Meaning of Auditing

The term ‘Audit’ is derived from the Latin word, “Audire”, which means, ‘to hear”. Auditing is a
detailed and critical examination of books of accounts and support documents to verify whether the
financial statements which include Profit and Loss Account and Balance Sheet represent a true and
fair view of the state of affairs of the business concern.

It is the verification of financial position as it is disclosed by the Balance Sheet and the Profit and
Loss Account. It is an examination of accounts to ascertain whether the Balance Sheet and the Profit
and Loss Account give a true and fair view of financial position and Profit or Loss of the business.
For this purpose, all the business transactions and the manner in which these are recorded must be
examined.

Auditing is the intelligent and critical test of accuracy, adequacy and dependability of accounting
data and accounting statements. It is concerned with examination of accounting data to determine
the extent of accuracy of Profit and Loss account and the Balance sheet prepared from such data.

Definition of Audit:
▪ 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 organization.
▪ An audit is an analysis or study of an accounting system that summarizes its finding with an
opinion on the accuracy of the system and its reports. In other words, an audit is an
examination of the processes and procedures put in place by management to ensure that
accounting information is recorded accurately and the financial statements are free from
material misstatements.

Description:

Audit can be done internally by employees or heads of a particular department and externally by an
outside firm or an independent auditor. The idea is to check and verify the accounts by an
independent authority to ensure that all books of accounts are done in a fair manner and there is no
misrepresentation or fraud that is being conducted.

All the public listed firms have to get their accounts audited by an independent auditor before they
declare their results for any quarter.

Who can perform an audit? In India, chartered accountants from ICAI or The Institute of Chartered
Accountants of India can do independent audits of any organization. CPA or Certified Public
Accountant conducts audits in USA.
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There are four main steps in the auditing process. The first one is to define the auditor’s role and the
terms of engagement which is usually in the form of a letter which is duly signed by the client. The
second step is to plan the audit which would include details of deadlines and the departments the
auditor would cover. Is it a single department or whole organization which the auditor would be
covering. The audit could last a day or even a week depending upon the nature of the audit.

The next important step is compiling the information from the audit. When an auditor audits the
accounts or inspects key financial statements of a company, the findings are usually put out in a
report or compiled in a systematic manner.

The last and most important element of an audit is reporting the result. The results are documented
in the auditor’s report.

What is Auditing?
Auditing is the process of assessment and ascertaining of financial, operational, and strategic goals
and processes in organizations to determine whether they are in compliance with the stated
principles in addition to them being in conformity with organizational and more importantly,
regulatory requirements. Indeed, among the objectives of auditing as mentioned above,
conformance with regulatory norms and rules and regulations is indeed one of the drivers behind
auditing and historically and traditionally, has been the main reason why organizations get their
financial statements, operational process, and strategic imperatives audited.

Auditing typically refers to financial statement audits or an objective examination and evaluation of
a company’s financial statements – usually performed by an external third party.

Audits can be performed by internal parties and a government entity, such as the Internal Revenue
Service (IRS).

Characteristics of Auditing
❖ Systematic Process: Auditing is a systematic process of examining the authenticity of the
book of accounts. It follows a logical and scientific series of steps for examining financial
accounts. Auditing is a systematic and scientific process that follows a sequence of
activities, which are logical, structured, and organized.
❖ Independent Examination: It is an independent evaluation done by the body of individuals
who are external to the business. These persons have the required qualifications for
conducting auditing and give their views or opinions without any biases.
❖ Expresses Opinion: The auditor does not only examine the accounts but also give his
opinions regarding them. He expresses whether accounts present a true and fair picture of
the organization and also comply with required laws. The auditor has to express an opinion
as to the reasonable assurance on the financial statements of the entity.

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 ❖ Evidence: Auditing process requires collecting various financial and non-financial
documents for verifying accounts. The auditor evaluates various documents such as
certificates, vouchers, questionnaires etc. for examining purpose. The auditing process
requires collecting the evidence, that is, financial and non-financial data, and examining
thereof.
❖ Established Criteria: In auditing, the whole examination of evidence collected is done in
accordance with the established criteria or principles. These consist of International financial
reporting standards, international accounting standards, industry practices, generally
accepted accounting principles etc.
❖ Three-party relationship: The audit process involves three parties, that is, shareholders,
managers, and auditors.
❖ Subject matter: Auditors give assurance on a specific subject matter. However, the subject
matter may differ considerably, such as – data, systems or processes and behavior.

Conclusion on Audit Features: Audit Features influences the objectives of the audit to refer to the
security of the information and systems, the protection of the personal data, access to some
databases with an informational sensitive character.

Objectives of Auditing

The objective of an audit is to express an opinion on financial statements. The auditor has to verify
the financial statements and books of accounts to certify the truth and fairness of the financial
position and operating results of the business. Therefore, the objectives of audit are categorized as
primary or main objectives and secondary objectives.

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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
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.

Meaning of Books of Accounts

· Books of Accounts mean the financial records maintained by a business concern for a period of
one year. The period of one year can be either calendar year i.e., from 1st January to 31st December
or financial year i.e., from 1st April to 31st March. Usually, business concerns adopt financial year
for accounting all business transactions.

· Books of accounts include the following: ledgers, subsidary books, cash and other account
books either in the written form or through print outs or through electronic storage devices.

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.

Meaning of Financial Statement

Financial Statement means the statements prepared at the end of the year taking into account the
business activities that took place for a year, for example, transactions that takes place in a business
concern from 1st April to 31st March.

Components of Financial Statement

Financial Statement includes the following:
· Trading and Profit and Loss Account, and
· Balance Sheet.

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Elements of Financial Statements include the following:
· Assets: Assets include cash and bank balance, value of closing stock, debtors, bills receivable,
investments, fixed assets, prepaid expenses and accrued income.
· Liabilities: Liabilities include capital, profit and loss balance, creditors, bills payable,
outstanding expenses and income received in advance.
· Revenue: Revenue includes sales, collection from debtors, rent received, dividend, interest
received and other incomes received.
· Expenditure: Expenditure includes purchases, payment to creditors, manufacturing and trade
expenses, office expenses, selling and distribution expenses, interest and dividend paid.

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 preparing the books of
accounts or committing mistakes in the process of keeping accounting records. Errors which take
place in the books of accounts and the duty of an auditor to locate such errors are discussed below:

1. CLERICAL ERROR
Errors that are committed in posting, totalling and balancing of accounts are called as Clerical
Errors. These errors may or may not affect the agreement of the Trial Balance.

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Types of Clerical Errors:

(A) Errors of Omission:

When a transaction is not recorded or partially recorded in the books of account is known as Errors
of Omission. Usually, it arises due to the mistake of clerks. Error of omission can occur due to
complete omission or partial omission.

