AUDITING STUDY NOTES
DEFINITION, SCOPE AND LIMITATION OF AUDTING
Auditing Defined:
Audit may be defined as the verification of accuracy and correctness of the books of accounts
by independent persons qualified for the job and not in any way connected with the
preparation of such accounts. It is an intelligent and a critical scrutiny of the books of
accounts of a business with the documents and vouchers from which they have been written
up.
Montgomery:
“a systematic examination of the books and records of a business or other organization in
order to ascertain or verify and report upon the facts regarding the financial operations and
the results thereof”
According to Taylor & Perry:
An audit is an investigation by an auditor into the evidence from which the final revenue
accounts and balance sheet or other statement, of an organization have been prepared in
order to ascertain that they present a true and fair view of the summarized transactions for
the period under review and of the financial state of the organization at the end date, so
enabling the auditor to report there of”
J.R. Batlibol:
An intelligent and critical scrutiny of the books of accounts of a business with the documents
and vouchers from which they have been written up, for the purpose of ascertaining whether
the working results of a particular period as, should by the profit & loss Accounts and also the
financial position reflected in the Balance sheet are truly and fairly determined and presented
by those responsible for their completion.”
Dickee:
“An arrangement of accounting record undertaken with a view to establish whether they
correctly and complete reflect the transactions to which they purport to relate”.
Auditing may further be defined as:
“careful searching of the books of accounts by comparing them with the documents
and papers from which they have been written up. And thus trying to find out whether the
profit or loss for a particular period and the financial position, as shown by the final Accounts
are correct and true”.
All the above definitions clearly show that the auditor has not only to see the arithmetical
accuracy of the books of accounts but has also to go further and find out whether the
transactions entered in the books of original entry are correct or not. It most of the cases he is
required to go behind the books.
In fact, audit implies the scouting of the complete course of a transaction in a
business. It is an important part of an auditor’s job to check up the authority behind the
transaction, the relation of the transactions with the business, examination of the book
entries their presentation of its results and lastly, the correct presentation of its results in the
final accounts.
An important objection of auditing is to satisfy those who are interested in the
financial affairs of an under taking that the books and accounts are accurate and reliable, that
all receipts and payments have been properly accounted for and that the Balance sheet or
final statement of accounts are true and correctly drawn up.
PREPARED BY MR. ANTONY AMBIA Page 1
,Scope of Auditing:
1. Legal Requirement:
The auditor can determine the scope of an audit of financial statements in
accordance with the requirements of legislations, regulations or relevant professional bodies.
The state can frame rules for determining the scope of audit work. In the same way
professional bodies can make rules to conduct the audit. The auditor can follow all the
applicable on the audit work while checking the accounts of a business concern.
2. Entity Aspects:
The audit should be organize to cover all aspects of the entity as far as they are
relevant to the financial statement being audited. A business entity has many areas of
working. A small entity may have few functions while a large concern has many functions.
The auditor has duty to go through all the function of a business. The audit report should
cover all function so that the reader may know about all the working of a concern.
3. Reliable Information:
The auditor should obtain reasonable assurance as to whether the information
contained in the underlying accounting record and other source data is reliable and sufficient
as the basis for preparation of the financial statements. The auditor can use various techniques
to test the validity of data. All auditors while doing the auditor work usually apply the
compliance test and substance test. The auditor can show such information in the report.
4. Proper Communication:
The auditor should decide whether the relevant information is properly
communicated in the financial statement. Accounting is a information system so facts and
figures must be so presented that reader can get information about the business entity. The
auditor can mention this fact in his report. The principles of accounting can be applied to
decide about the disclosure of financial information in the statements.
5. Evaluation:
The auditor assesses the liability and sufficiency of the information contained
in the underlying accounting records and other source of data by making a study and
evaluation of accounting system and internal controls to determine the nature, extent and
timing of other auditing procedures.
6. Test:
The auditing assesses the reliability and sufficiency of the information
contained in the underlying accounting record and other source data by carrying out other
test, enquiries and other verification procedures of accounting transactions and account
balance as he considers appropriate in the particular circumstances. There are compliance test
in order to examine the data. The vouching, Verifications and valuations techniques are also
used.
7. Comparison:
The auditor determines whether the relevant information is properly
communication by comparing the financial statement with the underlying accounting records
and other source data to see whether they properly summarized the transactions and events
recorded therein. The auditor can compare the accounting record with financial statement in
order to check that same data has been processed for preparing the final accounts of a
business concern.
