-

es

.42

-26
-32
[I]
,32 Auditing : An Introduction

History of Auditing in India

d with
In India auditing work has _been s:~teAct the mendatory
it was establishment of
for all
14 the Companies Act, 1913. Accordmg to ~\ d Provincial Governments
Public companies to get there accounts au I e . k aud1't rules to o-et
h.
were authorised for t ts work, they. have to ma d' e d et the certificate
' 0
26 arrangement of training, to issue certificate for au It ~n g the
from Government But Provmc1a • · l Governments fatled to carry . on d
32 audit work then i~ has been discussed that the work of accountmg an
auditing sh,ould be under Central Government so an organised struct~re
I6 for this work can be framed for Cntire country. Section 144 of the Companies
16 Act, 1913 has been amended and all rights regarding accountmg and
~uditing were handed over to Central Government. Central Govt. started
functioning in this area and 'Accounting Board of India' has constituted
-d under 'Auditing Certificate Rules, 1932' to help the Govt. Simultaneously
d a committee of experts was also framed to give suggestion from time to
9me. But the progress was not upto the mark, so the committee of experts
has recomended to constitute an independent organisation for the regulations
df accounting and auditing work. As a result Institute of Chartered
D Accountants of India, 1949 has been established and Accounting Board
of India was abolished. At present accounting and auditing related work,
like-framing of rules, finalisation of Accounting Standards, training,
examination ·and allotement of certificate are functioned by this Institute.
Apart from this in 1956, a new Companies Act was constituted to replace
the Companies Act, 1913. This Act contains various provisions regarding
qualifications of auditor, disqualifications, procedure of appointment, re-
appointment, removal and rights, duties and liabilities of company auditor.
Need of exercising much more strictness was realised in respect of
:mditing work by keeping in view the role of the auditor (Price Water
~oopers-PWC) in Ramalingam case. Keeping this very objective in
1iew strict provisions have been made in respect of auditing work and
;rporate governance in new and amended the Companies Act, 2013,
•i. ich has become applicable since 1 April, 2014, and it has been expected
·111 the auditor that he should ensure compliance of these provisions.

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 ____.,
L2
H Auditing : An I ·
I 11 0 u
dian Efforts for armomzation in the Area f ••er Auditing : An /111rod11ctto11 , 'Standards on u
n . . .
· . o A«ou
tr c1 •
r s~nd,rrds , . . A diting' are
Pi r, '"'" " b,mg ""''Y '" fo1em,,.oo,J Acco""';" I
_..1 ration of Accountants (lFAC) Was set up in 1977 Fg, nternati
"•1 . divided
Afocosa;d s,,o,d type o " ' ""''""
into followm!! se
A) fl-ue bl , hcdlnrcrnationa
. IA ud" . Urther
. dB r-.-. 01 Mam
•rJ\tl
Ja cslJI is
with the main . .
ob1ec11ve lo d I
•tingandAssuranceStand
eve op a~d .
issue audit ar oard (' • '
standards of hi ""4s
-~
- . Numerical Series
S.No. Types of Standards on Audit
. the member of IFAC, the Institute of Chartered A gh qu~/· 100-199
Being1 0 . . ccounra 1 I. Introductory Matters
compelled to follow the guidelines issued by IFAC S .
01 s of 1 200-299
~:;., "' "P Auditing Pmti<~ Coun,;1 [APC). n,, ,.;;:.~. 198111 2. General Principles and Responsibilities
300-499
C S 10 3. Risk Assessment and Response to Assessed Risk
AP wa 10 review the standards. m connection to present a d' ~ec1ive
u It Pra . 4. Audit Evidence 500-599
India. an d develop audit standards. To achieve these ob,ie .
J c IVes t
C!Jce
600-699
, lions are 10 be done by the. APC : .
iwo 1unc 1 o o\1/i5 5. Use of Works of Others
A! I To take care of In1ernat1onal guidelines issued b I 11 700-799
6. Audit Conclusions and Reporting
· Auditing Human pracllces • Comm11tee, . and Otero a1io • 7. Specialized Area 800-899
2 To construct audit standards as per the Indian law · 1 Audit standards will apply to all those instructions, whether these
. and business environment.
· S, CUstOllJ are profit earning institutions or not or are of any type of statutory form
In 2002, the ICAI has changed the APc in to Auditing and Ass- and who wants to get independent examination of their accounts. Hence,
S d8rds Board, so 11. can be egu1va . Ient to International S urall it is the duty of the members of the institution to ensure at the time doing
tan from this the name of SAPs has been changed as Auditor
Apart ta nd ard a of audit, whether compliance of Audit and Assurance Standards (AASs)
2( has been made or not. If not, it has to brought to the notice of the
AS.fflrance Standards-AAS. ~t present these are further renarned as S i
SA SRE, SAE, SRS, the detail of these are as follows : Q managers and should be clearly mentioned in the audit report also. It
should be kept in view that all audit standards are binding and while
' (i) Standards on Quality Control-SQCs : These Will b . doing audit, it is essential for the members of the institution to make their
to quality control of the fjtms conductmg . the audit. e app1l! full compliance.
(ii) Standards on Audit-SAs : These Will be applied in aud't Important Audit Standards (SAs) are given in the followiQg table :
hislorical financial information. • I (
S. No. of Audit Title of Audit Standards Effective Date
(iii) Standards on Review Programmes-SREs : These will b No. Standards
Pr applied to review of historical informations.
I. SQC-1
Quality Control for Finns that Perform
(iv) Standards on As.surance Engagements-SAEs : These will b Audits and Reviews of Historical
applied to other assurance programmes in addition of historical financi; Financial Information, and Other
informations.
Assurance and Related Services
(v) Standards on Related Services-SRSs : These will be applie Engagements l April, 2009
to related service programme, like compilation engagements, etc. 2. SA-200 Overall Objectives of the Independent
Thus, a numerical series has been alloted for aforesaid every grou Auditor and the Conduct of an Audit
and standard related to that each group as alloted number from th; in Accordance with Standards on
C numerical series paniculars of these are as follows : Auditing 1 April, 2010
s. SNo 1
3. SA-210
Types of Standard Agreeing the Terms of Audit
Symbol Numerical Engagements 1 April, 2010
Series 4. SA-220 Quality Control for an Audit of
Standards on Quality Control
SQC Financial Statements 1 April, 2010
Standards on Auditinet,, 01-99
SA 5. SA-230 Audit Documentation 1 April, 2009
Standards on Review Engagements 100-899
Slandards A SRE 6. SA-240 The Auditor's responsibilities Relating
P, 2000-2699
on ssurance Engagements to Fraud in an Audit of Financial
Standards O R I . SAE
\ n e atcd Services
SRS
3000:3699
4000-4699
Statements 1 April, 2009
Cvntd......
L
 1.4
A11diting : An lntroductio~ Auditing : An Introduction 1.5
Co111d..... .
7. SA-250 Consideration of Laws and Regulations ontd..... .
in an Audit of Financial Statements -
1 April, 2009 2!8. SA-600 Using the Work of Another Auditor 1 April, ·2002
8. SA-260 Communication with Those Charged
with Governance 2!9. SA-610 Using the Work of Internal Auditors l April, 2010
-
30. SA-620 Using the Work of an Auditor's Expert 1 April, 2010
9. SA-265 Communicating Deficiencies in Internal 1 April, 2009
Control to Those Charged With 31.
1 SA-700 Forming an Opinion and Reporting
Governance and Management
-
on Financial Statements I l April, 2012
JO. SA-299 Responsibility of Joint Auditors I April, 2010 332. SA-705 IModifications to the Opinion in the
11. SA-300 Planning an Audit of Financial 1 April, 19% Independent Auditor's Report I t April, 2012
Statements 33.
1
SA-706 I Emphasis of Matter Paragraphs and
12. SA-315 Other Matter Paragraphs in the
ldentifyin~ and Assessing the Risks I April, 2008 Independent Auditor's Report I t April, 2012
of Materi~l Misstatements through --;
34. SA-710 IComparative Infonnation-Corresponding
Understanding the Entity and its
Environment Figures and Comparative Financial
13. SA-320 I April, 2008 - Statements 11 April, 2011
Materiality in Planning and Performing
an Audit - 35. SA-720 IThe Auditor's Responsibility in Relation
14. SA-330 1 April, 2010 to Other Information in Documents
The Auditor's Responses to Assessed
Risks - -
36.
Containing Audited Financial Statements I 1 April, 2010
15. I April, 2008 SA-800 ISpecial Considerations-Audits of Financial
SA-402 Statements Prepared in Accordance
Audit Considerations Relating to an
Entity Using a Service Organization with Special Purpose Frameworks I l April, 2011
16. SA-450 I April, 2010 37.
Evaluation of Misstatements Identified SA-805 I Special Considerations-Audits of Sing!,
during the Audits Purpose Financial Statements and
17. SA-500 1 April, 2010 Specific Elements, Accoµnts or Items
Audit Evidence of a Financial Statement I 1 April, 2011
18. I April, 2009
SA-501 Audit Evidence-Specific Considerations 38. I SA-810 I Engagements to Report on Summary
for Selected Items Financial Statements I 1 April, 2011
19. 1 April, 2010
SA-505 External Confirmations 39. I SRE-2400 I Engagements to Review Financial
20. 1 April, 2010
SA-510 Initial Audit Engagements - Opening Statements I !_April, 2010
Balances 40. I SRE-2410 I Review of Interim Financial Information
I April, 2010
21. SA-520 Analytical Procedures Performed by the Independent Auditor
l April, 2010 of the Entity I 1 April, 2010
22. SA-530 Audit Sampling I April, 2009 41. I SAE-3400 IThe Examination of Prospective
23 . SA-540 Auditing Accounting Estimates, Financial Information I ! April, 2007
Including Fair Value Accounting 42. I SAE-3402 I Assurance Reports on Controls at a
Estimates, and Related Disclosures I April, 2009 Service Organisation 11 April, 2011
24. SA-550 Related Parties 43. I SRS-4400 IEngagements to Perform Agreed
l April, 2010
25. SA-560 Subsequent Events Upon Procedures Regarding Financial
l April, 2009
26. Information I I April, 2004
SA-570 Going Concern I April, 2009 44. I SRS-4410 IEngagements to Compile Financial
27. SA-580 Written Representations I April, 2009 _ Information I 1 April, 2004
--- I.7
•. Auditing ·. A11 l11trodu •
1.6 Book . eepmg, Accounting .and Aud1tmg.. ctio, Auditit1g : An J11trod11ction . and Accountancy
K
Before studying various aspects of auditin •. :- --~o~•~fti~e~re~n~c~e~b~et~w:e:e:n~B:o:o:k~K:e~e~p:__•_n:g--;;:;;;;~;;----
knowledge about .meaning of Book-Keeping • AgccountmgII is ?ecessary to have I Accoun tancy1
and their
· co-relauon. . and Auditi ng Book-Keeping art to c asst·ty and
Mcamng • f B• ok•.Keeping •· t. M<0ologc1ti,,..,tof..,in1Smmg · · Wh"le
' it •is anion of monet>'Y
Tho wool m""og of Book-K<eping is to k P'°P" "'"'nting boOk• ,eg,nling '""'"'"·"at th t results of
•'"" w k«P "'"'" books of finoodal ltansaor "P books here . all ,nooel"Y transa"ion of a uaosacuons so a d lv•d
'""" .,y,P"ific method. . '°"'of an ion
o,g;nisat' " b,sine<•• Wh
business,,.-1 · not a rouune
ho - '" _aoawork.
o,finirionso on · repmg are as follow, .
t. A""oiing Bto JR
2. N,ruu , It iwootine wo<k so d"" e,e "' ' ." . r f:
f k kBolliboy, "Book-krepi; not ,equi,e ,pedal q"'lification. th~•• ,equtres spectal qua ' '
the science as well as the art of recording transac ions
'"""no." 1
. g mayund be defined as cauons and
"appropriao 3. Objedirt, Its mfiln objecti,e is to Wh"""" •• o ,ee "C'
· skills
b" t"to do.
·s to know
2. . As pe, c,rt.,, "Book-keeping is the scie,ce ,reo<d the financial ""'""tions " the fi,andal pos<lt oR ao_d to
"'ooling in books of "'"no, all those Bosines, T and ~" of'""''" P'' the mies of accoonting. ,nalysethe net"""I" of tho -
°'
in th, u,,,.fer of money Money's Worth." nu>saouons that,..,/,
4. Stage, II is the primMY si,ge Where,,; it is seeooda,y stage.
Co""'"'°" ' B?"k-ko,ping is an art to write d 5. S<op•, Book-keeping iod,des the Whmas A"°"ntanoy iocludes
"""''"°"' ,eg,lo,ly m , system,ti, way. It is a k' owo all bosiae"
which P"P" books are kept to gi,e troe knowl;:;d of process ""d•
following, foQowing-th,nBook-Keeping,
(i) To identify the ltansactions of (i) Summadzi•g the catego-
ge about business monetary nature. rised transactions.
(ii) Calcul~tio~ of indentified (ii) Analyzing summarised
transactions. ... transacu_ons m term~ of m?~ey. transactions and interpre-
Meaning of Accountancy : (m) Record~ng of 1den11f1ed talion of results.
Accountancy means a complete structure of accounting principles . transacll_ons; (iii) Dispatching of results to 11
and practices. In other words it means systematic knowledge of principles (1v) ~atagor_1sa11on of transaction parties interested in b,
and techniques used in accountancy. It guides us how to prepare accounts, mto vanous subsidiary books.
how to sumrnerise accounting informations and how to publish accounting 6. Principle : It does not have its own I Whereas it has its own principles.
informations in the interest of stakeholders of the business. Various principles, it is based on accounting
definitions are as follows : principles.
I. As per AICPA (American Institute of Certified Accountants), 7. Posting in Subsidiary Books : All Whereas posting in ledger books
"Accounting is the art of recording, classifying and summarizing in a the journal entries are posted into is not a part of accountancy.
significant manner and in terms of money, transactions and events which various catagorised ledger books.
are in part at .least, of a financial character and interpreting the results,
8. Calculation and Balances Whereas on the basis of balances,
thereof." Calculation of original books of checking of mathematical
2. According to American Accounting Principles Board, entries and getting balance of ledger accuracy comes under
?ccoun~ng is a service activity. Its function is to provide such _quantitative
books is the end job of book-keeping. accountancy.
mfonnauon mainly of financial nature about economic units, which is 9. Inaccuracy, Remission a,id Whereas remission of errors and
usef~l in taking economic decisions through logical selection in alternativeAdjustments : There can be adjustments are part of
dealing activities." · possibility of mistakes while accountancy.
3: According to Smith and Ashburn "Accounting is the science of recording transactions in original
accounting and cl ·f • th . ' .
are . assi ying ose busmess transactions and events, which books or posting in ledger, but
mam1Y of. financial nature and th"1s 1s
· also an art
· of conducting· of remission and adjustment of such
People havmg .
Interest i k" ·· · · d
interpretation of th
. Conclusion : Accoun

