INTRODUCTION

30
information has been prepared using acceptable
(a) financial consistently.
which have been applied
accounting policies, and
with relevant regulation
complies
financial information
(b)
statutory requirements. to the
of all material matters relevant
disclosures
(c) there is adequate information, subject
to statutory
of financial
proper presentation
requirements, where applicable.
a clear opinion on
be prepared expressing
The audit report should as per the
term and
should be prepared
financial information. The report unqualified report
or agreement. An
contents prescribed by law, regulation above. In case of
in all
satisfied material reports of
means that auditor
is of the above
is given regarding any or all
qualified report, an
adverse opinion
matters along with the
reasons.

ADVANTAGES OF AN AUDIT
those
can be judged from the fact that even

Importance of auditing their

which are not covered by
Companies Act, 1956 get
organisations for every commercial
statements audited. It has become a necessity
financial interested to know the true
non-commercial orgaisation. People are
and even
which are helpful to them for future planning and
facts about their business
improvements in operations.
business is conducted
Sold trader is knowing whether the
interested in
the partners, in case of
not. To maintain healthy relations among
efficiently or
statement must be
financial
it is important that tue
partnership business, and
Because of separation of ownership
made known to every partner.
do not have knowledge
stock companies, shareholders
management in joint the
whether
administration. Shareholders would like to know
of day-to-day such
theme is properly used or not. Answer for all
amount invested by
can be obtained by getting
the accounts audited from a qualified
questions
auditor.
Advantages of an Audit

For the For the For Others

For Owners of For the
Creditors Government
Business & Management
Shareholders
Bodies
Shareholders
1. For the Businessmen and
he can depend on the audited accounts. He
(i) In case of sole trader, the
can value his
business on the basis of audited accounts for
buSiness or for admitting a new partner.
purpose of sale of
INTRODUCTION 31

(i) Dispute over the correctness of profits can be avoided. In case of

partnership fim, audited accounts will be useful in valuing
goodwill and business on admission and retirement of a partner.
(ii) Shareholders, who do not know about day-to-day administration of
the company, can judge the performance of management from
audited accounts.

(iv) Shareholders can value their shares on the basis of audited financial
statements.
2. For the Management
(v) It helps the management is detecting and preventing errors and
frauds.
(vi) It keeps the accountants and staff vigilant while preparing books
and records as they know in advance that all the accounts are to be
audited.
(vii') Claims due to fire, theft and accident can be estimated from audited
accounts.

(vii) Management gets advice on financial affair from the auditors who
have expert's knowledge.
(ix) Because the audited accounts are uniformly prepared over the
year,
comparison of such statement becomes easier.
3. For the Creditors
(x) Long-term and short-term creditors can depend on audited financial
statements while taking decision to
grant credit to business houses.
4. For the Government Bodies
(xi) Taxation authorities depend on audited statements in assessing the
income-tax, sales-tax and wealth-tax liability of the business.
(xii) Audited accounts can be produced in the Court to provide an
evidence.
(xii) Audited accounts are useful for the government while granting
subsidies etc.
5. For Others
xvi) It can be used by insurance companies to settle the claims arising
on account of loss
by fire.
(xvii) In case of amalgamation and absorption, the
purchasing company
can calculate purchase consideration on the basis of audited
accounts.
(xvul It safeguards the interests of the workers because audited accoul
are useful for
settling trade disputes for higher wages or bonus
Limitations of Audit
tnc
The audit of accounts suffers from several limitations also. Some or
limitations are as follows
32 INTRODUCTION
I. The audit may not give complete picture. If the accounts are
prepared with bad intentions and for that fraud is committed,
auditor may not be able to fully unearth them.
2. Sometimes the auditor has to depend on explanations, clarifications
and information from staff and client. He may or may not
get
correct or complete information.
3. Under law, shareholder's appoint an auditor, but in fact directors
appoint him. Under such situation he may not be an independent
auditor
4. Auditor has to seek opinion of experts on certain matters on which
he may not have expert's knowledge. The auditor has to depend
upon such reports which may not be always correct.
5. The auditing may not serve its purpose unless the auditors are
independent and bold. Lack of these qualities may force him to give
clean report even though certain discrepancies existed.
6. Auditing is considered as a mechanical work. Auditors may not
frame audit programme from the viewpoint of particular situation.
7. Auditing is a post-mortem examination. What is the use of such
examination when events have already happened?
8. It is very difficult to verify certain items i.e. stock-in-trade.
9. Success of audit depends on the sincerity with which auditor has
performed his duties.

TUTORIAL ASSIGNMENTS
1. What do you mean by auditing ? Discuss its objects.
2. "An auditor is a watch-dog and not a blood-hound." Discuss.
3. Distinguish between an error and a fraud in books of business.
Illustrate with
examples, how can errors and frauds be prevented?
4. What are the objects of auditing?
5. Discuss the scope of an audit.
6. Write short notes the following:
on

(a) Manipulation of cash and

goods.
(b) Detection of errors and frauds.
(c) Prevention of errors and frauds.
7. "The main purposes of auditing are detection and
errors and frauds." Comment.
prevention of
8. You have been appointed as an auditor. How will
you proceed to
detect errors and frauds?
9. Give the examples of errors which are not revealed trial
by balance,
and state the steps an auditor would take to detect them.