(1) Error of Complete Omission: When a transaction is totally or completely omitted to be

recorded in the books it is called as “Error of Complete Omission”. It will not affect the agreement
of the Trial Balance and hence it is difficult to detect such errors.
Example – 1: Goods purchased on credit from Mr. X on 10.5.2016 for Rs. 20,500, not recorded in
Purchases Book.
Example – 2: Goods sold for cash to Ram for Rs. 10,000 on 1.7.2016, not recorded in Cash Book.

(2) Errors of Partial Omission: When a transaction is partly recorded, it is called as “Error of
Partial Omission”. Such kind of errors can be detected easily as it will affect the agreement of the
Trial Balance.
Example – 1: Credit purchase from Mr.C for Rs. 45,000 on 10.12.2016, is entered in the Purchases
Book but not posted in Mr.C’s account.
Example – 2: Cash book total of Rs. 1,10,100 in Page 5 is not carried forward to next page.

(B) Errors of Commission:

Errors which are not supposed to be committed or done by carelessness is called as Error of
Commission. Such errors arise in the following ways:

(1) Error of Recording,

(2) Error of Posting,

(3) Error of casting, or Error of Carry-forward.

(1) Error of Recording: The error arises when any transaction is incorrectly recorded in the books
of original entry. This error does not affect the Trial Balance.
Example – 1: Goods purchased from Shyam for Rs. 1000 wrongly recorded in Purchases Day Book
as Rs. 100.
Example – 2: Goods purchased from Ram for Rs. 1,000, instead of entering in Purchase Day Book
wrongly entered in Sales Day Book.

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(2) Error of Posting : The error arises when a transaction is correctly journalised but wrongly
posted in ledger account.
Example – 1: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted to debit side of
Repairs account instead of debit side of Rent account.
Example – 2: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted to credit side of
Rent account instead of debit side of Rent account.

(3) Error of casting, or Error of Carry-forward: The error arises when a mistake is committed in
carrying forward a total of one page on the next page. This error affects the Trial Balace.
Example – 1: Purchases Book is totalled as Rs. 10,000 instead of 1,000.
Example – 2: Total of Purchases Book is carried forward as Rs. 1,000 instead of Rs. 100.

2. ERROR OF DUPLICATION
Errors of duplication arise when an entry in a book of original entry has been made twice and has
also been posted twice. These errors do not affect the agreement of trial balance, hence it can’t
located easily.
Example: Amount paid to Anbu, a creditor on 1.10.2016 for Rs. 75,000 wrongly accounted twice to
Anbu’s account.

3. ERROR OF COMPENSATION (or) COMPENSATING ERRORS

When one error on debit side is compensated by another entry on credit side to the same extent is
called as Compensating Error. They are also called as Off-setting Errors. These errors do not affect
the agreement of trial balance and hence it cannot be located.
Example: A’s account which was to be debited for Rs. 5,000 was credited as Rs. 5,000 and
similarly B’s account which was to be credited for Rs. 5,000 was debited for Rs. 5,000.

4. ERROR OF PRINCIPLE
An error of principle occurs when the generally accepted principles of accounting are not followed
while recording the transactions in the books of account. These errors may be due to lack of
knowledge on accounting principles and concepts. Errors of principle do not affect the trial balance
and hence it is very difficult for an auditor to locate such type of errors.
Example – 1: Repairs to Office Building for Rs. 32,000, instead of debiting to repairs account is
wrongly debited to building account.
Example – 2: Freight charges of Rs. 3,000 paid for a new machinery, instead of debiting to
Machinery account wrongly debited to Freight account.

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Detection and Prevention of Frauds
Fraud is the intentional or wilful misrepresentation of transactions in the books of accounts by the
dishonest employees to deceive somebody. Thus detection and prevention of fraud is of great
importance and constituents an important duty of an auditor. Fraud can be classified as:

1. 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. Cash may be misappropriated in the following
ways:

(1) By omitting to enter cash which has been received.

Example: Cash received on account of cash sales for Rs. 35,000 is not accounted in the debit side of
the cash book.

(2) By accounting less amount on the receipt side of cash book than the actual amount received.
Example: Cash received on account of cash sales for Rs. 35,000 is accounted in the debit side of the
cash book as Rs. 25,000. The difference of Rs. 10,000 may be defrauded by the cashier.

(3) By recording fictitious entries on the payment side of cash book.

Example: Cash book is credited for Rs. 44,000 as amount paid to Mr.X for goods purchased on
credit but actually no amount is paid. Hence, cashier misappropriates Rs. 44,000 of cash as paid to
Mr.X.

(4) By accounting more amount on payments side of cash book than the actual amount paid.
Example: Amount paid to Gopal for Rs. 5,000 is accounted on the credit side of cash book
as Rs. 15,000. The difference of Rs. 10,000 may be defrauded by the cashier.

(5) Teeming and Lading of Fraud which means cash received from one customer is misappropriated
and remittance received from another debtor is posted to the first debtors account.

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2. 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.
Example – 1: Goods purchased amounting to Rs. 58,000 is wrongly accounted in Purchases Book
as Rs. 50,000. Hence, showing less amount of purchases than the actual and misappropriating goods
worth Rs. 8,000.
Example – 2: Goods issued from stores for 1000 units is wrongly accounted in the Ledger accounts
as 3000 units issued. The difference of 2000 units may be misappropriated by the storeskeeper.
Example – 3: Entries in the Purchases Book may be suppressed or inflated to show more or less
profit.

Detection of Misappropriation of goods is a difficult task for an Auditor. Only through efficient
system of inventory control, periodical stock verification, internal check system and adequate
security arrangement the scope for such frauds can be eliminated or minimized.
Auditor has to thoroughly scrutinize the inward and outward registers, invoices, sales memos, audit
notes, etc., to detect the goods-related frauds.

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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Ways of Manipulation of Accounts
Manipulation of accounts may be made in the following ways:
· By showing more or less amount on fixed assets,
· By showing over valuation or under valuation of stock,
· Over or under valuation of liabilities,
· Creation of over or under provision for depreciation,
· Charging capital expenditure as revenue expenditure or vice versa,
· By making more or less provision for bad debts and for outstanding liabilities,
· By showing advance income or expenditure in the current year accounts.

Objectives of Manipulation of Accounts

The objectives of Manipulation may be window dressing or creation of secret reserves.
Window Dressing: In window dressing, accounts are manipulated in such a manner to reveal a
much better and sound financial position of the business than what actually it is, in order to mislead
the outsiders by inflating the profit.
Secret Reserves: Accounts are prepared in such a manner that they disclose a worse financial
position than the real. The real picture of the business is concealed and a distorted one is revealed.

