EE cm. En, Ka f Auditing (EY.B.A, (1) Items included in Financial Statements According to Standard on Auditing (SA) 200 by the ICAI, the term “General Purpg Financial Statements” [FS] includes — a balance sheet, a statement of profit and loss, a cash flow statement (wherever applicable), statements and explanatory notes which form part thereof; and supplementary schedules and information based on such statements. veep = (2) Items not included in Financial Statements FS do not, however, include such items as Teports by directors, statements by the chairma, discussion and analysis by management etc, that may be included in a financial or anny, report. (3) Requirement Financial statements are ordinarily prepared and presented annually. The financial statemen| aim to meet the need for information of different types of users. In view of this, financiy statements need to be prepared in accordance with : 4 1. relevant statutory requirements, €.g., the Companies Act, 2013, for companies 2. accounting standards issued by the Institute of Chartered Accountants of India 4 3. Guidance Notes issued by the Institute of Chartered Accountants of India recommended accounting principles and practices, These requirements are known as ‘financial reporting framework’. (4) Audit and Financial Reporting Framework The objective of an audit of financial statements is to enable the auditor to express opinion whether the financial statements are Prepared in accordance with an identif financial reporting framework. Ifthe financial statements are prepared as per the financi Teporting framework, the auditor gives an opinion that the financial statements give “a tr and fair view”. (5) Responsibility for Financial Statements SA 200A deals with the respective responsibilities of the management and the auditor f the financial statements. While the auditor is responsible for forming and expressing opinion on the financial statements, the responsibility for their preparation is that of t the maintenance of adequate accounting records and internal controls, the selection application of accounting policies and the Safeguarding of the assets of the enterprise. audit of the financial statements does not relieve management of its responsibilities.Introduction to Auditing : [2 _ USERS OF FiNANGIALINEO RMIATION ii tii ean nia ‘The utility (use) of Accounting in providing the needed information to different persons is as follows TABLE 1.1: INFORMATION PROVIDED BY ACCOUNTING Who ‘Type of Accounting Information Owner Owners, who supply capital, need to know how much income is earned by using their funds. 2. | Employees | Employees need to know whether their employer is profitable as well as stable. A profitable concern will pay a good salary and a big} bonus. A stable concern will employ the staff for a long time and pay| them pension etc. even after retirement. 3. | Lenders Lenders, such as banks which give loans to the business concern, need to know whether their loans and interest will be paid in time. nee 4. | Creditors | Creditors, who supply goods to the business concern on credit, need to know whether their outstanding will be paid in time. 5. | Customers | Customers, who purchase goods, need to know whether they can| depend upon the business concern for supply of the goods over a long period of time. 6. | Government | Government needs to know how much taxes should be paid by the concern. DEFINITION OF AUDITING The term Audit is derived from the latin word ‘audire' which means to hear. In medieval times auditors used to ‘hear’ accounts read out by the book-keepers. The final accounts of a business concern are used by various persons such as the owners, shareholders, investors, creditors, lenders, Government etc. for different purposes. All these users need to be sure that the final accounts prepared by the management are reliable. An auditor is an independent expert who examines the accounts of a business concern and reports whether the final accounts are reliable or not. Different authorities have defined Auditing as follows : 1. R.K. Mautz “Auditing is concerned with the verification of accounting data, with determining the accuracy and reliability of accounting statements and reports.” /R.K. Mautz, Fundamentals of Auditing, John Wiley & Sons, N.Y] 2. Prof. L. R. Dicksee “Auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate.” [Prof. Lawrence Robert Dicksee, Auditing : A Practical Manual for Auditors, Amo Press] 3. R.H. Montgomery “Auditing is a systematic examination of the books and records of a business or other3.2 FEATURES OF AUDITING G a Auditing (FY.B.A.E: Sey organisation, in order to ascertain or verify, and to report upon the facts regarding 4 financial operations and results thereof.” /Robert H. Montgomery, Auditing : The and Practice, Ronald Press, N.Y] A. W. Hanson “An audit is an examination of accounting records to establish their reliability ang reliability of statements drawn therefrom.” (Arthur W. Hanson, Problems in Audi McGraw-Hill Book Co., N.