8. Judgments:
PREPARED BY MR. ANTONY AMBIA Page 2
, The auditor determines whether the relevant information is properly
communicate by consideration the judgments that management has made in preparing the
financial statements, accordingly, the auditor assesses the selection and consistent application
of accounting policies, the manner in which the information has been classified and the
adequacy of disclosure.
The auditor must have the quality of judgment when accounting book do not
provide true data.
9. Work
Judgments permeates the auditor work, for example in determining the extent
of audit procedures and in assessing the reasonableness of the judgments and estimates made
by management in preparing financial statements. The accounting data is based on personal
judgment of accountant and managers in preparing final accounts. Such judgments also effect
the working of an auditor. He is also bound to make guess work on the basis of available data.
10. Evidence:
The audit evidence available to auditor is persuasive rather than conclusive in
nature. Due to judgment and persuasive evidence absolute certainty in auditing is really
attainable. That is why the auditor can express an opinion as true and fair instead of exact and
cent percent correct. The personal judgment affects the value of many items. The value of
such items becomes an opinion so cent percent accuracy is not there.
11. Misstatement:
The Auditors carries out procedures designed to obtain reasonable assurance that
financial statement are properly stated in all material aspects. Because a test nature and other
inherent limitations of an audit, together with inherent limitations of any system of internal
control, there is an unavoidable risk that even some material misstatement may remain
undiscovered. The statements show true and fair view instead of exact view of operations.
12. Errors:
The auditor may get an indication that some fraud or error may have occurred
which could result in material misstatement would curse the auditor to extend his procedures
to confirm or dispel his suspicion. It is the duty of auditor to check cent percent items in
order to discover the error in accounting books and other records when he smells any doubt.
He should clear the doubt or confirm it while going through the record.
13. Opinion:
Constraints on the scope of audit of financial statement that impair the
auditor’s ability to express an unqualified opinion on such financial statements should be seen
out in his report, and a qualified opinion or disclaimer of opinion should be expressed as an
appropriate.
Distinguishing between Auditing and Accounting
Accounting Auditing
1. It is an art of recording, classifying, 1. It is an examination and reporting on
summarizing and interpreting the their accuracy.
Transaction.
2. It works with raw or primary data 2. Auditing works beings, where the
and has primary responsibility for accounting work ends
bringing out useful results of
operation.
PREPARED BY MR. ANTONY AMBIA Page 3
, 3. It is concerned with the preparation
3. Accountant is primarily responsible & submission of report
for the preparation of financial
statements.
4. Accountant need not to be qualified 4. He must be a Chartered Accountant
chartered Accountant in case of public limited company.
5. The management determines the 5. The extent of work is determined by
extent of work. Companies Ordinance.
Preliminaries to a new audit
Before commencing the actual audit, the auditor of a limited company should carry out the
following preliminary work.
1. PROFESSIONAL ETIQUETTE: If the organisation has an auditor who is ceasing to act, i.e.
one is replacing another, then the professional bodies required new auditor to communicate
with the previous auditor.
2. CONFIRMATION OF APPOINTMENT: The new auditor must confirm that he has been
properly and legally appointed. He does this by examining and obtaining a certified true copy
of the resolution of the Board of Directors or shareholders, as the case may be, and placing it
in the permanent audit file.
3. LETTER OF ENGAGEMENT: In companies, the auditor’s work is laid down by the
Companies Ordinance but even in these cases the auditor may be asked to perform additional
work, perhaps in the area of taxation, systems etc.
Therefore it is advisable for an auditor to write an engagement letter to an organization,
which sets out the agreement between the auditor and his client.
4. DOCUMENTS: A copy of the Memorandum and Articles of Association should be
obtained studied carefully. Particulars affecting the auditor in relation to accounts books and
internal procedures relating to relevant matters should be noted.
5. MINUTE BOOKS: He should go through the directors and shareholders minute books and
got down notes of important decisions.
6. TECHNICAL OPERATIONS: He should acquaint himself as far as possible with the
technical operations of the company. It is advisable that he should visit the works before
starting the audit.
7. LIST OF BOOKS: He should obtain list of books… statutory; statistical and accounting,
which are in use together with the names and duties of various clerks who are to write them
up.
8. SYSTEM OF ACCOUNTING: A note on the system of accounting employed by the
company should be obtained.
