MEANING

 The word „auditing‟ has been derived from Latin word “audire” which means
“to hear”.

 Auditing is an essential process that helps businesses maintain transparency

and accountability. It involves examining financial records, operations, and
compliance with regulations to ensure that everything is accurate and lawful.

 Auditing is a systematic process of examining financial records, transactions,

and operations of an organization to ensure that they are accurate, reliable,
and comply with relevant laws and regulations.

 The primary purpose of auditing is to provide assurance to stakeholders that

the organization's financial statements are free from material misstatement
and fairly represent its financial position, performance, and cash flows.
DEFINITION

The International Federation of Accountants has given the following definition of an

audit, “audit is an independent inspection of the financial information of any
organization, whether profit-oriented or non-profit-oriented, irrespective of its legal
form, status or size when such examination is conducted with a view to express an
opinion thereof”.

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 recognizes the
propositions before him for examination, collects evidence, evaluates the same and
on this basis formulates his judgment which is communicated through his audit
report.”

What is an Audit?

“An audit is independent examination of financial information of any entity, whether

profit oriented or not, and irrespective of its size or legal form, when such an
examination is conducted with a view to expressing an opinion thereon.”
Features of Auditing

 Auditing is a systematic process

 The audit is always done by an independent authority or a body of persons

with the necessary qualifications.

 An audit is the examination of all the books of accounts and financial

information of the company.

 Auditing is not only the review of the books of accounts but also the internal
systems and internal control of the organization.

 To conduct the audit we need the help of various sources of information like
vouchers, documents, certificates, questionnaires, explanations, etc.

 The auditor must completely satisfy himself with the accuracy and
authenticity of the financial statements. Only then can he give the opinion that
they are true and fair statements.

True and fair view

 Whether Balance sheet correctly reflects the state of affairs.

 Whether Profit&Loss Account shows the correct results.

 Whether Accounting Principles are consistently followed.

Objectives of Auditing

1. Primary objectives

(a) Examine the Internal Control and Internal Check.

(b) Verify whether all the books of accounts as required by law are kept.

(c) Verify whether proper accounting principles and procedures are followed.

(d) Check the arithmetical accuracy of the books of accounts.

(e) Verify the authenticity and validity of the transactions.

(f) Confirm the existence and the values of the assets and liabilities by physical
verification.

(g) Find out whether the financial statement is properly drawn up.

(h) Report whether the profit and loss gives a true and fair view.

2. Secondary objectives

 Detection and prevention of errors.

 Detection and prevention of frauds.

Specific objectives

There will be specific objective in respect of each type of 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, there may be different objective in
respect of each specific audit.

Advantages of Auditing

Advantages of Audit to the business enterprise and Management

 Audit ensures the accuracy or correctness of the books of accounts.

 Audit ensures the authenticity and reliability of the financial statements.

 Audit helps in the detection and rectification of errors and frauds.

 Audit helps the enterprise and management to ascertain whether the legal
requirements are complied with.
  Audit point out the weakness of the existing system of internal check and
internal control.

 Audit examination makes the employees in charge of accounts and records

vigilant, regular and up- to –date in their work.

 Loans and credit facilities can be easily obtained by a concern on the basis of
audited accounts.

 Liability of an enterprise as to income tax, wealth tax, and value added tax
etc. can be easily determined on the basis of audited accounts.

 A business can enjoy better reputation, if its accounts are audited by an

independent professional auditor.

 Audited accounts are more reliable as evidence in courts of law.

 Facilitates calculation of purchase consideration.

 The insurance claim can be easily determined on the basis of audited accounts.

 Audited accounts serve as a basis for solving the disputes as to higher wages.

 Comparison of accounts from year to year becomes easier since the accounts
are uniformly prepared.

Advantages of Audit to the owners of the business

 In the case of a sole trader, auditing assures him that all business transactions
have been duly accounted for and there are no errors or frauds. It also helps
him to know the true facts about the business.

