Practical Auditing // 1

CHAPTER

1
Introduction to Auditing

2 // Practical Auditing

CHAPTER

1
Introduction to Auditing
A.

Meaning of Auditing

The word 'audit' is derived from the Latin word 'audire',

which means 'to hear'. In olden times, whenever the owners of a
business suspected fraud, they appointed certain persons to check
the accounts. He used to call accountant and hear the explanations
needed. The person, who heard the accounts, came to be known as
an auditor.
Auditing has generally been associated with only accounting
and financial records. Auditing means an examination of the
account books and the related documentary evidence by an
independent qualified person in order to ascertain the accuracy of
the figures appearing therein. It can be defined as to ascertain
whether the Balance Sheet and Profit and Loss Account exhibit a
true and fair view of financial state of affairs of a concern. Briefly,
an audit implies an investigation and a report. Some of the
definitions given by different writers are given below:
According to Montgomery, '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.'

Practical Auditing // 3
In the words of Ronald A. Irish, ' Auditing in its modern
concept, is a scientific and systematic examination of books,
vouchers, and other financial and legal records in order to verify and
report upon the facts regarding the financial condition disclosed by
the Balance Sheet and the net income revealed by the Profit and
Loss Account.'
Similarly, R. K. Mautz defines auditing as being 'concerned
with the verification of accounting data, with determining the
accuracy and reliability of accounting statements and reports.'
These various definitions clearly emphasize on verification of
accounting data with a view to reporting on the reliability of the
accounting statements. Verification of accounting data involves a
careful evaluation of evidence available to the auditor in support of
various transactions. Thus, an auditor examines internal evidence,
i.e. the records, vouchers, and books of accounts. To assess the
quality of the internal evidence, he also tests and evaluates the
relevant system in the organization. He also obtains external
evidence such as confirmation of bank balances.
Developments in the last few decades have extended the
scope of auditing. Auditing today is no longer concerned only with
financial accounting records; it may also involve a review of
compliance with law, costing records, operations, and performances.
Therefore, a more comprehensive definition is required to describe
modern auditing.
A comprehensive definition, relevant to the modern business
world has been given by Robert E. Schlosser in the following
words: 'Auditing is a systematic examination of financial
statements, records, and related operations to determine adherence
to generally accepted accounting principles, management policies or
stated requirements.' It has emphasized on the point that auditing
does not simply involve examination of records but also 'related
operations' and adherence to 'management policies' or 'stated
requirements'. Thus, it reflects the modern trend of auditing and
points out that its scope has been enlarged considerably.
An auditor collects and evaluates evidence to make a report.
The audit report is the end product of auditing. The extent to which
an auditor should conduct his examination or the precise audit steps
depends on the circumstances of each case.

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In brief, the auditing involves the following main elements or
aspects:
1.
2.
3.
4.
5.

6.

7.
8.

B.

The auditing is to be carried out by independent but duly

qualified person.
It is a thorough, systematic and analytical examination of
accounting records of the client.
The accounts have to be prepared by accountants and not by
auditor.
The examination of accounting records may be made
throughout the year or periodically.
The auditor examines the accounting records with the help of
relevant vouchers, documents, and explanation etc. following
accepted tools and techniques of auditing.
The auditor has to satisfy himself and report with regard to the
truth and fairness of the profit and loss of the period and
financial position of the concern, as reflected in its balance
sheet.
The scope of audit is not limited only to the business concerns
but it may be used in non-commercial concerns also.
Auditing today is more concerned with the latest
developments in the business world and is changing with the
requirement. There is growing emphasis upon the efficiency
audit, social audit, and system audit, etc. It cannot be free
from the social responsibilities of the business.

Scope of Auditing

The scope of auditing is increasing day by day because of the

changes in the economic conditions of the country. The objective of
audit was detection of fraud in the beginning has now shifted to the
determination of the fairness and authenticity of reported financial
position together with the detection and prevention of errors and
fraud. This has vastly enhanced the scope of auditing. For this,
exhaustive rules and regulations are necessary for conducting
independent and professional audits.