PREPARED BY MR. ANTONY AMBIA Page 4
DEFINITION, SCOPE AND LIMITATION OF AUDTING
Auditing Defined:
Audit may be defined as the verification of accuracy and correctness of the books of accounts
by independent persons qualified for the job and not in any way connected with the
preparation of such accounts. It is an intelligent and a critical scrutiny of the books of
accounts of a business with the documents and vouchers from which they have been written
up.
Montgomery:
“a systematic examination of the books and records of a business or other organization in
order to ascertain or verify and report upon the facts regarding the financial operations and
the results thereof”
According to Taylor & Perry:
An audit is an investigation by an auditor into the evidence from which the final revenue
accounts and balance sheet or other statement, of an organization have been prepared in
order to ascertain that they present a true and fair view of the summarized transactions for
the period under review and of the financial state of the organization at the end date, so
enabling the auditor to report there of”
J.R. Batlibol:
An intelligent and critical scrutiny of the books of accounts of a business with the documents
and vouchers from which they have been written up, for the purpose of ascertaining whether
the working results of a particular period as, should by the profit & loss Accounts and also the
financial position reflected in the Balance sheet are truly and fairly determined and presented
by those responsible for their completion.”
Dickee:
“An arrangement of accounting record undertaken with a view to establish whether they
correctly and complete reflect the transactions to which they purport to relate”.
Auditing may further be defined as:
“careful searching of the books of accounts by comparing them with the documents
and papers from which they have been written up. And thus trying to find out whether the
profit or loss for a particular period and the financial position, as shown by the final Accounts
are correct and true”.
All the above definitions clearly show that the auditor has not only to see the arithmetical
accuracy of the books of accounts but has also to go further and find out whether the
transactions entered in the books of original entry are correct or not. It most of the cases he is
required to go behind the books.
In fact, audit implies the scouting of the complete course of a transaction in a
business. It is an important part of an auditor’s job to check up the authority behind the
transaction, the relation of the transactions with the business, examination of the book
entries their presentation of its results and lastly, the correct presentation of its results in the
final accounts.
An important objection of auditing is to satisfy those who are interested in the
financial affairs of an under taking that the books and accounts are accurate and reliable, that
all receipts and payments have been properly accounted for and that the Balance sheet or
final statement of accounts are true and correctly drawn up.
PREPARED BY MR. ANTONY AMBIA Page 1
,Scope of Auditing:
1. Legal Requirement:
The auditor can determine the scope of an audit of financial statements in
accordance with the requirements of legislations, regulations or relevant professional bodies.
The state can frame rules for determining the scope of audit work. In the same way
professional bodies can make rules to conduct the audit. The auditor can follow all the
applicable on the audit work while checking the accounts of a business concern.
2. Entity Aspects:
The audit should be organize to cover all aspects of the entity as far as they are
relevant to the financial statement being audited. A business entity has many areas of
working. A small entity may have few functions while a large concern has many functions.
The auditor has duty to go through all the function of a business. The audit report should
cover all function so that the reader may know about all the working of a concern.
3. Reliable Information:
The auditor should obtain reasonable assurance as to whether the information
contained in the underlying accounting record and other source data is reliable and sufficient
as the basis for preparation of the financial statements. The auditor can use various techniques
to test the validity of data. All auditors while doing the auditor work usually apply the
compliance test and substance test. The auditor can show such information in the report.
4. Proper Communication:
The auditor should decide whether the relevant information is properly
communicated in the financial statement. Accounting is a information system so facts and
figures must be so presented that reader can get information about the business entity. The
auditor can mention this fact in his report. The principles of accounting can be applied to
decide about the disclosure of financial information in the statements.
5. Evaluation:
The auditor assesses the liability and sufficiency of the information contained
in the underlying accounting records and other source of data by making a study and
evaluation of accounting system and internal controls to determine the nature, extent and
timing of other auditing procedures.
6. Test:
The auditing assesses the reliability and sufficiency of the information
contained in the underlying accounting record and other source data by carrying out other
test, enquiries and other verification procedures of accounting transactions and account
balance as he considers appropriate in the particular circumstances. There are compliance test
in order to examine the data. The vouching, Verifications and valuations techniques are also
used.
7. Comparison:
The auditor determines whether the relevant information is properly
communication by comparing the financial statement with the underlying accounting records
and other source data to see whether they properly summarized the transactions and events
recorded therein. The auditor can compare the accounting record with financial statement in
order to check that same data has been processed for preparing the final accounts of a
business concern.