n m~ mg the summary class1f1cat1on an

decisions may be t:~:n'.~ansacllons and events, on the basis of which
.
I
inaccuracy is not a part of book-keeping.
IO. Qualification : There is no need of Whereas accountant needs to be
specific qualification for the book- ar.alytically well qualified.
informations related to a b t~ncy ~s a process under which monetary keeper.
usmess rs summerised and analysed.
l.'e. A11di1ing : An lntroduc,;
•
I\

J.9
Auditing : An Introduction
Meaning of Audit
Contd
4, ......
e,g;nning of Worl< , Book-keei>;ng Whot< ,.dit;n g ""'~ aft<~
l\udi\ini means elt.amination of financial statements, relat~
documcn\S and Ol)Cta\ions on the basis of which auditor _presents 14 starts as soon as the transaction is completion of book keeping an
TC\')OT\ on \)TO\\\ and \oss account and balan_ce she~t. of business depiC\ done. accounting.
\"c \.rue, stafo,fac\ory and authentic financial pos~llon. In ot~er wor~ S. Employee or External : It is done Where as auditing is performed
u .amina\ion oi a\\ financial records known as audit, thus, on its basis 1 by the employees of the organisation. by person who is external.
\rue and authentic report can be prc\)ated. 6. Legal Regulation : There are no Whereas regarding auditing
/\udi\ing definition arc as fo\\ows : legal_ regulation related to book- auditors appointment, work
\ . J\ccording to 'R.G. \~\\\\ams, "Audi1ing may be defined as th, keeping. procedure, rights, duties and
responsibilities all are governed
e1.amination of lhe boo\-s , accounts and vouchers of a business with a vie 11
\o ascertaining whether or not the Balance Sheet is_properly drawn up so 21\ by legal regulations.
\o show a true and correct view of the stale of affairs of the business."
l . According 10 International Audi_lin~ and Assurance Standard'
'I I
7. Eligibility : There is not any Whereas auo 1-
·:_or
1 must be
eligibility criteria a person with basic professionally qualified, trained
Uoard, "An nudi1 is 1hc independent exammallo~ of financial informatio~ knowledge can be book- keeper. and experienced.
o{ an cn1i1y. whc1hcr profi1-oricn1cd or not, and irrespective of its size or
ki;al form , when such an examination is conducted with a view of,
Iis presented by auditor.
8. Report : No report is prepared in Whereas after audit work a report
book-keeping.
cxpn:ssins and opinion thereon." . . .
.l According 10 F.R.M, De Paula, "An audit denotes the examination Difference in Accountancy and Auditing
of II bnluncc sheet and profit and loss account prepared by others together
wilh lhc books, accounts and vouchers relating thereto in such a manner that Accountancy Auditing
lhe audiror may be able to satisfy himself and honesty report that, in· his 1. · Meaning : Accountancy is an art of Auditing means the examinations
opinion, such balance sheet is properly drawn-up, so 11s to exhibit a true and classifying, summarising and of financial accounts and records
correc1ive view of the state of the particular concern, according to the analysing the monetary transactions to check the accuracy and to
informnlion and explanation given lo him and as shown by the books." on the basis of which results can be present the report reflecting the
Condusion : When the business organisation wants to know about concluded. results.
accuracy of s1a1emen1S of accounts and wether they presents correct view 2. Beginning and End : Accountancy Whereas auditing starts where
P or nol. for chis accounls books are checked by auditor. After the complete starts where book-keeping ends. _11ccountancy ends.
delniled examination auditor presents his report about the accuracy of 3. Object : Objective of accountancy Whereas objective of auditing is
financial information. This process is known as auditing. is to summarise and analyse the to verify the accuracy reliability
Difference in Book Keeping and Auditing transactions to reflect the financial of all financial statements
position of business. prepared by accountant.
Book-Keeping Auditing 4. Scope : Preparation of accounts of Whereas auditor domain of
I. Meaning : II means recording of all Where as auditing refers to the business is the domain of working is decided by employee
the monetary transactions or examination accountancy.
( of financial or in case of legal auditor decided
transactions which can be measure transaction and books of
s by law or acts.
in terms of money with accuracy. 5. Principle : Accountancy follows the
accounts, so that an auditor can Whereas auditing is also based
certain principles from top to bottom
present true opinion in his report. 1• on certain principles but the re
2. Natul'! or Work : It is applied for preparation of final accounts.
Whereas it is critical and can be change as per need of the
activi1y of business transactions. situation and circumstances.
analytical activity.
3. Obj«t : hs object is to record lhe 6. Knowledge of Accounting and
Whereas object of auditing is Where as it is necessary for
business transactions. Auditing : It is not necessary for
systematic examination of business auditor to have complete know-
P1 accountant to have knowledge of
transactions in books of accounts. auditing. ledge about accounting, other-
H wise he will unable to do auditing.
Contd......
Contd......
11P' vc-
1.1 0 Auditing : An l11troduc1io~ t.11
Contd......
Auditing : An Introduction
r, 7• Qualificntlon : Person possessing/
·
Whereas aUd111n
subitcl knowledge, effic1cncy and done by Ch
..
g can only b t Audiwr can only be
c;onra. .... , mus
AJ ' ·
cxpcrrcnce can on Jy do Ih c arteredA ccouniant. e e Accountant
6, Qualification : Tuer possess specialise d Chartered Accountant.
J• accountancy. a
is no need of knowledge of subject
. Accounranl is a Whereas auditor_ is ~ot employee specific qualification
S. Appointment ·loyee of !he of t~e organ1sa11on, he is for book-keeping. An auditor must have
salaried . cmp ap~ointed only for one Year 7. Knowledge: It is not It is not necessary for entire knowledge of
orgnnisa11on. Which can be changed next year. necessary for book- accountant to have Book-Keeping and
about
Responsibility _Whereas auditor works keeper to have knowledge accounting.
9 Posilion and 0ks under idependentJy, and is liable to the knowledge of auditing.
A' · management,
Accounrnnl so \ : is liable to statutory rules and regulations. Accounting and
Auditing. It is mandatory for the
managers. 1. need of Whereas it is mandatory for 8. Report : No report is Accountant does not auditor to prepare
JO. Report : There ~ ":ccountant. auditor to p~esent the r_epon after given by book- give any report to report after completion
resenting a report Y the completion of audit work. keeper. employer.
of audit to present it
p
Difference m
. Book-Keeping,
----------- I
.. Accountancy and Auditing to the employer.
21 Book-Keeping Accountancy Accountancy as Necessity and Auditing as Luxury .
Auditing
I Meaning : Book- Whereas accountancy is Whereas an auditing . After above analysis it has been found that accunting_ is necet~~
. keeping means an art f I 'f .
_c ass1 ymg, the e~amination of IS whereas auditing is luxury these both words are of economics. Thu '.
recording of all the summarmng and financial statements so understand the difference and view, it is required to understand the meaning
monelar)' transactions analysing the recorded that auditor can present of n~cessity and luxury.
of business monetary transactions the report of their Necessity and Luxury .
organisation. and lo conclude the results. reliability and accuracy. . Necessity : Necessities are those things and arrangements without
Pl 2. Object : Its object is Its object is to identify Its object is to verify which the task cannot be performed and in absence of these one has to
10 record the financial the financial position the statement of face lot of difficulties, thus, it is required for efficiency.
nature transactions as and financial results of accounts prepared by Luxury : There are such things and arrangements, the absence of
per the rules. the business. accountant to check such do not effect adversely, but it can improve the working efficiency.
"Accountancy as necessity and Auditing as Luxury" this study is
:--:--:-------- their accuracy.
3. Stage : II is the It is the secondary It is the third and final
divided in two parts :
(I) Accountancy as Necessity
preliminary stage. stage. stage.
4. Scope : '· · · · - (II) Auditing as Luxury
··:-• : II 10c1uaes In includes preparation Its work domain is (I) Accountancy as Necessity : Business can be small or big but
(
identifying the of final accounts of decided among accountancy is the necessity. Following are the arguments in its favour :
s. monetary transactions business. employer and auditor, 1. Retention Capacity : There are infinite transactions in business.
and their recording otherwise as per the Although small business have less number of transactions, but still its not
and posting in books. statutory laws.
possibl~ to recall them after few days, and in large business there are
. 5. Pri~riple : Book- It has all the rules and Auditing also has unlimited transactions which cannot be retained in mind ever for 2-3
· ~eepmg d~ n?1 hav_e principles for entire certain principles but it hours. Thus, accountancy is necessary for all businesses.
, its own pnnc1ples, rt accounting which are to can be altered as per 2. For Existence of Business : To keep the business alive
ts ~ased on be followed. the requirement of accountancy is necessary. Because accountancy helps to find out the
~ accounung principles. circumstances.
profit and loss of business, goods are sold above the cost or not, to whom
H -
the goods are sold on credit and from whom how much amount is received
Contd...... etc.
 I.I 2 Auditing : An lntroduc,;
01 1.13
J . l o know uboul the Profit und Loss : The main objective
. .
l>u"nc<, is 1o cnrn pro lil , 1hus every businc_ssman has ~unous1ty
. . to kno,Ill A11diti11g : A11 Introduction
p
ul>nul ihc proli1s al 1hc end o r each fin?ncial year. TIHS can be possibJ,
,.
.\ only hy nccoun1ing, llms accountancy 1s necessary.
4. Lcgnl Evidence : Accounta ncy has legal importance also
Accountancy as a Luxury
As we all know accouniancy •~kn
like-green-grocers, scooter-m otorb1 ·e me