Objectives of audit
The objective of an audit is to express an opinion on financial statement to give the opinion about
the financial statements, the auditor examines the financial statements to satisfy himself about the
truth and fairness of financial position and operating results of the enterprise. There are certain
inherent limitations of audit examination. It would not be possible for auditor to discover all errors
and frauds, in the financial statements due to the limitations of the checking. The objectives of audit
can be categorized into (1) Main objectives (2) secondary objectives and (3) specific objectives.
The main objective of audit is to express expert opinion on financial statements. The secondary
objectives are (1) detection and prevention of errors and (2) detection and prevention of frauds.
1. Main objectives

Expression of expert opinion: An entity prepares balance sheet to portray its financial
position. It also prepares profit and loss account to disclose the operating results of the
period covered in the statement. These financial statements are submitted to the auditor for
his checking and comment. The auditor checks them in a careful manner with utmost
diligence and professional competence. He verifies that the accounts are prepared within the
framework of recognized accounting policies and practices and relevant statutory
requirements if any. He checks whether the facts as represented in the balance sheet and
profit and loss account are true. Based on his checking in these respects, the auditor
expresses his opinion about the quality of the financial statements concerning proper
disclosure of facts in the financial statements and the truth and fairness of the financial
position and operating results of the enterprise, as disclosed in the balance sheet and profit
and loss account respectively.

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2. Secondary objectives

i) Detection and prevention of errors: Errors are generally innocent but sometimes errors
which might appear, at first sight, as innocent are ultimately found to be due to
fraudulent manipulation and therefore an auditor must pay particular attention to every
error, however, innocent it may appear to be at first sight. The following are various
types of errors:

1. Clerical errors: These errors are committed in posting, totaling and balancing. Such errors may
again be subdivided into-

(a) Errors of omission: The error of omission is one where a transaction has not been recorded in
the books of account either wholly or partially. In the former case it will not be easy to detect the
error and it will not affect the trial balance. But sometimes it is apparent from the balance of an
account that an entry has been omitted. This type of error can be detected by careful observation.
But there are many cases where it may not be possible to detect the omission.

(b) Errors of commission: When a transaction has been recorded but has been wrongly entered in
the books of original entry or posted in the ledger, error of commission is said to have been made.
Such an error may be intentional or un-intentional. Other errors of commission are wrong castings,
calculations, postings, extensions, carry forwards, etc. Some of such errors will be detected by the
non-agreement of the trial balance. On the other hand, if a mistake has been committed in the
invoice for the sale of goods. The error will not be detected, as the mistake will appear, both in the
original books as well as in the ledger.

2. Errors of principle: Such errors arise when the entries are not recorded according to the
fundamental principles of accountancy. Such errors may be committed either intentionally or
unintentionally. If they are committed intentionally, the object is to falsify and manipulate the
accounts either to show more profits or less profit than they actually are. Such errors ultimately
affect the profit and loss account and the balance sheet. Therefore, it is very important for an auditor
to pay particular attention towards this type of error. Such an error is not disclosed by the trial
balance or by routine checking. It can be detected only by a searching inquiry and independent
checking.

3. Compensating errors or off-setting errors: A compensating or off-setting error is one which is

counter-balanced by any other error or errors. These errors are most dangerous and are difficult to
guard again. This type of error will not be detected by the trial balance. This error not affects the
trial balance and not be detected easily. This error may or may not affect the profit and loss account.

4. Errors of duplication: Such errors arise when an entry in a book of original entry has been made
twice and has also been posted twice.

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Location of errors
The question is how to locate an error if the trial balance does not agree and the auditor is
called upon to locate the error although it is not his duty to do so. If the following steps are taken,
there will be no difficulty to find out an error:

1. Check the totals of the trial balance.

2. Compare the names of the accounts in the ledger with the names of the accounts as have been
recorded in the trial balance. It is possible that balance of some accounts might not have been
transferred to the trial balance especially in the case of the balance of cash book, purchases and
sales book, bills books, etc.

3. Total the lists of debtors and creditors and compare them with the trial balance.

4. If the books are maintained on the self-balancing system; see that the total of different
accounts agrees with the total of these accounts with the balance of accounts as recorded in the
trial balance.

5. Compare the items of the trial balance with the items of the trial balance of the previous year
to see if any item has been omitted.

6. Whatever be the difference in the trial balance, half it and see if there is any item of this
value. This is done to avoid the putting of the debit balance on the credit side of the trial balance
or vice versa.

7. It is possible that the totals of some subsidiary books might not have been transferred to the
trial balance. Re-check the totals of these books.

ii) Detection and prevention of fraud

Fraud means false representation or entry made intentionally or without belief in its truth with view
to defraud somebody.
Detection of fraud is considered one of the important duties of an auditor. As a matter of fact,
originally audit was conducted mainly with a view to detect fraud whenever it was suspected. The
system of internal check aims at the prevention of fraud. If an auditor finds that the internal check
system is defective and will not prevent the commission of fraud, he should suggest a better system.

The following are the chief ways in which fraud may be prepared:

1. Embezzlement of cash: There is a greater possibility of defalcation of money in a big

business house than in the case of a small proprietary business where the proprietor has a direct
control over the receipts and payments of cash. In a big business house, the system of receipts and
payment of cash should be such that the work of one clerk is automatically checked by another
clerk. Such a system is known in auditing as “internal check” system which will be dealt with in
detail later on. It is easier to misappropriate cash and , therefore, the auditor will do well to pay
particular attention towards cash transactions.

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 Cash may be misappropriated by

a) Omitting to entry any cash which has been received; or

b) Entering less amount than what has been actually received; or
c) Making fictitious entries on the payment side of the cash book; or
d) Entering more amounts on the payment side of the cash book than what has been actually
paid.
In order to discover fraud under (a) and (b) above, the auditor should check the debit side of the
cash book with rough cash book, salesman’s report, counterfoils of the receipt books, agents
returns and other original records while the fraud under (c) and (d) can be discovered by
reference to the vouchers, wage sheets, salary book, invoice, etc.

2. Misappropriation of goods: Again, fraud may be in respect of goods, i.e, misappropriation of

goods. This type of fraud is very difficult to detect especially when the goods are less bulky and
are of higher value. Proper methods of keeping accounts in regard to purchases and sales, stock
taking, periodical checking of stocks, comparing the percentage of gross profit to sales of two
periods, necessity for collusion will help to avoid misappropriation of goods.