 In the case of partnership firm, audited accounts serve as an evidence of proper

management of the affairs of the business. Audited accounts helps in the
valuation of goodwill and settlement of accounts on the admission, retirement
or death of a partner. Again audited accounts minimize the chances of disputes
among the partners.
  In the case of a joint stock company, audit of accounts assures the shareholders
that the affairs of their company are smoothly and their investment is safe.
The shareholders of a company can value their shares on the basis of audited
accounts.

 In the case of a cooperative society or a trust, audit assures the members or

the beneficiaries that the affairs of the society or trust are conducted properly
and their investment are looked after properly.

Advantages of Auditing to others

 Lenders can depend on audited financial statements while taking a decision

to grant credit to the business concern.
 Tax authorities can depend on audited statements in assessing sales tax,
income tax and wealth tax of the business.
 Audit of accounts safeguards the interests of the workers and is helpful in
the settlement of claim for higher wages and bonus.
 Insurance company can rely on audited accounts to settle claims in respect
of damage or loss of any business asset by fire, theft etc.
 The purchaser of a business can easily calculate the amount of purchase
consideration on the basis of audited accounts.
 Audited accounts create confidence in the minds of investors in a joint stock
company.

Limitations of Auditing

 Rely on Experts − An Auditor has to rely on experts like engineers and

lawyers for estimation and valuation of fixed assets and estimation of
contingent liabilities.

 Efficiency of Management − An Auditor does not comment on the efficiency

of management working in client organization; no comments on future
performance of an organization can be made through audited financial
statements.
 Checking of All Transactions − It is not possible for an Auditor to check all
business transactions especially in big organizations where the number of
transactions is very high. An Auditor has to rely on sampling and test
checking.

 Additional Financial burden − An organization has to bear additional financial

burden on account of any fees and other such expenses for conducting an
audit.

 Not Easy to Detect Some Frauds − It is not easy for an Auditor to detect deeply
laid frauds like forgery, misstatements and non-recording of transactions.

 Higher Cost Burden: Due to Higher Cost Burden, the auditor limits his scope
of work to selective testing or sampling thus in depth checking of books of
accounts is not possible.

 Insufficient Time: Generally an auditor needs to release the report up to a

specified timeline. Sometime this timeline become a constraint for an auditor
in carrying out the auditing exercise effectively. This time constraint may
affect the amount of evidence that can be obtained concerning events and
transactions after the balance sheet date that may have an effect on the
financial statements. Moreover, there is a relatively short time period available
for resolving uncertainties existing at the financial statement date

 Inconclusiveness of Evidences: The evidences obtained by an auditor are

persuasive rather than conclusive. For example, an architect‟s certificate of
valuation for a newly constructed building of a client may not be conclusive
evidence of the correct value of building.

 Based on Estimates: Estimates are an inherent part of the accounting process,

and no one, including auditors, can foresee the outcome of uncertainties.
Estimate range from the allowance for doubtful accounts and an inventory
obsolescence reserve to impairment tests of fixed assets and goodwill. An
audit cannot add exactness and certainty to financial statements when these
factors do not exist.
  Based on the Information provided by the Management: The audit opinion is
based on the information provided by the management. Hence, outsiders
cannot fully rely on the auditor‟s report.

1] Integrity, Independence and Objectivity

The auditor has to be honest while auditing, he cannot be favoring the organization.
He must remain objective throughout the whole process, his integrity must not allow
any malpractice.

Another important principle is independence. So the auditor cannot have any interest
in the organization he is auditing, which allows him to be independent and impartial
at all times.

2] Confidentiality

The auditor has access to a lot of sensitive financial information of the organization.
It is important that he respect the confidential nature of such information and
documents.
3] Skill & Competence

The auditor must be experienced and trained in the procedures of auditing, i.e. must
be qualified as an auditor. And as a professional, he must be up to date on recent
changes, announcements, rules etc.

4] Work Performed by Others

The scope of audit at times can be very vast. So an auditor has employees, delegates
and other people who work under him.

5] Documentation

In most cases the auditor maintains an audit notebook, an audit plan and auditing
file.