. ecessity but for the small busine:~•

chanic Paanwala, hawkers e .
• .
SP mc1 imcs 1hc clashes and di sputes arises among the customer and accountancy is luxury. .
bu si ness man . 1hus, they seek court for i1s se11lement. Thus, accountanc) (II) Auditing as a_ L~xury : . . as luxuries states the follow mg
ca n be ev idence in such cases. Scholars considering auditing
5. Knowledge of Financial Position of Business : Balance Shee arguments in the favour : .. . the ·ob done by chartered
is pr,·pared 10 know 1hc financial position of business, it is the mirror of1 1 Wastage of Money : Auditing is J II bus1·ness are not
• • · h"gh so hsma
A
busi ness, i1 depicts the credit ors and debtors of business. But for preparing accounrant and his remunerat10ns 1s very
fi nluncc Shce1 , Journal. Book-keeping and profit and loss accounts are able to afford this. Thus, auditing is luxury
2 Auditing is Meaningless : It has been oun

I
fr t de:;t errors and frauds
. va1·n
required, which ore prepared under accountancy. Thus, accountancy is • .. · • h ase it becomes m ·
necessary fo r business. remains even after aud1tmg, thus, m sue c . fi malities like to
3. Wastage of Energy : Auditing ~eed cert:n o\st of debtors,
6. To know about the efficiency of Business ; It is necessary for manage vouchers serial-wise and datew1se, p~ep_ ? ·1 II wastage .
every bu siness to compare the profitability of various aclivilies, a?d to creditors, stock, investments etc. These all are fuule/mvam as I a .
give up the operations which are not profiiable for th: bu~rn~ss the energy of employees. . • If aes
orgnni su1ions. For the planning of business progress, and fo~ 1denrify1~g 4. Absence of Reliability : If owner of business h1mse manao
21 the rcuson s for reduced efficiency and suggesting solutwns for It, the business then audit is luxury. .
account nncy is must thus, ii is necessary. s. Wastage ·o f Time : So many stateme~ts. list and explanat'.ons are
7. For Prestige of Business : Accountancy is necessary for the ro be given during auditing that is why also 11 1s luxury. Thus, 11 waste
prestige nnd reputation of business, as it is not possibl~ r_o get the loans the lol of time of employees. . ..
nnd other subsidies in absence of accountancy. Thus, 11 is necessary. 6. Decrease in the Efficiency of Employees : While aud1_11ng
8. Easy to Culculale Tax Liability : Acco~ntancy !s
very help_ful auditor ask various informations from the employees, ask many quesllo~s
in cnlcula1ion of sales tax and income tax. Otherwise officials can decide which creates the hurdles in work of employees. Thus, it reduces their
sponl!lnc ous sales tax and income tax, which can lead lo a deal of Joss, efficiency.
Pl
thus. lo avoid this accounrancy is necessary. 7. To Enhance the Reputation : It has been found that small
9. Comparative Study : Every businessman is interested in businesses with objective of enhancing its reputation and prestige ge l the
compllring irs current position wirh irs previous. Thus, accountancy is auditing done. In such case it is luxury.
necessary for compararivc analysis of financial position of business of Auditing is not a Luxury
past years for strong planning process. For large organisation auditing is not luxury as ii improves the
10. Helpful in Getting License : Businessman need licence for the efficiency of employees like :
export and import. While getting license he has to prove, that he is doing I. Enhanced Management Efficiency : When management is aware
the business in area which require accountancy and can also show its about that report of their work performance will be presented lo the
exisrence in this field in past years. owners, which is accepted by all , which results to motivate them with
more dedication and honesty.
11. Helpful in Buying/Selling of Business : Before purchase of
busine.ss, buyer is interested lo know about the actual position, which can 2. Enhanced Work Efficiency of Accounting Staff : The business
only Ill: fulfilled on the basis of accounts. Buyer analyse lhe business on in which accounts are audited by independent auditor, the accounting
the basis of accounts and rake the decision to purchase or not. staff is more careful, honest and cautious which improves their efficiency.
Besides the auditor is aware of minute details and he gives suggestions
12 Protection from Frauds and Forgery: There are always chances
for the better utilisation of employees, in this way auditing is not luxury.
of frauds and forgery by the employees. But this can be controlled by
3. Enhancement in Procedural Working Efficiency : Each business
accountancy. The stock can also be verified with accounts to find the
p
H fro""'· Th"'· from ,,~, ""'"' "'" •=••>,cy ;, "'" , ,~es,Hy. I organisation has its own procedures for its dealings. If the auditor discovers
any loop holes he gives suggestions to remove them which results in th e
increase in procedural working efficiency.
 , r«
I \ ,14 Auditing : An lntroducr
'a, 1.15
4, Enhnnccmcnt in Efficiency Through Reputation : Audit A11diti11g : An /11trod11ctio11 h t I crore. But, tax audit is
nccounis ure more re\iabh: which results the support of creditors, lendi~ . . urn over of more t an
ni;cncic~. invcs1ors and government department m the growth of \hi Proprietorslnp having I h t accounting and
.
essential. ouments we can state t a letely true t hat
hu~ines~ nnd nlso in increasing repu\a\ion of \he business. t
S. Improved Erficicncy of Plant and Machinery : Audit of co~ Thus, from the abov\~othe business but it i~ c_om~e ihat benefits
auditing both are necessary o d" . is luxury. But JI JS
nccoun\s reveals \he fac\ors responsible for the break down of plant ani accounting is . necess ary and au. 111ngbe widely use d . .
machinery. Thus, such weakness can be corrected which will result in tht of accounring are more and Jt can , .
improved capaci\y. Objectives of Autlitmg unts of the
6. Improved Efficiency throui;h Comparison : Audited accounts h ther the fina1 acco
un: most credible, thus, managcrncn\ can use the financial statements of The object of audit is to find out w e d they are fair or not.
previous years \o compare \he performance lo ascertain \he ways of business have been prepared according ~o rul~s :;fleeting fair profit/loss
} overall enhancement in efficiency. The Profit and Loss account o~ the bu~mess JS financial position of the
or not, and the balance sheet JS showmg true uirement or not. Various
Auditin11, is 11 Necessity
business or not. And all b~oks are kep~ ~s per _req·ves in following ways:
Thus, i\ can he concluded from above arguments that auditing ii scholars and judges explamed the audJtmg obJ:t~. "The main objective
helpful in over all enhancement in efficiency. Archer W. Homes rightly According ro Spicer, Peggler and Water • Jg, db
s\nlcd, "Auditing helps the owner ro gcr figures, views and reactio~ ' of auditing is to verify the account~, and financial statements prepare y
durin g 1he course of business nnd ro rake profitable decisions, otherwise th layer and their employees. .
ii wouldn't he possible. Thus. auditing is nor luxury rather iris necessity, e emAccording to Judge Lindley, "Fundamental objective of financ~a 1
2( which clear from 1hc following arguments : . statements is related to present the true and accurate aspect of financial
1. Necessary for Companies : It is a statutory compliance for position and activities of the organisation." .. . . :
companies 10 nudir 1hcir accounts because : Accordin<> to Accounting Standards SA 200 and SA 240, AudJtrn_g
(i) Audi1or rc\'cnls rhe correct position of the company. objectives are ;espectively reporting, unabling auditor to prese~t _his
(ii) lnl'Cslors nre inreresrcd to invest their money. opinion about financial statements, preventions of frauds and to rectJfymg
(iii) Prcvcnls the managers and employees from misuse of funds is primary responsibility." . .
2. Nrrrssnry for Trust : Trust Members are satisfied only b;
Thus, above all views conclude that auditing has many obJectJves.
uudi1,·d Ul'counrs as they are able ro know about that trustee's assets are
properly u1ilised ns per the objectives. That is why while determining the scope of auditing he . must get ~he
J. Compulsory for the Cooperative Societies : Auditing is
written objectives, so that there should not be any disputes while perform mg
compulsory for rnoperarive socities as auditor reflects the correct position the responsibilities in future like in case of Amphel V/s Anan Deckster
of the socierie~. This able _to confirm the government and public thar & Company and Lich V/s Stocks. Thus, considering all above facts
auditing objectives are divided into two parts
roopernure socret1es are bcrng run on lines of principles and funds are
nor misused. A. Main Objectives
B. Subsidiary Objectives
4. Necessart for Public Corporations and Government
A. Main or Principal Objectives
Dtputmeots : Audrtmg depicts the position of public corporation a d
gorernmen1 departments not only to ensure the honesty and loyalty n0 f Examination of Accuracy and Appropriateness of Final Accounts :
employees, as ll'ell as ro clearify that public funds are not misused. The important objective of auditing is to examine the accounts and
S. N~cessary for Partnership Firm : As such audit" . related documents in details on the basis of which auditor can presents
m11JJdarory rn partn h· fi . . . mg 1s not the report of correctness about the profit and loss presented by profit and
accuracy of accounise:;~ .irm ii is optmnal but auditing confirms the
loss account and the financial position of business shown by Balance
statutory audi1 is not requir;:f mutual f~~h among the partners. Although Sheet is accurate and reliable statements. According to Spicer and Peggler,
f I crore, bu1 tax audit is o~ p:i,ners ip frrm with turnover exceeding "Objective of auditing is not only to discover the frauds and
6 Necessa t, require m respect of such firms
b . · ry or Sole Proprietor . F 1 · misappropriation but also to assure the extent of reliability of the final
usmess, proprietor are depe ded · or arge sole proprietory accounts and statements."
P1
the performance of the em I n ;n employees, thus, auditing ensures B. Subsidiary Objectives :
H p oyees. tatulory audit is not required for sole
1. Detection of Errors : There can be so many errors in books of
accounts like fundamental errors, technical and repeatation errors and
 -· . ---
1.16 t.17
Auditing : A11 lntroducr;0 ~
P.
calculation mistakes etc. Auditor must detect these errors and to remove A d iting : An lntroductio." ·at position oC th e company :
·al statements.