3. Fraudulent manipulation of accounts: This type of fraud is more difficult to discover as it is

usually committed by directors or managers or other responsible officials with object of

a) Showing more profits than what actually they are (i) so that if they get commission on
profits, they may get more commission; or (ii) their service may be retained by showing to
the shareholders that because of their efficiency they have shown more profits and thus
maintain the confidence of the shareholders or (iii) if they hold shares, they may sell them at
high price by declaring higher dividends; or(iv) to obtain further credit by showing the
financial position of the business better than what actually it is; or (v) to attract more
subscribers for the sale of the shares of the company, etc. or
b) Showing less profits than what actually they are (i) in order to purchase shares in the market
at a lower price; or (ii) to reduce or avoid the payment of income tax; or (iii) to give a
wrong impression about the success of the business to competitors, etc.
Falsification of accounts may be resorted to

a) By not providing any depreciation or providing less depreciation or providing more

depreciation; or
b) By under-valuation or over-calculation of assets and liabilities; or
c) By showing fictitious sales or purchases or returns in returns in order to show more profits or
loss profits whatever the case may be; or
d) By the utilization of secret reserves during a period when the concern has made less or no
profit, without disclosing that fact to the shareholders; or
e) By sharing revenue expenditure to capital account, or vice versa; or
f) By crediting the revenue account with the income which will be received next year or not
crediting the profit and loss account with the income which has accured but which has not
been received.
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 Such fraud are difficult to detect as they are committed by the people at the helm of affairs who
are presumed to be trustworthy, honest and responsible and therefore, no suspicion falls on
them. They are very cleverly made and, as such, the auditor should be very careful in detecting
such frauds. He should carry out the routine checking and vouching most carefully and make
searching, tactful and intelligent inquiries.

Position of auditor in regard to errors and frauds affecting financial statements

The position of auditor in regard to errors and frauds as follows

1. It is the responsibility of management to prevent errors and frauds.

2. The auditor is not liable for any subsequent discovery of misstatement of financial
information resulting from errors and frauds, if he carried out his duty according to the
generally accepted auditing practices.
3. If the discovers any errors or frauds during his audit, he must see that the errors are
corrected and the effect of fraud on financial information of the financial statements is
properly reflected. He must also bring to the notice of the concerned, the occurrence of
fraud at the earliest time.
4. The auditor need not sniff for errors and frauds. But if the smells something about it, he
should not leave them carelessly. He must enlarge his extent of checking and modify
checking procedures to suit the occasion.

3. Specific objectives

We have emphasized that the term audit should not be taken to imply financial audit alone. The
audit may encompass such other areas like review of operations, performance management
policy, cost records and so on. Accordingly, there will be specific objective in respect of
each type of such specific audits. For example, in operational audit, the aim of audit is to
evaluate the existing operations of the entity in order to give expert advice to improve their
efficiency. The cost audit is to check the cost records of the entity in order to make a report
on the proper ascertainment of cost of production of goods or services. Depending upon the
nature of specific audit engagement and terms of engagement, there may be different
objective in respect of each specific audit.

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Advantages of Auditing

Auditing provides benefits to the business, owners and to the outsiders in the following ways:

Benefits to the Business I.

1. Exhibits a True and Fair View of the Financial Statements: Audited accounts enables to
reveal that the Profit and Loss Account and Balance Sheet of the business concern shows a true and
fair view of the state of affairs of the business concern.

2. Detection and Prevention of Errors and Frauds: When books of accounts are audited, errors
and frauds can be detected and necessary action can be taken to prevent it.

3. Expert Advice: Auditors who possess professional outlook provide expert advice to the company
on various aspects such as tax matters, internal check, internal control and submission of various
reports to the statutory authorities, preparation of project reports etc.

4. Check on Employees: When accounts are audited it creates a moral pressure on the employees
to be very cautious and regular in their work, as a result the chances of errors and frauds will be
minimized.

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5. Helps in Resolving Disputes: Audited accounts provides a basis for settling disputes and
conflicts among the partners in the case of partnership firm and to settle disputes with regard to
bonus, wages etc. in the case of companies.

6. Helps in Determination of Claims: An insurance company settles claims to the companies for
the loss due to damage of business property only on the basis of audited accounts.

7. Helps in Obtaining Loan: Loans can be easily borrowed from banks and other financial
institutions on the basis of audited accounts, as the audited accounts authenticate the truthfulness of
the books of accounts and financial statements.

8. Helps in Decision-Making: Audited accounts are relied upon for the purpose of decision-
making by the management.

9. Helps to Determine Future Trends: By comparing the audited accounts with past years, the
trend of financial activities can be determined. On the basis of review, weaknesses are found out
and policies for the future period can be determined.

10. Increase in Goodwill: Audit of business on a regular basis increases confidence to the
interested parties and general public, as a result goodwill of the business can be enhanced.

Benefits to the Owners II.

1. Benefits to the Sole Proprietors: Audited accounts provide assurance to the proprietor about the
accuracy of accounts maintained by his employees and also enables to know the financial
performance of the business. It further enables the proprietor to obtain loan and in computation of
income tax liability.

2. Benefit to the Partners: In case of partnership business, audited accounts help the partners in
settlement of accounts among the partners at the time of admission, retirement or in the case of
death of a partner.

3. Benefit to the Shareholders: Share holders are the owners of the company. With the help of
audited accounts, they get a real picture of the financial position of the company and that directors
and managing directors have not taken any undue advantage of their position.

4. Benefit to Trust, Co-operative Societies: Audit of accounts of co-operative societies and Trusts
provide evidence that the interest of the beneficiaries and members are properly protected.

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III. Benefits to the Third Parties

1. Bank and Financial Institutions: Banks and other financial institutions grant loan to the
business concern on the basis of audited financial statements.

2. Creditors: Creditors who supply goods to the business may assess the solvency and liquidity
position of the business on the basis of audited accounts.

3. Insurance Companies: For settlement of insurance claims, insurance companies can rely on
audited accounts.

4. Statutory Authorities: Statutory authorities like income tax, sales tax, wealth tax etc. accept
audited statements for determining the liability which arises due to income, sales and wealth.

5. Prospective Investors: Prospective investors who wish to invest money in shares and debentures
of a company rely on audited accounts.

Advantages of Auditing

Auditing is a process to detect the accuracy of the cost accounts books and other cost records.
Auditing has become an essential task in business organizations. Every type of organization like a
business, social, industries, and trading organization makes audits of books of accounts. At present,
a business owner and its management are separate from each other. So, to detect and prevent fraud,
auditing has become essential. Not only for business organizations but also the government, the
investors, creditors, shareholders, it is an important process. All of them are rely on audited
accounts for important decision-making. So there are many advantages of auditing. The advantages
of auditing are elucidated below-
1. Detecting and preventing errors and frauds: One of the main duties of an auditor is to
detect the fraud and errors of the cost accounts books and prevent them. Besides auditing
also take care to avoid such frauds and errors. Though all the business organization is not
bound to do audit the organizations which do audit evaluates each financial transaction of
business for checking if there is any mistake or not. In this way, auditing reduces the chances
of errors and frauds and the overall risks associated with the frauds.
2. Maintaining account regularly: Maintenance of all accounts regularly is another major
advantage provided by the auditing process. Regular auditing gives pressure to maintain the
accounts properly. So if the accounts are not maintaining regularly then it raises questions.
3. Auditing helps to get compensation: If there is any loss in the property or business, the
insurance company provides compensation based on an audited statement of valuation made
by the auditor. So, it helps to get compensation.
4. Helpful in obtaining a loan: Auditing reports help to obtain loans from financial
institutions. Banks or other financial institutions provide loans to organizations based on
auditing reports. Auditing reports show the true financial position of the business
organizations which helps them to take decisions related to loans.