6] Planning

An audit plan allows the auditor to plan out his work and enables him to be more
efficient and timely. Every audit plan is different as it has to be customized according
to the type of organization, the kind of business they conduct, the scope of the audit,
the efficiency of the internal controls etc.

7] Audit Evidence

The auditor must collect enough evidence to support his final opinion. This
collection of such evidence is done by compliance and substantive procedures. There
are two sources of this evidence – internal and external. Also, external sources of
evidence are always more reliable.

8] Accounting Systems and Internal Controls

The auditor has to assure that the accounts of the organization are accurate and
represent a true and fair picture of the financial status of the company. Also, the
auditor must ensure that all material information has been recorded in the accounts.
Testing the internal controls system is also important as it helps determine the same.
9] Audit Conclusions and Reporting

After the auditor collects all evidence he must now form his opinion on the basis of
the following criteria,

i. all relevant accounting standards were applied at all times

ii. financial statements are in compliance with all regulations and statutory
requirements

iii. all material information has been disclosed

Qualification and Qualities of an Auditor

To be an efficient auditor, an auditor must possess certain professional qualifications
and professional and personal qualities.

Professional qualification: - An auditor is a professional accountant. So he must

possess certain professional qualifications. Under the Companies Act, an auditor of
a joint stock Company must be a Chartered accountant within the meaning of the
Chartered Accountants Act of 1949. To be a Chartered accountant, he must pass the
C.A examination conducted by the Institute of Chartered Accountants. He must also
obtain a certificate from the institute from the Institute of Chartered Accountants to
take up public practice of accountancy.

Professional Qualities: - To perform his work efficiently, an auditor must possess

certain professional qualities. They are:

1. Knowledge of principles and practice of general accounting.

2. Knowledge of Cost accounting

3. Knowledge of Management accounting

4. Thorough knowledge of techniques of auditing

5. Knowledge of provisions relating to income tax, wealth tax, VAT etc.

6. Knowledge of business laws.

7. Knowledge of economics.

8. Knowledge of Mathematics and Statistics

9. Knowledge of Business Management and Organization and financial

administration

10. Knowledge of report writing.

11. Knowledge of technical details of the business under audit.

12. Knowledge of the accounts of the business under audit.

Personal Qualities or General Qualities: - Besides the professional qualities, an

auditor must also have certain personal or general qualities to perform his work
efficiently and smoothly. The requisite personal qualities are :

Honesty and Integrity. (ii) Tactfulness (iii) Vigilance (iv) An enquiry mind
(v) Methodical(vi) Care and Skill (vii) Diligence (viii) Judgement. (ix)
Responsibility (x) Impartiality and independence(xi) Common sense (xii)
Ability to communicate (xiii) Ability to work hard (xiv) Patience
(xv) Courtesy (xvi) Ability to maintain secrets.

TAKEAWAY
1. Only the qualified chartered accountant can be appointed as auditor of a
limited company.
2. The auditor must have thorough knowledge of principles and practice of
all aspects of accountancy. He must be familiar with all systems of
accountancy in use.
3. He should have adequate knowledge of financial management, industrial
administration and business organization.
4. He must have thorough knowledge of audit case laws as per the various
cases decide by the courts in and outside India.
5. He should be able to understand the technical details of business whose
accounts he is going to audit.
6. An auditor must be honest i.e. He must certify that he does not believe to
be true and he must take reasonable care and skill before he believes what he
certifies is true.
6. An auditor must be honest i.e. He must certify that 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 act impartially and not influenced by others, directly or indirectly
while discharging his duties.
8. He should be hard working, systematic and methodical.
9. He must have capacity to hear arguments of others.
10. He should have adequate skills and courage to write audit report correctly
clearly and concisely.
11. He should not disclose the secrets of his client.
AUDITING Vs INVESTIGATION

Investigation is an enquiry into the accounts and records of a business concern for a
special purpose, say, to know the actual financial position of the concern or to know
the real earning capacity of the business or to know the extent of fraud, if any.

