Unit – 1

AUDITING

Q1) Define Auditing.

A1)

• 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.

Q2) What are the objective of auditing?

A2)

• 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. Also, the existence and the value of assets and liabilities need to be verified.

- 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. There may be errors of omission or errors of recording or errors of posting or error of duplication or error of principle.
• 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 statements show true and fair view.

Q3) What are the Qualities Of An Auditor?

A3)

1)     Experience:

-         Certifications are key academic qualifications for an auditor. An auditor should have the required knowledge of accounting, business and taxation laws.

-         It is also necessary that he or she has computer operation skills because most of the operations will require one.

2)     Ability to Make Independent Decisions:

-         An auditor’s decision should not be influenced by anyone.

-         Their actions, decisions, and reports should be a result of careful analysis of the company’s operations.

-         When the Auditor has to uncover sensitive information, he should do this and submit the results confidently and without fear, to the appropriate authorities.

-         If the situation demands to ask questions, an Auditor can face the management or those charged with governance and clear his doubts.

-         The Auditor, in times, also need to issue a Qualified Report, if it is necessary as per his expertise.

-         When some findings are not clear, the Auditor should not settle until they gets to the extremity of the issue.

3)     Dependable:

-         The work of the auditor may affect the internal operations of the organization. Therefore, he needs to followthe set guidelines and ensure that the work is completed on time.

4)     Trustworthy:

-         An auditor should be trustworthy and decisive. He should not share the confidential information of the company with third parties. Sometimes, an auditor come across sensitive information. He should only disclose this to the concerned parties, if required.

5)     Effective communication skills:

-         An auditor cannot be effective if they he has not mastered excellent communication skills. That is why, it is necessary that the Auditor have effective communication skills.

6)     Cautious and Vigilant:

-         An auditor must be vigilant in his work. It is said that an Auditor should always proceed with his eyes open and be alert.

7)     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.

8)     Common Sense:

-         An auditor should possess a good common sense.

-         Over and above 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 also trust.

9)     EDP system:

-         The Electronic Data Processing (EDP) systems are in operation for maintenance of accounts in many organisations. Therefore, 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-Commerce.

Conclusion:

The work of an auditor sometimes is complex and demanding, but these qualities can help him deliver quality work that is not biased.

Also, a strong character will ensure him to remain competitive.

Q4) Define Auditing As Distinct From Bookkeeping And Accountancy.

A4)

• Book-keeping: J.R. Batliboi defines Book-keeping as an art of recording business dealings in a set of books. R.N. Carter defines it as the science and art of correctly recording in the books of accounts, all those business transactions that results in transfer of money or money’s worth.
• Accounting: Prof. Robert N. Anthony defines accounting as a means of collecting, summarizing, analysing and reporting in monetary terms- the information about the business transactions.
• 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."

From the above definitions, the following points are clear:

1)     Book-keeping deals with writing of the books of accounts.

2)     Accounting emphasises on briefing, studying and reporting on the financial statements prepared from the day-to-day book-keeping process.

3)     Accounting is a continuous process and focuses on preparing the financial statements.

4)     Auditing is the process of examining the financial information.

5)     Auditing is an independent process and it focuses on critical evaluation of financial statements.

6)     The main purpose of Auditing is to frame an unbiased opinion on the financial statements.

There is a saying that Auditing begins where the accounting ends, which is justified by the points listed above.

The difference between Accounting and Auditing can be understood with the help of following points:

1)     Scope: Accounting is concerned with preparation of financial statements whereas Auditing is concerned with the checking of financial statements.

2)     Purpose: The purpose of accounting is to show the performance of the business by preparing financial statements. On the other hand, Auditing is the process to certify the true and fair view of the financial statements.

3)     Knowledge: Accounting work requires that the accountant should have accounting knowledge and Auditing requires that the auditor should have accounting as well as auditing knowledge.

4)     Personnel Status: An accountant is a permanent employee of the organisation whereas Auditor is an independent person.

5)     Necessity: Accounting is necessity of every business. On the other hand, Auditing is not a necessity for every business.

Q5) What are the Advantages Of Auditing explain?

A5)

The meagre fact that audit is compulsory by law, shows that it is of great importance. The obvious benefit of the audited financial statements is that the users of these statements can rely on the observations and conclusions drawn by the auditor.

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.

-         Insurancecompaniesrequiresauditedstatement of valuation in case the company is claiming for any loss suffered.

-         Audit helps in the following cases of reconstruction (restructure)

• Upon admission of a new partner
• Settlements with the family members of the deceased partner
• While amalgamating the business
• At the time of sale of business

1. Give a short note on Internal Check?

• In the Accounts Department, generally, the routine transactions are handled by more than one accountant, in such a way that the work of one employee is verified by the second employee. This accounting procedure is known as Internal Check. It ensures earlier detection of errors or irregularities. Internal Check ensures that

- Responsibilities are fixed at every level of the Accounting Department.

- Adequate and Reliable Information is produced to the Auditor.