Practical Auditing // 5
An auditor has to certify the correctness of the books of
accounts and to detect errors committed by the clerks and
accountants in the preparation of financial records. There may be
various reasons due to which the financial books may be incorrect
and inaccurate. It is the duty of an auditor to bring them to light and
to report them to the owners of the business. He should satisfy
himself and ensure that the entries passed in the books are correct.
For this, he has to exercise reasonable care and skill during the
course of audit. Thus, the scope of auditing can be mentioned in the
following points:
1.

to certify the correctness of the books of accounts after

checking the arithmetical accuracy of the accounts.

2.

to check the books of accounts with the help of all the

relevant vouchers, invoices, correspondence, minute books,
etc.

3.

to verify the assets and liabilities shown in the Balance sheet,

4.

to investigate properly and thoroughly such matters which

arise suspicion and doubt.

5.

to report the client on the basis of his findings,

6.

At present, audit also covers tax audit, cost audit,

management audit, internal audit, and government audit. It is
not confined only to business organizations but service
organizations also avail the services of qualified auditors to
get their accounts audited.

Limitations of Auditor's Duties

1.

The auditor of a limited company is expected to submit his

report on annual accounts which are placed before an Annual
General Meeting. In other cases, however, auditors submit
some sort of certificate or report on the account.

2.

The work of audit usually depends upon the amount of

discretion exercised by an auditor. It is not always possible to
lay down any hard and fast rules in this connection.

3.

An auditor cannot check every item. He cannot conduct audit

in detail in big concerns. In such cases, he had to rely much

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on the system of internal checks and test checks. During the
course of audit, checking has to be exercised by him.
4.

An auditor should satisfy himself and ensure that the entries

passed in the books are correct. He should exercise
reasonable care and skill during the course of his work.

5.

An auditor is not a technical man. Therefore, he has to rely

upon the statements and explanation of responsible officials.

6.

An auditor should investigate such matters properly and

thoroughly which arouse suspicion and doubt.

Thus, limitations of auditor's duties provide a guideline

towards the scope and subject matter of auditing.

C.

Objectives of Audit

The objectives of auditing are changing with advancement of

business. Earlier, it was in the form of cash audit and its objective
was to ensure the correctness of accounting for all the receipts and
payments. Later on, detection of errors and frauds became the main
object of audit. However, the main objective of an independent and
external audit is to prove that the financial statement of a concern
shows a true and fair view of the earnings and financial state of
affairs.
According to Nepal Standards on Auditing (NSA 01) issued
by Institute of Chartered Accountants of Nepal (ICAN) , 'The
objective of an audit of financial statements is to enable the auditor
to express an opinion whether the financial statements are prepared,
in all material respects, in accordance with an identified financial
reporting framework. The phrases used to express the auditor's
opinion are 'give a true and fair view' or 'present fairly in all
material respects' which are equivalent terms.
Thus, at present, the main object of an audit is to express his
views whether the balance sheet and profit and loss account are
drawn up accordingly and they represent a true and fair view of
financial state of the affairs of the concern or not. This is possible

Practical Auditing // 7
when the auditor verifies the accounts and the statement. While
performing his duties, the auditor also has to discover errors and
frauds which is incidental to such main objective. Thus, the
objective of audit today can be classified into the following:

(1) Primary Objective

The primary (main) objective is to form an independent
judgement and opinion about the reliability of accounting records
and true and fair view of financial state of affairs and working
results. The main objective of auditing has been clear in Section
115 (3) of the Company Act 2063, as it requires the auditor of a
company to state in his report, whether or not in his opinion the
present Balance Sheet, Profit and Loss Account, and Cash Flow
statement for the year ended reflect the true and fair position of the
financial status, profit and loss, and cash flow of the company. The
auditor must satisfy himself about the accuracy of the books of
accounts in order to report upon the actual financial position and the
working results. Hence, he must:
a. check the arithmetical accuracy of the books of accounts
by verification of posting, castings, and balancing, etc.
b. verify the authenticity and validity of transactions entered
into the books with relevant supporting documents.
c. confirm the existence and value of assets and to verify
liabilities.
d. ascertain all the statutory requirements as regards the
format of books of accounts and final accounts have been
duly complied with.
e. ascertain the facts as represented in the balance sheet and
profit and loss account are true.

