AUDITING

What is Auditing?
Auditing is a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic
actions and events to ascertain the degree of
correspondence between those assertions and established
criteria and communicate the results to interested users.
Audit is the examination or inspection of various books of
accounts by an auditor followed by physical checking of
inventory to make sure that all departments are following
documented system of recording transactions. It is done to
ascertain the accuracy of financial statements provided by
the organisation.

What are the objectives of Auditing?

Primary Objectives
The primary or main objective of audit is as follows:
1. To Examine the Accuracy of the Books of Accounts
An auditor has to examine the accuracy of the books of
accounts, vouchers and other records to certify that Profit
and Loss Account discloses a true and fair view of profit or
loss for the financial period and the Balance Sheet on a given
date is properly drawn up to exhibit a true and fair view of
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the state of affairs of the business. Therefore the auditor
should undertake the following steps:
· Verify the arithmetical accuracy of the books of
accounts.
· Verify the existence and value of assets and liabilities
of the companies.
· Verify whether all the statutory requirements on
maintaining the book of accounts has been complied with.
2. To Express Opinion on Financial Statements
After verifying the accuracy of the books of accounts, the
auditor should express his expert opinion on the truthness
and fairness of the financial statements. Finally, the auditor
should certify that the Profit and Loss Account and Balance
Sheet represent a true and fair view of the state of affairs of
the company for a particular period.
Secondary Objectives
The secondary objectives of audit are: (1) Detection and
Prevention of Errors, and (2) Detection and Prevention of
Frauds.
Detection And Prevention of Errors
The Institute of Chartered Accountants of India defines an
error as, “an unintentional mistake in the books of accounts.”
Errors are the carelessness on the part of the person
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preparing the books of accounts or committing mistakes in
the process of keeping accounting records.
(2) Detection and Prevention of Frauds.
A. MISAPPROPRIATION OF CASH
This is a very common method of misappropriation of cash
by the dishonest employees by giving false representation in
the books of accounts intentionally. In order to detect and
prevent misappropriation, the auditor should verify the
system of internal check in operation and by making a
detailed examination of records and documents.
B. MISAPPROPRIATION OF GOODS
Fraud which takes places in respect of goods is
Misappropriation of Goods. Such a type of fraud is difficult to
detect and usually takes place where the goods are less
bulky and are of high value.
· By showing less amount of purchase than actual
purchase in the books of accounts.
· By showing issue of material more than actual issue
made.
· By showing good materials as obsolete or poor line of
goods.
· By showing fictitious entries in the books of accounts.
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3. MANIPULATION OF ACCOUNTS
There is a very common practice almost in every
organization, some dishonest employees have intention to
commit this type of fraud. Manipulation of accounts is the
procedure to alter books of accounts in such a way that there
will be an increase or decrease in the amount of profit to
achieve some personal objectives of the high officials. It is
very difficult for the auditors to identify such frauds which
may be due to manipulation of accounts.
Causes of Manipulation of Accounts
· There are different reasons for manipulation of
accounts. The reasons are:
· To get more commission calculated on profit
· For evasion of income tax and sales tax
· To get huge loan from financial institutions by showing
more profit in the books of accounts.
· To declare more dividend to the shareholders.
· By showing more profit than actual to get confidence of
the shareholders.
· To make secret reserves by showing less income or by
showing more expenses in the books of accounts.
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What are the importances of Auditing?
Importance of Audit
Audit satisfies the owner about the working of the business
operations and the functioning of its various departments.
The purchase or sale of a business is a complex process that
requires careful planning, due diligence, and negotiation. For
business owners, it’s important to showcase the value of
their business, prepare necessary documents, market the
business, and negotiate the terms of the sale if they decide to
do so.
The audit helps in the detection and prevention of errors
and frauds.
The audit helps in maintaining the records and verification
of books of books of accounts.
The independent opinion of the auditor is extracted through
auditing which is extremely essential for the management of
the company.
The audit establishes a moral check on the staff of the
business so that they became aware of not committing any
irregularity. This makes the staff more active and
responsible.
Audit protects the interests of the shareholders in the case of
a joint-stock company by assuring them that their accounts
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are being managed properly and their interests will not
suffer under any circumstances.
Audit creates confidence among stakeholders such as
creditors, debenture holders, and banks, etc.
Audited statements ensure compliance with legal
requirements such as listing requirements of stock exchange
etc.
Auditing reinforces and strengthens Internal control and
provides suggestions necessary in the internal control
system.
Audited financial statements enable easy access to loans
because it provides a crystal clear image to the banks.

What are the basic principles of Auditing?

Basic Principles Governing an Audit
This Auditing and Assurance Standard was the standard on
auditing that was first issued by the Institute. It explains the
basics of auditing that govern the professional
responsibilities of an auditor.
The basic principles of auditing are confidentiality, integrity,
objectivity, independence, skills and competence, work
performed by others, documentation, planning, audit
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evidence, accounting system and internal control, and audit
reporting.

1) A thorough examination of all systems

The assessment of all systems and procedures related to
accounting and financial operations is the primary goal of
any audit. Before beginning the audit of the final statements
of accounts, the auditor must first comprehend the system
and its functionality. It will serve as the foundation for the
entire auditing process.
2) Internal Controls Assessment
The extent of the audit will be determined by the efficacy of
the organization's internal control system. The auditor can
rely on the system if the company's internal controls are in
place and very effective. Then he won't have to go over the
accounting in great detail.
If the internal controls, on the other hand, are ineffective, the
auditor must go over the accounts with a fine-tooth comb.
The auditor must also assess the internal control system,
according to CARO 2003.

3)Arithmetic Precision
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The auditor must also check the accuracy of the books of
accounts regularly. This includes double-checking the books'
arithmetical accuracy and verifying that the entries are
properly posted.

4) Principles of Accounting
The auditor must check that the capital and income
transactions are properly distinguished. All financial
transactions must fall into one of two categories: revenue or
capital. The auditor must also verify the accuracy of both
income and expenditure items.

5) Assets Verification
All of the company's assets must be physically verified by the
auditor. As a result, he must examine all legal documents,
certifications, official statements, and other documents to
determine the ownership of all assets. The auditor must also
make certain that no assets are missing from the balance
sheet.

6) Liabilities Verification
The auditor must also verify the organization's liabilities.
He'll go over all of the documents, letters, and certificates
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once again. He can also seek confirmation from outside
parties if necessary.

7) Attestation
A paper trail is left behind by every financial transaction.
These supporting documentation must be examined by the
auditor to ensure that the transactions are valid and
accurate. Vouching is the term for this. The organisation, for
example, has a 12,000/- electrical expense. The auditor must
then examine the electrical bill to double-check the
transaction.

8) Statutory Obligations
The auditor's job is to ensure that the company's financial
records conform with all laws, rules, and regulations in
effect at the moment. As a result, he must ensure that the
accounts are compliant with the Companies Act 2003, the
Income Tax Act 1961, and other relevant laws.