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Auditing full notes
Bachelors of Business Administration (Guru Gobind Singh Indraprastha University)
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Auditing-B.com 3rd Year
Unit I
Introduction to Auditing
Meaning and Definition of Auditing
The word Audit is derived from Latin word “Audire” which means ‘to hear’. Auditing is the
verification of financial position as disclosed by the financial statements. It is an examination of
accounts to ascertain whether the financial statements give a true and fair view financial position and
profit or loss of the business. Auditing is the intelligent and critical test of accuracy, adequacy and
dependability of accounting data and accounting statements. Different authors have defined auditing
differently, some of the definition are:
“Auditing is an examination of accounting records undertaken with a view to
establishment whether they correctly and completely reflect the transactions to which they purport to
relate.”-L.R.Dicksee
“Auditing is concerned with the verification of accounting data determining the
accuracy and reliability of accounting statements and reports.” - R.K. Mautz
“Auditing is the systematic examination of financial statements, records and related
operations to determine adherence to generally accepted accounting principles, management policies
and stated requirement.” -R.E.Schlosser
Objectives of Auditing
The objectives of auditing are changing with the advancement of business techniques. Earlier it
was only to check the correctness of receipts and payments. The objectives of the auditing have been
classified under two heads:
1) Main objective
2) Subsidiary objectives
Main Objective: The main objective of the auditing is to find reliability of financial position
and profit and loss statements. The objective is to ensure that the accounts reveal a true and fair view
of the business and its transactions. The objective is to verify and establish that at a given date balance
sheet presents true and fair view of financial position of the business and the profit and loss account
gives the true and fair view of profit or loss for the accounting period. It is to be established that
accounting statements satisfy certain degree of reliability. Thus the main objective of auditing is to
form an independent judgement and opinion about the reliability of accounts and truth and fairness of
financial state of affairs and working results.
1
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Subsidiary objectives: The subsidiary objectives of the auditing are:
1. Detection and prevention of fraud: the one of the important subsidiary objective of
auditing is the detection and prevention of fraud. Fraud refers to intentional
misrepresentation of financial information. Fraud may involve:
a. Manipulation, falsification or alteration of records or documents
b. Misappropriation of assets.
c. Suppression of effect of transactions from records or documents.
d. Recording of transactions without substance.
e. Misapplication of accounting policies
2. Detection and prevention of errors: is another important objective of auditing. Auditing
ensures that there is no mis-statement in the financial statements. Errors can be detected
through checking and vouching thoroughly books of accounts, ledger accounts, vouchers
and other relevant information.
Importance of Auditing
Importance of auditing can be judged from the fact that even those organizations which are
not covered by companies Act get their financial statements audited. It has become a necessity for
every commercial and even non- commercial organization. The importance of auditing can be summed
in following points:
a. Audited accounts help a sole trader in knowing the value of the business for the
purpose of sale.
b. Dispute over correctness of profits can be avoided.
c. Shareholders, who do not know about day-to-day administration of the company ,
can judge the performance of management from audited accounts.
d. It helps management in detecting and preventing errors and frauds.
e. Management gets advice on financial affairs from the auditors.
f. Long and short term creditors depend on audited financial statements while taking
decision to grant credit to business houses.
g. Taxation authorities depend on audited statements in assessing the income tax,
sales tax and wealth tax liability of the business.
h. Audited accounts are useful for the government while granting subsidies etc.
i. It can be used by insurance companies to settle the claims arising on account of loss
by fire.
j. Audited accounts serve as a basis for calculating purchase consideration in case of
amalgamation and absorption.
k. It safe guards the interests of the workers because audited accounts are useful for
settling trade disputes for higher wages or bonus.
2
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Types of audit
Based on ownership: On the basis of ownership audit can be:-
1. Audit of Proprietorship: In case of proprietary concerns, the owner himself takes the
decision to get the accounts audited. Sole trader will decide about the scope of audit and
appointment of auditor. The auditing work will depend upon the agreement of audit and the
specific instructions given by the proprietor.
