Auditing Today

Unit 1

Audit

The word audit is derived from the Latin word audire, which means to hear 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.

Nature of Auditing

An intelligent and a critical examination of the books of accounts of a business Done by an independent person or body of persons qualified for the job Help of vouchers, documents, information and explanations received from the authorities Satisfaction with the authenticity of financial accounts Prepared for a fixed term Report for Financial Statements

Key Phases

a)
b) c)

Economic information
Financial statements Closing statements Statements prepared to facilitate managerial control Stock records and stock statements

d)

Reporting Collection and evaluation of evidence

Scope of Audit

Determination of the fairness and authenticity of reported financial position Detection and prevention of errors and fraud

Objects of an Audit

Main objects :- Expression of expert opinion Secondary objects :- Detection and prevention of Errors & Frauds Specific objects

Types Of Errors

Clerical Errors :- errors are committed in posting, totaling and balancing (a) Errors of Omission (b) Errors of Commission Errors of Principle Compensating Errors or offsetting errors Errors of Duplication

Location of errors

Scrutiny of the books of accounts Castings of ledger accounts should be tallied with those given in the trial balance Ledger postings The names of the accounts in the ledger should be compared with names of accounts recorded in the trial balance The lists of debtors and creditors should be totalled Trial balance tallied with previous years Casts and carry forwards should be examined

Detection of fraud

Embezzlement of cash Misappropriation of goods Fraudulent manipulation of accounts

Types of audit

On the basis of legislative control Statutory audit, Govt. audit, Private audit. On the basis of relation of auditor and Mgt. External audit and Internal audit. On the basis of periodicity of audit Continuous audit, Interim audit, Periodical audit, Occasional audit. On the basis of subject matter of audit Financial audit, Operational audit, Cost audit, Management audit. On the basis of coverage of audit Complete audit, Partial audit. On the basis of manner of checking Standard audit, Balance sheet audit, Post and Vouch audit

Relations of auditor vis--vis Management

External audit Internal audit

Qualities of an Auditor

Professional or Statutory Qualities Personal qualities or General Qualities

Professional or Statutory Qualities

Knowledge of principles and practice of general accounting Cost accounting Management Accounting Knowledge of techniques of auditing Provisions relating to different taxes Economics Business Laws or Commercial Law and Company Law Business management and organization and financial administration Mathematics and statistics Report writing

Personal qualities or General Qualities

Honesty and Integrity Impartial Vigilance Methodical An Enquiring Mind Diligence Ability to trace out the facts and figures Ability to maintain secrets Courtesy Other Qualities

Business where Continuous Audit is Applied

Where final accounts are prepared just after the close of the financial year. Like Banks, Railways etc. Transactions are many in numbers. System of internal check in operation is not satisfactory. Statements of accounts are prepared after every month or quarter to be presented to the management. Sales affected are very Large.

Auditing is Luxury

For smaller concerns For small vendors, shopkeepers, vegetable or fruit sellers etc. Which cannot afford high cost of auditing. It results in unnecessary wastage of time. If it is undertaken merely to increase the prestige and credibility of the concern Lack of competent and independent auditor

Development of Auditing in India

Compulsory audit in case of companies was introduced by the Companies Act of 1913 In 1930, the accounting profession was brought under the control of Central Government to ensure uniformity in standards throughout the country. 1949, the Parliament enacted the Chartered Accountants Act and the Institute of Chartered Accountants of India (ICAI) was established. 1956, a new Companies Act replaced the Act of 1913 The Companies Act, 1956 prescribed a cost audit in the case of specified companies to be conducted by a Cost and Works Accountants within the meaning of the Cost and Works Accountants Act of 1959. In 1984, the Income Tax Act, 1961 was amended to provide for compulsory audit of accounts of certain assesses, which has further contributed to the growth of auditing profession in India.