them is the objective of the auditing. Although many of the errors are u financ1 financ1 .• n
,.
-\ discovered by general auditing process whereas some of mistakes are
detected only by detailed auditing and deep knowledge and inferences
7 Ascertaining the _trueto make opinion _on of financial pos1UO
C)· Unable Ihe Auditor . . n for the fa1·r view
(!.) Auditor presents op1_01_0_
.
nt J·ustificauon
like excess payment of wages, mistake in depreciation rates. 11 • 1 acuv1ues. .. to prese
and operauona . al activ1ues,
2. To Discover the Frauds and Embezzlements : As there are so h operation
(iii) Other than t e. . special areas.
many ways of mistakes in the same manner there can be various types of , for the transacuons m . .
frauds like frauds in cash, stock, assets, facilities, labour, calculation and
accounts etc. Although ii can be done by a normal person as it can be Scope of Auditmg . f xamining the
done by tactful person. Thus, it is not easy to detect the frauds. In such
r itauons O e
f auditing refers to decide the im n auditor to detenmne
·
A case ii is the objective of auditing lo discover the frauds and embezzelments,
for this vouching and verification, are used by auditor. For this Institute
accoun~;~f r~e auditor. It (s very i~p~~ta;::t ;II waste his tim:
the scope of work, othe~w1se exces h reason for the court to prov
of Chartered Accountant or India-lCAI has explained for auditing that gy and lesser work will become t e .
ener . fi . ents
Auditor must always be alert for the chances of frauds and embezzlements careless and guilty of mis ~asance. . . sco e for financial stat~m .
as these are unfavourable for auditing because such frauds and ICAI SA-200A explained the aud1u~g d P_ded by considenng the
misappropriatious can prove the financial positions to be superficial. Scope of audit of financial statembel~gt!ti~ns decleration of institute.
3. To Prevent frauds and Errors : Objective of auditing is not I
. . area, necess ity .of stautory·11O not
activity limit the scope of au d"It w hich are
2, only lo discover frauds and errors but a/so to restrain them. Although Whereas terms of appomtment ~1 . t
auditing cannot prevent Lhem direcr/y but can surely reduce them. . 1 · I (on and mstltu e. ·t ·
II has been stated in Indian Companies Act, 2013, that it cannot determmed by eg1s a I . . f of books of accounts. Thus, I is
Audit is the indepth mvesugall1onh . rtant points of financial
be expected from auditor that all the mistakes, errors frauds and inaccuracy . h a way that a t e 1mpo .
arc discovered bur still the checking is relevant in auditing so that it can to be dotsn:r:nci~~idered. For this before determining any no~msfiaud1~orl
be helpful as follows : hstatemen
to check that relevent information . . d" d operly m manc1a
1s 1sc 1ose pr . . . h
(i) If auditor traces any circumstances which promotes the frauds,
he may give suitable suggestions but he is not bounded for it.
as
statements . . (1"f app 1·1cabl e ) · RPoardmo
within the statutory hmrts """" .. ct· ,
this Itd as t
been stated in the London and General Bank case that, 'Au 1tor s u Y
Pi (ii) Auditor can reduce the errors, frauds and inaccuracy. is not just to ensure mathematical accuracy but also check carefully that
(iii) Informing the employees of organisation to perform the duties certified things are also correct." . .
cautiously.
a
1. Accounting and Internal Control Process : It 1s exammed to
In this way auditing can reduce the frauds and errors by
psychological effects. check its appropriatness and to know about all accounts are leg~lly
recorded. Before that verification is to be done to confirm the workmg
r ~- Advice to Management: Advicing is not the statutory obligation
or. auditor nor management is bound to folJow the auditor advice But of these process. It is necessary to establish the opinion that basis of
_o course accounts related advice should be followed b th . preparing final accounts are reliable.
1s also the objective of auditin 10 Y e managers. It 2. Techniques and Methods : To check its comprehensiveness and
loopholes and to advice th em.g make the management aware about its
adequacy it is necessary to review the weakness and loop holes due to
s. Moral Pressure on Em I . which the errors and inaccuracy exists.
being examined among the em lop oyee : _Auditor imposes the fear of
errors and frauds and enhanc: lee~, which reduces the possibility of
performance of employees Wli" h e on~sty and morality among the
3. Mathematical Accuracy : To examine the Mathematical accuracy.
4. Verification of Accounts : To verify the accounts with the help
of vouchers, invoice, documents operative books etc.
the audit work and reduce; th IC results in facilitating and simplifying
6. Proper Plannin e _errors and frauds. S. Balance Sheet : Verification and confirmation of existence,
to lntemalionaJ A . . g for disclose of Auditors O . . value and rights of assets and liabilities figured in balance sheet.
p to wort 00 Jina . utting and Assurance Board th :m•?n : According
6.- Examination or Entries : With the help of supporting documents
on them can benc1~ statements to make them w rthe o ?ect,ve of audit is
H the relevance should be verified on the entered transactions.
given to the Stakeholders. o Whl/e, so that opinion
7. Capital and Revenue Nature : To confirm th;it capital and
revenue nature are taken separately and to confirm that all incomes and
expenditures are included in accounting.
- I . 18
.

WI
Auditing : An Introduc,·

- 1.19
8. Comparison with Other Accounts : Comparison of Bala 11 Ct Auditing : An Introduction d ds or not like given
P, . d t minant stan ar
Shccl nnd Profil and Loss Account with other statements so that to verir fnd ils cost is according to e ~r com lished to what extent.
"'
Ja
1h01 final accounts arc correctly prepared.
9. Examination of Results : Examining and ~erifying the resui~
l responsibilities to the employ~s is ac t ~heck the cost .and its related
S. Cost Audit : Cost audit m~an~ o f accuracy of cost accounts.
rcncc1cd in profit nnd loss account and to confirm its accuracy. accounts. In other words it· ,s "Cost° audit is the exammauon
· e xammauon · · of
10. Compliance of Statutory Mandates : If audit is of a11 According to ICWA (London), es not the postmortem
. fi . hed ods and the expens
orgnni sn1ion incorporalcd under any act, then it is to confirm that all th! effectiveness of semi- uri:us_ go . kin of the costing system,
s1n1utory mnndntcs are fulfilled. investigation." Cost Audit is the detailed chec / cost accounting plans.
11. Requirement of Written Agreements and Provisions : The cost records and accounts and its adherence to t e d . . also beneficial
It is used in favour of managers, customers an dit is mers
i-copc of nudil is decided on the basis of written agreements and relatC\\ . ment an consu ·
A: for the shareholders statutory auditor, govern . . f incomes,
provisions. 6 Tax Audit : Tax audit means examinations_ o .
12. Report : After examining the results, actual report is present~ · . . • emptions. Its mam
10 1hc owners.
expenditures, special deductions and vanous tax ex . d r income
objects is to check the rebates, exemptions and deductions un e . .
Types of Audit tax act Tax audit is done by professional chartered accountant and ~t is
based ~n provisions of income tax act and the princi?les of accounll?g.
Practically there are followi~g type~ of auJ!' :Efficiency Audit
Tax audit report is to be given in the prescribed format which
Complete and Partin\ Audit, Interim Au ,t, . d" 1 Audit et '
21 Performance Audit, Cost Audit, Continuous and peno ,ca c. includes : ..
Each of these arc explained as under : (i) If accounts are not audited under any other provmons and law
'Iypes of Audit then auditor has to mention the correctness ·and accuracy of
1. Complete and Partial Audit :
Complete audit means complete J. Complete and Partial Audit financial accounts, profit and loss account and balance sheet
examination of enlirc books of accounts. 2. Interim Audit of organisation. '
For example if finnl accounts are prepared 3. Efficiency Audit (ii) All the enclosed documents with audit report are correct and
onnunlly then audit is done annually 4. Performance Audit accurate.
whereas if Jinn/ accounts are prepared 5. Cost Audit 7. Management Audit : It is the evaluation of performance of
Pi holf yearly 1han audit is done 1wice a 6. Tax Audit management. It is the audit of qualities of managers, which evaluates the
7. Management Audit managers individually and checks the quality of entire management process.
year. . .
Partial audit means exammaflon 8. Continuous and Periodical It also known as performance audit.
of specific plltt of accounts. It can be on ' - -Audit
------------' The main objective of management audit is check the ability and
111·0 basis work and time. If accounts are . . performance of managers. The supporting objectives are to examine the
prepared annuJ//y and audit is done for six or last _three _m?nths 1t will objectives of management, organisational plans, patterns and procedures
be known as partial audit on the basis on rime. Also 1f audit 1s done only and effectiveness of control.
of purrhase transactions or sales transactions, ii is known as partial audit There are three main aspects of management audit : Efficiency
on lhe basis of work.
audit, Propriety audit and Performance audit. Many techniques are used
2. loltrim Audit: Interim audit refers to audit between the financial
for management audit which basically incl,udes-Morality test, Ratio
year. It is required for those businessmen who prepares the final accounts analysis, Budget analysis, Operation analysis etc.
in mid of lhe year like for declaration of interim dividend.
8. Continuous and Periodical Audit : Continuous and Periodical
3. Efficiency Audit : Efficiency audit means to examine the / Audit can be studied in detail as follows : )
proficiency of various departments and to check their achievements, how
much performance is accordance to plans, and in which areas there is need Continuous Audit
to change. The significance of each transaction is checked and observed Meaning of Continuous Audit : Continuous audit means audit
p the ~odilication in transactions of few areas, which can improve the which is done by auditor's staff throughout the year. In other words
efficiency.
H 4 auditor's staff is occupied continuously with the audit of accounts
Performance Audit : Performance Audit refers to examination to
fi nd that• performance throughout out the year or auditor attends at intervals fixed or otherwise
·
15 d .
accoi ance lo the obJectiv~s and goals or not, during the financial year and complete the audit work. ·
• p

