What is auditing?
• The word 'audit' is Derived from the Latin word “Audire” which means “To Hear”.
Earlier it was customary for a person responsible for maintenance of accounts to go to some
Impartial & Experienced Person who used to hear these accounts and express their Opinion about
their correctness or otherwise. Such person were known as Auditor.
• Thus the term auditor means Hearer. ( One who hears)
AUDITING IN INDIA
• The history of auditing in India dates back to April 1914 when the Indian Company Act, 1913 came
into force.
• Because Of This Act There was a Growth In the Accountancy Profession in India which made it
obligatory on the part of every company registered under it to have an accounts auditor at least
Once Every Year.
• The Act for the first time prescribed the Qualification For An Auditor.
• The Chartered Accountant Act was passed in 1949 and on the passing of this act the autonomy was
granted to the accountancy profession.
AUDITING - DEFINITION
An Audit is an Investigation by an auditor into the Evidence from which the Final Revenue
Accounts and Balance Sheet or other statements of an organization have been prepared, in
order to ascertain that they present a True & Fair View of the summarized transaction for the
Period Under Review and of the financial state of the organization at the end date, so
enabling the auditor to Report thereon.
By- Taylor & Perry
"Audit is the Verification of the Accuracy and Correctness of the books of accounts by an
Independent Person Qualified for the job and not in any way connected with the preparation
of such accounts".
By-R.B Bose.
1. What- An Intelligent & Critical Examination of the books of account of a business.
2. Whom- Done by an Independent Person or body of persons qualified for the job.
3. How- With the help of Vouchers, Documents, Information, and explanation received from
the authority.
4. End- The auditor may Satisfy Himself With the authenticity of financial accounts prepared for
a fixed term and ultimately Reports that the balance sheet & P & L A/c exhibit a true and fair
view of the state of affairs of the concern.
Scope of Auditing
1. To determine the Fairness & Authenticity of the reported financial position.
2. Detection and Prevention of Errors & Fraud.
3. Check whether the financial Statements meet with exhaustive Rules And Regulations
which are being framed in a particular country.
Book-keeping Vs Accountancy Vs Auditing
Difference between Auditing and Accounting
Auditing Accountancy
Audit is the examination of the Mainly concerned with the
completed record. preparation of summary and
analysis of records prepared by
bookkeeper.
To certify the correctness of to ascertain the trading result
financial statement prepared by of a business during the
accountant financial year.
Auditor is an independent Accountant is an employee of
outsider the business.
Auditor is paid a Remunerations Accountant being an employee
agreed upon between him and of the business he draws his
his client. monthly salary
Auditor it is very essential to Accountant is not expected to
possess a thorough knowledge have a knowledge of auditing
of accountancy.
Audit Vs Investigation
Audit Investigation
Audit is carried out to find out Investigation is done with some
whether the balance sheet & P special purpose.
& L A/c of a concern, is
properly drawn up and it
exhibits a true and fair view of
a state of affair.
Audit is generally conducted at Investigation covers several
the end of financial year and it year to find out average earning
is relates to the account of one capacity etc.
year only
Audit is always carried Investigation is normally carried
conducted for proprietors only out on behalf of those who are
outsider who either want to
purchase the business or to
become partners ,or to advance
loan etc.
Audit is legally compulsory, Investigation is voluntary and
especially in the case of depends upon the necessity of
Companies some purpose.
Qualifications of an Auditor
1. The auditor should be a Chartered Accountant.
2. An auditor should have in-depth Knowledge of the fundamental principles
theories and practices of all aspects of accounting.
3. The auditor should also know all the Technical And Other Details of working
of business.
4. Auditors should also have a thorough knowledge of Company and
Mercantile Law.
5. He should be honest and impartial and not Be Influenced directly or
indirectly by others in the discharge of his duty.
Objective of auditing
• To Verify the books of Accounts and to report whether the balance sheet and the
PL account have been drawn properly according to the Company Act and whether
they exhibit a True & Fair Position of the company.
• To Detect the Errors and Frauds.
• To Prevent the recurrence of those errors and fraud.
What are errors and frauds?
An error means “Unintentional Mistakes in the preparation or presentation of financial
information. Errors generally arises out of the Innocence/Carelessness on the part of those
responsible for the preparation of accounts.