¥.] Spicer and Pegler “Auditing is such an examination of books of accounts and vouchers of business, will enable the Auditor to satisfy himself that the Balance Sheet is properly drawn’ So as to give a true and fair view of the state of affairs of business and that the profi) and loss account gives true and fair view of the profit/loss for the financial periog!, according to the best of information and explanation given to him and as shown by books; and if not, in what respect he is not satisfied.” /Spicer and Pegler's Practig Auditing, HEL] International Auditing Guidelines “Auditing is an independent examination of financial information of any entity with, view to expressing an opinion thereon.” [International Auditing Guideline 3 ~ Bas) Principles Governing an Audit, ICAEW, 1985] ICAI "Auditing is the independent examination of financial information of any entity, wi profit oriented or not, and irrespective of its size or legal form, when such examination is conducted with a view to expressing an opinion thereon". [AAS 1] "Auditing is a systematic and independent examination of data, statements, record operations and performances (financial or otherwise) of an enterprise for a state purpose." [General Guidelines on Internal Auditing] [This is the most important definition.] Audit is a systematic and scientific examination of the books of accounts of a business; Audit is undertaken by an independent person or body of persons who are duly qualifie for the job. ‘Audit is a verification of the results shown by the profit and loss account and the sta of affairs as shown by the balance sheet. Audit is a critical review of the system of accounting and internal control. Audit is done with the help of vouchers, documents, information and explanatio received from the authorities. q The auditor has to satisfy himself with the authenticity of the financial statements report that they exhibit a “rue and fair view of the state of affairs of the concern. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporti the transactions and examine correspondence, minute books of share holders, Memorandum of Association and Articles of association etc., in order to estab! correctness of the books of accounts.Introduction to Auditing Tae ee d= eel aa se OBJECTS OF FINANCIAL AUDIT 7 BASIC OBJECT INCIDENTAL OBJECT ] [ NO OBJECT t Ze: z TRUE & FAIR VIEW DETECTING ERRORS Opinion on & FRAUDS ASSETS / LIABILITIES PROSPECTS EFFICIENCY | EFFECTIVENESS Financial Audit means an independent audit of the financial statements (i.e. balance sheet | and profit and loss account) of a concern. SA 200 (Overall Objectives of Independent Auditors) issued by the ICAI states that the objective of an audit of financial statements is to enable an auditor to express an opinion on such financial statements. A Financial Audit has the basic object of examining whether the accounts are true and fair. It has an incidental object of detecting errors and frauds. 1. Basic Object - True and Fair View The basic or primary object of financial audit is to enable an auditor to express an opinion on the financial statements. SA 200A states that the auditor's opinion helps in determination of the true and fair view of the financial position and operating results of an enterprise. The auditor gives an opinion on whether the final accounts give a true and fair view of the affairs of the concern i.e. whether (i) the balance sheet gives a true and fair view of the financial position of the concern as at the end of the year and (ii) the profit and loss account gives a true and fair view of the profit or loss for the year. This means, in brief : (a) The financial position or the net worth is disclosed as it is; it is neither overstated nor understated. (b) Similarly, the profit or loss for the year is disclosed as it is. (c) All material items are disclosed. (d) Final Accounts comply with the requirements of law. (e) Final Accounts are made according to the recognised Accounting Principles and Auditing Standards laid down by professional bodies, like the Institute of Chartered Accountants of India etc. (The concept of “True and Fair View” is explained in detail below- see Para 16). 2. Incidental Object - Detection of Errors and Frauds Laymen generally feel that the main object of an audit is the detection of errors and frauds. But, this is only an incidental or secondary object of audit. Detection of errors or frauds is no doubt important. If the accounts are to be true and fair, they must be free from errors and frauds. While an audit is not intended to disclose all errors and frauds, their discovery may be incidental to audit. The main objective of a financial audit is to report on the truth and fairness of the final accounts. Since the final accounts