DEFINITION OF AUDITING
It is not easy to define the word 'audit' precisely. The word audit is derived from the Latin word audit, which means 'to hear'. In the olden days, a person was appointed to audit cash transactions only, i.e. whether the person responsible for recording cash receipts and payments on the behalf of the business owner has done his job properly or not. Hence, it was merely a cash audit. But now the word audit has a wider meaning.
Auditing is the verification of financial position as 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 profit and loss accounts 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
Auditing is the intelligent and critical test of accuracy, adequacy and dependability of accounting data and accounting statements. It is concerned with examination
Auditors enjoy a distinctive professional status in the society because of the specialized function of auditing. Professional accountants, by auditing, certify financial statements of organizations. Audited financial statements gain confidence of shareholders and other persons interested in the organization.
Auditing involves the following steps:
(i) A study of organization and its structure.
(ii) Analysis and review of systems of accounting and internal control.
(iii) Testing arithmetical accuracy of records and collection and evaluation of evidence in support of transactions.
(iv) Verification of state of affairs disclosed by the Balance Sheet and Profit or Loss disclosed by profit and loss account.
(v) Preparation of report, expressing opinion whether accounts present a true and fair view.
FUNCTIONS OF AUDITING
Important functions of auditing can be summed up as follows:
l. Reviewing systems and procedures of business.
2. Examining documentary evidence to establish the accuracy of recorded transaction.
3. Reviewing the system of accounting and internal control.
4. To verify the valuation and existence of assets.
5. To examine the mathematical accuracy of accounting statements.
6. To see whether the statutory requirements have been complied with.
7. Reporting as, to what extent, accounts exhibit truth and fairness.
8. To make recommendations for improvement in internal control and accounting system.
9. To verify the distinction between capital and revenue items
Object of Audit
The primary object of audit is to express an expert’s opinion. The expert here is the auditor, and his opinion is expressed in the form of a report called Auditor’s Report. Apart from the primary object of audit, there are numerous other objectives which are considered secondary.
The secondary objectives of the audit can be grouped under the following heads.
Prevention and Detection of Fraud
Prevention and Detection of Errors
Others Specific Objective
Prevention and detection of frauds
1. Misappropriation of cash
2. Misappropriation of goods
3. Fraudulent manipulation of accounts.
Prevention and detection of errors
1. Clerical Errors Error of Commission Error of omission Partial Omission Complete Omission
2. Error of Principle
3. Compensating errors
4. Duplicating error
Periodicity of Audit
Based on the frequency with which the audit is conducted, the audit is classified into continuous audit, periodical audit, interim audit, and occasional audit.
I. A Continuous Audit A Continuous Audit or a detailed audit as it is sometimes called is an audit which involves a detailed examination of the books of account at regular intervals of, say, one month or three months. The auditor visits his clients at regular or irregular intervals during the financial year and checks each and every transaction. At the end of the year, he checks the profit and loss account and the balance sheet. A continuous audit is not of much use to a small concern, as its accounts can be audited at the end of the financial year without much loss of time.
Businesses where Continuous Audit is Applicable
1. Where it is desired to present the accounts just after the close of the financial year, as in the case of a bank.
2. Where the volume of the transactions is very large
3. Where the statement of accounts is required to be presented to the management after every month or quarter.
4. Where no satisfactory system of internal check is in operation.
II. Periodical Audit or Final Audit or Complete Audit.
Periodical audit is one which is taken up at the close of the financial or trading period when all the accounts have been balanced and a Trading and Profit and Loss Accounts and the Balance Sheet have been prepared. It may also commence before the final accounts are prepared and continue till the audit is completed even after the close of the financial or trading period, The audit is completed in one continuous session. In the case of such an audit, the auditor visits his client only once a year and goes on checking the accounts until the audit work for the whole of the period is completed.
III. Interim Audit.
Some writers opine that an audit which is conducted in between the two annual audits, with a view to find out interim profits they enable the /company to declare an Interim Dividend, should be called Interim Audit. It is a kind of audit which is conducted between the two Periodical or Balance Sheet Audits.
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