(2) Subsidiary Objectives

The subsidiary objectives of audit, which are incidental to the
main object are as follows:
(a) Detection and Prevention of Errors
Generally, errors are the result of carelessness on the part of
the person preparing the accounts. Errors can be described as
unintentional mistakes. They may occur while preparing documents
such as invoices, credit notes or statements, etc. or while castings,

8 // Practical Auditing
carrying forward, posting and balancing. During the course of
auditing, errors may be detected though auditing does not ensure
detection of all errors. Some of the errors may be easily detected if
they affect the trial balance, while others may necessitate detailed
checking for their detection. These errors may be of following
types:
(1) Errors of Omission: When a transaction is completely
or partially omitted from the books of accounts, it is known as an
error of omission. For example, purchases worth Rs. 5,000 were
made but no record was kept in the books. This type of error is not
reflected in the trial balance and hence is more difficult to detect.
However, if there is partial omission, it would affect the trial
balance and may be traced out easily.
(2) Errors of Commission: When incorrect records are
made in the books of accounts, it is known as errors of commission.
They may consist of wrong entries, posting, castings, carry
forwards, etc. For example, purchases worth Rs 4,400/- may be
entered in the books for Rs 4,000/-. This error will not affect trial
balance. Rent paid should be posted in the credit side of the Cash
book may be posted in the debit side. Posting to the wrong side of
an account will affect the trial balance. Hence, the agreement of the
trial balance would depend upon the nature of the mistake
committed by the staff.
(3) Compensating Errors: When an error offsets the effect
of another error, it is known as compensating error. If an error is
committed amount Rs 500 on the debit side and by chance, another
error of the same amount is committed on the credit side, they
would compensate each other. For example, a debit balance is
undercast by Rs 100 and credit balance is undercast by the same
amount. If A's account was to be debited for Rs 500 but was debited
by Rs 50 while B's account which was to be debited for Rs 50 was
debited by Rs 500. Thus, both the accounts have been debited for a
total sum of Rs 550 but both accounts have errors. Such an error
will not affect the trial balance and will not be detected easily.
(4) Errors of Principle: When principles of accountancy are
not followed in recording transactions, the error is known as error of
principles. These errors may consist of wrong allocation of
expenditure between capital and revenue or valuation of assets on a

Practical Auditing // 9
wrong basis, or making incorrect provisions for depreciation. Such
errors may be committed intentionally to understate or overstate
assets and liability to inflate or deflate profits. Hence, these errors
are important as they affect the profit or loss and the financial
statement materially. Mere routine checking of the books of
account may not help in detecting such errors and only intelligent,
careful and thorough checking may disclose them.
(5) Errors of Duplication: Errors of duplication are also
clerical errors and occur if the same transaction has been recorded
twice in the books of original entry and also posted twice in the
ledger. For example, purchase worth Rs 5,000 may be recorded
twice in the books of original entry, which will not affect the
agreement of the trial balance. Such errors are not so easy to trace.
But if the transactions are recorded twice in ledger then, such errors
will affect the trial balance.
Methods of Detecting Errors
The detection of errors is an important part of an auditor's
duties since it involves the accuracy of the accounts and the
statements. However, it is no part of an auditor's duty to trace and
locate the differences in the books he is required to audit. In many
cases, the auditor is called upon to discover the differences in the
books of accounts. Such a situation arises only when the accountant
is unable to trace it. The auditor should apply the following steps :
1. Check the totals of the trial balance.
2. Verify the balances of all the books of account.
3. Totals of the debtors and creditors should be checked and
compared with the trial balance.
4. Compare the names of the accounts appearing in the
ledger with the names of the accounts as have been
recorded in the trial balance. Check up the balances of
ledger accounts with the trial balance.
5. Totals of cash book, purchases and sales books should be
checked and see that they have been properly recorded in
the trial balance.
6. Verify that no entry of the books of original entry has
remained unposted.

