall checks, quantity reconciliations etc.
Example;
Purchase of machinery for Rs. 10,000/-. Instead of passing Machinery account to Cash account,
it will be passed as Cash account which is against to golden rules of accounting.
Machinery a/c Dr 10,000 Cash a/c Dr 10,000
To cash a/c 10,000 Machinery a/c 10,000
(correct entry) (Wrong entry)
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CLERICAL ERROR
1. Error of omission :
An error of omission occurs when a transactions is omitted from books either wholly or party.
If a transaction is partially omitted, the trial balance would not tally and the error can be detected
and rectified. If a transaction is omitted, the trial balance would tally and it would be difficult to
detect such error.
This kind of error can be detected only through bank reconciliation, vouching cheque counter foils,
scrutiny of creditors account and so on.
Example: Purchase of Land for Rs. 1,00,000. Here, only one account is entered that is Purchase
account (Land), but another account that is Cash account is omitted to record. In this case, trial
balance will not tally.
2. Error of Duplication:
An error of duplication occurs when a transaction is recorded twice in the books of accounts. The
posting is also done twice. Such an error will not affect the trial balance. This can be detected by
careful vouching, scrutiny of ledger account, confirmation with parties etc.
Example: Sale of Machinery for Rs. 50,000. This transactions recorded twice in the books of
accounts.
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CLERICAL ERROR
1. Compensating error:
An error of omission occurs when the effect of one error is compensating by another error. Thus
one error cancels the effect of another error and do not affect the trial balance. This can be detected
through vouching, obtaining statement of account, confirmation from parties etc.
Example: Purchase of stationary for Rs. 2000. Here, purchase debited by 200 where this can be
rectified by passing one more transaction by debiting purchase account by 1800.
2. Error of Commission:
An error of commission occurs when a transaction is entered in the books but wrongly. Such errors
may be,
1. Mathematical errors – Calculation error Example: The sale of machinery as entered as Rs. 10,000
instead of Rs. 1000
2. Casting errors – error in totalling, carry forward etc Example: The total of purchase account is Rs.
10,000 but wrongly totalled as Rs.100000
3. Posting errors – Error while posting amounts from journal to ledgers. Example: Sale of
Machinery to Mr. A was wrongly posted to Mr. B account
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FRAUDS
MISREPORTING MISAPPOPRIATON
I. Misappropriation of Cash
1. Not recording the transaction
a. Cash received
2. Recording dummy transaction (Not recording the cash received)
b. Cash payment
3. Misapplication of accounting policies (Recording dummy/excess payment)
4. Overstatement/Understatement of c. Cash balance (theft)
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Types of Auditing
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ON THE BASIS OF AUTHORITY
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Features of Statutory Audit
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2. Non-statutory Audit/Voluntary audit
■ It is not compulsory under any law. They include audit of sole concern,
partnership firms and Hindu undivided families etc.
■ The conduct of audit is not a legal requirement but still many organizations
conduct the audit.
■ The main objectives is most of the times for sanctioning of loan, grants,
taxes, appointment, division of profits, etc., audited books of accounts are
required.
■ Another advantages of audit is the proprietor can ensure that books of
accounts are free from errors and frauds.
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On the basis of Scope
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3. Internal audit:
It is a review of the operations and records, sometimes continuously undertaken, within a business which is
normally done by the employees of an organization. This is done with a view of reassuring management that
the accounts are being properly maintained and the system contains adequate safeguards to check any
leakage of revenue or misappropriation of property or assets and the operations have been carried out in
conformity with the plans of the management.
Scope: It reviews, examines and verify the accounting system and related internal controls and also physically
examines and verify the assets, cash, stock etc.
Features:
a. It is normally done by the employees of the organisation
b. It is a part of internal control system
c. It is critical review of the internal control system
d. It is a kind of continuous audit
Objective:
a. To verify accuracy and authenticity of financial records presented to the management
b. To verify whether standard accounting policies decided earlier have been followed
c. To establish that there is a proper authority for every acquisition, retirement and disposal of assets
d. To confirm that liabilities incurred are related to legal activities of the organisation
e. To facilitates prevention and detection of frauds
f. To make special investigations for the management
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On the basis of Time
■ Continuous audit: Auditing is carried on continuously during the accounting
period. Accounting and auditing is done simultaneously. He checks each and
every transactions continuously. It is suited by large scale organization.
Advantages:
Disadvantages:
1. Quick discovery of errors and
frauds 1. Tedious
2. Check on the staff members
2. Costly
3. Thorough knowledge of clients
business 3. Disturbs the accounting staff
4. Valuable advice 4. Alternation of figures
5. Preparation of interim accounts 5. Conflicts
6. Quick preparation of final a/c
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Final/Periodic/Annual Audit:
■ Auditing is conducted after the end of the accounting period is called final
audit. The audit work begins after the accounting year is over, the books of
accounts are balanced, closed and complete. It is suitable for small
business as its less expensive.