1.20 Auditing : An lntroducr

lmportanl definition s of Conlinuous Audit are :
I. Accordin g 10 Walter W. Bigg, "Conlinuous audit is that aud·

lo~

------
.
Auditing : An /11trod11ction
done easily and helps to p
delay.
repare the report
and final accounts

t.21
without anY
• Continuous au
• Interim Accounts . h delay as many
dit
,."' in which slaff of an audi1or inspects lhe accounlS conlinuous of whoJ~
year."
6. Helpfu~ in _Prep_an:~counts without muc accounts.
helps in preparing inter~ quarterly and half ~early audit leads , to
organisation prepare, mon y, Planning : Conunuous nagement
2. According 10 Eric L. Kohler, "Continuous audit is an audit lhe d'tor report helps ma . 1
7• Formation of Future .
detailed work of which is performed conlinuously or al inlervals during preparation of ~nal accounts along with a~:duction and other financia
the fiscal period, the purpose being to uncover and correct undesirable in quick plannmg of purchase, sales, P
practices and errors before the end of the year as well as to relieve the
auditors workload thereafter." plans. A d"t
Disadvantages of Continuous u _1
Accordin g to Lawrence R. Dicksce, "'Inc continuous audit is one Disadvantages of Continuous Audit
A whi ch is commenced and carried on before close of the financial period are as follows : Disadvantages ~f
to which it relates . An audit which is fully conlinuous involves the J. Interruption in Work : As the Continuous Audit
anendancc of the auditors staff at the client's office lhroughout the period auditor visits the office regularly to check 1. Interruption in Work
under rev iew. In olher cases th at atlcndance taken place at frequent the records which interrupts the business 2. Expensive
intervals." activities. 3. Tampering in Figures
Conclusion : Continuous audit acrua//y m eans the audit in which 2. Expensive : Continuous audit 4. Reduction in Moral
uuditor is constantly engaged in audit from beginning 1_0 the en~ of can be a costly affair for small business as Pressure on Staff
21 fi nnncial year and audit staff occupied in audit al regular mtervals ltke,
arrangements of audit and needs of 5. Loose and Careless
wee kl y, fo rrni ghtl y, monthly etc.
auditor's staff requires lot of time and Performance
Advnntngcs of Continuous Audit efforts. 6. Declined Quality of
Ad va ntages of Conrinuous Audit are as follows :
1. Close and Extensive Checking : _ _ _ _ _ _ _ _ __ 3. Tampering in Figures : In 1,__Wi_o_rk_ _ _ _ _ _ __,
continuous audit, records and figures in
Due to detailed close and exhaustive AdvantagesofContinuous
checking errors 11nd frauds are discovered Audit the books of accounts which have already been checked by auditors may
easi ly nnd quickly and none of the 1. Close and Extensive be altered after the audit is over.
Pt irregularities remain lefr. 4. Reduction in Moral Pressure on Staff : In continuous audit staff
Checking
2. Com-incnt and Smooth Auditing : 2. Convinent and Smooth is aware about the limits of auditor due to his continuous visit to the
Conrinuous audit leads to regular checking Auditing office. Thus, they do their work so cleverly that they are never caught.
of accounts throughout the year which 3. Reduction and 5. Loose and Careless Performance : As auditor's staff knows that
leads to convenienr and smooth yearly Prevention of Fraud there is lot of time so they become careless and relaxed in the beginning
audir. of the year.
Habits
3. Reduction and Prevention of 4. Enforced for Regula ity 6. Declined Quality of Work : As continuous audit becomes
Fraud Habits : During continuous audit 5. Easy in Preparation r of mechanical, so auditor and his staff become less interested which results
staff does not get chance to make any p· I A ts in decline of quality of work and there is fear of missing transactions
. . ma ccoun
frauds which results in the reduction and 6 H f; · p · without audit.
pre1·enrion of Fraud Habits. · I eI uA 1 rn repanng
_,
4. Eworced • ntenm ccounts Measures to Save from the Disadvantages of Continuous Audit :
for Regularity : The .
regular i•isits performed b th d' 7. Format10n of Future 1. Measure to avoid work Interruptions : This is related with the
Y e au Jtor Plannin psychology of the staff, thus, they should work with loyalty, honestly and
keeps the check alert to maintain the .._____g::;.______...,
cautiously to improve their confidence level.
acro~nts upto date and accurate as auditor may land up in the office at
any time. 2. Not to be adopted by small business : Continuous audit is
5 expensive, thus, to overcome this one should not get audited their accounts
p 1 d · Easy in Preparation of Final Accounts : As continuous audit as it is not mandatory legally.
H r,ea s .: constant ex.aminatioo of accounts due to which at the end of
manci year only few of the work remains incompleted, which can be
 1.22 Auditing : An lntroduc,,·
3. To avoid alterations in_figures : Measures to Save front the

..
0~

r=c
Auditing : An I
ntroduction
of Tampering in Advantag~udit
of Periodical

1.23
(i) From next time Auditor muS t Disadvantages of
2 No Chance ce to change . t
p strictly order not lo alter the fi_gures. Continuous Audit
F" res.: There is no chan ords as it is l. Convemen f Tampering
,\ (ii) Auditor must note the important I. Measure to avoid work_ ig~ter the figures of a re~ al year and 2. No Chance o
figures till mid of the date. Interruptions
Ja ~~nae at the _e~d of f\:~;~: till then ~he in .Figures sive
(iii) Over wrillen figures muSt be 2. Not to be adopted by carried until Jl is comp der the possession 3. Less Ex pen tions in
marked with special symbol. small business booksofaccounrsareun . 4. No Interrup
(iv) Over wriuen ~gures muS t be 3. To avoid alterations in of auditor. Ex ensive : Periodic aud_1t Work .
wriuen again and duly signed. figures
3. Less p. e of auditor and his 5 Time Savmg
4. Measure for Moral Pressure : 4. Measure for Mora\ consumes the
. less llm •son to continuous
• · "'ork Contm · uity
Efforts should be made to get more and Pressure .,, h s in
staf , , t u ,
compan . Iess
. .s less so it is ... ,
6
A more cooperation from the employ~es, f~r S. Other Measures audit its remunerat10n I ' t of periodical
this auditor must create closer relallonsh1p ' - - - - - - - - - - - - - - . . o~ebecause
of the men
towards employees but it should be in limits. expen~v~o Interruptions in Work : _It is auditor visits on ly
. • . does not create hindrance m w?~
~,., '!'\!: '"' of fioaocial ,=.foc ~";''""t1ing is ,ompl,ted in ••:
S. Other Measures :
(i) Personal Accounts should be checked ar the end of t~e year.
(ii) Auditor must note down rhe impoTtant infoTmat10n and once, 5. Time Saving : In p~nod1c da~i~, s~:ff from visiting agam an
clarifications. . h1"ch prevents the auditor an .
timew h"tme ·
(iii) Auditor must rotate the work of his employees. again to the office, l?us: sa;e; t_ a~diting not only con~ibutes_ I~
21 6 Work Contmmty • eno ic
Periodical Auditing continuity but also avoids the chances o f errors. Thus , audit 1s carne
until it is completed. •
Meaning of Periodical Auditing : Periodic Auditing means, yearJy
or fin al audit in which the audit is done at the end of the year, after the Disadvantages of Periodical Aud!t f ll
closure of nil final nccours of the business, when all accounts are completely Disadvantages of Periodical A~d1t are as o ows
prepared. As accounts are audited only once in this type of audit. It is also 1 Lack of Deep and Exhaustive ,.-------f::P;---:;-.::-di:;:.;-:ca::_~17
known as Balance Sheet Auditing. Checki~g : Periodical audi!in~ lacks Disadvantal:~ eno
Important definitions of Periodical Auditing are as follows : detailed and exhaustive exammattons as f D nd
I. According to Lawrence R. Dixey, "The periodical audit or
there is time constraint and also the scope l. Lack ;epki a
complered audir is one which is begun only after the close of the financial of work is very vast. Exhausttve C ec ng
period lo which ir re/ares." · 2. End of Moral Pressure : 2. End of Mor~l Pressure
. 2. According to D Paula, " A periodical audit is one where the · Periodical Audit does not create any moral 3. Delayed Discovery of
audiror does nor artend unril the end of the period of the accounts and pressure on the employees as the Error and Frauds
lhe whole of the checking is effected at one time" employees know very well that auditing 4. Delay in due to which
., 1h 3.dAccfordthing to S~icer and Peglar, 'This audit .is generally conducted will be done at the end of the year which Preparation of Final
• e en o e financral year h th fi creates chances of frauds and errors. Accounts
('
s. ready. The auditing work does •n:r :~d t:il a;counts a:,e completely 3. Delayed Discovery of Error 5. Delay in Advice
Conclusion : Periodical Audit . o_mp~ete. and Frauds : Periodical audit discover - - - - - - - - - - - - -
of financial Year after the clo /°;ans ~udrt which is done at the end the errors and frauds at the end of the year. Which lay the cumulative
until it is completed. sure o manc1al accounts and it is carried impact on the business and that occurs the huge losses in business.
Advantages of Periodical Audit 4. Delay in due to which Preparation of Final Accounts : It is one
Advantages of Periodical Audit of the lacuna of periodical audit that it is time consuming the preparation
. I. Convenient : It is . are as follows : of final
the year. accounts is delayed as all the audit work is done at the end of
p r:ud;tor _visits the organisation c;:;;~~e:t for auditor and owners staff as
I:' g ve informations and explanation to ~:Can~ secondly staff need not I S. Delay in Advice : As the auditor examines the records in the next
year~ thus, h~ ?ives advice also after that, thus, the suggestions to improve
auditor throughout the year.
the 1rregular1t1es and to prepare influencial internal control plan . is also
--- I 24
Dirren:ncc in Continuous Audit and Periodical Audit