10 // Practical Auditing
7. Check the posting of entries from the various books into
the ledger.
8. Compare the items of the trial balance with the items of
the trial balance of the previous year to see if any item has
been omitted.
9. Ascertain the difference amount and check if there is a
balance of this amount on the wrong side of the trial
balance.
In spite of all this checking, some errors may still be there for
which a detailed inspection and examination of the books should be
done.
Regarding the prevention of errors or frauds, the auditor can
do nothing concrete directly. All he can do is to advise his client
and suggest the ways and means to prevent them. However, it is his
moral influence that ultimately helps in prevention of errors or
frauds.
(b) Detection and Prevention of Fraud
Fraud means false representation or entry made intentionally
with a view to defraud somebody. This is done deliberately which
means that here is intent to deceive, to mislead or to conceal the
truth. Frauds are more serious than unintentional errors because of
the implication of dishonesty which accompanies them. Thus,
detection and prevention of frauds is of great importance and
considered to be one of the important duties of an auditor. Frauds
may be of following types:
(1)
Misappropriation or Embezzlement of Cash:
Misappropriation of cash is possible in any size of business
organization. The possibility of the misappropriation of cash is
small in small organization, where the proprietor has a direct control
over the cash receipts and disbursements. The chances are greater
in case of large organizations. Cash may be misappropriated in any
of the following ways:
1. Omission to record cash receipts.
2. Recording less amount than what has actually been
received.
3. Recording fictitious payments.

Practical Auditing // 11
4. Recording more amount than what has actually been paid.
5. By 'teeming and lading'.
In case of this type of fraud, the auditor will need to carry out
detailed checking of all the important books and documents i.e. cash
book, vouchers, invoices, wage sheets, etc and confirmation of
balances from customers.
(2) Misappropriation of Goods: Fraud may be in respect of
goods. It is very difficult to detect the misappropriation of goods
because it is usually committed by old and trusted employees. It
may happen that the valuable goods of an organization may be
stolen by the employees. It may also happen that the storekeeper in
collusion with the works manager may sell the goods ill legally to
some third party. The work of investigation becomes more difficult
when the goods are small in size but costly in value. Hence, a
proper stock record should be maintained. An efficient system of
internal check must be introduced in the business. There should be
adequate security arrangement to see that no goods are taken out of
the business premises without proper authority.
(3) Manipulation of Accounts
Accounts are manipulated through falsification of accounts.
This type of fraud is always intentional and predetermined which is
more difficult to detect as it is usually committed by the directors or
responsible officials. As a result of manipulation of accounts profits
are increased or decreased. The accounts are so prepared that they
conceal the true picture of a business. The objects of manipulation
of accounts are as follows:
b.
to show less profits in order to pay less income tax.
c.
to show more profit to earn more commission by the directors.
d.
to pay higher rate of dividend.
e.
to manipulate share prices in order to earn speculative profit.
f.
to attract a purchaser by showing more profit.
g.
to raise additional finance.
h.
to prevent disclosure of poor financial position of the company.
The manipulation of accounts can be done by different
methods. The most common methods are as follows:
a. Over and under valuation of assets and liabilities.

12 // Practical Auditing
b.
c.
d.
e.

Omission of legitimate business expenses.

Charging capital expenditure to revenue and vice versa.
By showing fictitious sales.
By creating minimum or excessive provision for known
liabilities.

