1.

1 INTRODUTION OF AUDITING

The Origin of auditing can be traced to Italy. Around the year 1494, Luca Paciolo introduced the

double entry system of book keeping and described the duties and responsibilities of an auditor.

Auditor in India has been described in different ways:

The Institute of Chartered Accountant of India says that, “Auditing is a systematic and
independent examination of data, statements, records, operations and performance (financial or
otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives
and recognizes the propositions before him for examination, collects evidence, evaluates the
same and on the basis, formulates

The audit Is an intelligent and critical examination of the books of accounts of the business.
Auditing is done by the independent person or body of persons qualified for the job with the help
of statements, papers, information and comments received from the authorities so that the
examiner can confirm the authenticity of financial accounts prepared for a fixed term and report
that:

• The balance sheet exhibits an accurate and fair view of the state of affairs of concern;

• The profit and loss accounts reveal the right and balanced view of the profit and loss for
the financial period;

• The accounts have been prepared in conformity with the law.

Thus, it will be seen that the duty of an auditor is much more than a mere comparison of the
balance sheet and accounts with the books. his judgement which is communicated through his
audit report”.

1.1.1 Meaning:

The term audit is derived from a Latin word “audire” which means to hear authenticity of
accounts is assured with the help of the independent review. Audit is performed to ascertain the
validity and reliability of information. Examination of books and accounts with supporting
vouchers and documents to detect and prevent error, fraud is the primary function of auditing.

Auditor has to check the effectiveness of internal control systems for determining the extent of
checking out the audit. Initially its meaning and use were confined merely to cash audit, and the
auditor has to ascertain whether the persons are responsible for the maintenance of accounts had
adequately accounted for all the cash receipts and the payment on behalf of this principle.

But the word audit has an extensive usage, and it now means a thorough scrutiny of the books of
accounts and its ultimate aim is to verify the financial position disclosed by the balance sheet and
profit and loss accounts of a company.

1.1.2 Definition of Auditing

According to Lawrence R. Dickey defines that, “An audit is an examination of accounting

records undertaken with a view of establishing whether they correctly and completely reflect the
transactions to which the purport to relate”.

According to Taylor and Perry defines that, “Audit is defined as an investigation of some
statements of figures involving examination of figures involving examination of certain
evidence, so as to enable an auditor to make a report on the statement”.

According to J.B.Bose defines that, “Audit may be said to be verification of the accuracy and
correctness of the books of accounts by an independent person qualified for the job and not in
any way connected with the preparation of such accounts”.

1.2 OBJECTIVES
The Objective of an audit is to express an opinion on financial statements. The
auditor has to verify the financial statements and books of accounts to certify the truth and
fairness of the financial position and operating results of the business. Therefore, the objectives
of audit are categorized as primary or subsidiary objectives.

1.2.1 Primary Objectives of Audit

The main objectives of the audit are known as the primary objectives of the audit.
They are as follows,

• Examining the system of Internal Checks.

• Checking arithmetical accuracy of books of accounts, verifying posting, casting,
balancing, etc.
• Verifying the authenticity and validity of transactions.
• Checking the proper distinction between the capital and revenue nature of transactions.
• Confirming the existence and value of assets and liabilities.

1.2.2 Subsidiary Objectives of Audit

There are such objectives that are set up to help in attaining primary objectives.

They are as follows;

• Detection and prevention of errors.

• Detection and prevention of fraud.
• Under or Over valuation of stock.
• Other Objectives.

Detection and preventing of errors

Errors are those mistakes which are committed due to carelessness or negligence or
lack of knowledge or without having vested interest. Errors may be committed without or with
any vested interest. So, they are to be checked carefully. Errors are of various types. Some of
them are:

 Error of principle.
 Error of omission.
 Error of commission.
 Compensating errors.

Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested interest
in the direction of top-level management.
 Management commits frauds to deceive tax, to show the effectiveness of management. To get
more commission, to sell a share in the market or to maintain the market price of share etc.

Detection of fraud is the main job of an auditor.