DISADVANTAGES:
1. Quarterly results
2. Interim dividend DISADVANTAGES:
3. Speedy conduct of final audit
4. Up-to-date books of accounts to banks & 1. Expensive
investors 2. Alteration of figures
5. Check on employees 3. Disrupts routine accounting work
6. Early detection and prevention of error and 4. Additional work
frauds 5. Proper planning for the final audit
7. Utilization of audit staff
8. Thorough checking
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Concurrent Audit
Auditing of books of accounts or verification of transactions of an organization
conducted concurrently or as continuously. It is generally performed by banks. It
is conducted to verify & detect errors and frauds in transaction within shortest
possible time. RBI gives guidance for conduct of concurrent audit. The Scope of
concurrent audit are::
■ 50% of total deposit and advances should be covered under concurrent audit
■ Cash transactions
■ Purchase and sale of shares, securities etc
■ Verification of overdrafts, cash credit, term loans, guarantee etc
■ Verification of procedures and documents for opening a new account
■ Procedures for TDS
■ Procedures for safe custody for security forms
■ Treatment of customers complaints
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Appointment: it is the decisions of management to have internal
or external concurrent auditors. If its external auditor, his term is
for 1 year and extended to 5 years. Cancellation of his
appointment should be reported to RBI or ICAI.
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Audit on the Basis of Object:
1. Special audit:
Under section 147 of Companies Act, 2013 the Central Government has special powers to
direct special audit for particular organisation. The main objective behind conduct of such type of
audit is to determine whether the business of the company is conducted according to sound
business principles and prudent practices. This is conducted to know the following:
a. Affairs of the company are not managed as per the sound business principles
b. Company is being managed in such a manner which is likely to cause serious injury or
damage to the interest of the trade or industry.
c. Financial positions of the company is such as to endanger its solvency.
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2. Cost audit:
Section 128 of the companies act, 2013 empowers the Central government to order companies
engaged in manufacturing, production, processing and mining to maintain cost recording the
prescribed manner showing details relating to utilization of material, labour and other items of cost.
Cost auditor should report his True & fair view of cost records of those companies to Central Govt.
Section 148 states that companies under section 128 the Central Government may direct to audit the
cost records for the following objectives:
a. To fix up the selling price to its product
b. To offer price concession to the company
c. To safeguard interests of the customers
d. To apply for protection to be granted to the company
e. To determine the causes of loss suffered by the company
Appointment: The auditor will be appointed by Board of direction as per section 139 of the companies
act, 2013 with the approval of Central Govt.
Qualification : He should be a Cost accountant within the meaning of Cost and work accountant Act,
1959 or other prescribed qualification.
Powers and Duties: The cost auditor has same powers and duties which a company auditor has under
section Section 143.
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3. Management Audit
This is the most modern technique of audit which involves examination & evaluation of plans, policies, methods
and strategies of the organisation. It mainly concerned with appraising and evaluating the management and its
different functions like planning, organisation, directing and controlling and also to evaluate actions taken for
achieving goals & objectives of the business. The objectives of management audit are:
a. Appraisal of internal control
b. Key performance indictors
c. Appraisal of objectives and plans of the organisation
d. Appraisal of organisational structure
e. Confidence to lenders
f. Poor management
Appointment: Appointment of management audit is not statutory requirement so there are no provisions for
appointment under any law and also there are no prescribed qualification but management prefers CA in practice for
this purpose.
Reports: There is no prescribed format for management audit but report should be brief covering all important
points by using charts, diagrams and figures. Then, he also draft a report and discuss the same with heads of
various departments.
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4. Social Audit:
It is a new concept and has gained significance on account of the growing awareness of the responsibility of the business
organisation towards the society but its not statutory under any law. The aim is to assessment of social contribution made
by the business enterprise. Besides earning profits, corporates are expected to fulfil their social obligations. Social
responsibilities can be identified in two ways: a. Internal social responsibility i.e, promoting staff welfare (Provident fund,
medical & insurance facility etc), good working condition, providing good quality with fair prices and providing reasonable
returns to investors on their investment b. External social responsibility i.e, Overall community development like
development of roads, parks, playgrounds, hospitals, tree plantations, protection of environment, women empowerment etc.
Social audit is assessment of social performance of an organisation where auditor prepare social audit report by indicating
the social responsibilities discharged by organisation and how they are promoting social awareness among the public.
Objective of social audit:
a. To make assessment of social performance of the organisation
b. Evaluate social projects from viewpoint of their social costs and social benefits
C. Assist the management in preparation of social accounts
d. To inform the society about the effectiveness of the organisation is discharging their social responsibility
e. To examine the correctness of “value added statement” where contribution of an enterprise to the society is described
f. To verify correctness of assets and liabilities shown in balance sheet
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CONCLUSION
Auditing is the critical examination of the books of accounts. It is compulsory under the law
that every company has to audited her books of accounts with an independent person called
Auditor. All shareholders and stakeholders believe the financial statements verified,
examined and scrutinized by an auditor which is called as Auditors Report.
The person who audits the books of accounts of the company and expresses his true & fair
view of the financial statement i.e, profit & loss a/c and balance sheet he is called as Auditor.
The company can have both Internal auditor and external auditor. Internal auditor are the
one who is an employees of the organisation he is appointed to examine the books of
accounts continuously to verify and detect the errors and frauds. Whereas, external auditor
is an independent auditor who critical examines the books of accounts and expresses his
true opinion of the financial statement in the auditors report of the company.
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