Types of Errors-
1. Error of Omission-
It arises if a transaction has been Omitted from being entered in
the books of account, wholly or partially.
Example- there were entries purchase/sales which have to be
recorded in the book of accounts but due to
oversight/carelessness they have been wholly omitted from
being recorded.
This error will Not Affect The Trial Balance (as it arises due to the
nonrecording of certain items) and as such omission can be
detected by careful scrutiny.
2. Error Of Commission-
It is a type of Clerical Error that happens when a mistake is
committed by the clerk in the Recording Of Transactions in
the book of accounts. (Negligence).
Example - Incorrect recording wholly or partially. a sale of
rupees 100 is entered in the sale book as rupees 10 such an
error does not affect the trial balance), Errors in totalling and
balancing, Errors in carrying forward total to trial balance.
3. Compensating errors-
When one error has been compensated/Counter-
Balanced/Nullify by an Offsetting Entry that's also in error,
So that the adverse effect of one on debit or credit side is
neutralised by that of another on credit or debit side.
Compensating error will Not Affect The Trial Balance and
therefore will not be detected easily.
4. Error of Principles-
It arises when the accountant Not Consider the principles of
accounting while preparing Accounts.
Such errors are sometime committed intentionally to Falsify
& Manipulate Accounts with an objective of Showing
More/Less Profit then the actual figure.
Example- Valuation of assets against principles of
accountancy, incorrect allocation of Expenditure between
Capital and Revenue, Posting an item of
revenue/expenditure to a personal account.
Fraud means the Unlawful & Deliberate Misstatement of financial statements. It involves
some Intention to Gain Out of manipulating records.
• Fraud occurs when an entity, such as a Company/ Organization, deliberately falsifies its
financial records.
• Fraud is a False Representation/Entry which is made always intentionally with some
mysterious objective.
Types of Fraud-
1. Misappropriation of Cash By-
he theft of cash receipt and petty cash.
the theft of cheques and other negotiable instruments.
False payments made to fictitious creditor or workman.
Example - Omitting to record sales and pocketing money received from
customers, recording a fictitious purchase, and misappropriating money
shown as wages by entering dummy names of workers therein.
2. Misappropriation Of Goods-
By actual Theft of stock.
The auditor is required to do detailed checking of stock records,
purchases, and sales only then this fraud can be brought to light.
3. Manipulation Of Accounts
Accounts of an organization can be Falsified by making False Entries in
respect of fictitious sales or purchases.
It can be detected with Great Difficulty by the auditor because it is
generally committed by the high Official of a business and usually
involves large amount.
Limitations of Auditing
1. Cost Factor -A very thorough and detailed audit would be a costly affair. It is
not cost effective. So the auditor has to limit the scope of his audit and use
techniques like sampling and test checking.
2. Time Factor -Auditors generally work on a very specific timeline. Sometimes
this is due to statutory requirements. This means he has to audit a whole
year’s accounts in a few weeks. Hence insufficient time is one of the main
limitations of auditing.
3. Inconclusive Evidence - Generally, the audit evidence the auditor collects is
persuasive in nature, not conclusive in nature. So there is never cent percent
conclusive evidence in most cases while auditing.
Advantages of auditing-
1. Assurance to the Owners/Investors- One of the biggest advantages of auditing
is that it offers assurances to the owners, investors, shareholders etc. The
owners of the business will be assured about the accuracy of their books of
accounts.
2. Errors and Frauds- An error is something that is done without the intention to
fraud the company, it is an innocent mistake. Fraud, on the other hand, is
deliberate. During the process of auditing, both errors and frauds are
discovered. Auditing also helps prevent such errors and frauds. It creates a
fear of being detected.
3. Independent Viewpoint- If the auditor is an external auditor, the business can
get a second opinion on their financial statements and their financial standing
as well.
An external auditor will closely inspect the books and be completely true and
fair in his opinion as he has no hidden agenda.
4. Moral Check- One of the other advantages of auditing is that the staff and the
workers of the company do not try to steal or defraud the company. They are
under constant scrutiny since they know that the accounts will be audited.
Any irregularities can be identified during such an audit, and they will be
caught eventually. This helps the staff in being honest and responsible at all
times.
