Objectives of Auditing:

An entity prepares balance sheet to represent

its financial position. It also prepares profit and
loss account to disclose the operating results of
the period covered in the statement. These
financial statements are submitted to the
auditor for checking and comment. The auditor
checks them in a careful manner with utmost
diligence and professional competence.
1.Main Objective: Expression of Expert Opinion
The auditor’s main job is to check the company’s accounts,
policies, and standards to make sure the financial
information is correct. After reviewing everything, the
auditor gives their opinion on the quality and accuracy of
the financial statements. They also say whether the
financial position (shown in the balance sheet) and
business performance (shown in the profit and loss
account) are presented fairly and truthfully.
2.Secondary Objectives:
a. Detection and prevention of Errors
b. Detection and prevention of Frauds
3. Specific Objective This is called an operational audit. The
main goal is to review how the organization is currently
working and to give expert advice on how to make
operations more efficient. An audit can also be done for any
specific purpose.
 Definition and Types of errors
Errors refer to unintended miss-statements or miss descriptions
in the records or books of accounts by the books keeper. In
other words, they are unintentional mistakes arising on
account of negligence or ignorance.
Detection and Prevention of Errors: Errors are generally
innocent but some times errors which might appear, at first
sight, as innocent are ultimately found to be due to fraudulent
manipulation and therefore an auditor must pay particular
attention to every error, however innocent it may appear to
be at first sight.
The following are the various types of errors.
1. Clerical Errors. These errors are committed in posting,
totaling and balancing, Such errors may again be subdivided
into-a) Errors of Omission and
b) Errors of Commission
2. Errors of principle.
3. Compensating Errors and 4. Errors of Duplication
Errors of Omission As the name suggests, errors of
omission happen when a transaction is either fully or
partly left out of the accounting records. If it is completely
missed, it’s hard to find and won’t affect the trial balance.
However, sometimes you can notice the missing entry by
checking the account balances.

Errors of Commission Errors of commission happen

when a transaction is recorded, but something is wrong
— like entering the wrong amount, posting it to the
wrong account, or making a mistake while recording.
The entry is made, but with errors.
 Errors of Principle Errors of principle happen when
transactions are not recorded by following basic
accounting rules. Examples include wrongly dividing
expenses between capital and revenue, ignoring
outstanding assets and liabilities, or valuing assets
incorrectly.

Example: Suppose a company spends money to buy a

machine (which should be treated as a capital
expenditure), but the accountant records it as a regular
expense in the income statement.

It should have been added as an asset, but it was

wrongly recorded as a normal expense.
Compensating Errors Compensating errors are mistakes that
cancel each other out. One error is balanced by another, so
the overall totals still look correct.
Example: If rent expense is recorded ₹200 extra and salary
expense is recorded ₹200 less, the two mistakes balance each
other out, and the trial balance remains correct.

Errors of Duplication:
Such errors arise when an entry in a book of original entry has
been made twice and has also been posted twice.
 Definition of fraud:
Fraud means false representations or entry made
intentionally or without belief in its truth with a view
to fraud somebody.
Detection of fraud is considered to be one of the
important duties of an auditor. As a matter of fact,
originally audit was conducted mainly with a view to
detect fraud whenever it was suspected. The system
of internal check aims at the prevention of fraud.
The following are chief ways in which fraud may be
committed:
1. Embezzlement of cash
2. Misappropriation of goods and
3. Fraudulent manipulations of Accounts.
 1.Embazzlement of cash:
There is a greater possibility of embezzlement of
money in a big business house than in the case of
a small proprietary business where the operator
has a direct control over the receipts and payment
of case .
Cash may be misappropriated by
A. Omitting to enter any cash which has been
received
B. Entering fewer amounts than what has been
actually received
C. Making fabricated entries on the payment side
of the cash book
D. Entering more amounts on the payment said of
cash book than what has been actually paid.
 2 Misappropriation of goods:
Again, fraud may be in respect of goods
misappropriation. This types of fraud are
very difficult to detect especially when the
goods are less bulky and are of higher
value.
3 Fraudulent manipulations of Accounts
This types of fraud is more difficult to
discover as it is usually committed by
directors or manager or other responsible
officials with the object of
 Continue
A. showing more profit than actually they are
# Get commission on profit
# management may use this overestimated profit to retain
the support of shareholders, keeping them satisfied with the
apparent strong performance
# They may sell the share at high price by declaring higher
dividends
# To obtain further credit by showing the financial position of
the business better than what actually it.
# To attract more subscribers for the sale of the share
B. Showing less profit than actually they are
# In order to purchase share in the market at a lower price
# To reduce the payment of income tax
# To give a wrong impression about the business to the
competitors or other companies
 Location of frauds & errors:
If the trial balance doesn’t match and the auditor is called to
find the error, it’s his responsibility to locate it. Here are
steps to help find the error easily:
1. Check the total of the trial balance.
2. Compare the account names in the ledger with those
recorded in the trial balance.
3. Total the lists of debtors and creditors and compare them
with the trial balance.
4. If using a self-balancing system, ensure the total of different
accounts matches the balance in the trial balance.
 Location of frauds & errors:
5. Compare the items of the trial balance with the
item of trial balance of the previous year to see if
any item has been omitted.
6. Check the difference in the trial balance and see if
there is any item with that value. This helps
prevent placing a debit balance on the credit side
or vice versa in the trial balance.
Example: Suppose the trial balance shows a difference of $100. You
should carefully check if any account in the trial balance has a value of
$100. For instance, if a debit balance of $100 for accounts payable was
mistakenly placed on the credit side, this would cause the trial balance
to be out of balance by $100. By identifying this error, you can correct it
and ensure that the debit and credit sides are properly balanced.
 7. It is possible that the total of some subsidiary books
like as - cash books, purchases book, sales book etc.
might not have been transferred the trial balance.
Recheck the totals of these books.