 Misappropriation of cash.
 Misappropriation of goods.
 Manipulation of accounts or falsification of accounts without any misappropriation.

Under-or over-valuation of stock

Normally such frauds are committed by the top-level executives of the business. So,
the explanation is given to the auditor also remains false. So, an auditor should detect such frauds
using skill, knowledge and facts.

Other Objectives

 To provide information to the Income-Tax authority.

 To satisfies the provisions of the Companies act and to have a moral effect.

1.3 TYPES OF AUDITING

1. External Audit.

2. Internal Audit.

3. Internal Revenue Service (IRS) Audits.

1.3.1 External Audits

Audits performed by outside parties can be extremely helpful in removing in any bias in
reviewing the state of a company’s financials. Financial audits seek to identify if there are any
material misstatements in the financial statements.

An unqualified, or clean, Auditor’s Opinion provides financial statement users with confidence
that the financials are both accurate and complete. External audits, therefore, allow Stakeholders
to make better, more informed decisions related to the company being audited.
External auditors follow a set of standards different from that of the company or organization
hiring them to do the work. The biggest difference between an Internal and External audit is the
concept of independence of the external auditor. When audits are performed by third parties, the
resulting auditor’s opinion expressed on items being audited (a company’s financial, internal
controls, or a system) can be candid and honest without it affecting daily work relationships
within the company.

1.3.2 Internal Audits

Internal auditors are employed by the company or organization for whom they are performing an
audit, and the resulting audit report is given directly to management and the Board of Directors.
Consultant auditors, while not employed internally, use the standards of the company they are
auditing as opposed to a separate set of standards. These types of auditors are used when an
organization doesn’t have the in-house resources to audit certain parts of their own operations.

The results of the Internal Audit are used to make managerial changes and Improvements to
Internal controls. The purpose of an Internal audit is to ensure compliance with laws and
regulations and to help maintain accurate and timely financial reporting and data collection. It
also provides a benefit to management by identifying flaws in internal control or financial
reporting prior to its review by external auditors.

1.3.3 Internal Revenue Service (IRS) Audits

The Internal Revenue Service (IRS) also routinely performs audits to verify the accuracy of a
taxpayer’s return and specific transactions. When the IRS audits a person or company, it usually
carries a negative connotation and is seen as evidence of some type of wrongdoing by the
taxpayer. However, being selected for an audit is not necessarily indicative of any wrongdoing.

IRS audit selection is usually made by random statistical formulas that analyse a taxpayer’s
return and compare it to similar returns.

A taxpayer may also be selected for an audit if they have any dealings with another person or
company who was found to have errors on their audit.
There are three possible IRS audit outcomes available: no change that is accepted by the
taxpayer, or a change that the taxpayer disagrees with.

If the change is accepted, the taxpayer may owe additional taxes or penalties. If the taxpayer
disagrees, there is a process to follow that may include mediation or an appeal.

1.4 ADVANTAGES OF AUDITING

Auditing is a best practice that ensures the growth of public companies. Many of the stakeholders
of business are financial statements of the audit. Some of them are listed below:

Auditing is considered to be the place of substantive testing and the need to be verified. It is
considered to follow the set of rules. It mentions the maximum of the costs so that people can
have prior intimation about the auditing. Here are some of the advantages of an audit programme
or benefits of auditing.

 Access to the capital market

The public has to remain under the security exchanges and the requirements Given under it.
Once the auditing is done the accounts that are audited are easily accepted by the government
such as Central Banks, Public Authorities. This carries greater authority standards for the account

 Lower capital cost

This has reduced information that is associated with the financial statements That have lower
interest rates and return on their investments. Sometimes this activity provides facilitated
settlements and claims of a partner. By performing the process of auditing of frauds and errors
can be rectified on time.

 Amalgamation members of the company

The nature of each organization will be to define the goals. This Amalgamation helps in uniting
people to work together as a team. This combination or unity can be found during the process of
auditing.

 Proof can be presented

During the audit, one may collect the details from the person so as to ensure That every property
has a legal proof. It helps in the evaluation of further discussions. It helps in increasing the
goodwill that might keep track of the collected data.

