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    Auditing Unit 1

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    Kailasam Srithar
    This document defines auditing and discusses its objectives. It provides 3 definitions of auditing from different authors. The primary objectives of an audit are to examine internal checks, check accuracy of books, verify transactions, check capital vs revenue transactions, and confirm assets/liabilities. Subsidiary objectives help achieve primary objectives, such as detecting and preventing errors and fraud, and detecting under/overvaluation of stock. Auditing is important as it helps various stakeholders, including management, shareholders, creditors, and tax authorities. Proper audit planning is also discussed as an important principle, including considering the client's business, prior experience, and environment.

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    Auditing Unit 1

    Uploaded by

    Kailasam Srithar
    17 views10 pages
    This document defines auditing and discusses its objectives. It provides 3 definitions of auditing from different authors. The primary objectives of an audit are to examine internal checks, check accuracy of books, verify transactions, check capital vs revenue transactions, and confirm assets/liabilities. Subsidiary objectives help achieve primary objectives, such as detecting and preventing errors and fraud, and detecting under/overvaluation of stock. Auditing is important as it helps various stakeholders, including management, shareholders, creditors, and tax authorities. Proper audit planning is also discussed as an important principle, including considering the client's business, prior experience, and environment.

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    Chapter about auditing and corporate governance

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    Auditing unit 1

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    This document defines auditing and discusses its objectives. It provides 3 definitions of auditing from different authors. The primary objectives of an audit are to examine internal checks, check accuracy of books, verify transactions, check capital vs revenue transactions, and confirm assets/liabilities. Subsidiary objectives help achieve primary objectives, such as detecting and preventing errors and fraud, and detecting under/overvaluation of stock. Auditing is important as it helps various stakeholders, including management, shareholders, creditors, and tax authorities. Proper audit planning is also discussed as an important principle, including considering the client's business, prior experience, and environment.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    17 views10 pages

    Auditing Unit 1

    Uploaded by

    Kailasam Srithar
    This document defines auditing and discusses its objectives. It provides 3 definitions of auditing from different authors. The primary objectives of an audit are to examine internal checks, check accuracy of books, verify transactions, check capital vs revenue transactions, and confirm assets/liabilities. Subsidiary objectives help achieve primary objectives, such as detecting and preventing errors and fraud, and detecting under/overvaluation of stock. Auditing is important as it helps various stakeholders, including management, shareholders, creditors, and tax authorities. Proper audit planning is also discussed as an important principle, including considering the client's business, prior experience, and environment.

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    of 10

    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 objective of an audit is to express an opinion on financial statements.
    The objectives of the audit can be categorized into;

    1. Primary objectives
    2. Subsidiary objectives
    Primary Objectives of Audit

    The main objectives of the audit are known as the primary objectives of the
    audit.

    They are as follows:

     Examining the system of internal checks.


     Checking arithmetical accuracy of books of accounts, verifying
    posting, casting, balancing, etc.
     Verifying the authenticity and validity of transactions.
     Checking the proper distinction between capital and revenue
    nature of transactions.
     Confirming the existence and value of assets and liabilities.

    Subsidiary Objectives of Audit


    These are such objectives that are set up to help in attaining
    primary objectives.
    They are as follows:
     Detection and prevention of errors.
     Detection and prevention of fraud.
     Under-or over-valuation of stock
     Detection and prevention of errors

    Errors refer to an accidental mistake in the commercial data


    arising due to ignorance of accounting procedures. Due to the wrong
    posting, such errors may occur. Errors are those mistakes that are
    committed due to carelessness or negligence or lack of knowledge or
    without having vested interest. Detection of errors is, therefore, an
    essential prerequisite for confirmation of accounts and financial results.
    Errors may be committed without or with any vested interest. So, they
    are to be checked carefully. Errors are of various types. Some of them
    are:
    Errors of principle
    These errors arise out of transactions recorded in a way contrary
    to the accepted principles of accounting.
    Errors of omission
    It is to enter a transaction in a subsidiary book
    Errors of commission
    It comprising the posting of an amount to a wrong account on the
    correct side or a mistake in the calculation is difficult to find out for the
    same reason.
    Compensating errors
    These errors involving one wrong entry being off-set by another
    wrong entry in the opposite direction are difficult to detect as none of
    them affects the agreement of the trial balance.

