Unit 1
Introduction to Auditing
Q1) Briefly explain the Scope of Auditing. What are its inherent limitations?
A1)
Definition of Auditing:
According to General Guidelines on Internal Auditing issued by the ICAI, "Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report."
The Scope of Auditing is as follows:
The scope of audit of financial statements depends upon the terms of engagement and the requirement of the relevant laws.
It is the inherent authority with the auditor to cover all those aspects of the organisation which are relevant to the financial statements.
While forming an opinion on the financial statements, the auditor should satisfy himself that the financial statements of the entity reflects true and fair view on the financial stand, internal control and profitability of the entity.
The auditor is predominantly concerned with those items of the financial statements which either individually or in a group are material.
Following are the limitations:
Opinion Only: The auditor is empowered only to give opinion on the financial statements. He cannot give guarantee regarding the financial soundness of the business entity.
Rely on Management: Auditor has to rely on the information, data and statistics provided by the management of the organisation. If there remains a deep laid fraud, (generally possible with the involvement of top management) it may not come to the knowledge of the auditor with the normal course of examination. So there are chances of undisclosed frauds.
No control over past activities: Auditing does not involves control over the past activities. Since auditing starts after the completion of the accounting work that is, recording the transactions, the audited accounts cannot prevent past damage that has been done.
Q2) What are the objects of Auditing?
A2)
Definition of Auditing:
According to General Guidelines on Internal Auditing issued by the ICAI, "Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report."
SA 200 ‘Overall Objectives of the Independent Auditor’ lays down the objectives of the auditor while conducting an audit and reporting on the financial statements.
The objectives of an Auditor is mainly two-fold.
To obtain reasonable assurance whether the financial statements are free from material misstatements, whether due to fraud or error.
And
To report on the financial statements and communicate in accordance with the Auditor’s findings and discoveries.
The above mentioned objectives of audit are explained with the help of the following points:
To examine the accuracy of books of accounts
While examining the accuracy of books of accounts, the Auditor has to verify the vouchers and other records. The auditor have to verify the arithmetical accuracy of the books of accounts.
Detection and prevention of errors and frauds
An error is nothing but an unintentional mistake. It depicts carelessness at that person’s end who prepares the accounting records.
Fraud is an intentional misrepresentation in certain transactions in the books of accounts. Unlike Error, Fraud is done wilfully to deceive somebody.
This is why, detection of frauds is of utmost importance while conducting Audit.
Expression of opinion
Once the verification of books of accounts is done, the Auditor has to express his expert opinion on the financial statements.
The auditor need to express, in his Audit Report, whether the financial statements show true and fair view.
Q3) Define Auditing. Explain its Advantages and Disadvantages.
A3)
Definition of Auditing:
According to General Guidelines on Internal Auditing issued by the ICAI, "Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report."
The meagre fact that audit is compulsory by law, shows that it is of great importance.
Advantages of Auditing:
- Audited financial statements help in determining and settling the tax liability.
- while negotiating loans with the Banks or any financial institutes, audited statement of profit and loss and the balance sheet are required.
- As audit requires checking of internal controls of the organisation, any inadequacy in the internal controls can be traced.
- Insurance companies requires audited statement of valuation in case the company is claiming for any loss suffered.
Limitations of Auditing
The limitations of Auditing arise from:
- Nature of audit procedures
- Fraud, where top management is involved
- Non-compliance of applicable laws
Following are the limitations:
Opinion Only: The auditor is empowered only to give opinion on the financial statements. He cannot give guarantee regarding the financial soundness of the business entity.
Rely on Management: Auditor has to rely on the information, data and statistics provided by the management of the organisation. If there remains a deep laid fraud, (generally possible with the involvement of top management) it may not come to the knowledge of the auditor with the normal course of examination. So there are chances of undisclosed frauds.
No control over past activities: Auditing does not involves control over the past activities. Since auditing starts after the completion of the accounting work that is, recording the transactions, the audited accounts cannot prevent past damage that has been done.
Short Notes:
Q4) Origin of Auditing
A4)
The word Auditing is derived from the Latin term ‘audire’ which means – to hear.
In ancient times, auditing was done in such a manner. But, the manner of Auditing has undergone dramatic changes with the time.
From the end of the 15th Century, great significance was given to trade and business. In 1494, when the Double Entry System of Bookkeeping was introduced to the world by Luca Paciolo of Venice, this accounting system proved to be a remarkable point.
The ancient cultures worldwide, show the existence of Accounting and its Auditing.
In India, Kautilya’s famous script ‘Arthashashtra’ has a detailed understanding on the process of Accounting and Auditing. The system of checks and counter checks has been explained in this script.
Industrial Revolution that began in the 18th Century, was a massive step towards growth and development throughout the world. The traces of Auditing, too can be found from that time, when the mass production began to flourish the business.
So, there has been a long history of ‘Auditing’ right from early Kingdoms till date.
Q5) Define Auditor. What is Auditing of Financial Statements?
A5)
Definition of AUDITOR - “An Auditor is a person who diligently examine the accounting records and other financial statements of the business entity, does the work of audit, frames his opinion, present it through his report (called Audit Report) for the concerned period.”
Definition of AUDITING (of Financial Statements) - According to General Guidelines on Internal Auditing issued by the ICAI, "Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the propositions before him for examination, collects evidence, evaluates the same and on this basis formulates his judgement which is communicated through his audit report."
An Audit of Financial Statements is conducted for the following two reasons –
To obtain reasonable assurance whether the financial statements are free from material misstatements, whether due to fraud or error.To report on the financial statements and communicate in accordance with the Auditor’s findings and discoveries.