Auditing : An lntrodu .
cr, 0~
A11diting : An Introduction
Difference 1n '-'u 11 . . . . - -
dit and Interim Audit

1.25
,,, Contlnous Audit Periodical Audit
I. Mnning ; Auditor and his staff Whereas Periodical auditing meani Continous Audit
InterimAudit
. • h k·
. . . Whereas interim audit is c ec mg
,.A.I uami ncs the accoun ts throughout which is done at the end of th,
the year. year, after the closure of books Of
J. Meaning : Contrnuous Audit is an f
audit in which checking of accounts o acc~un
ts during the course of
accounts, when all accounts ar, goes on throughout the year. financial year. . b. .
prepared. . h · t ·m audit o ~ecuve
2 Objective : Continuous Audit W ereas men d
· object is not to prepare profit an . to ascertai·n the profit an 1oss
d 1s
2. J'lioturc or C hecking ; The Whereas in it detailed checking is
chec ki ng ib d,'. lailed and intensive.
not possible. Joss account. account.
3. Timing or Audit : The auditor and Whereas in this audit commences 3. Trial Balance : There is no need Whereas Trial Balance is required
hib sturr. audit at re gular and after the end of financial year and for trial balance to be prepared to be prepared repeatedly and
A except the end of the accounting profit and loss account and
irregular intervals throughout the continues till completion.
cur. year. balance sheet is also prepared.
4. l'rcp11r11tion or Finni Accounts : Whereas auditing is done after 4. Nature of Checking : It is detailed Whereas it is Comparatively less
f-i nul Accoun ts arc not prepared preparation of final accounts and and intensive checking. detailed and intensive.
hcforc nud itin g. at the end of financial )'_ear. S. Verification of Assets and Whereas in this verification of
5. Knowlcdi:,c or Errors and Whereas the errors and frauds are Liabilities : Verification of assets assets and liabilities is done along
Frauds : TI1e errors nnd frauds arc discovered very late. and liabilities is done at the end of with the interim audit.
21 uctcctcd ut early stage. financial year.
,,. C ost or Auditing ; TI1c cost is high~ Whereas it is less expensive as the 6. Audito~'s Sug~esti~n : In Whereas less suggestions can be
u~ uuditor has lot of work to do, auditor and his staff has less work compar~son to rntenm audit, given in interim audit.
thu s, remuneration is high. so accepts less remuneration. appropnate suggestions can be
7. Moral E«rct on Employcesi.· Whereas it docs not morally impacts given more speedily.
TI1crc is cfft"Clil'I: moral effect on the employees as they know 7 Work Completion : In this some
• Whereas in interim audit entire
th e cmpl.oycc:s in continuous accounts will be audited once in a work are left to be done for the end work is completed. -
uudit beca use auditing and year, so they become careless and ?f year, so some of the work remains ·
accounting continues less attentive. mcomplete.
simu/r11ncously. rhus, employees
arc more a/en and honest. 8. Auditors Report : The auditor gives Th .
his final report at the end of . e ~~dltor report is. giv~n
8. Conn~oit.nrt' : Continuous audit/ Whereas periodical auditing is more accounting year im~e iately after the interim
not conn:nienr us rhcre are lot convinient then continuous audit.
is difficulties · audit.
of during this.
9. Netd o( Interim Audit : There is Basic Principles Governing an Audit
no need of interim audit separately Whereas in periodical audit there SA -200 of ICAI has
- -
C
s in continuous audit. is need of interim audit. explained the basic principles Basic Principles Governing an Audit
JO. Completion o( Au,1:, · Th,. aud ' of audit, which are to be ·I. Integrity, Objectivity Independe nce
-- ••uu .. ' ;;~ ....... Cd.S IO/S audit takes time to be followed during auditing and Confidentiality
is completed immediately after the completed even after the end of the process and for preparing report
end of financial yw, financial year. 2. Skills and Competence
lL. SuilJlbility : It is suitahlP rn. •--_::_ according to the circumstances. 3. Work Performed by Others
SCa/e butina, . - - ... _.• •v• IMge I lt ;_ _ , .
The Basic Principles are 4. Documentation
12. Audi,~=:'·, .
n rnn, ...... ,,,,,_
unci;,t~uk•1.•nao1e tor small business
gs. as follows : 5. Planning
.,,.,,. : u, •vuuuuvu.s auau ry, ereas Jn peno IC au I 1. Integrity, Objectivity
'
I _..,iU,g
d>, so
fas,
-
wo,t
the repon i, <omp/""'
is Biven instantly.
·; "<ei,.,
"'h . d .with d·t
. report
the owners
delay. Independence and
Confidentiality : The auditor
6. Audit Evidence
7. Accounting System and Internal
Control
should be honest, independent
8. Audit Conclusions and Reporting
 1.26 Auditing : An lntroducu011
... ·,·,g .. An /11troductio11 1.27
,411d,,,
and ~i nccrc in hi s approach to his professional work. He must _be fair and
(ii) Analysis of signi~icant ratios and trends including the unusual
mu ~t not all ow any bias to override his object~vity._ The auditor should fluctuations and items.
respect th e confidentiality of information acquired m ~he course <_>f his
7. Accounting System and Internal Control : Auditor must ens~re
wo rk :ind should not disclose any information to a third party Wllhou 1
~pccific nuth ority, unless there is legal duly to disclose. accounting system by management are adequate and all the accounting
th
2. Skills and Competence :
~\,nation
0
has been recorded which is required to be recorded. Internal
'" rrol normally contribute such assurance. The auditor must evaluate
(i) The audit should be performed and the report prepared_ ~ith
due profess ional care by persons who have adequate trammg, ~on accounting system and internal control on the basis of which he
experience and competence in auditing. _ehes ro rely on audit procedures.
(ii ) The audi1or requires specialised skills and competence which w,s 8. Audit Conclusions and Reporting : The auditor should review
nre acquired through combination of general education, the conclusions drawn from the audit evidences on the basis of his
kn owled ge obtained through study and formal courses and knowledge, experience and financial information. This review should
prac1ical experience. include following :
(i ii) The audil or requires awareness of development of ICAI on (i) The given financial information is according to acceptable
nccoun1ing and relevant guidelines and regulations. accounting policies.
3. Work Performed by Others : When the auditor deligates his (ii) Financial information fulfills relevant regulations and statutory
work 10 nssisrnn ts, lhe work performed by other auditors and experts, he requirements.
con he responsible for forming and expressing his opinion. Thus, he will (iii) There is adequate disclosure of relevant information, subject to
he entitled to rely on work performed by others provided he uses adequate statutory requirment.
skills and care, and is not aware of any reason ro believe he should not The audit report should contain clear opinion. It can be qualified
have so relied. The auditor should care fully direct, the work delegated to or unqualified. Qualified report and adverse opinion indicates the audit
assist.once l>cforc making any opinion. In case of any statutory auditor, the report should state the reasons. Whereas unqualified report indicates the
work performed by him on which au,ditor rely, should be clearly expressed
in report for such reliance. (. auditor's satisfaction in all matters stated above. Report should be laid ·
down in prescribed format of aggreement or related statute or regulations.
4. DocumenlJIUon : The auditor should keep the documents safely
which are important in providing evidence that the audit was carried out Auditing : Principles, Procedures and Techniques
in accordance with lhe !Jasic principles.
Auditing Principles : Normally the word 'Principles' implies a
5. Planning : To complete the work efficiently and timely an
universal truth, a basic rule or a rule specified in relation to a particular
auditor mus·, cover the following things in his plans :
activity. In other _words general rule which are to followed as guidance
(i) Plans should be based on nature of clients business.
to achieve the objective are known as principles.
(ii) Acquiring knowledge of the clients accounting system, policies
and internal control procedures. Auditing Principles mean those conceptual views which directs
(iii) Dere,-mining the nature, timing an·d extent of audit procedures and provides guidance for auditing activities for the qualitative auditing.
10 be performed. In other words these are basic truths which lay down the auditing objectives
(iv) Coordinating the work td be performed. Plans should be and give the knowledge about the ways, which helps in the fulfillment
reviewed and revised as necessary during the course of the . of the objectives.
audit. Auditing is the reason to have faith in accounting statements. This
. 6: Audit Evidence : The auditor should obtain sufficient appropriate is the reason, to achieve the wide functional objectives many procedures
audit cndcnce to enable him to draw his opinion on financial information. and techniques have been developed on the basis .of these views and
Complian~ procedures are tests designed to obtain assurance of internal principles, which are considered as controlling powers. SA-200 illustrates
control. Substantive procedures are designed to obtain evidence the the basic principles of auditing on the basis of original principles governing
completeness, accuracy and validity of the data collected and produced auditing which operates. the responsibilities of professional auditor and
by accounting system. that are to be followed during the auditing. Original principles are expected
These are of two types : to be applied in special circumstances for appropriate auditing techniques
(i) Test of details of transactions and balances. and reporting.
 Auditing : An /ntroducr;
1.28 0 II
. . g . An [rJtroduction 1.29
Audltinit Prottdures . . . ,4/1d,un • · . . _
Generall y. Procedures means scrialwisc accomplishment of_obJ~hve8 !2. Examination of Original Documents and Comparison with
to ach ieve the prede termined objectives and goals of the organisation. In
o ther wordJI. how work will be done, various stages of work: who Wilt "oecords. . anses
Now question . w ha t IS
. d·-1uerence between A u d"it p r1nc1p
. . Ie s ,
perfo rm wh ich task and when will be completed are some questions whiclJ edures and Techniques. It can be answered as ;
arc answen:d th rough procedures. . . proc: 1. Meaning; Audit Principles means conceptual views which gives
Procedure covers oil those activities which are accomplished during irections and gu_idance for qualit_a tive aud~t whereas au~it p_rocedures ar_e
a udit. dh activities which are accomplished during the exam:mat10n and audit
Accordi ng 10 Arthur W. Homes, "Auditing procedure comprise all :e:hniques are all those activities which are accomplished to complete
i. uch nc1ivi1ics wh ich arc odopted with regard to auditing under audit the procedures.
princ iple ond audit slnndards." z. Includes : Audit Princ h les includes honesty, independence
Thw.. ii is clear. during the audit activities original principles like bje~rivity, confidential, skills, st: :··er vision planning, audit evidence,
ho nC!.ly. Independence objectivity, confidential, skills, supervision, audit ~ocumentation, conclusion and report etc. Whereas audit procedure includes
evidence. conclusion ond report arc to be considered. the activities which are required dunng checking and audit techniques
We known oudi1or has to give judgement on checking of financial includes the activities which are required to accomplish audit procedures.
store menls their rcliobili1y and accurateness. But before · arriving at the 3. Scope : Scope of audit principles is narrow in comparison to
Jud ,1:cmen1. he must obtain necessary audit evidence. On the basis of . audit procedures where as scope of audit techniques is most wide as this
which he con enable 10 give assurance for the relevance and reliability collects the audit evidence using audit procedures.
of fin ancial stalcmcn ts. Thus. for auditor iris mandatory to obtain sufficient Example (Credit Sales) : Audit Principles states "All sales pertaining
and appropriolc oudir evidence. To obtain these evidences there are certain to the financial year shall be included in revenue income." Whereas audit
techn iq ues ond proccdwes A ccording to SA-500 there are two procedures ; procedure guides auditor to determine sales orders, invoices, records of
J. Compliance Procedures : Related lo internal control on the despatching goods and the entries in books are to be examined. And by
organisotion . audit techniques auditor accomplish his job by examining original
2. Substantive Procedures : Designed to obtain ~vidence as to' documents and comparison with records, retracing book-keeping
lhe comple1cness, accuracy and validity of the data produced procedures, scanning inquiry, examination of subsidiary book etc.
by accounting system. ·
Audillng Techniques : Audit Techniques means all those activities
Errors and Frauds in Financial Books
14·bich helps to complete the audit procedures. In other words all those When human being performs the task, it is quite natural to commit
mcl!Sures which adopt~d- to collect necessary evidences for examining erros by him . Although lot of caution is applied but commiting errors are
_the 11ccounts. In _this way, II 1s clear that audit techniques are not evidence unavoidable as there are so many transactions are to be recorded in the
m thcms~ ves with regard to business transactions they are the tools to books of accounts. In the same way whatsoever precaution and control
collec-1_evidences. Some of the techniques adopted by auditor to collect the possibilities of fraud completely cannot be ruled out.
the c1,1dence are : · In accounting errors and frauds are studied in two parts
I . Physical Examination and Counting (I) Errors ·
2. Inspection (II) Frauds
3. Inquiry and Confirmation Each of them explained as follows
4. Computation
(I) Errors
5. Correlation
6· Repeating process of ledgers Meaning of Errors : In accounting errors means such mistakes
7. Scanning which occurs due to ignorance of employees of accounting, due to lack
8. Casual Inspection of care and caution, committed unknowingly, there is no deliberate and
9. Internal Control Questionnaire desired plans. It results that profit and loss account and Balance sheet do
10. Flow Chart not depicts the fair position of the business. In other words errors refers
11. Analysis of Financial Statements to unknowingly mistakes in financial statements :
I. Error of recording figures and transactions.
2. Wrong expressions of facts.
3. Improper application of accounting principles.
L_
 1.30 Auditing : An lntroduc,-