There are many differences between the two:

 Classification of audit or types of audit
 On the basis of organization structure

 On the basis of degree of independence of the auditor

 On the basis of method or approach to audit work

 On the basis specific objectives

Classification on the basis of organization or organization structure

1. Statutory Audit

Statutory audit refers to the audit of accounts of a business enterprises carried

out compulsorily under the provisions of a statute or law. It is the audit carried
out compulsorily under any statute any law.

Features of statutory audit are:

1) Statutory audit is compulsory under law.

2) Statutory audit is required to be conducted by a qualified auditor.

3) In the case of Statutory audit, the rights, duties and liabilities of the
auditor are governed by the statute or law applicable to the undertaking.

4) Statutory audit is an independent audit.

5) Statutory audit is an external audit.

6)Statutory audit must be a complete or full audit.

 Joint stock Companies governed by the Companies Act of 1956.
 Banking companies governed by the Banking Regulation Act of 1949.
 Insurance companies governed by the Insurance Act of 1938.
 Electricity supply companies governed by the electricity supply Act of
1948.
 Co-operative societies registered under the Co-operative Societies Act.
 Public and charitable trusts registered under Religious and Endowment
Acts
 2. Government audit

Government audit refers to the audit of accounts of Government

departments and offices, Government companies and statutory or public
corporations.

The features of government audit are:

 Government audit is prescribed for by law.

 It is conducted either by the comptroller and Auditor General of India
and his staff or professional chartered accountant approved by the
Comptroller and Auditor General of India.
 It is internal audit.
 A government audit is a continuous audit.

Government audit may be classified into three types. They are:

1. Audit of government departments and offices.
2. Audit of Government Companies.
3. Audit of Statutory Corporations registered as statutory corporations.

3. Private audit or Voluntary audit

Where an audit is not compulsory under any statute, but is undertaken by the
owners voluntarily to get the benefit of audit, the audit is called private audit.

In other words, private audit refers to the audit of accounts of private

enterprises such as a sole trading concerns, partnership firms and other
individuals and institutions.

Advantages of private audit

1. Audit assures to the owners that the accounts of the business are properly
maintained and there are no irregularities.

2. It provides a moral check on the employees.

3. It helps the owners of the business to know the real profitability and the
state of affairs of their business.

4. Audited accounts serve as a basis for assessment of tax liability.

5. Audited accounts facilitate the process of raising loans from banks and
other financial institutions.

6. Audited accounts help in the settlement of dispute and claims between the
partners of a firm.

Classification of audit on the basis of Degree of Independence

 Internal audit

 External audit

Internal audit : is a continuous and systematic review of the accounting,

financial and other operations of a concern by the staff specially appointed for
the purpose. In other words, it is the audit of accounts by the staff specially
appointed for the purpose.

Objectives of Internal audit

1. To ascertain whether internal check and accounting systems are adequate

and effective.

2. To ascertain whether predetermined policies, plans and procedures have

been complied with.

3. To ascertain the reliability of the accounting and other data.

4. To evaluate the performance of the personnel.

5. To ascertain whether the properties of the concern are safeguarded.

6. To suggest to the management the improvements desired in the internal

check systems, accounting system etc.
External Audit : Audit conducted by independent qualified person and
examines the books of accounts and report to the management.

On the basis of Conduct of audit or methods or approach to audit work

 Continuous Audit

Continuous audit is one where the auditor’s staff is occupied continuously on

the accounts whole the year round and performs interim audit. It is an audit
under which detailed examination of the books of accounts is conducted
continuously throughout the year. It is continuous review of the accounts of the
organization. It is generally applicable to banking company and insurance
company.

 Final Audit or Annual or periodical audit

It is an audit carried out after the preparation of financial statement. It is an

audit where the auditor takes up his work of checking the books of accounts
only at the end of the accounting year. In this case, the audit work is commenced
and completed in a single uninterrupted session.

 Interim Audit

It is an audit conducted between two annual audits. In other words, it is the

audit conducted in the middle of the financial year. It is carried out for some
specific purpose for declaring interim dividend, ascertaining interim profit.