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 5. Facilitate the sale of the business: Auditing helps in the right valuation of the assets of the
business. Based on this valuation of assets and liabilities, the business can be sold by the
businessman. It also helps to determine the business price.
6. Keeps morale check: Auditing closely monitors the financial transactions, deals, cost
records, etc. which prevent the staff to commit any error or frauds purposely. All the staffs
do their job roles honestly with the fear that all the frauds or errors will be identified easily
by auditing. So this is another advantage of auditing.
7. Helps to assess Tax: Another advantage of auditing is it helps to assess the tax. The tax
authorities assess taxes based on profit calculated by the auditor. The tax authorities are
depended on the auditing reports to calculate the sales tax.
8. Facilitates in comparing: Auditing provides instructions to the accountants to compare the
books of accounts of the current year with the accounting of the previous year. This
comparison helps to detect fraud or errors or any mistakes that need to be solved.
9. Assists in decision-making: Auditing provides valuable information to managers for
important decision-making. Auditing is done by various experts of account and finance who
have detailed knowledge of subjects, so they provide advice and resolves all problems.
10. Stakeholder’s confidence: Auditing statements help to gain the confidence of stakeholders.
Because all the stakeholders ensure that auditing will provide the accurate results of the
financial statements and cost accounts books. All stakeholders such as creditors,
shareholders, banks, investors, etc. have more confidence in audited financial accounts of the
company.
11. Presenting proof: If any case is filed against the auditor regarding negligence, the auditor
can present an audited report as a proof to settle such a case. So, it helps to present proof to
settle such cases.
12. Providing information about profit or loss: Every business organization calculated its
profit or loss after a certain period. With the help of auditing, the organization can get to
know the profit or loss of the business through audited statements or reports.
13. Increasing goodwill: With the help of auditing, business organizations show their exact
profitability and financial position to their audience. So that the audiences are ensured that
the statements are correct which increases their faith in that organization. As a result, it helps
to increase the goodwill of the organizations.
14. Amalgamating the company: Sometimes, the same nature of the organization may be
amalgamated. Auditing makes the valuation of assets and liabilities which helps to
amalgamate the company. The purchaser of the company can accept such business
organization based on valuation made by the auditor.
15. Helpful in Future Planning: Auditing all the accounts and statements show correct and
accurate results as it reduces the chances of frauds and errors. As a result, these accurate and
correct accounts and statements help the organization in future planning.
16. Increasing operational efficiency: While doing auditing the auditor provides valuable
suggestions and guidelines which helps to increase the efficiency of the business operations.

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Disadvantages of Auditing
Auditing refers to the periodic examination of accounts, documents, and vouchers in a corporate
world. It is a detail checking of books of record in profit and non-profit organization. Audit has
many advantages as well as disadvantages. The major disadvantages are listed in below-
1. Extra cost: Testing involves the extra cost to the organization which is considered a
burden. It involves the disruptions of multiple cases. The auditor has to concentrate more
even though there are disruptions. Before the audit begins the auditor must get the attention
of all the staff members of the organization.
2. Impossibility of checking all transactions: Another major drawback of auditing is that it
is not always possible to check each financial transaction of organizations. Some
organizations are too big and have a large number of transaction, where evaluating all of
them become quite an impossible task.
3. Harassment of staves: Since the employees cannot express their own in terms of auditing,
these changes are calibrated and the employees will feel harassed due to the changes that
are caused. Even if they try to express their knowledge of new ideas, the organization may
not entertain the employees in these types of situations.
4. Unsuitable changes: The rules and regulations of business may vary from time to time. It
remains unstable when the program begins. The company’s policies may not change
periodically whereas the rules and regulations may.
5. Chances of fraud: Since the information delivered after the audit procedure is credential
then there becomes more chance of getting the situations where an individual will be forced
to commit the crime. It harasses the auditors to commit crimes after the audit gets over.
6. Unsuitable for small concern: Auditing may not be fruitful for small organizations where
there are limited transactions. Their accounts can be evaluated without an audit program.
7. Problems in remedial measures: Here the problem is created in remedial measures that
are enhanced by the detailed interface of the data of remedial measures. These remedial
measures are not included in the audit program.
8. Insufficient considerate: The education curve will be contented about the business and
insufficient relaxed networks and also offers systematic internal recruitment. These may
gravely obstruct the expense of all the employees.
9. Not guaranteed: Auditing cannot provide any data that are analyzed and prepared. It has
financial accounts for the data that are provided. It is disclosed based on the information
and explanations that are agreed on by the clients.
10. Rely on experts: Auditor is dependent on experts of various fields for conducting auditing
process. For acquiring true information regarding the valuation of fixed assets and
contingent liabilities, he needs to approach valuers, engineers and lawyers.

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Limitations of Auditing

The limitations or disadvantages of auditing are as follows:

1. Gives Opinion: After the completion of audit, an auditor gives only the opinion regarding true
and fair view of the books of accounts and financial position of the business. Therefore, an auditor
is not an insurer; he does not give guarantee regarding financial reflections of the business.

2. Chances of Undisclosed Errors and Frauds: An Auditor has to depend on many financial
data and statements supplied by the management which may be wrong or misleading. Therefore,
there may be some undisclosed errors and frauds in the books of accounts.

3. Lack of Proper Care and Skill: Often it is seen that an Auditor does not apply proper care and
skill to verify the books of accounts and take it as a routine matter. As a result, the books of
accounts do not reflect true and fair view of the financial position of the business.

4. No Evaluation of Managerial Efficiency: An Auditor is not an advisor, therefore, he cannot

give his opinion regarding managerial efficiency because every concern has its own policy,
procedures and practices.

5. Not Preventive: Audit is a post-mortem examination. The work of audit starts after the
completion of transactions recorded in the books of accounts. Therefore, audited accounts can
prevent the future activities but not the past.

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Book-Keeping, Accountancy and Auditing

Book-Keeping is the art of recording the business transactions in the books of original entry. It
involves the process of recording all the transactions, journalising, posting to the relevant ledger
accounts and balancing.

Accountancy involves the process of recording, classifying, summarising and interpreting all the
financial transactions that take place during a particular period in a concern. It is the work of an
accountant in maintaining financial books, checking of numerical accuracy of the books of
accounts, preparation of trial balance, trading account, profit and loss account and balance sheet.
Hence, it is commonly said “Accountancy begins where Book-keeping ends”.

