AUDITING
Unit 1
Meaning of Auditing
The term audit is derived from a Latin word “audire” which means
to hear authenticity of accounts is assured with the help of the
independent review. Audit is performed to ascertain the validity
and reliability of information.
Examination of books and accounts with supporting vouchers and
documents to detect and prevent error, fraud is the primary
function of auditing. Auditor has to check the effectiveness of
internal control systems for determining the extent of checking out
the audit.
Initially its meaning and use were confined merely to cash audit,
and the auditor has to ascertain whether the persons are
responsible for the maintenance of accounts had adequately
accounted for all the cash receipts and the payment on behalf of
this principle.
But the word audit has an extensive usage, and it now means a
thorough scrutiny of the books of accounts and its ultimate aim is
to verify the financial position disclosed by the balance sheet and
profit and loss accounts of a company.
In short, an audit implies an investigation and a report. The
process of checking and vouching continues until the study is
completed and the auditor enables himself to report under the
terms of his appointment.
Definition of Auditing
“An audit is an examination of accounting records undertaken with
a view of establishing whether they correctly and completely reflect
,the transactions to which the purport to relate.” –Lawrence R.
Dickey
“Audit is defined as an investigation of some statements of figures
involving examination of certain evidence, so as to enable an
auditor to make a report on the statement.” –Taylor and Perry
Characteristics of Auditing
1. There must be an institution.
2. An auditor must be an independent person.
3. To examine the truthness and fairness of the books.
4. Use of vouchers.
5. To get necessary clarifications.
6. To follow the principles.
7. Collection and evaluation of evidences.
8. Certain period
9. Tactfully
10. Report
Objectives of Auditing
The main objective of auditing is to ensure the financial reliability
of any organization; detection of fraud is just an incidental object.
Independent opinion and judgement form the objectives of
auditing. The job of an Auditor is to ensure that the books of
accounts are kept according to the rules stipulated in the
Companies Act; an Auditor also needs to ensure whether the books
of accounts show a true and fair view of the state of affairs of the
company or not.
The following are the three distinct types of fraud −
,A. Misappropriations of cash
B. Misappropriations of goods
C. Manipulations of accounts
Misappropriation of Cash : Misappropriation of cash is the easiest
way of fraud especially in large business houses where there is
limited or no communication between the owner of an
organization and the cashier.
Misappropriation of Goods :Misappropriation of goods can be done
in the following ways −
Goods may be stolen by employees or with the help of
employees.
By issuing false credit notes to customer on account of goods
return.
Detection of misappropriation of goods is more difficult rather
than detecting misappropriation of money, especially where
management is not much vigilant and sound system of book-
keeping, internal control and adequate system of securities are not
available. To keep control on the physical verification of goods,
reconciliation of physical stock with books and careful checking of
sale and purchase is must.
Manipulation of Accounts :Two types of manipulation of accounts
are mainly done by top management to mislead some parties for
some specific purpose.
Showing higher profit
Showing low profits.
, Auditors should be very careful about the detection of errors
because manipulation in accounting may also appear as error or it
may be a result of carelessness on part of a bookkeeper.
Errors may be broadly classified as follows −
A. Errors of principles.
B. Errors of omissions.
C. Errors of duplication.
D. Errors of commission.
E. Compensating errors.
Error of Principle
Where the recording of the items of transactions are not done
according to the Principle of Accounting, it is known to be an
error of principle. These errors are not traceable from trail balance;
these errors may be committed unintentionally or for the purpose
of manipulation of accounts to inflate or deflate profit.
Following are the examples of such type of errors −
A. Providing excessive or inadequate depreciation.
B. Where the provision for outstanding expenses or prepaid
expenses is wrong.
Errors of Omission
There may be two types of omission of entry while recording the
transactions in the books of accounts;
A. Where transaction is totally omitted from the books of accounts,
it will not affect the trial balance and the detection of such error
is difficult. Following are the examples of such errors;
Unit 1
Meaning of Auditing
The term audit is derived from a Latin word “audire” which means
to hear authenticity of accounts is assured with the help of the
independent review. Audit is performed to ascertain the validity
and reliability of information.
