Principles and Practice of Auditing

Programme B.Com

Subject Principles and Practice of Auditing

Semester VI th Sem

Session No. 01

Topic Meaning and Definitions of Auditing

Created by Dr. N.L.Vijaya, Associate Professor &

P.G.Coordinator,
Government College for Women, Kolar
 Origin and Evolution:
• The term audit is derived from the Latin term ‘audire,’
which means to hear. In early days an auditor used to listen
to the accounts read over by an accountant in order to
check them
• Auditing is as old as accounting.
• It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. and India.
• The Vedas contain reference to accounts and auditing.
• Kautilya in his book Arthasashthra has given detailed rules
for accounting and auditing of public finances.
• The original objective of auditing was to detect and prevent
errors and frauds.
• Auditing evolved and grew rapidly after the industrial
revolution in the 18th century.
• With the growth of the joint stock companies the ownership
and management became separate.
• The shareholders who were the owners needed a report
from an independent expert on the accounts of the company
managed by the board of directors who were the employees.
• In India, The Companies Act 1913 made audit of company
accounts compulsory.
• With the increase in the size of the companies and the
volume of transaction the objective of audit shifted and
audit was expected to ascertain whether the accounts were
true and fair rather than detection of errors and frauds.
• The Companies Act 1913 has prescribed for the first time
qualification of auditors.
• The International Accounting Standards Committee and
the Accounting Standards Board of the Institute of
Chartered Accountants of India have developed standard
accounting and auditing practices to guide the
accountants and auditors in the day to day work.
• The later developments in auditing pertain to the use of
computers in accounting and auditing.
• it can be said that auditing has come a long way from
hearing of accounts to taking the help of computers to
examine computerised accounts.
 Meaning of Auditing:

• The term audit is derived from the Latin term ‘audire,’ which
means to hear. In early days an auditor used to listen to the
accounts read over by an accountant in order to check
them.
• Auditing simply means verification and examination of
accounts. It is done to ascertain the reliability and validity of
information. The auditing process can be started only when
accounting ends.
• In other words, an audit is an attempt to find out whether
the financial statements reflect the true and fair result and
financial position of the company or institution’
 Definitions of auditing

• According to Spicer and Pegler, “Auditing is such an examination

of books of accounts and vouchers of business, as will enable the
auditors to satisfy himself that the balance sheet is properly drawn
up, so as to give a true and fair view of the state of affairs of the
business and that the profit and loss account gives true and fair
view of the profit/loss for the financial period, according to the
best of information and explanation given to him and as shown by
the books; and if not, in what respect he is not satisfied.”
• In the words of R.B. Bose, “Audit may be said to the verification of
the accuracy and correctness of the books of accounts by an
independent person qualified for the job and not in any way
connected with the preparation of such accounts”.
• According to A.W. Hanson, “An audit is an examination
of such records to establish their reliability and the
reliability of the statement drawn from them”.
• According to R. K. Moutz, “Auditing is concerned with
the verification of accounting data with determining the
accuracy and reliability of accounting statement and
record.”
• According to Montgomery, a well-known author,
“auditing is a systematic examination of the books and
records of a business or the organization in order to
ascertain or verify and to report upon the facts regarding
the financial operation and the result thereof.”
 FEATURES OF AUDITING:
1. Audit is a systematic and scientific examination of the books of accounts
of a business.
2. Audit is undertaken by an independent person or body of persons who are
duly qualified for the job.
3. Audit is a verification of the results shown by the profit and loss account
and the state of affairs as shown by the balance sheet.
4. Audit is a critical review of the system of accounting and internal control.
5. Audit is done with the help of vouchers, documents, information and
explanations received from the authorities.
6. The auditor has to satisfy himself with the authenticity of the financial
statements and report that they exhibit a true and fair view of the state of
affairs of the concern.
7. The auditor has to inspect, compare, check, review, scrutinize the
vouchers supporting the transactions and examine correspondence,
minute books of share holders, directors, Memorandum of Association
and Articles of association etc., in order to establish correctness of the
books of accounts.
 Meaning of an Auditor

• An auditor is a trained professional who is

responsible to review and verify the accounting
data of any business undertaking pertaining to its
business activities.
• An auditor may be internal auditor or external
auditor. Internal auditors are those auditors who
are appointed by the company exclusively for their
company’s audit. Whereas, external auditors are
independent auditors having firms who are hired
by the companies subject to an audit.
 The auditor can suspect fraud under the following circumstances:

1. When vouchers, invoices, cheques, contracts are missing etc.

2. When control account does not agree with subsidiary books.
3. When the difference in trial balance is difficult to locate.
4. When there is greater fluctuation in Gross profit and Net
profit ratios.
5. When there is difference between the balance and the
confirmation of the balance by the parties.
6. When there is difference between the stock as per records
and the stock physically counted.
7. When the explanation given by the client is not satisfactory.
8. When there is a overwriting of some figures.
9. When there is a contradiction in the explanation given by
different parties.
 Procedure to be followed to detect errors.

1. Check the opening balances from the balance sheet of the last year.
2. Check the posting into respective ledger accounts
3. Check the total of the subsidiary books.
4. Verify all the castings and the carry forwards.
5. Ensure that the list of debtors and creditors tally with the ledger accounts.
6. Make sure that all accounts from the ledger are taken into accounts.
7. Verify the total of the trial balance.
8. Compare the various items from the trial balance with that of the previous year.
9. Find out the amount of difference and see whether an item of half or such amount
is entered wrongly.
10. Check differences involving round figures as Rs. 1,000; Rs. 100 etc .
11. See where there is misplacement or transposition of figures that is 45 for 54; or 81
for 18 etc.
12. Ultimately careful scrutiny is the only remedy for detection of errors.
13. See that no entry of the original book has remained unposted.
 The auditor should perform the following duties in respect of fraud:

1. Examine all aspects of the finance.

2. Vouch all the receipts from the counterfoils or carbon copies or
cash memos, sales mart reports etc.
3. Check thoroughly the salary and wages register.
4. Verify the methods of valuation of stocks.
5. Check up stock register, goods inwards notes, goods out wards
books and delivery challans etc
6. Calculate various ratios in order to detect fraudulent
manipulation of accounts
7. Go through the details of unusual items.
8. Probe into the details of the problems when there is a suspicion.
9. Exercise reasonable skill and care while performing the duty.
10. Make surprise visit to check the accounts.