Auditing involves a detailed and critical examination and verification of accounts by an

independent and qualified person to ascertain the true and fair view of the financial position of the
concern. For example after verification the auditor has to submit a report to the management that the
financial statement represents a true and fair view of the statement of affairs of the business. Hence,
it is said “Auditing begins where Accountancy ends”.

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 Difference between Accounting and Auditing

Criterion Accounting Auditing

Accounting is keeping records of the Auditing is critical examination of
Definition financial transactions and preparing financial the financial statements to give an
statements opinion on their fairness
Periodic process and carried out
Continuous with daily recording of financial
Timing after the preparation of final
transactions
accounts
Beginning Starts where book-keeping ends Starts where accounting ends.
Concentrates on the current financial Concentrates on the past financial
Period
transactions and activities statements
All transactions, records and statements Final financial statements and
Coverage
having financial implications records.
Level of Very detailed and captures all details related Uses financial statements and
Detail to financial transactions and records records on sample basis.

Type of Checking details related with all financial Carried out through test checking or
Checking records sample checking.
To accurately record and present all financial To verify the accuracy of the
Focus
transactions and statements. financial statements
To determine the financial position, To add credibility to the financial
Objective
profitability and performance. statements
Legal Status Governed by Accounting Standards Governed by Standards on Auditing

Performed by Accountants Auditors.

Carried out by an external person or
Status Carried out by an internal employee
independent agency
Appointment By the management By the shareholders
Some specific qualification is
Qualification Specific qualification is not compulsory
compulsory
Remuneration
Salary Auditing fee
Type

Remuneration
By the management By the shareholders
Fixation

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Scope
by the management by the relevant laws
Determination
Necessary for all organizations in the day-to- Not necessary in the day-to-day
Necessity
day or routine operations operations
Financial statements e.g. Income Statement
Deliverables or P/L, Balance Sheet, Cash Flow Statement, Audit Report
etc.
Report
To the management To the shareholders
Submission
Accountants may make suggestions for the
Auditor usually does not make
Guidance improvement of accounting and related
suggestions
activities
Generally ends with the preparation of the Liability after preparation and
Liability
accounts submission of the audit report
Shareholders’
Accountant does not attend Auditor may attend
Meetings

Professional Accountant is not usually prosecuted for Auditor can be prosecuted for
Misconduct professional misconduct professional misconduct

Removal By the management By the shareholders

External Audit Vs Internal Audit

Basis for comparison External Audit Internal Audit

Meaning External Audit is an audit Internal Audit refers to an
function performed by the ongoing audit function performed
independent body which is within an organization by a
not a part of the organization.
separate internal auditing
department.
Objective To analyze and verify the To review the routine activities
financial statement of the and provide suggestion for the
company. improvement.

Conducted by Third party Employees

Auditor is appointed by Members Management
Reported to Shareholders and members Board of Directors, and members
outside of the company. of management.
Users of report Stakeholders Management

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Opinion Opinion is provided on the Opinion is to provide on the
truthfulness and fairness of effectiveness on the operational
the financial statement of the activities of the organization.
company
Scope Decided by the statute Decided by the management of
the entity
Obligation Yes, according to Companies No, it is voluntary
Act, 1994.
Period Once in a year Continuous Process
Checks Accuracy and validity of Operational efficiency
financial statement

Relationship of Auditing with other Disciplines

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Disciplines Relationship

1. Accounting: Auditor has to review and evaluate the financial statements by providing an opinion.
Therefore, he should have thorough knowledge about accounting concepts and principles.

2. Mathematics and Statistics: Auditor deals with financial data and the amount that appears in
financial statements. Hence, it requires knowledge of calculation procedure involved in computing
various items, for example., depreciation, provision for bad debts, tax etc.
Auditor is also expected to have knowledge of statistical sampling for making meaningful
conclusion.

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3. Economics: Auditor requires knowledge regarding business and economic environment affecting
the client. Thus, economic concepts are required to perform auditing in a meaningful way.

4. Law: Audit of a business concern has to be undertaken with respect to conformity with law. Thus,
an auditor should have sound knowledge of laws affecting the client.

5. Computer Information System: In recent times, clients maintain their accounts in computer
information system. Thus, working knowledge on computer is required for auditors to conduct audit
in an effective way.

6. Financial Management: Auditor to understand and evaluate the financial statements in a better
way should have knowledge of financial techniques.

7. Behavioural Science: Auditor has to deal with many personnel to conduct the audit efficiently.
Hence, he should have the tact of getting along with people.

Investigation

MEANING

Investigation is a detailed examination of accounts and enquiry into the state of affairs of the
business or for a specific purpose. It involves the process of analysing, collecting and presenting
facts in a manner which enables the parties to know the essential facts regarding the matter under
enquiry. Investigation covers more than one financial period and the programme depends on each
type of investigation.

Example: Investigation is conducted in deduction of suspected fraud and theft, to identify causes for
continuous loss and low productivity and to evaluate the credit worthiness of business.

DEFINITION

· According to Spicer and Pegler, “The term investigation implies an examination of records for
some special purpose”.

· Taylor and Perry, “Investigation involves and enquriy into the fact beyond the books of
accounts into the technical, financial and economic position of the organisation”.

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Objectives of Investigation
The following are the objectives of Investigation:
· To ascertain the financial position and the earning capacity of the concern.
· To investigate when fraud is suspected by the proprietor.
· To investigate on behalf of Income Tax authorities for tax liability.
· To investigate for the purpose of lending money to a concern.
· To investigate for claims under insurance policy covering losses.

Differences between Auditing and Investigation

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Auditing Vs Investigation

1 Meaning
Auditing: Auditing is concerned with examining the accounts and reporting on financial
statements.
Investigation: Investigation is the examination of accounts of a business for special purpose.

2 Objective
Auditing: The objective of Auditing is to express an opinion on the financial statements of the
concern.
Investigation: Investigation is done for some specific purpose.

3 Compulsion
Auditing: It is compulsory in case of Joint stock companies.
Investigation: It is not compulsory

4 Period
Auditing: Auditing is done at the end of the financial year.
Investigation: Investigation can be done over a period of years.

5 Conduct
Auditing: Audit is conducted on behalf of the owners of the company
Investigation: Investigation is conducted on behalf of outsiders and owners at some times.

6 Scope
Auditing: It is has a narrow scope
Investigation: It has a wide scope

7 Appointment
Auditing: An auditor is appointed by the shareholders or directors or by Government.
Investigation: An investigator is appointed by the outsider.

8 Report
Auditing: Auditor has to give a report about the true and fair view of the final accounts.
Investigation: The Investigator gives a report on the basis of conclusion and enquiries. Expression
of the opinion is not necessary.