•
'o~ . . . An Introduction 1.31
Causes of Errors : . AUd1t111g · . •
Errors in acco unting can be due to fol~ow~ng reas?ns • According to ~A-240, "Fraud means intentional mis~eprese~tat:~n
I . lgnornnce of employees for accounting transact~ons. ocial information by management, employees or thud parties.
2. Lack of cautiousness and carelessness of accounting employees of fi 0 \hus, frauds includes the following :
3. Convert the error to personal benefit. . I. Manipulation, falsification and alteration of accounting records
ClassUicatlon or Errors : . d related documents.
Generally errors arc catagoriscd into follo~ing 1 an 2_ Defalcation of Assets, cash, labour and goods.
I . Self revealing errors and non-self revealing errors. 3. Concealing the effects of financial statements and documents.
2. Desired errors and unwanted errors. 4. Misapplication of Accounting Policies.
3. Concealed errors and non-concealed errors. J("
1
nds of Frauds :
4. Errors effecting general ledger balance and errors not effecting it Business frauds can be of following types :
5. Some certain errors, which may supplement each other. · 1. Misappropriation of Cash : The main characteristic of cash is
Kinds or Error : that it carry 13:ge value in small w_eight, and as it is the mediu~. of
The kinds of error which are found in the books of accounts are as xchange anything can be purchased m exchange of it. A person desmng
follows : ; commit fraud has maximum interest in cash. Although cash related
0
1. Errors or Principle : Errors which occurs due to voilation of transactions are handed over to the trusted persons but still some persons
basic accounting principles. Like errors in adjustment of income and succeed in frauds--cash sales without recording and embezzling the cash
expenditure while preparing final accounts, capital expenditure are recorded received out of it, taking away the amount by forged receipts preparing
as revenue expenditure. These mistakes have no effect on trial balance forging receipts of payment of wages etc.
but profit and loss and balance sheet are necessarily affected by this. 2. Misappropriation of Goods : Control over goods is often not
2. Errors of Omission : When lransaction is omitted from being as strong as on cash in business organisations, that is why it is easier for
recorded in Journal or left from being recorded in accounting · books are employees to embezzle the goods. Nature of goods which are less in
known as errors of omission. Such errors can be of two types : weight and large in value can easily be stolen like theft from stores,
(I) Complete Omission : When any transactions being left from misappropriation in purchased goods, despatches of goods by dumy sales
recording at both debit and credit side are known as complete etc.
omission. 3. Misappropriation of Labour : Such frauds are generally done
("u) Partial Omission : When any transaction is recorded at one by the higher officials like employee deployed for official work is engaged
side but omitted at other side are known as partial omission. in domestic work or for personal work although he get salary from the
3. Compensating Errors : When two or more errors conceal their office.
mutual effects from being disclosed in trial balance is called compensating 4. Misappropriations of Assets : This type of fraud is of many
errors. Example Rakhi ale debited with t 300 instead of t 3,000 and types like purchase of assets for business is replaced by old worn assets
Rnshmi ale debited with t 3,000 instead oft 300. In this way first mistake and using the new assets at home.
compensated by other one. S. Misappropriation in Amenities : There are several types of such
4. Errors of Duplication : When one transaction is recorded twice frauds but they are generally not treated as frauds . For example, using of
in the books of accounts are known as errors of duplication. This errors official car for personal work and office telephone for personal calls etc.
c_an be of two types : If any entry is made twice in both debit and credit 6. Misappropriation in Accounts : Manipulation in accounts is
side ~no~n as complete error whereas if error is recorded twice at only done by high officials, owners and managers and sometimes by lower
one side 1s known as partial error.
5 cadre employees.
. •1E~ror of Commission : When any transaction amount is recorded Main objectives behind manipulation in accounts are
0infcorrectY is kno~ as error of commission li!-:e errors of additions, errors (i) Showing Profits more than actual :
wrong balances m ledgers etc.
(a) To enhance the share prices.
(II) Frauds (b) To enhance the goodwill of the organisation.
(c) To sell the business at higher price.
Meaning or Frauds : Intentional and deliberate errors with object
to deceive others and for self benefit are known as frauds and (d) To exaggerate efficiency.
embezzlements. (e) To decieve the competitors.
 1.32 A11di1i11g : An h1troduc1;0 ,, . . All /ntrod11ctio11 1.33
,4uditf/18 ·
(ii ) Showing Profits less than actual : ,4udilor's Position Relating to Detection of Errors and Frauds
(a) For dec laring less dividend on shares. There are so many errors and
(h) Creati on of surreptitious/secret reserves. d in books of accounts which Auditor's Position Relating to
(c) To pay less bonus to the employees. frau !moved either by auditor or Detection of Errors and Frauds
(d) To evade the taxes payable lo government. are :ved by clients employee on I. Appropriate caution and
(c) To reduce business competitions. rcflldilor advice. But after the Skill
Manipulati on in Accounts can be done in following ways au 2. Auditor must work with
(i) Over valuation and under valuation of stock. ,ornpletion_ o f au d"1t any err_o r ~r
fraud remarns unrevealed which _is honesty
(ii ) Recording fa b e sa les, purchase and purchase return. 3. Auditor is not liable to
{scovered at later stages then will
(iii ) Over valuati on and under valuation of assets and liabilities. guarantee correctness
~e auditor 'is responsible for this?
(iv) Drcs.~i ng of boo ks of accouns with objective to cheat. 4. Auditor's duty not to be
(v) Outstand ing, accrued and prepaid expenses are not recorded. 'fhere are different views for the
nswer of this question and these suspicious
(vi) ny nor making, or by making more or less provision of 5. Auditor is not liable for the
~e different judgements by the court,
J cprcci:llion . well planned frauds
(vii) Redu cing profits by notional expenses and not recording which are the basis to make him
performed by high officials
ac w nl expenses in the books. · responsible for this or not.
6. Auditors work area below his
Auditors position relating to
DilTcrcncc in Error and Fraud complicated job
detect the errors and frauds will be
Error Fraud as follows :
1. Appropriate caution and Skill : The decision of Kingston Cotton
I. Menning : Errors in accounting Whereas planned and deliberate Mills case was, "Auditor will function with reasonable skill and
refers to the mist:ikes which occurs errors with the object to deceive cautiousness resonable ca ution and skill will be determined by the
due to ignorance, carelessness and others for individual benefit are circumstance of particular case.
lock of cnutiousness of accounting called frauds .
2. Auditor must work with honesty : If auditor has performed his
f"--Ople. It is not deliberate or p/::inncd.
task with honesty, still some errors and frauds remain indiscovered than
2. Nature : Error is human nature, Whereas frauds are not natural, auditor is not liable for this. As in the case of London and General Bank,
thus, oecuronce of errors is natural. they are intentionally done.
judge stated, Auditor should be honest, and he must not verify anything
J. KJwwfodge : It occurs unknow- Whereas it is known to the person as true untill it is certified and believe to be true and before certifying
ingly as persons occuring error is who deliberately make such errors. he must be cautious and careful.
not aware about it.
3. Auditor is not liable to guarantee correctness : In case of
4. Intention : It is not intentionally Whereas it is pre-determined London and General Bank, "Auditor is not insurer, he does not guarantee
occurancc. intention with object to deceive that books of company are correct and depicting true position . He does
others. not guarantee that the balance sheet is accurate as per the books of
5. R<'ason : It occurs due to careless- Whereas it is done tactfully very accounts."
ness and lack of cautiousness. cautiously. 4. Auditor's duty not to be suspicious : In Kingston Cotton Mills
6. Plun : There is no plan behind Whereas it is planned and executed case it is observed that auditor is not a detective, so he should not have
crmrs as they occur automatically. in such way that it cannot be suspicious work approach and pre-assumptions. He is like watch dog and
traced or detected. not a blood hand. It is the right of auditor to assume employees of
7. Seriousness of Crime/Depth of Whereas it is punishable offense, organisation are honest.
Crime : It is not crime, and it can so cannot be forgiven. S. Auditor is not liable for the well planned frauds performed by
be forgiven.
high officials : The case of Kingston Cotton Mills the court explains "In
8. Detection : Direction of error is absence of any suspicious circumstances, the auditor enable to detect the
Whereas it is difficult to detect the
easy as these are generally dis- e?"ors which are performed in well planned a~d skillful ~anner by the
frauds as the person involved tries
covered during routine checking. higher officials, the auditor cannot be made hable for this.
all the efforts to cover up such errors.
.,,r.
 l. ] 4 . . All Introduction
A11diti11g : A11 /111roduc1; 0 ,,_ •~JittnG · . . 1.35
be creating faith, tax
_ 6. Auditors work area below his complicated Job : In case of city . h can . . Advantages or Importance of
..,h,c taking insurance po 1icy.
cq u,i nhlc Fire Ins urance Company it is observed that 1fany audllor faJf Auditing
paY'"..,ent orofficials rely on au d"1ted
hc lo w h is spec ific complicalcd work , he cannot be forgiven jusl becaus: j11U 5•
8 11
which results lots of 1. Information of actual and
he hn~ J')crformed all other 1ask wilh complete effort, care and skills. correct business position
1,,ou_nts and facilities to the 2. Credibility of Accounts
TI1us, ii is clear 1ha1 audir or musl perform his !ask with honesty benef1 ts
c are. cou1 ion nnd skill. Even afler 1ha1errors and frauds remain undiscovered · ess 3. Watch dog of investors
busin _·watch dog of investors : It 4. Elimination of corruption
he c an"t be held liable for 1his. Dixey slated regarding !his "It should be 3
re m e mbered that if auditor is careless 1owards his work he is liable lo the nature that he wants to and red tapism
. huma 0
owne r for the adverse cffecls due to frauds."
15 oney by hook or by crook. In 5. Control over irregularities,
earnm . . frauds and errors
While auditing rhc financial accounts detection of any errors and f public compames, investor
case 0
6. Valuable Advice
fr a uds. lhc rcsponsibilily 10 find the detailed spurious statements and any in shares, debentures, mutual
inves Is . 7. Moral effect on employees
s usp ic ion the principles gi ven by ICAI SA-240 are to be followed : fun ds e .
tc Later on the orgamsers
.
I . While execution of audit plans auditor must take of suprious management avail the 8. Credential of honesty and
an d sincerity
obscrva1ion due to frauds and errors. · advantages of t~ese funds, and 9. Enhanced Goodwill
2. If frauds arc identified than auditor must consider about its metimes they misuse these funds. 10. Determination of fair tax
effects on the financial accounts. •
11ius, auditing protects t h .
e interests 11. Increase in the profitability
3. If auditor trace out the frauds, he must confirm its effects on of investors and control over such 12. Profit of Company
the financial staremenrs and if there are any errors must be 13. Legal Proof
rectified. activities.
~.~.A
4. Elimination of corruption 14. Helpful in Loans
4. If rhc directors and other executives of the company responsible 15. Other Benefits
for the instructions and directions are suspicious than statutory/ and red tapism Auditing
eliminates the red tapism and
J
legal advice and management consultation is required to deal
such technically. corruption as auditor not only instruct to keep the accounts according to
!"-., "-. Advantages or Importance of Auditing rules and also controls the financial accounts.
5. ControJ over irregularities, frauds and errors : Auditing is
In India Auditing is compulsory under Indian Companies Act,
friend of management which discovers the irregularities, frauds and errors
Cooperative Society Act, Public Trusts etc. for the related organisations,
in accounts. Which results in the control over these in future because
however i1 is voluntary for sole proprietory and partnership firms, yet they
pn:fcr audi1ing. This lhe reason for considering auditing important and have fear of being exposed during auditing.
ad va ntageous. The first president of India Dr. Rajendra Prasad rightly 6. VaJuabJe Advice : The employer and his employees gets the
said "'In IOday s industrial and commercial world chartered accountants valuable advice and suggestions from the auditor from time to time
plays the important role. They complete their jobs selflessly and saves the regarding accounting, book-keeping etc. It results to keep away from
expenditure and creates the awareness. These two qualities are very financial and legal problems.
importanl for commercial enterpreneur. · 7. Moral effect_ on employees : Only to set up good tradition,
Merits and Advantages of Auditing are as follows : providing healthy environment, lay down good norms and procedures are
1. Information of actual and correct business position : On the not enough to maintain the discipline in the organisation. But it is
b:isis of audired accounts correct and actual of business is reflected about equally important to examine them regularly. This makes employees more
the profit and loss of business and there is no error in it. And auditor also ~onest, sincere and energetic towards work. Thus, Auditing lays the positive
discovers the errors and irregularities and rectify them. Thus, Audited impact of employees. _
Profit and Loss Account and Balance Sheet presents actual and correct 8. Credential of honesty and sincerity : For honest and smcere
business position.
Person It· 1s . not sufficient only to work honestly an d smcere ·· 1Y, but to
2. Credibility of Accoun~ : Information of accounts is given to express it among all. Auditing is the medium of putting sta mp on th e
owners, Tax departments, banks and Insurance Companies, the object of
honesty and sincerity.
 1. 3 6 Auditing : An lntroducr,·011