Such frauds are difficult to detect as they are committed by

the responsible officials who are presumed to be trustworthy,
honest, and responsible. The auditor should be very careful in
detecting such frauds. He should carry out the routine checking and
vouching carefully and make searching tactful and intelligent
enquiries. The auditor who uses adequate professional skill and
reasonable care in detecting such frauds cannot be held responsible
if he fails to discover a well planned defalcation. He should act as a
watch-dog and not as a blood hound. On the other hand if he fails
to discover a fraud which could have been discovered by the
exercise of reasonable care he will be liable for negligence.
Regarding the prevention of errors or frauds, the auditor can
do nothing concrete directly. All he can do is to advise his client
and suggest the ways and means to prevent them. His job is simply
to give advice but it is owners and directors who are responsible for
getting things done.
However, it is his moral influence that
ultimately helps in prevention of errors or frauds.

Role of Auditors in Detecting and Preventing Errors and

Frauds
The auditor carries out necessary checks before expressing his
opinion on the truth and fairness of financial position and operating
results of a concern as reflected in financial statements. He has to
certify in his report as to whether the profit and loss account reflects
the true profit or loss for the financial year concerned and the
balance sheet exhibits a true and fair view of the state of affairs at
the end of the financial year. The emphasis is on financial
statements. However, business community as well as public tends
to see an auditor's duties in terms of the detection and possibly
prevention of error and fraud. Accordingly, he has a duty to
ascertain frauds and errors to justify the correctness of the accounts.
This duty of detecting and preventing errors and frauds can be
analyzed in the following ways:

Practical Auditing // 13
Detection of Errors and Frauds: It is desirable that the
auditor should exercise reasonable care and skill, so that he may
detect errors and frauds. If he carries routine checking and
vouching more carefully and checks the books of accounts
thoroughly, he may be successful in his duty. Whereas, in doing so,
if he is not successful but he himself feels that he has not shown any
negligence in his duty, then he cannot be held responsible for any
error or fraud which remains undetected in accounts. Hence, an
auditor is not an insurer.
Prevention of Errors and Frauds: The auditor has no
authority to introduce remedial measures for the prevention of errors
and frauds. All that he can do is to advise his client and suggest the
ways and means to prevent them. His job is simply to give advice
but it is owners and directors who are responsible for getting things
done. It is certain that if his advice is taken seriously, chances of
errors and frauds can be reduced to the minimum. The persons
responsible for the maintenance of accounts know that the books
prepared by them would be closely scrutinized by the auditor.
Hence, auditing serves as a considerable moral influence on those
employees responsible for maintenance of accounts that ultimately
helps in prevention of errors or frauds.

D.

Advantages of Audit

The utility of auditing is increasing in this business age.

Hence, businessmen, industrialists and other organizations
compulsorily audit their transactions. This creates confidence in
both general public and government. The advantages of audit are as
follows:
(1) Quick Discovery of Errors and Frauds: There may be
various errors and frauds in the books of accounts of Business.
Such errors and frauds are quickly located through audit. Hence,
accounting staffs become careful not to commit errors or frauds.
(2) Profit and Loss and Financial Position: Every
businessman wants to get information about the profit and loss and
financial position of his business. The auditor checks whether the

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facts as presented in the profit and loss account and balance sheet
are true or not. Based on his checking, the auditor expresses his
opinion concerning the truth and fairness of profit and loss and
financial position of the business.
(3) Makes the Staff Alert: A regular audit makes the staff
alert and vigilant so that the books of accounts and other records are
kept up-to-date. Thus, it prevents the application of wrong
principles as well as carelessness and irregularity on the part of the
staffs. It also exercises a great moral influence on the whole staff.
(4) Comparison of Accounts: The audited accounts enable
the comparison of accounts from year to year. If there is any
discrepancy, the cause may be enquired into.
(5) Obtain Loan: The audited balance sheet proves the
actual financial position of the business. It is helpful in obtaining
loan or additional capital from banks or other sources.
(6) Compensation Claim: Audited accounts are helpful in
claiming reasonable compensation from the insurance company in
respect of loss by fire or burglary, etc. The estimates for the claim
must be based on reliable past records.
(7) Increases Goodwill: Audited accounts prove the truth
and fairness of the profit and loss and financial state of the concern.
It increases the prestige and goodwill of the concern. It also helps
in the valuation of the goodwill of a concern when the business has
to be sold out.
(8) More Reliable: Audited accounts are more reliable as
evidence in the court of law. It is taken to be more reliable by the
tax authorities for purposes of tax-assessment.
(9) Builds Confidence: It builds confidence in the minds of
investors and other stake holders by bringing all the facts to light
and ensuring whether capital invested is safe or not. The third party,
who has dealings with is interested in its financial soundness. The
audited accounts and duly certified by an independent auditor helps
a lot in this matter.
(10) Expert Advice: An auditor possesses practical
knowledge of business finance, tax laws and other financial and