9 Qualification
Auditing: Only Chartered Accountants are qualified to conduct audit.
Investigation: An investigation need not be conducted by a Chartered Accountant.

10 Process of Work
Auditing: Investigated accounts are not audited in ordinary course.
Investigation: Generally audited books of accounts are taken up for investigation.

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Definition of an Auditor

The person who checks the accuracy of the books of accounts and expresses an opinion on the
financial statements of the business concern is called as an Auditor. The person who is a Chartered
Accountant holding Certificate of Practice from the Institute of Chartered Accountants of India is
referred to as an Auditor. Auditors enjoy a distinctive professional status in the society because of
specialized functions of auditing.
An auditor is responsible for judging the validity and reliability of a company by evaluating
evidence and financial reports with established standards.
The person doing the audit and who is ultimately responsible for the results of the audit is called an
auditor.
An auditor multiple his hand by employing the assistance for doing the work, but still, he alone is
responsible for what he does and others do for him.
So, an auditor is a professional that accumulates and evaluates evidence to report on the degree a
company’s assertions that they comply with an established set of procedures or standards (criteria).

Functions of an Auditor
The following are the functions or basic aspects to be covered by the auditor in the course of audit.
They are:

1. Examination: Auditor should examine the accounting system to ensure about their
appropriateness.
2. Books: Check the books of accounts to ensure the arithmetical accuracy.
3. Evidence: The auditor should examine documentary evidence to support the entries in the books
of accounts.
4. Full Inclusion: Check whether all entries in the books of accounting have been taking while
preparing financial statements.
5. Properness: Examine whether information contained in financial statements is proper and it does
not contain any fraudulent entry.
6. Verification of Assets and Liabilities: Check the existence, valuation and disclosure of all assets
and liabilities in financial statements.
7. Statutory Compliance: Verify the compliance of financial statements with the relevant statutory
authorities.

8. Disclosure: Examine whether the information in financial statements is disclosed properly as per
accounting principles.
9. Truth and Fairness: Check whether financial statements represent a true and fair view of
profit or loss and of assets and liabilities of the business concern.

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Qualities and Qualifications of an Auditor

An efficient auditor must possess certain general qualities besides statutory qualification, so that he
can carry out his work efficiently and smoothly. The qualities of an auditor as classified below.
1. Professional Qualification i.e., Statutory Qualification.
2. Professional Qualities i.e., Personal Qualification.
3. Personal Qualities i.e., General Qualities.

They are detailed below:

Professional Qualification | Statutory Qualification of an Auditor
In the case of sole trading concern and partnership the law has not prescribed any qualification for
an auditor. However in the case of auditors of joint stock companies, the auditor must be a
Chartered Accountant within the meaning of Chartered Accountant Act, 1949.
He must pass Chartered Accountant (C.A) examination conducted by the Institute of Chartered
Accountants of India (ICAI). To be entitled to practice, a chartered accountant should obtain a
certificate of practice from the council of the ICAI on payment of a prescribed annual fee.
There are two categories of members of the ICAI such as – Associates, and Fellows.
A person is regarded as an Associate Member of the Institute when his name is entered in the
Members Register maintained by the Institute. This entitles him to use the letters A.C.A. after his
name.
An associate in continuous practice in India for at least five years under any other associate who has
been a member of the Institute for five years and possesses such qualifications as prescribed by the
Council of the Institute can be enrolled as a Fellow of the Institute and is entitled to use the letters
F.C.A. after his name.

Professional Qualities | Personal Qualification of an Auditor

The professional qualities required for auditors are many and are of varied in nature. They are
required for the successful performance of audit work. They are as follows:
1. The auditor must have a complete and thorough knowledge of the principles, theory and
practice of accountancy. The auditor must be familiar with the different system of accounting and
their aspects. He must be well versed with the all branches of accounting. He should be aware of the
latest developments in the field of accounting.
2. He should have a thorough knowledge in various legislation regulating business such as
Companies Act, the Indian Partnership Act, Banking and Insurance Act, Sale of Goods Act,
Foreign Exchange Management Act, the Indian Contract Act, etc.
3. The auditor should have a thorough knowledge of the techniques of auditing. He should be fully
aware of new changes and developments in the principles and practice of auditing.
4. The auditor must be familiar with the computer accounting and other automatic machine
devices used in the office.
5. In addition to the knowledge of commercial laws, an auditor should have a thorough knowledge
of the various provisions relating to income tax wealth tax, VAT, gift tax, etc.
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6. The auditor should be familiar with the principles of economics and economic laws because a
business has to work, within some specific economic laws and social environment and its influence
is visible into business.
7. The auditor should have knowledge in statistics and mathematics, which will help him to deal
with complicated problems.
8. He must study important judgements in audit cases, which will help him to define the duties,
responsibilities, and liabilities of an auditor.
9. An auditor should have a good knowledge in business organization and financial
administration, and industrial management.
10. The auditor should have knowledge on the technical details of business under audit.

Personal Qualities | General Qualities of an Auditor

Individual qualities ate the essential monitors of a successful auditor. The personal qualities that are
needed for an auditor are as follows:
1. Honesty: An auditor must be honest in his work if he has to carry out his duties successfully. He
has to maintain a good moral standard.
2. Tactful: The auditor should be tactful in dealing with the client’s staff.
3. Ability to Work Hard: The auditor must have a painstaking attitude and willingness to work
hard.
4. Impartial: The auditor should not be influenced by any bias in discharging his duties. He should
be impartial.
5. Cautious and Vigilant: An auditor must be vigilant in his work. He should always proceed with
his eyes open and be alert.
6. Methodical: He must perform his duties methodically, and should be thorough, and complete in
his work.
7. Ability to Trace out Facts and Figures: Auditor should posses a realistic attitude towards his
work. He should be able to trace out facts and figures.
8. Always Inquisitive: The auditor should not be suspicious. He should always be inquisitive. He
should not adopt an attitude of suspicion.
9. Courage: The auditor should be bold enough to discharge his duties. He should not certify which
he doubts to be genuine.
10. Ability to Maintain Secrets: The auditor should have the ability to maintain secrets and should
not disclose the secrets of his client to anybody.
11. Ability to Communicate: An auditor must have the ability to prepare audit report correctly and
forcefully, precisely, concisely, and clearly.
12. Common Sense: An auditor should posses a good common sense. The auditor should have a
full share of the most valuable commodity – common sense. But common sense is normally very
much uncommon in man.
Over and above the statutory and professional qualification, the auditor has to observe certain code
of conduct and professional ethics. Responsibility and attitude of professional auditor can gain
public confidence and trust.
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 Further, in the digital age, majority of the business transactions are done on line. Accounts are
maintained on computer. The Electronic Data Processing (EDP) systems are in operation for
maintenance of accounts. No primary data are used for recording transaction. Thus the auditor has
to acquire the knowledge of EDP System. He himself must be competent to face the challenges of
new digital business world of E-Governance and E-Commerce.

