INTRODUCTION TO AUDITING STUDY NOTES
Introduction
Meaning of Auditing: An examination and verification of a company's financial and accounting
records and supporting documents by a professional, such as a certified chartered Accountant.
Auditing is defined as a systematic and independent examination of data, statements, records,
operations and performances (financial or otherwise) of an enterprise for a stated purpose. In auditing
the auditor perceives and recognizes the propositions before him for examination, collects evidence,
evaluates the same and on this basis formulates his judgment which is communicated through his
audit report
Other Definitions:
Spicer and Pegler: "Auditing is such an examination of books of accounts and vouchers of business, as
will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a
true and fair view of the state of affairs of the business and that the profit and loss account gives true
and fair view of the profit/loss for the financial period, according to the best of information and
explanation given to him and as shown by the books; and if not, in what respect he is not satisfied."
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.
By considering all these definitions auditing is the process of checking, vouching and verification of
the financial statement for the purpose of getting true and fair result of the business.
Feature or aspects or Important of auditing
It’s only with sure knowledge of external verification of organization resource allocation and use that
can they be put to determinate purpose and accounted for. Importance of auditing;
1. Audit is a systematic and scientific examination of the books of accounts of a business;
2. Audit is undertaken by an independent person or body of persons who are duly qualified for the
job.
3. Audit is a verification of the results shown by the profit and loss account and the state of affairs as
shown by the balance sheet.
4. Audit is a critical review of the system of accounting and internal control.
5. Audit is done with the help of vouchers, documents, information and explanations received from
the authorities.
6. The auditor has to satisfy himself with the authenticity of the financial statements and report that
they exhibit a true and fair view of the state of affairs of the concern.
7. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions and examine correspondence, minute books of share holders, directors, Memorandum of
Association and Articles of association etc., in order to establish correctness of the books of accounts.
8. Audit of a accounts in business made thought the year or periodically
9. Auditing always provides true and fair report of financial statement.
10. The scope of audit is not only limited to the business concern but also extended non business
concerns such as educational institutions. Health department , charitable trust etc.
ADVANTAGES OF AUDIT
1. Verification of Books and Statement:-
PREPARED BY MR. ANTONY AMBIA Page 1
,The main object of audit is the verification of the books and the financial statements of the company
concerned.
2. Discover and Prevention of Error:-
While examining the books, auditors detect some errors. These are various kinds of errors. So audit is
very useful in preventing and detecting the errors.
3. Discovery and Prevention of Fraud:-
Fraud means false representation made intentionally with a view to defraud somebody. It is the duty
of the auditor that he should detect the fraud. So audit main object and advantage is that fraud may
be detected and prevented. Auditor may also suggest various methods of internal check which will
prevent fraud.
4. Moral Check:-
When each staff of the company knows that this financial transactions will be examined by the
auditor then he fears to do that fraud. The fear of their detection acts as a moral check on the staff of
the company.
5. Independent Opinion:-
Auditing is very useful to obtain the independent opinion of the auditor about the business condition.
If the accounts are audited by the independent auditor, the report, of the auditor will be a true
picture and it will be very important for the management. Keeping in view the report, owner of the
business will be able to prevent frauds and errors in future.
6. Protects the Interest of Share Holder:-
Audit protects the interest of shareholders in the case of Joint Stock Company. Through audit
shareholders are assured that the accounts of the company are maintained properly and their interest
will not suffer.
7. Check on Directors:-
Audit acts a check upon the directors and precaution against fraud on the part of the management.
8. Proper Supervision:-
Sometimes owner of the business can not look after the business personally. Audit acts as a check on
employees and it saves the owner from losses.
9. Valuable Advice:-
The auditor has expert knowledge about the accounts and finance problems, so he may be consulted
about these problems.
10. Disputes Settlement:-
In case of partnership, audit is very useful in settling the disputes among the partners. If any partner
dies, or retires, the audited balance sheet will be very useful in estimating the value of goodwill.
11. Loan Facility:-
If accounts are audited, then true picture will be known to the financial institutions and they will
never hesitate to lend the money.
12. Insurance Claim:-
In case of fire insurance and participation of fraud claims can be settled on the basis of audited
accounts of the previous years.
13. Property Value Assessment:-
If the accounts have been audited, then it is easier to value property when the business is sold. In the
eyes of law audited accounts are considered more reliable.
14. Correct Information about Business:-
PREPARED BY MR. ANTONY AMBIA Page 2
, Due to the fear of audit work accounting always remains upto date and correct information is given
to the members in time.