 Balance sheet audit

Balance sheet audit is a type audit which concentrates mainly on the verification
of the items in the balance sheet such as capital, reserves, profit and loss account
balance, liabilities and provisions and all the assets of the business.
  Occasional Audit

An occasional audit is an audit which is conducted once a while, whenever the

need arises. In other words, it is a kind of audit which is not conducted on
regular basis, but is conducted for a special event, time or purpose.

 Complete Audit

Complete audit is a kind of audit under which all the records and books of
accounts are audited by an auditor.

 Partial Audit

It is a kind of audit the scope of which is limited one. It is carried out in respect
of only a part of the books of accounts of a business, for a part of whole of the
period.

Classification of audit on the basis of specific objectives

1. Cash Audit

It is a type of partial audit which is undertaken for only cash receipts and cash
payment.

2. Special Audit

It is a kind of audit with some special object in view. It is a fact finding enquiry.

3. Operational Audit

It is an efficient examination of the various operations of the different

functional area of business.

4. Proprietary Audit

It is an audit in which various actions and decisions are examined to find out
whether in public interest and whether they meet the standard of conduct.

5. Efficient Audit

It is an evaluation of overall efficiency and performance of an organization.

 6. Tax Audit

It means audit for tax purpose.

Audit required to be carried out of income tax act of 1961. It is conducted by

certified Chartered Accountant. There are certain circumstances in which tax
audit is necessary.

Compulsory tax audit under section 44 AB of the Income tax Act 1961

Tax audit for claiming deductions and Reliefs under the Income Tax Act.

Tax audit for Tax Consultancy and Representation.

7. Cost Audit

It is a thorough examination of the cost accounting records of a company by

a cost auditor to ensure that they are accurate and they also follow to the
cost accounting principles, procedures and plans.

8. Management Audit

It is the critical examination, scrutiny and appraisal of plans, policies,

procedures, objectives, means and operational area of the organization. It is
the audit of managerial actions and decisions. It is the audit of activities of
various level of the managers.

New Generation audit

a) Inflation audit
b) Human Resource Audit
c) Social Audit
d) Energy Audit
 Relationship of auditing with other disciplines
 AUDITING AND ACCOUNTING

 AUDITING AND LAW

 AUDITING AND BEHAVIORAL SCIENCE

 AUDITING AND STATISTICS AND MATHEMATICS

 AUDITING AND DATA PROCESSING

 AUDITING AND FINANCIAL MANAGEMENT

 AUDITING AND PRODUCTION

Auditing and Accounting

 Are closely related with each other as auditing reviews the financial
statements

 Auditing begins when accounting ends

 The auditor must have through knowledge of generally accepted

principles of accounting before reviewing the financial statements

Auditing and Law

 If the entity audited is governed by laws, then the auditor should be

aware of the law which are applicable

 He should be well versed with the laws which are applicable like
negotiable instruments, law of contracts etc

 Must have through knowledge of various tax laws

Auditing and Behavioral Science

 While performing auditing he has to interact with lots of people

  Management auditor is expected to deal with human beings rather than
financial figures

 One of the basic elements in designing the internal control system is

personnel

 The working of internal control depends upon the competency and

honesty of the employees

Auditing and statistics and mathematics

 Examine the transactions on test checking basis

 Auditor is expected to have knowledge of statistical sampling

 The knowledge of mathematics is also required on the part of the

auditor at the time of verification of inventories

Auditing and data processing

To carry out audit in computerized environment, the auditor should have

good knowledge of the components

Auditing and financial management

 Closely related with functional fields such as finance, production,

marketing, personnel and other general areas of business management

 The auditor is expected to have knowledge about various financial

techniques such as working capital management, fund flow, ratio
analysis, capital budgeting

 The knowledge of various institutions and government activities that

influence the operations of the financial markets

Auditing and production

 The knowledge of production process becomes essential in case of internal

auditor. He should also required to have knowledge of the cost system
and its adequacy

 Also have knowledge of the terminology of the production