8. Judgments:
PREPARED BY MR. ANTONY AMBIA Page 2
, The auditor determines whether the relevant information is properly
communicate by consideration the judgments that management has made in preparing the
financial statements, accordingly, the auditor assesses the selection and consistent application
of accounting policies, the manner in which the information has been classified and the
adequacy of disclosure.
The auditor must have the quality of judgment when accounting book do not
provide true data.
9. Work
Judgments permeates the auditor work, for example in determining the extent
of audit procedures and in assessing the reasonableness of the judgments and estimates made
by management in preparing financial statements. The accounting data is based on personal
judgment of accountant and managers in preparing final accounts. Such judgments also effect
the working of an auditor. He is also bound to make guess work on the basis of available data.
10. Evidence:
The audit evidence available to auditor is persuasive rather than conclusive in
nature. Due to judgment and persuasive evidence absolute certainty in auditing is really
attainable. That is why the auditor can express an opinion as true and fair instead of exact and
cent percent correct. The personal judgment affects the value of many items. The value of
such items becomes an opinion so cent percent accuracy is not there.
11. Misstatement:
The Auditors carries out procedures designed to obtain reasonable assurance that
financial statement are properly stated in all material aspects. Because a test nature and other
inherent limitations of an audit, together with inherent limitations of any system of internal
control, there is an unavoidable risk that even some material misstatement may remain
undiscovered. The statements show true and fair view instead of exact view of operations.
12. Errors:
The auditor may get an indication that some fraud or error may have occurred
which could result in material misstatement would curse the auditor to extend his procedures
to confirm or dispel his suspicion. It is the duty of auditor to check cent percent items in
order to discover the error in accounting books and other records when he smells any doubt.
He should clear the doubt or confirm it while going through the record.
13. Opinion:
Constraints on the scope of audit of financial statement that impair the
auditor’s ability to express an unqualified opinion on such financial statements should be seen
out in his report, and a qualified opinion or disclaimer of opinion should be expressed as an
appropriate.
Distinguishing between Auditing and Accounting
Accounting Auditing
1. It is an art of recording, classifying, 1. It is an examination and reporting on
summarizing and interpreting the their accuracy.
Transaction.
2. It works with raw or primary data 2. Auditing works beings, where the
and has primary responsibility for accounting work ends
bringing out useful results of
operation.
PREPARED BY MR. ANTONY AMBIA Page 3
, 3. It is concerned with the preparation
3. Accountant is primarily responsible & submission of report
for the preparation of financial
statements.
4. Accountant need not to be qualified 4. He must be a Chartered Accountant
chartered Accountant in case of public limited company.
5. The management determines the 5. The extent of work is determined by
extent of work. Companies Ordinance.
Preliminaries to a new audit
Before commencing the actual audit, the auditor of a limited company should carry out the
following preliminary work.
1. PROFESSIONAL ETIQUETTE: If the organisation has an auditor who is ceasing to act, i.e.
one is replacing another, then the professional bodies required new auditor to communicate
with the previous auditor.
2. CONFIRMATION OF APPOINTMENT: The new auditor must confirm that he has been
properly and legally appointed. He does this by examining and obtaining a certified true copy
of the resolution of the Board of Directors or shareholders, as the case may be, and placing it
in the permanent audit file.
3. LETTER OF ENGAGEMENT: In companies, the auditor’s work is laid down by the
Companies Ordinance but even in these cases the auditor may be asked to perform additional
work, perhaps in the area of taxation, systems etc.
Therefore it is advisable for an auditor to write an engagement letter to an organization,
which sets out the agreement between the auditor and his client.
4. DOCUMENTS: A copy of the Memorandum and Articles of Association should be
obtained studied carefully. Particulars affecting the auditor in relation to accounts books and
internal procedures relating to relevant matters should be noted.
5. MINUTE BOOKS: He should go through the directors and shareholders minute books and
got down notes of important decisions.
6. TECHNICAL OPERATIONS: He should acquaint himself as far as possible with the
technical operations of the company. It is advisable that he should visit the works before
starting the audit.
7. LIST OF BOOKS: He should obtain list of books… statutory; statistical and accounting,
which are in use together with the names and duties of various clerks who are to write them
up.
8. SYSTEM OF ACCOUNTING: A note on the system of accounting employed by the
company should be obtained.
PREPARED BY MR. ANTONY AMBIA Page 4