2. Audit of Partnership: To avoid any misunderstanding and doubt, partnership audits
their accounts. Partnership deed on mutual agreement between the partners may provide
for audit of financial statements. Auditor is appointed by the mutual consent of all the
partners. Rights, duties and liabilities of auditor are defined in the mutual agreement and
can be modified by the partners.
3. Audit of Companies: Under companies Act, audit of accounts of companies in India
is compulsory. Chartered accountant who is professionally qualified is required for the audit
of accounts of companies. Companies Act 1913 for the first time made it compulsory for
joint stock companies to get their accounts audited from a qualified accountant. A number
of amendments have been made in companies Act, 1956 and 2013 regarding appointment,
duties, qualification, power and liabilities of a qualified auditor.
4. Audit of Trusts: The beneficiaries of the trusts may not have access and
knowledge of accounts of the trust. The trustees are appointed to manage and look after
the property and business of the trust. Accounts of the trust are maintained as per the
conditions and terms of the trust deed. The income of the trust is distributed to the
beneficiaries. There are more chances of frauds and mis-appropriation of incomes. In the
trust deed as well as in the Public Trust Act which provide for compulsory audit of the
accounts of the trust by a qualified auditor. The audited accounts of the trust ensure true
and fair view of accounts of the trust.
5. Audit of Accounts of Co-operative Societies: Co-Operative societies are
established under the Co-Operative Societies Act, 1912. It contains various
provisions for the regulations and the working of these societies. Some of the states
have adopted it without any change, while others have brought certain changes to
it. The auditor of the Co-operative Society should have an expert knowledge of the
particular act under which Co-operative society under audit is functioning. He should also
study by-laws of the society and make sure that the amendments made from time to time in
the by-laws have been duly registered in the Registrar’s Office. Companies Act is not
applicable to the co-operative Societies. The Registrar of co-operative societies shall audit or
cause to be audited by some person authorized by him, the accounts of the society once in
every financial year.
3
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Auditing full notes
Bachelors of Business Administration (Guru Gobind Singh Indraprastha University)
StuDocu is not sponsored or endorsed by any college or university
Downloaded by Amardeep Kumar ()
, lOMoARcPSD|5579969
Auditing-B.com 3rd Year
Unit I
Introduction to Auditing
Meaning and Definition of Auditing
The word Audit is derived from Latin word “Audire” which means ‘to hear’. Auditing is the
verification of financial position as disclosed by the financial statements. It is an examination of
accounts to ascertain whether the financial statements give a true and fair view financial position and
profit or loss of the business. Auditing is the intelligent and critical test of accuracy, adequacy and
dependability of accounting data and accounting statements. Different authors have defined auditing
differently, some of the definition are:
“Auditing is an examination of accounting records undertaken with a view to
establishment whether they correctly and completely reflect the transactions to which they purport to
relate.”-L.R.Dicksee
“Auditing is concerned with the verification of accounting data determining the
accuracy and reliability of accounting statements and reports.” - R.K. Mautz
“Auditing is the systematic examination of financial statements, records and related
operations to determine adherence to generally accepted accounting principles, management policies
and stated requirement.” -R.E.Schlosser
Objectives of Auditing
The objectives of auditing are changing with the advancement of business techniques. Earlier it
was only to check the correctness of receipts and payments. The objectives of the auditing have been
classified under two heads:
1) Main objective
2) Subsidiary objectives
Main Objective: The main objective of the auditing is to find reliability of financial position
and profit and loss statements. The objective is to ensure that the accounts reveal a true and fair view
of the business and its transactions. The objective is to verify and establish that at a given date balance
sheet presents true and fair view of financial position of the business and the profit and loss account
gives the true and fair view of profit or loss for the accounting period. It is to be established that
accounting statements satisfy certain degree of reliability. Thus the main objective of auditing is to
form an independent judgement and opinion about the reliability of accounts and truth and fairness of
financial state of affairs and working results.