     Detection and prevention of frauds


    Frauds are those mistakes that are committed knowingly with
    some vested interest in the direction of top-level management.
    Management commits frauds to deceive tax, to show the effectiveness
    of management, to get more commission, to sell a share in the market
    or to maintain the market price of a share, etc. Such detection is only
    possible through a thorough examination of all financial and other con-
    cerned data. Detection of fraud is the main job of an auditor. Such
    frauds are as follows:

    a. Misappropriation of cash
    This may be perpetrated by complete or partial
    omission to enter receipts of money in the cash book
    or by the inclusion of fictitious payments and of larger
    sums than have been actually paid.
    b. Misappropriation of goods
    This involves pilferage of stock and is very difficult to
    detect, particularly in the case of small pilferages,
    unless a strong and efficient system of stock recording.
    c. Manipulation of accounts or falsification of accounts
    without any misappropriation.

     Under or overvaluation of the stock


    Normally such frauds are committed by the top-level executives
    of the business. So, the explanation was given to the auditor also
    remains false. So, an auditor should detect such frauds using skill,
    knowledge, and facts.

    Importance of Auditing
    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.

    AUDIT PLANNING
    As per Auditing and Assurance Standard 1, “Basic Principles
    Governing an Audit”, Audit Planning is one of the basic principles.
    Accordingly, it states “The auditor should plan his work to enable him
    to conduct an effective audit in an efficient and timely manner. Plans
    should be based on knowledge of the client’s business. Plans should be
    made to cover, among other things:
    (a) Acquiring knowledge of the client’s accounting systems, policies
    and internal control procedures;
    (b) Establishing the expected degree of reliance to be placed on internal
    control;
    (c) Determining and programming the nature, timing, and extent of the
    audit procedures to be performed; and
    (d) Coordinating the work to be performed. Plans should be further
    developed and revised as necessary during the course of the audit.”
    AAS-8 further expounds this principle. According to it, planning
    should be continuous throughout the engagement and involves
    • Developing an overall plan for the expected scope and conduct of the
    audit; and
    • Developing an audit programme showing the nature, timing and
    extent of audit procedures. Changes in conditions or unexpected results
    of audit procedures may cause revisions of the overall plan of and the
    audit programme. The reasons for significant changes may be
    documented.
    OBJECTIVES OF PLANNING
    Adequate audit planning helps to:
    • Ensure that appropriate attention is devoted to important areas of the
    audit.
    • Ensure that potential problems are promptly identified;
    • Ensure that the work is completed expeditiously;
    • Utilize the assistants properly; and
    • Co-ordinate the work done by other auditors and experts. In planning
    his audit, the auditor will consider factors such as complexity of the
    audit, the environment in which the entity operates his previous
    experience with the client and knowledge of the client’s business. The
    auditor may wish to discuss elements of his overall plan and certain
    audit procedures with the client to improve the efficiency of the audit
    and to coordinate audit procedures with work of the client’s personnel.
    The overall audit plan and the audit programme, however, remain the
    auditor’s responsibility.
    FACTORS TO BE CONSIDERED
    Planning his audit, the Auditor will consider the following factors -
    Complexity of the Audit: The scope of work and reporting
    responsibilities is analyses in order to determine the complexity of
    audit. Environment in which the entity operates: This enables the
    Auditor to understand various operational aspects of audit, e.g. extent
    of computerization, nature of internal controls, general attitude of
    personnel, etc.
    Previous experience with the client:
    By analyzing the previous year's audit working papers and other
    relevant files, the Auditor should pay particular attention to matters that
    required special consideration and decide whether they might affect the
    work to be done in the current year. Knowledge of the client's business:
    This is required to establish the overall audit plan. The Auditor will be
    able to - (a) identify areas of special audit consideration, (b) evaluate
    the reasonableness both of accounting estimates and management
    representations, and (c), make judgments regarding the appropriateness
    of accounting policies and disclosures.
    Discussion with Client:
    The Auditor can discuss his overall plan and certain audit
    procedures with the client to improve the efficiency of the audit and to
    coordinate audit procedures with work of the client's personnel. The
    overall audit plan and the audit Programme, however, remain the
    Auditor's responsibility.

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