Practical Auditing // 15
legal matters. He can always advise on these matters and his
opinions can be helpful to his clients.
(11) Settlement of Accounts: In a partnership firm, the
audited accounts are helpful in settlement of accounts between the
partners amicably and avoiding any dispute among them. Audited
accounts will be of great use at the time of division of profits
amongst the partners, admission of a new partner, retirement of a
partner or death of a partner.
The person who conducts audit is known as auditor. He
makes a report to his client after careful examination of accounting
records and statements, who has appointed him. In the report he
expresses his opinion whether the statements of accounts are true
and fair or not.

D.

Evolution of Auditing Practices in Nepal

The system of accounting and auditing is believed to have

existed in our country long back during the Lichhavi and Malla
Period. Since financial transactions were very few in numbers, an
audit on those days was simply a comparison of the records of cash
receipt and payments with vouchers thereof. Looking back at the
history of auditing in Nepal, evidences show that it is not so old. In
fact, the work of auditing started after the establishment of office
named "Kumari Chowk Adda" in B. S. 1828, Baisakh 6. At that
period King Prithivi Narayan Shah assigned the duty of examining
the revenue and expenditure of the country. Thus, in Nepal,
auditing began in the form of examining governmental revenue and
expenditure through 'Kumari Chowk Adda'. From the study of
various copper inscriptions and royal seals issued by King Rana
Bahadur Shah, we know that there was a provision of submitting
books of accounts.
After the beginning of the Rana Regime in B. S. 1903, Prime
Minister Jung Bahadur Rana made a provision that every office
(Adda) had to submit the income and expenditure accounts to
'Kumari Chowk Adda' and take clearance from it.

16 // Practical Auditing
Prime Minister Chandra Shamsher also introduced some rule
and regulations in B. S. 1973 to implement the provisions of
submitting and receiving the books of accounts strictly to make
financial administration effective and strong. At that time, on the
basis of rule and regulations (Sanad, Sawal) and acts of receiving
books of accounts, financial transactions should be recorded in the
predetermined form and submit to 'Kumari Chowk Adda' within the
prescribed period for clearance. Hence, 'Kumari Chowk Adda' used
to examine books of accounts and gave clearance to government
offices. It was empowered to examine whether the expenditure
were made as per provisions of rules and regulations and take action
against those persons who do not submit the books of account for
clearance. It used to submit the list of dues along with report to the
Prime Minister at that time.
After the political change in B. S. 2007, Budget System was
implemented in B. S. 2008 in Nepal.
For the successful
implementation of budget system, the need for proper accounting
and auditing was realized. Hence, Accountant General's Office was
established in B. S. 2013 for maintaining books of accounts in
government offices. However, the work of auditing of accounts
remained with 'Kumari Chowk Adda'.
Constitution of Kingdom of Nepal, 2015, made the provision
of Auditor General as a constitutional body for auditing the books of
accounts of government offices. Accordingly, Office of Auditor
General was established in B. S. 2016. Government enacted
'Procedural Rule for Government Fund Expenditure 2016' for
establishing uniformity in financial administration. Then Kumari
Chowk Adda was confined to the work of examining dues till 2016.
In 2027 Shrawan 1, Kumari Chowk Adda was converted into
Goswara Tahabil and assigned the duty of protecting old documents
and disposing records as per rules and regulations.
After the political change in 2017, Auditing Act 2018 was
implemented for the first time. It included all previously ignored
contents such as scope, duties and responsibilities of Auditor
General. This act gave Auditor General an authority to register the
auditors and to appoint auditors for the fully owned state enterprises
and to recommend auditors in the case of partly government owned
enterprises. Auditor General had to submit the results of annual