 Reports

It produces the report of the truth and fairness of the reported audit. It Involves financial
statements that are more compatible when a person goes through the Documents and reports of
the audit.

1.5 DISADVANTAGES OF AUDITING

The main risk in the audit program is towards the assurance services that derive wrong
conclusion. Assurances are to be provided within the related certification. Here are some of the
limitations of an audit.

 Extra cost

Testing involves the extra cost to the organization which is considered as a Burden. It involves
the disruptions of multiple cases. The auditor has to concentrate more even though there are
disruption. Before the audit begins the auditor must get the attention of all the staff members of
the organization.

 Chances of fraud

Since the information delivered after the audit procedure is credential then there Become more
chances of getting the situations where an individual will be forced to commit the crime. It
harasses the auditor to commit crime after the audit gets over.

 Small concerns
Small-scale industries may usually proceed with transactions that are usually Completed within
the shorter period of time. Thus, auditing is not too important.

 Not guaranteed

Auditing cannot provide any data that are analysed and prepared. It has financial Accounts for
the data that are provided. It is disclosed based on the information and explanations that are
agreed on by the clients.

 Unsuitable changes

The rules and regulations of business my vary from time to time. It remains Unstable when the
program begins. It is obvious that the company’s policies may not changes periodically whereas
the rules and regulation may.

1.6 SCOPE OF AUDITING

The scope of an audit is the determination of the range of the activities and the period of records
that are to be subjected to an audit examination.

The scope of audit is;

1. Legal Requirements.
2. Evaluation.
3. Test.
4. Judgments.

These four heads are scope of auditing.

 Legal Requirements

The auditor can determine the scope of an audit of financial statements in accordance with the
requirements of legislation, regulations or relevant professional bodies. The state can frame rules
for determining the scope of audit work. In the same way, professional bodies can make rules to
conduct the audit.
  Evaluation

The auditor assesses the reliability and sufficiency of the information contained in the underlying
accounting records and other source data by making a study and evaluation of accounting system
and internal controls to determine the nature, extent, and timing of the other auditing procedures.

 Test

The auditing assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by carrying out other tests, inquiries and
other verification procedures of accounting transactions and account balances as he considers
appropriate in the particular circumstances. There are compliance test and substantive test in
order to examine the data. The vouching, verification and valuation technique is also used.

 Judgements

The auditor determines whether the relevant information is properly communicated by

considering the judgement that management has made in preparing the financial statements,
accordingly. The auditor assesses the selection and consistent application of accounting policies,
the manner in which the information has been classified and the adequacy of disclosure.

1.7 IMPORTANCR OF AUDITING

Audit is nothing but an independent and systematic examination of statutory records, books of
accounts, documents and vouchers of an organization. This mainly performed or conducted to
ascertain how far the financial statements as well as non-financial disclosures present a true and
fair view of the concern. Audit is an activity that attempts to ensure that the books of accounts
are properly maintained by the concern as required by law.

Academics have started identifying an “Audit Society” Since, auditing has become a ubiquitous
phenomenon in the corporate as well as the public sector. It is an individual that perceives and
recognises the propositions before them for examination. Auditor obtains evidence and
formulates an opinion on the basis of his judgement which is communicated through their audit
report.
Third party assurance is provided by the auditor on every subject matter. There are many other
areas which are commonly audited such as Secretarial & Compliance Audit, Internal Controls,
Quality Management. Project Management. Water Management. And Energy Conservation.

In case Small Business owners, the thought of a financial audit is formality. The financial
position and organization of a business can be revealed by auditor. Through this, Small
Businesses can receive tremendous benefits from better understanding their financial position.
Financial audits are also beneficial in highlighting areas of success or concern in a business and
help the management team find greater pathways to future success.

Following are the Benefits of Legal and Financial Audit

• Better rate of securing financing.

• Preparation for business growth.
• Lower interest rates on business loans.
• Identifying business weaknesses to avoid future tax penalties.