Examination of books and accounts with supporting vouchers and
documents to detect and prevent error, fraud is the primary
function of auditing. Auditor has to check the effectiveness of
internal control systems for determining the extent of checking out
the audit.
Initially its meaning and use were confined merely to cash audit,
and the auditor has to ascertain whether the persons are
responsible for the maintenance of accounts had adequately
accounted for all the cash receipts and the payment on behalf of
this principle.
But the word audit has an extensive usage, and it now means a
thorough scrutiny of the books of accounts and its ultimate aim is
to verify the financial position disclosed by the balance sheet and
profit and loss accounts of a company.
In short, an audit implies an investigation and a report. The
process of checking and vouching continues until the study is
completed and the auditor enables himself to report under the
terms of his appointment.
Definition of Auditing
“An audit is an examination of accounting records undertaken with
a view of establishing whether they correctly and completely reflect
,the transactions to which the purport to relate.” –Lawrence R.
Dickey
“Audit is defined as an investigation of some statements of figures
involving examination of certain evidence, so as to enable an
auditor to make a report on the statement.” –Taylor and Perry
Characteristics of Auditing
1. There must be an institution.
2. An auditor must be an independent person.
3. To examine the truthness and fairness of the books.
4. Use of vouchers.
5. To get necessary clarifications.
6. To follow the principles.
7. Collection and evaluation of evidences.
8. Certain period
9. Tactfully
10. Report
Objectives of Auditing
The main objective of auditing is to ensure the financial reliability
of any organization; detection of fraud is just an incidental object.
Independent opinion and judgement form the objectives of
auditing. The job of an Auditor is to ensure that the books of
accounts are kept according to the rules stipulated in the
Companies Act; an Auditor also needs to ensure whether the books
of accounts show a true and fair view of the state of affairs of the
company or not.
The following are the three distinct types of fraud −
,A. Misappropriations of cash
B. Misappropriations of goods
C. Manipulations of accounts
Misappropriation of Cash : Misappropriation of cash is the easiest
way of fraud especially in large business houses where there is
limited or no communication between the owner of an
organization and the cashier.
Misappropriation of Goods :Misappropriation of goods can be done
in the following ways −
Goods may be stolen by employees or with the help of
employees.
By issuing false credit notes to customer on account of goods
return.
Detection of misappropriation of goods is more difficult rather
than detecting misappropriation of money, especially where
management is not much vigilant and sound system of book-
keeping, internal control and adequate system of securities are not
available. To keep control on the physical verification of goods,
reconciliation of physical stock with books and careful checking of
sale and purchase is must.
Manipulation of Accounts :Two types of manipulation of accounts
are mainly done by top management to mislead some parties for
some specific purpose.
Showing higher profit
Showing low profits.
, Auditors should be very careful about the detection of errors
because manipulation in accounting may also appear as error or it
may be a result of carelessness on part of a bookkeeper.
Errors may be broadly classified as follows −
A. Errors of principles.
B. Errors of omissions.
C. Errors of duplication.
D. Errors of commission.
E. Compensating errors.
Error of Principle
Where the recording of the items of transactions are not done
according to the Principle of Accounting, it is known to be an
error of principle. These errors are not traceable from trail balance;
these errors may be committed unintentionally or for the purpose
of manipulation of accounts to inflate or deflate profit.
Following are the examples of such type of errors −
A. Providing excessive or inadequate depreciation.
B. Where the provision for outstanding expenses or prepaid
expenses is wrong.
Errors of Omission
There may be two types of omission of entry while recording the
transactions in the books of accounts;
A. Where transaction is totally omitted from the books of accounts,
it will not affect the trial balance and the detection of such error
is difficult. Following are the examples of such errors;