Practical Auditing // 17
audit report to the King.
The new accounting system of the
Government (Shree Panch Ko Sarkarko Shresta Pranali) based on
double entry system was implemented in Nepal from the fiscal year
2019/20 and covered whole country from fiscal year 2020/21. But
towards the revenue, new system could be followed only from
2031/32. In the process of modernizing the Auditing work,
Performance Auditing was implemented in Nepal from B. S. 2032.
The first Company Act, 2007, had few provisions on
accounting and auditing. Companies followed the government
accounting system instead of commercial accounting just because it
was easy and regulating agencies were non existent. Most of the
public enterprises had their own legislation. Being state owned
enterprises, accounting and auditing were not treated as important
functions. Backlog in preparation of financial reports was a
common phenomenon. Only after adoption of liberalization policy
in B. S. 2037 (1980), the country saw substantive improvement in
this area. Instead of family run businesses, joint stock companies
and joint venture business came into existence.
After the success of People's Movement I, in B. S. 2046,
Constitution of Nepal 2047 and Auditor's Act 2048 brought drastic
changes in the Government auditing. Similarly Company Act made
compulsory audit of all companies and audit report should be
presented in Annual General Meeting and submit to the Registrar's
Office. It shows the development of auditing in the field of
business.
In 1984, a group of chartered accountants qualified from India
and aboard gathered to form an association called 'The Association
of Chartered Accountants of Nepal' (ACAN). After a long united
effort of professional accountants, Office of the Auditor General
(OAG), ACAN and the government, the parliament enacted the
Nepal Chartered Accountants Act, 2053 B. S. (1997). From 1st
August 1997, the Institute of Chartered Accountants of Nepal
(ICAN) started functioning as an apex professional accounting body
of Nepal. Though the Institute, constituted under the Act, was said
to having full autonomy, two sections in the Act tied its hands.
These sections specified that provisions repealing the Auditor's Act
and transfer of OAG authority of issuing licence to ICAN shall be

18 // Practical Auditing
effective only after notification published by the government in the
Gazette.
In 10 July 2002, the Nepal Chartered Accountants first
amendment bill received the royal seal which was duly notified in
16 July 2002. This amendment made the institute a professional
apex body with full autonomy. This repealed the Auditing Act 2048
B. S. for ever. This was a milestone in the accounting and auditing
history of Nepal.
After the success of People's Movement II, new Interim
Constitution of Nepal, 2063 has changed the provision of submitting
the Auditor General's annual audit report to the prime minister
instead of king.

G.

Differences Between Accountancy and

Auditing

The differences between accountancy and auditing are as

follows:
(1) Meaning: Accounting is basically concerned with the
actual recording of transactions in the books of accounts and
preparation of the financial statements. Where as auditing is an
independent examination and verification of books of accounts
prepared by accountants.
(2) Objective: The objective of accountancy is to know the
financial result and financial position of the concern. The objective
of auditing is to express his opinion whether the Profit and Loss
Account and Balance Sheet shows a true and fair view of the state
of affairs of the concern.
(3) Scope: The scope of accountancy is restricted to
preparation of accounting information whereas the scope of auditing
is concerned with checking and verifying of accounts. However, the

Practical Auditing // 19
scope of auditing can be determined with agreement between the
client and the auditor.
(4) Nature of Employees: An account does the work of
accounting in the concern. He is an employee of the concern and
draws a monthly salary regularly from the business. An auditor is
an independent outsider, who can be changed year by year. He is
paid a remuneration agreed upon between him and his client.
(5) Reporting: Accountancy is concerned with preparation
of final accounts. Report is not prepared by the accountant.
Reporting is an important duty of an auditor. After examination of
books of accounts an auditor has to give a report on whether the
final accounts show true and fair view of the affairs of the concern
or not.
(6) Continuity: The work of accountancy begins when the
transaction occurs. Accounting work is carried out throughout the
year. When the work of accountancy ends, the work of audit begins.
Auditing is usually carried out at the end of the year.
(7) Accountability: The accountant is accountable to the
management. The auditor is accountable to the shareholders.
(8) Qualification: Accounting work requires no formal
qualification. To be a company auditor, he should be a qualified
chartered accountant or registered auditor.