1
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, lOMoARcPSD|5579969
Subsidiary objectives: The subsidiary objectives of the auditing are:
1. Detection and prevention of fraud: the one of the important subsidiary objective of
auditing is the detection and prevention of fraud. Fraud refers to intentional
misrepresentation of financial information. Fraud may involve:
a. Manipulation, falsification or alteration of records or documents
b. Misappropriation of assets.
c. Suppression of effect of transactions from records or documents.
d. Recording of transactions without substance.
e. Misapplication of accounting policies
2. Detection and prevention of errors: is another important objective of auditing. Auditing
ensures that there is no mis-statement in the financial statements. Errors can be detected
through checking and vouching thoroughly books of accounts, ledger accounts, vouchers
and other relevant information.
Importance of Auditing
Importance of auditing can be judged from the fact that even those organizations which are
not covered by companies Act get their financial statements audited. It has become a necessity for
every commercial and even non- commercial organization. The importance of auditing can be summed
in following points:
a. Audited accounts help a sole trader in knowing the value of the business for the
purpose of sale.
b. Dispute over correctness of profits can be avoided.
c. Shareholders, who do not know about day-to-day administration of the company ,
can judge the performance of management from audited accounts.
d. It helps management in detecting and preventing errors and frauds.
e. Management gets advice on financial affairs from the auditors.
f. Long and short term creditors depend on audited financial statements while taking
decision to grant credit to business houses.
g. Taxation authorities depend on audited statements in assessing the income tax,
sales tax and wealth tax liability of the business.
h. Audited accounts are useful for the government while granting subsidies etc.
i. It can be used by insurance companies to settle the claims arising on account of loss
by fire.
j. Audited accounts serve as a basis for calculating purchase consideration in case of
amalgamation and absorption.
k. It safe guards the interests of the workers because audited accounts are useful for
settling trade disputes for higher wages or bonus.
2
Downloaded by Amardeep Kumar ()
, lOMoARcPSD|5579969
Types of audit
Based on ownership: On the basis of ownership audit can be:-
1. Audit of Proprietorship: In case of proprietary concerns, the owner himself takes the
decision to get the accounts audited. Sole trader will decide about the scope of audit and
appointment of auditor. The auditing work will depend upon the agreement of audit and the
specific instructions given by the proprietor.
2. Audit of Partnership: To avoid any misunderstanding and doubt, partnership audits
their accounts. Partnership deed on mutual agreement between the partners may provide
for audit of financial statements. Auditor is appointed by the mutual consent of all the
partners. Rights, duties and liabilities of auditor are defined in the mutual agreement and
can be modified by the partners.
3. Audit of Companies: Under companies Act, audit of accounts of companies in India
is compulsory. Chartered accountant who is professionally qualified is required for the audit
of accounts of companies. Companies Act 1913 for the first time made it compulsory for
joint stock companies to get their accounts audited from a qualified accountant. A number
of amendments have been made in companies Act, 1956 and 2013 regarding appointment,
duties, qualification, power and liabilities of a qualified auditor.
4. Audit of Trusts: The beneficiaries of the trusts may not have access and
knowledge of accounts of the trust. The trustees are appointed to manage and look after
the property and business of the trust. Accounts of the trust are maintained as per the
conditions and terms of the trust deed. The income of the trust is distributed to the
beneficiaries. There are more chances of frauds and mis-appropriation of incomes. In the
trust deed as well as in the Public Trust Act which provide for compulsory audit of the
accounts of the trust by a qualified auditor. The audited accounts of the trust ensure true
and fair view of accounts of the trust.
5. Audit of Accounts of Co-operative Societies: Co-Operative societies are
established under the Co-Operative Societies Act, 1912. It contains various
provisions for the regulations and the working of these societies. Some of the states
have adopted it without any change, while others have brought certain changes to
it. The auditor of the Co-operative Society should have an expert knowledge of the
particular act under which Co-operative society under audit is functioning. He should also
study by-laws of the society and make sure that the amendments made from time to time in
the by-laws have been duly registered in the Registrar’s Office. Companies Act is not
applicable to the co-operative Societies. The Registrar of co-operative societies shall audit or
cause to be audited by some person authorized by him, the accounts of the society once in
every financial year.
3
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