15. Advantage for General Public:-
Audited financial statements present the real position of the company before the general public.
Keeping in view the position of a company one can do the investment.
16. Useful For Tax Department:-
Assessment of tax becomes very easy job for the tax department. Keeping in view the audited
accounts they impose the taxes.
Disadvantages of auditing:
It is true that auditing as many advantages, but it as some limitations as such
1. Non-detection of errors/frauds: - Auditor may not be able to detect certain frauds which are
committed with malaise intentions.
2. Dependence on explanation by others:- Auditor has to depend on the explanation and information
given by the responsible officers of the company. Audit report is affected adversely if the explanation
and information prove to be false.
3. Dependence on opinions of others: - Auditor has to rely on the views or opinions given by
different experts viz Lawyers, Solicitors, Engineers, Architects etc. he can not be an expert in all the
fields
4. Conflict with others: - Auditor may have differences of opinion with the accountants,
management, engineers etc. In such a case personal judgment plays an important role. It differs from
person to person.
5. Effect of inflation: - Financial statements may not disclose true picture even after audit due to
inflationary trends.
6. Corrupt practices to influence the auditors: - The management may use corrupt practices to
influence the auditors and get a favorable report about the state of affairs of the organization.
7. No assurance: - Auditor cannot give any assurance about future profitability and prospects of the
company.
8. Inherent limitations of the financial statements: - Financial statements do not reflect current values
of the assets and liabilities. Many items are based on personal judgement of the owners. Certain non-
monetary facts can not be measured. Audited statements due to these limitations can not exhibit true
position.
9. Auditing is a postmortem examination: auditing work begins where accounting ends then the
auditor is fully depends upon the accounting transaction provided by the accountant in the
throughout the year. So auditing work is not suitable for the current position of the business. But it is
useful to the future business situation.
10 Detailed checking not possible: - Auditor cannot check each and every transaction. He may be
required to do test checking.
Qualification & qualities of an auditor:
Qualification of an auditor:
An auditor should be a chartered accountant, without obtaining the certificate of chartered account
any person cannot be appointed as an auditor of a public company. For this purpose the person is
required to pass the examination conducted by the institution of chartered accountant.
PREPARED BY MR. ANTONY AMBIA Page 3
Introduction
Meaning of Auditing: An examination and verification of a company's financial and accounting
records and supporting documents by a professional, such as a certified chartered Accountant.
Auditing is defined as a systematic and independent examination of data, statements, records,
operations and performances (financial or otherwise) of an enterprise for a stated purpose. In auditing
the auditor perceives and recognizes the propositions before him for examination, collects evidence,
evaluates the same and on this basis formulates his judgment which is communicated through his
audit report
Other Definitions:
Spicer and Pegler: "Auditing is such an examination of books of accounts and vouchers of business, as
will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a
true and fair view of the state of affairs of the business and that the profit and loss account gives true
and fair view of the profit/loss for the financial period, according to the best of information and
explanation given to him and as shown by the books; and if not, in what respect he is not satisfied."
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.
By considering all these definitions auditing is the process of checking, vouching and verification of
the financial statement for the purpose of getting true and fair result of the business.
Feature or aspects or Important of auditing
It’s only with sure knowledge of external verification of organization resource allocation and use that
can they be put to determinate purpose and accounted for. Importance of auditing;
1. Audit is a systematic and scientific examination of the books of accounts of a business;
2. Audit is undertaken by an independent person or body of persons who are duly qualified for the
job.
3. Audit is a verification of the results shown by the profit and loss account and the state of affairs as
shown by the balance sheet.
4. Audit is a critical review of the system of accounting and internal control.
5. Audit is done with the help of vouchers, documents, information and explanations received from
the authorities.
6. The auditor has to satisfy himself with the authenticity of the financial statements and report that
they exhibit a true and fair view of the state of affairs of the concern.
7. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions and examine correspondence, minute books of share holders, directors, Memorandum of
Association and Articles of association etc., in order to establish correctness of the books of accounts.
8. Audit of a accounts in business made thought the year or periodically
9. Auditing always provides true and fair report of financial statement.
10. The scope of audit is not only limited to the business concern but also extended non business
concerns such as educational institutions. Health department , charitable trust etc.
ADVANTAGES OF AUDIT
1. Verification of Books and Statement:-
PREPARED BY MR. ANTONY AMBIA Page 1
,The main object of audit is the verification of the books and the financial statements of the company
concerned.