H.

Differences Between
Investigation

Auditing

and

Investigation of accounts and audit of accounts are not

synonymous. An investigation is conducted with specific purpose
in mind. It may cover an enquiry relating to earning capacity, extent
of fraud, etc. The scope and objectives of an investigation are
normally narrow and specific while those of an audit are broad and
general. The difference between investigation and audit are as
follows:
(1) Object: The object of an audit remains the same in all
cases. More specifically, the object of an audit is to enable the

20 // Practical Auditing
auditor to report whether the Profit and Loss Account and Balance
Sheet shows a true and fair view of the state of affairs of the concern
as at the end of the accounting period. In case of investigation, the
object of each investigation may be different. It is carried on with
specific purpose.
(2) Legal Aspects: Audit is compulsory for a corporate
business according to Company Act. Investigation is not legally
compulsory. It is carried out only when a specific requirement
arises.
(3) Interested Parties: Audit is conducted on behalf of the
shareholders or proprietors. Investigation may be carried out on
behalf of the prospective purchasers of the business, government,
court, or the proprietors themselves.
(4) Depth of Work: Audit is a kind of test checking.
Investigation in the other hand is a thorough examination of the
books of accounts.
(5) Scope of Work: An audit is limited only for examination
of books of account, records, vouchers etc. of a business to report
whether annual accounts show a true and fair view of the business.
The auditor has to make sure that proper accounting policies are
adopted and adhere to the disclosure requirements. Investigation is
not only an examination of accounts, but also enquiry into other
factors e.g. it goes beyond the books of accounts.
(6) Period: The period for which the accounts are subject to
examination also differ. In case of audit the period is usually one
financial year but in case of investigation, the examination extends
to a period of more than a year depending upon the purpose of
investigation.
(7) Attitude Towards Work: The auditor does not audit
with a view that there are errors and frauds in the books of accounts.
The auditor is not a hound dog but a watch dog. If the auditor
suspects some errors or frauds only then he examines the books of
account in detail. On the other hand, the investigator examines the
books of accounts usually in suspicious circumstances and examines
in-depth.
(8) Qualification: Auditing can be conducted by a
practicising CA or registered auditors, but it is not necessary that an
investigator be CA. Investigator must be competent than auditor.

Practical Auditing // 21
(9) Report: An audit report is brief and follows the same
pattern except for the qualifications which may be necessary. The
auditor expresses his opinion as to the true and fair view of the
financial statements. An investigator's report, on the other hand is
usually lengthy. It contains the instructions given by the client, the
method of approach, the detailed work conducted, the adjustments
he finds necessary, and any recommendations made by him. The
investigator presents his conclusions and evidence in supporting
them.

Useful Examination Questions

1.

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8.

9.
10.

"Auditing begins where accountancy ends." Explain this

statement by showing difference between Accountancy and
Auditing.
Define 'Audit' and state the various objects of an audit.
Differentiate between 'Auditing' and 'Investigation'.
Trace the origin and development of Auditing in Nepal.
Explain the methods and objects of 'manipulation or
falsification of accounts'.
"Two main objects of an audit are detection and prevention of
errors and frauds." Discuss.
Explain the main classes of errors that may be found in the
accounts of a big concern. How such errors can be detected.
What are the different types of frauds in connection with
accounts ? State how auditor can detect and prevent such
frauds by giving examples.
Define auditing and explain its advantages to the business
concern.
What is detection and prevention of errors and frauds ?
Explain the role of auditor in detection and prevention of
errors and frauds.