BY : GHALIB HUSSAIN
Chapter # 1 Introduction to Auditing
Objectives of Auditing.
Auditors are basically concerned with verifying whether the account exhibit true and fair view
of the business. The objectives of auditing depends upon the purpose of his appointment.
Primary Objective.
The primary objective of an auditor is to respect to the owners of his business expressing his
opinion whether account exhibits true and fair view of the state of affairs of the business. It
should be remembered that in case of a company, he reports to the shareholders who are the
owners of the company and not tot the director.
Secondary Objective:
The following objectives are incidental to the main objective of auditing.
1. Detection and prevention of errors: Errors are mistakes committed unintentionally
because of ignorance, carelessness. Errors are of many types:
a. Errors of Omission: If a transaction has been totally omitted it will not affect trial
balance and hence it is more difficult to detect. On the other hand if a transaction is
partially recorded, the trial balance will not agree and hence it can be easily detected.
b. Errors of Commission: When incorrect entries are made in the books of accounts
either wholly, partially such errors are known as errors of commission. E.g. wrong
entries, wrong Calculations, postings, carry forwards etc such errors can be located
while verifying.
c. Compensating Errors: When two/more mistakes are committed which counter
balances each other. Such an error is known Compensating Error.
d. Error of Principle: These are the errors committed by not properly following the
accounting principles. These arise mainly due to the lack of knowledge of accounting.
E.g. Revenue expenditure may be treated as Capital Expenditure.
2. Location of Errors: It is not the duty of the auditor to identify the errors but in the
process of verifying accounts, he may discover the errors in the accounts. The auditor
should follow the following procedure in this regard.
1. Check the trial balance.
3. Compare list of debtors and creditors with the trial balance.
4. Compare the names of account appearing in the ledger with the names of accounting in
the trial balance.
5. Check the totals and balances of all accounts and see that they have been properly
shown in the trial balance.
6. Check the posting of entries from various books into ledger.
3. Detection and Prevention of Fraud: A fraud is an Error committed intentionally to
deceive/ to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.
a. Misappropriation of Cash: This is one of the majored frauds in any organization it
normally occurs in the cash department. This kind of fraud is either by showing more
payments/ less receipt. The cashier may show more expenses than what is actually
incurred and misuse the extra cash. E.g. showing wages to dummy workers. Cash can
also be misappropriated by showing less receipts E.g. not to recording cash sales, not
allowing discounts to customers. The cashier may also misappropriate the cash when it
is received.
b. Misappropriation of Goods: Here records may be made for the goods not purchase
not issued to production department, goods may be used for personal purpose. Such a
fraud can be deducted by checking stock records and physical verification of goods.
c. Manipulation of Accounts: this is finalizing accounts with the intention of misleading
others. This is also known as “WINDOWS DRESSING”. It is very difficult to locate
because its usually committed by higher level management such as directors. The
objective of WD may be to evade tax, to borrow money from bank, to increase the share
price etc.
Conclusion
To conclude it can be said that, it is not the main objective of the auditor to discover
frauds and irregularities. He does not give assurance against frauds and errors. But if
he finds anything of a suspicious nature, he should probe into it to the full.