2. Discover and Prevention of Error:-
While examining the books, auditors detect some errors. These are various kinds of errors. So audit is
very useful in preventing and detecting the errors.
3. Discovery and Prevention of Fraud:-
Fraud means false representation made intentionally with a view to defraud somebody. It is the duty
of the auditor that he should detect the fraud. So audit main object and advantage is that fraud may
be detected and prevented. Auditor may also suggest various methods of internal check which will
prevent fraud.
4. Moral Check:-
When each staff of the company knows that this financial transactions will be examined by the
auditor then he fears to do that fraud. The fear of their detection acts as a moral check on the staff of
the company.
5. Independent Opinion:-
Auditing is very useful to obtain the independent opinion of the auditor about the business condition.
If the accounts are audited by the independent auditor, the report, of the auditor will be a true
picture and it will be very important for the management. Keeping in view the report, owner of the
business will be able to prevent frauds and errors in future.
6. Protects the Interest of Share Holder:-
Audit protects the interest of shareholders in the case of Joint Stock Company. Through audit
shareholders are assured that the accounts of the company are maintained properly and their interest
will not suffer.
7. Check on Directors:-
Audit acts a check upon the directors and precaution against fraud on the part of the management.
8. Proper Supervision:-
Sometimes owner of the business can not look after the business personally. Audit acts as a check on
employees and it saves the owner from losses.
9. Valuable Advice:-
The auditor has expert knowledge about the accounts and finance problems, so he may be consulted
about these problems.
10. Disputes Settlement:-
In case of partnership, audit is very useful in settling the disputes among the partners. If any partner
dies, or retires, the audited balance sheet will be very useful in estimating the value of goodwill.
11. Loan Facility:-
If accounts are audited, then true picture will be known to the financial institutions and they will
never hesitate to lend the money.
12. Insurance Claim:-
In case of fire insurance and participation of fraud claims can be settled on the basis of audited
accounts of the previous years.
13. Property Value Assessment:-
If the accounts have been audited, then it is easier to value property when the business is sold. In the
eyes of law audited accounts are considered more reliable.
14. Correct Information about Business:-
PREPARED BY MR. ANTONY AMBIA Page 2
, Due to the fear of audit work accounting always remains upto date and correct information is given
to the members in time.
15. Advantage for General Public:-
Audited financial statements present the real position of the company before the general public.
Keeping in view the position of a company one can do the investment.
16. Useful For Tax Department:-
Assessment of tax becomes very easy job for the tax department. Keeping in view the audited
accounts they impose the taxes.
Disadvantages of auditing:
It is true that auditing as many advantages, but it as some limitations as such
1. Non-detection of errors/frauds: - Auditor may not be able to detect certain frauds which are
committed with malaise intentions.
2. Dependence on explanation by others:- Auditor has to depend on the explanation and information
given by the responsible officers of the company. Audit report is affected adversely if the explanation
and information prove to be false.
3. Dependence on opinions of others: - Auditor has to rely on the views or opinions given by
different experts viz Lawyers, Solicitors, Engineers, Architects etc. he can not be an expert in all the
fields
4. Conflict with others: - Auditor may have differences of opinion with the accountants,
management, engineers etc. In such a case personal judgment plays an important role. It differs from
person to person.
5. Effect of inflation: - Financial statements may not disclose true picture even after audit due to
inflationary trends.
6. Corrupt practices to influence the auditors: - The management may use corrupt practices to
influence the auditors and get a favorable report about the state of affairs of the organization.
7. No assurance: - Auditor cannot give any assurance about future profitability and prospects of the
company.
8. Inherent limitations of the financial statements: - Financial statements do not reflect current values
of the assets and liabilities. Many items are based on personal judgement of the owners. Certain non-
monetary facts can not be measured. Audited statements due to these limitations can not exhibit true
position.
9. Auditing is a postmortem examination: auditing work begins where accounting ends then the
auditor is fully depends upon the accounting transaction provided by the accountant in the
throughout the year. So auditing work is not suitable for the current position of the business. But it is
useful to the future business situation.
10 Detailed checking not possible: - Auditor cannot check each and every transaction. He may be
required to do test checking.
Qualification & qualities of an auditor:
Qualification of an auditor:
An auditor should be a chartered accountant, without obtaining the certificate of chartered account
any person cannot be appointed as an auditor of a public company. For this purpose the person is
required to pass the examination conducted by the institution of chartered accountant.
PREPARED BY MR. ANTONY AMBIA Page 3
