Auditing has several key features and objectives:
1. It acts as a control to ensure the truth and fairness of accounting information, and as a safeguard against carelessness, extravagance or fraud by those handling money and assets.
2. An audit provides assurance that the accounts truly represent the facts and that expenditures were made properly. It also assesses the accounting system.
3. The primary objectives of an audit are to enhance confidence in financial statements, ensure statements are free from material misstatements, and determine if they provide a true and fair view of the financial position.
4. An audit aims to detect and prevent errors and frauds like cash misappropriation, goods misappropriation
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Objectives of Auditing
Auditing has several key features and objectives:
1. It acts as a control to ensure the truth and fairness of accounting information, and as a safeguard against carelessness, extravagance or fraud by those handling money and assets.
2. An audit provides assurance that the accounts truly represent the facts and that expenditures were made properly. It also assesses the accounting system.
3. The primary objectives of an audit are to enhance confidence in financial statements, ensure statements are free from material misstatements, and determine if they provide a true and fair view of the financial position.
4. An audit aims to detect and prevent errors and frauds like cash misappropriation, goods misappropriation
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Auditing
Features and objectives
ESSENTIAL FEATURES OF AUDITING • 1. Accounting control: Audit is an instrument of accounting control. The truth and fairness of the accounting information is controlled and checked by auditing activities. • 2. Safeguard: Audit acts as a safeguard on behalf of the proprietor/s (whether an individual or a group of persons) against extravagance, carelessness or fraud on the parts of the proprietors’ agents or servants in the realization and utilization of his/their money and other assets. • 3. Assurance: Audit assures on the proprietors’ behalf that the accounts maintained truly represents facts and expenditure has been incurred with due regularity and propriety. • 4. Assessment: Audit assesses the adequacy of the accounting system in order to ascertain its effectiveness in maintaining accounting records of an organization ESSENTIAL FEATURES OF AUDITING • 5. Review: Audit carries out a review of the financial statements to know whether the accounting records are in agreement with those statements. • 6. Reporting tool: Audit is a tool for reporting on the financial statements as required by the terms of the auditors’ appointment and in compliance with the relevant statutory obligations. • 7. Practical subject: Auditing is a practical subject. It is something that people do. • How it is done today is a result of long history of marginal changes and responses to new commercial and legal developments • over the centuries with the most rapid progress made in the last few years WHY IS THERE A NEED FOR AN AUDIT? • The problem that has always existed when the managers are required to report to the owners is the credibility of the report. • The report may— • (a) contain error • (b) not disclose fraud • (c) be inadvertently misleading • (d) be deliberately misleading • (e) fail to disclose relevant information • (f) fail to conform to regulations • The solution to this problem of credibility in reports and accounts lies in appointing an independent person called an auditor to investigate the fact and report on his findings. WHY IS THERE A NEED FOR AN AUDIT? • Modern companies can be very large with multinational activities. • The preparation of the accounts of such groups is a very complex operation involving the bringing together and summarizing of accounts of subsidiaries with different conventions, legal systems and accounting and control systems • The examination of such accounts by independent experts trained in the assessment of financial information is of benefit to those who control and operate such organizations as well as to owners and outsiders. • Many financial statements must conform to statutory and other requirements. The most notable is that all company accounts have to conform to the requirements of the Companies Act. • In addition, all accounts should conform to the requirements of Accounting Standards. It is essential that an audit should be carried out on financial statements to ensure that they conform to these requirements OBJECTIVE OF AN AUDIT • the main objective of audit is to find out, after going through the books of accounts, whether the balance sheet and profit and loss account are properly drawn up accordingly and whether they represent a true and fair view of the state of the affairs of the concern. • This is possible when he verifies the accounts and the statements. While performing his duties, an auditor has also to discover errors and frauds • The ICAI in its Standard on Auditing (SA) titled ‘Overall Objective of an Independent Auditor and the Conduct of an Audit in accordance with Standards on Auditing’ (SA-200) enumerates the following as the objectives of an independent auditing of the financial statements: OBJECTIVE OF AN AUDIT • (a) Enhance degree of confidence of the users of financial statements: • The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework • (b) Ensure that the financial statements are free from material misstatements: Standards on Auditing require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. • The auditor should be an independent person who is appointed to investigate the organization, its records and financial statements prepared from them and thus form an opinion on the accuracy and correctness of the financial statements. • OBJECTIVE OF AN AUDIT • The primary aim of an audit is to