Qualities of an Auditor

An efficient auditor must have certain qualities besides Professional qualification. He needs to
carry out the audit efficiently and smoothly.

1. An auditor needs to be well versed in the fundamental principles and theory of all branches of
accounting, e.g., general accounting, cost accounts, income-tax, etc. A person can’t audit the
accounts unless he knows how to prepare them. He should be aware of the latest development of the
technique of accounting so that he may modify his procedure of work.
2. He should not pass a transaction unless he knows that it is correct. This is possible only when one
knows thoroughly well the principles of accounting.
3. He should be able to grasp quickly the technical details of the business whose accounts he is
auditing. If possible, he should pay a visit to the works of his client, before he commences his work.
4. He should be prepared to seek elucidation on technical questions rather than show a false pride or
fear of displaying his ignorance.
5. He should be quite familiar with the company and mercantile laws and must be complete master of
the principles of auditing.
6. He must be tactful and scrupulously honest. He must not certify what he does not believe to be true,
and he must take reasonable care and skill before he believes what he certifies is true.
7. He must not be influenced, directly or indirectly, by others in the discharge of his duties.
8. Sometimes he is put in a very awkward position when his duty to his client is opposed to his
interests, in which case he must have the courage to carry out his duty faithfully and honestly, even
if such a step harms him. In the long run, this policy will be of immense value to him. He will
acquire a reputation for his honesty, which will bring more business to him.
9. He must be prepared to resign, rather than sign a balance sheet, which he knows does not exhibit a
true and fair view of the state of affairs of the concern and thus give a false report.
10. He should not disclose the secrets of his clients.
11. He must have the tact to put intelligent questions to extract full information.
12. He must not adopt an attitude of suspicion.
13. He must be prepared to hear arguments and must be reasonable.
14. He must be vigilant, cautious, methodical and accurate.
15. He should have the ability to write the report, correctly, concisely and forcefully.
16. He should have an understanding of the general principles of economics.
17. He should have thorough training in a business organization, management, and finance.
18. Last but not least, he should have “Common Sense”.
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Responsibilities of an Auditor

Following are the responsibilities of an auditor:

• Examination: Cross-examination of the company’s accounting system and internal control

system is necessary to safeguard the record’s appropriateness.
• Checking of Books: The books of accounts should be checked thoroughly by an auditor to
ensure its arithmetical accuracy.
• Documentation: Proper documentation of the records should be maintained by the auditor
after investigating documentary pieces of evidence. It helps him in gathering the appropriate
information about the transactions of the business.
• Full Incorporation: An auditor should properly analyze whether all entries have been
recorded in the books of accounts or not while preparing the financial statement.
• Conventionality: Examining that the books of accounts or financial statement should not
contain any fraudulent or faulty entry.
• Authentication of Assets and Liabilities: Verification of assets and liabilities for checking
their existence, valuation, completeness and disclosure in financial statements.
• Statutory Consent: In case of audit of general insurance companies and banks, the auditor
secures the compliance of financial statements with the compatible decree.
• Disclosure: Auditor examines whether the data in the financial statement acknowledged
adequately or not. He discloses his point of view by way of the audit report after the
completion of the audit process.
• Facts and Integrity: Auditor ensures financial statement as a whole and serves an accurate
and fair view of profit/loss, assets and liabilities of a company in the appropriate forms.

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Auditing in a Computer Based Environment

Introduction
Information Technology (IT) is integral to modern accounting and management information
systems. It is, therefore, essential that auditors should be aware of the impact of IT on the audit of a
client’s financial statements. Information Technology auditing (IT auditing) began as Electronic
Data Process (EDP) auditing and developed largely as a result of the rise in technology in
accounting systems. The last few years have been an exciting time in the world of IT, auditing as a
result of the accounting scandals and increased regulations. Regardless of the computer systems
used, the audit objectives and approach will remain largely unchanged from that if the audit was
being carried out in a non-computer environment.

Audit Approach in Computeriszed Environment

1. Auditing Around the Computer: It is the type of auditing done in a traditional method. The
auditor summarises the input data and ignores the computer’s processing but ensures the correctness
of the output data generated by the computer, this approach is generally referred to as “auditing
around the computer”. This methodology was primarily focused on ensuring that source
documentation was correctly processed and this was verified by checking the output documentation
to the source documentation
2. Auditing Through the Computer: Due to the “real time” computer environments, there may
only be a limited amount of source documentation or paperwork hence the auditor may employ an
approach known as “auditing through the computer”. In this approach, the reliability and accuracy
of the results are analysed through the computer. This involves the auditor to perform tests on the
information technology controls to evaluate their effectiveness like Compliance test, Test Packs,
Reprocessing.
3. Auditing with the Computer: The utilization of computer by the auditor for some audit work
and he uses some general software for the purpose of calculating depreciation, printing letters, and
duplicate checking and files comparison.
The computer is not used for all the audit work and it is done manually.

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Audit Process for Computerized Accounting System

The audit process for a computerized accounting system involves the following five major steps:

1. Conducting Preliminary Survey: This is a preliminary work to plan how the audit should be
conducted. The auditors gather information about the computerized accounting system that is
relevant to the audit plan. This includes an understanding of how the computerized accounting
functions are organized, identification of the computer software used, understanding accounting
application processed by computer and identification applicable controls.
2. Reviewing and Assessing Internal Controls: There are two types of controls namely general
controls and application controls.
· General Controls: General controls are those that cover the organization, management and
processing within the computer environment. They should be tested prior to application controls,
because if they are found to be ineffective, the auditor will not be able to rely on application
controls. General controls include proper segregation of duties, file backup, use of labels, access
control, etc.
· Application Controls: Application controls relate to specific tasks performed by the system.
They include input controls, processing controls, and output controls. They should provide
reasonable assurance that the initiating, recording, processing and reporting of data are properly
performed.
3. Compliance Testing: Compliance testing is performed to determine whether the controls
actually exist and function as intended. This can be performed by comparing the results to
predetermined results or by processing dummy transactions.
4. Substantive Testing: This is performed to determine whether the data is real. Substantive tests
are tests of transactions and balances and analytical procedures designed to substantiate the
assertions. Auditors must obtain and evaluate evidence concerning management’s assertions about
the financial statements. The auditor must obtain sufficient competent evidential matter to provide a
basis for an opinion regarding the financial statements under audit. If sufficient competent evidence
cannot be obtained then an opinion cannot be issued.

5. Audit Reporting: The audit report will contain detailed information on various aspects of their
findings in the process of audit in a computerized environment.

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