.. . . All Introduction
;tudit"'g ·
siood that auditing ~as fe~
1.37 1
Limitations of Auditing
9. Enhanc«t Goodwill : The goodwill of the business enhanced b . auon 5 , Thus, before
.under. . usmg this I. Audit does not guarantee
the audited accounts as auditor certifies the reliability and accuracy 0 ~ 1,111 11 f, !lowing pomts should be I 00% correctness
reporl o
accoun t:- which improves the goodwill and also he_lps 10 decide the idered. 2. All frauds are not disclosed
cons In brief limitations of Audit 3. Auditor only express his
appropriate sale price if there is need 10 sale the business.
10. Determination or (air tax : We all know that business has to
pay so many taxes like income tax, sales tax etc. If accounts of that
bus iness arc audited, it easy 10 determine the taxes.
I as follows :
are 1. Audit does not guarantee
JO 0 -10
m. correctness : There are
• b .
·pie transactions m usmess and
5.

opinion
4. No attention on trivials
Auditing is not credential
11 . Increase In the profitability : Audited accounts are prepared 1 of the perfect honesty of
~u:~uld be impossible for auditor employees
s imilarly every year which helps to compare the accounts of one year with 1
examine each and every
an o ther, which results in th e use of comparative statements by h . d
6. Dependence for evidences
IO
sactions, t e time, money an on other people
the ma nagement 10 make future plans 10 increase the profits of the tran
i,our is ·also the reason b e h'm d th'1s.
la d" . . 7. Auditor does not examines
o rganisation . fhUS, few 1screpenc1es remain
12. Profit or Company: In Joint Stock Company management and
the correctness business
hidden means audit does not transactions
owners arc dilTercnt from each other. In such situation auditing is mandatory uarantee 100% correctness. 8. Lack of practical
and also helpful in following : g 2. All frauds are not
(i) When company requires capital, it issues the prospects along Independence
disclosed : Although the auditor 9. Dependence on internal
with the audited accounts.
(ii) Capiwl is easily arranged by public because public easily performs the audit work with lot of information
invest in company with audited accounts. care and caution but still it is not 10. Checking of previous
(iii) Audit report clearly states that regulations of companies act are possible for auditor reveal all frauds prepared accounts
followed or not. and embezzlements. Because the
(i v) Audit is helpful in liquidation and reconstruction of companies. frauds committed by trustworthy employees by their collusion in planned
13. Legal Proof: In case of any business dispute audit accounts manner remain undiscovered.
can be presented and judgement is given on the basis of audited, accurate 3. Auditor only express his opinion : The auditor certificate express
and verified accounts. only his opinion. He express the opinion about profit and loss account
14. Helpful in Loans : Short term and Long term loans are required and balance sheet, thus, it is not always considered correct, it can be false.
11S working capital for the development and expansion of the business. In
4. No attention on trivials : Auditor ignores the petty things nor
such situation on the basis of audited accounts, banks and other financial he pay more attention towards employees due to which there is chance
institutions easily grants the loans without any hassle.
15. Other Benefits :
of few irregularities. The auditor only concern about the irregularities
which affects the profit and loss accounts and balance sheet.
(i) Auditing helps to declare the insolvency of any individual and
5. Auditing is not credential of the perfect honesty of employees :
.. company as audited accounts can be relied by court.
(ii) Insurance claims are smoothly settled in case ·of audited
Auditor examines the accuracy of accounts not the honesty of employees.
accounts. If employees indulges in manipulation through collusion which remain
(iii) In c~e of trust the interest of other people can be saved. undiscovered and auditor cannot be liable for it. Thus, it is wrong to say
(iv) =~ted accounts are very much beneficial for partnership that auditing is credential of the honesty of employees.
6. Dependence for evidences on other people : The auditor is
unbaised but the work on the evidences provided by others who is not
Limitations of Auditing
specialist in each area. Thus, he is dependent on the evidences provided
Auditor is appointed by the shareb Id
the financial accounts of the c o ers of the company to examines by others, thus, if evidences are not true and fair report will also be not
the report. However before :t?any. On being satisfied auditor presents true and fair•
nng any conclusion, it should' be clearly
\ .38
Auditing : An lntroducr· ,
7. Audito d io'1
Aud· r oes not examines the correctness business transactioh-
llor : does not c h ec k th e -correctness of business
checks . .
transactions. li~
''11 •

Transaction happened actually or not.

(n) It is related to business. ·
(iii) It is authorised or legal.
(iv) It has been properly recorded.
But he does not check the correctness of transactions. It is because
~o check the commercial prudence of the transactions is the management I
Job.
8. Lack or practical Independence : Auditor lacks practical
independence because he is the person from company administration
which is influenced by the management. Thus, he is not free from their
influenc.e. Thus, auditor is not able to check the business transactions
correctness and he is not independent in practice so does not give fair and
unbiased report.
9. Dependence on internal information : Auditing depends on the
information provided by the management of the company. Thus, if
infonnation provided is not true the audited accounts on the basis of such
infonnation will not depicts the true and fair position.
IO. Checking or previous prepared accounts : It has been seen
generally that auditor is not present at the time of final accounts preparation.
In such situation if employees have made some manipulation tactfully
thac can be undetected even after the process of auditing.

[ QUESTIONS J

Very Short Answer Type Questions :

I. What do you understand by Standard on Auditing ?
2. Whal is the meaning of Audit ?
3. Define 'Auditing'.
4. Distinguish between Auditing and Book-keeping.
(M.D.S. University, Ajmer, 2012)
5. Explain difference between Accountancy and Auditing. ,
(Kota University, Kota, 2011)
6. 'i\ccountancy is necessary." Give (wo arguments in favour.
(Kota University, Kota, 2012)
1. 'i\ccounting is Luxury." Explain.
(University of Rajasthan, Jaipur, 2013, 05, 04:
M.D.S. University, Ajmer, 2013)