enable the auditor to conform that the accounts show a ‘true and fair view • the primary objective of an audit is to promote efficiency and accuracy in accounting and to place before the shareholders and management accurate information of the financial condition of the business, • which may serve as an aid to overall administration of the business entity. • For the fulfilment of the primary objectives of an audit, the following subsidiary objectives are to be realized— • (a) Detection of errors • (b) Detection of frauds • (c) Prevention of errors • (d) Prevention of frauds OBJECTIVE OF AN AUDIT • Again, errors, which arise out of innocence and carelessness, are of three types— • (a) Clerical errors • (b) Compensating errors • (c) Errors of principles • Also, clerical errors may be of two types: • (a) Errors of omission • (b) Errors of commission • On the other hand, frauds, which arise out of some intention to gain something through some manipulating devices, are of three types: • (i) Misappropriation or Embezzlement of cash. • (ii) Misappropriation of goods, and • (iii) Manipulation of accounts OBJECTIVE OF AN AUDIT ERRORS AND FRAUDS IN ACCOUNTING • Errors can be described as unintentional mistakes. • Errors can occur at any stage in business transaction processing: transaction occurrence, documentation, record of prime entry, double entry record, Summarizing process and financial statement production. • Errors can be of any of a multitude of kinds— mathematical or clerical or in the application of accounting principles ERRORS AND FRAUDS IN ACCOUNTING • Accounting errors, which are possible to be detected through auditing, can be of the following types
• (a) Errors of omission:
• When a transaction is omitted completely or partially from the books of accounts, such errors are known as errors of omission. • This type of error is not reflected in the trial balance and hence more difficult to detect. • Example: • 1. Omission of purchases from purchases day book. • 2. Ignoring depreciation on fixed assets completely. ERRORS AND FRAUDS IN ACCOUNTING • (b) Errors of commission: When entries made in the books of original entry or ledger are either wholly or partially incorrect, such errors are known as errors of commission. Some of these errors may not affect trial balance. • Example: • 1. Wrong amount recorded in the books of original entry, for example, sale of goods of Rs. 15,000recorded as Rs. 1,500 in sales day book. • 2. Posting to the wrong side of an account. In place of debiting, for example, an amount of Rs. 150 is credited. • (c) Compensating errors: When an error offsets the effect of another error, such errors are known as compensating errors. • Example: • 1. A debit balance is under cast by ` 100 and credit balance is under cast by the same amount of ` 100. • 2. Sales return of ` 500 is posted to the return inward A/c as ` 5,000 and similarly purchase return of ` 500 is posted to the return outward A/c as ` 5,000. ERRORS AND FRAUDS IN ACCOUNTING • (d) Errors of principles: When principles of book-keeping and accountancy are not followed, such an error is known as errors of principles. Such errors may be committed intentionally to under state asset and to overstate liability and to inflate and deflate profit as and when circumstance dictates. • Example: • 1. Treatment of capital expenditure as revenue expenditure, for example, purchase of machinery treated as purchase of goods. • 2. Valuation of stock on the basis of wrong principle. Fraud • Misstatements in the financial statements can arise either from error or from fraud. • ‘Fraud refers to an intentional act by one or more individuals among management , those charged with governance or third parties, involving the use of deception to obtain an unjust or illegal advantage’. • certain basic characteristics of fraud, which include the following • (a) Fraud is intentional: • Misstatements in the financial statements can arise from either fraud or error. • The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional. • (b) Causes of misstatement: Although fraud is a broad legal concept, the auditor is concerned with fraud that causes a material misstatement in the financial statements. • Two types of intentional misstatements are relevant to the auditor—misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets. • (c) No legal determination: Although the auditor may suspect or, in rare cases, identify the occurrence of fraud, he does not make legal determinations of whether fraud has actually occurred. fraud • The following are the main ways in which fraud may be activated • (A) Embezzlement of cash: Defalcation of cash is possible irrespective of the size of the business—small or large. • The possibility of the misappropriation of cash is small in a small business organization , where the proprietor has a direct control over the cash receipts and disbursement. • The chances are greater in case of large business organizations. There are different methods of misappropriation of cash defalcation, out of which ‘Teeming and Lading’ is noteworthy. The employees involved in the misappropriation of cash usually follow this procedure. fraud • (b) Misappropriation of goods: Misappropriation of goods is another type of fraud. It may happen that the valuable goods of an organization may be stolen by the employees or workers. • It may also happen that the storekeeper in collusion with the works manager may sell the goods illegally to some third party. Such frauds are very difficult to locate or identify • (c) Manipulation of accounts: Accounts are manipulated through falsification of accounts. • These are fraudulent manipulation through accounts and arise generally through passing of false entries with the motive of misappropriating fund slowly and steadily. • Unlike misappropriation of cash and goods, this type of fraudis done by sophisticated personnel of an organization