Example: Suppose the total of the cash book is $1,000,

but this amount was mistakenly not recorded in the trial
balance. To correct this, you need to recheck the cash
book and ensure that the $1,000 total is accurately
transferred to the trial balance under the cash account. If
this step is missed, the trial balance will not balance
correctly.
 Different classes of audit:
The audit is the final task of accounting performed by the
auditor and may be classified into
(a)On the basis of legislative control; Statutory audit,
Government audit, Private audit.
(b)On the basis of the relations between the auditor
and management External audit, Internal audit.
(c)On the basis of periodicity; Continuous audit, Interim
audit, Periodical audit, Occasional audit.
(d)On the basis of subject matter; Financial audit,
Operational audit, Cost audit, Management audit.
(e)On the basis of coverage; Complete audit, Partial
audit.
(f)On the basis of manner of checking; Standard audit,
Balance sheet audit, Post and Vouch audit.
• Statutory Audit: Where the appointment of auditors,
manner of audit, contents of audit report etc., are
specifically mentioned in any enactment, the audit
conducted with reference to them is called statutory
audit. Statutory audit is a compulsory audit and is to be
carried out each year by an auditor called statutory
auditor.
• Government Audit: Government auditors audit the
accounts of state unions, government departments,
public undertakings, and local bodies. Each state has its
own Auditor General. It is necessary to audit the
accounts of citycorporation, universities, and other
government institutions. A government audit happens
when the government appoints an auditor to review the
accounts of government organizations.
• Private Audit: In case of private audit , there is no
statutory or constitutional compulsion to get the accounts
audited. for example, the sole proprietors, partnership
firms get the accounts audited without obligation in view of
advantages of having audit.
• External Audit: If the appointment of auditor is made by
persons other than those whose performance is evaluated
by auditor then it is called external audit. For example, the
director of a company are responsible for the activities of
the company. The appointment of this auditor is made by
the shareholder in the AGM and auditor is the
independent.
• Internal Audit: On the other hand when the auditor is
appointed by persons who are responsible for the
performance of the entity is called internal audit. An
internal auditor is usually appointed by management of the
company and they works as an employee of the company.
• Continuous Audit: Continuous audit or a
detailed audit as it is sometimes called is
an audit which involves a detailed
examination of the books of account at
regular intervals like one month or three
months .It is used for the bank, insurance
and large company.
Periodical Audit: A periodical audit is conducted at the
end of a financial or trading period, after all accounts are
balanced and the Trading, Profit and Loss accounts, and
Balance Sheet are prepared.

Example 1: A retail store conducts a periodical audit at

the end of the year to review its sales, expenses, and
profits, ensuring the accounts match the prepared
Balance Sheet and Profit and Loss statements.
Example 2: A manufacturing company performs a
periodical audit at the close of its financial quarter to
verify its expenses, income, and assets, ensuring the
reports are accurate before finalizing the financial
documents.
• Occasional Audit: As the name indicates this
type of audit is conducted once a while whenever
the need arises and the clients desires it to be
carried out.
• Interim Audit: An interim audit is done between
two annual audits to check the company’s profits
temporarily, allowing the company to declare an
interim dividend. It’s conducted in the middle of
two periodical audits or balance sheet audits.

• Example: A company conducts an interim audit

midway through the year to assess its profits,
enabling it to declare an interim dividend to
shareholders before the year-end audit.
• Financial Audit: Financial audit is examination of financial
statements for opinion on the truth and fairness of financial
condition and operating results of the entity.
• Cost Audit: A cost audit is an examination of a company's
cost records. It involves checking the cost accounts, methods,
and systems used to calculate and track expenses.

• Example: A manufacturing company conducts a cost audit to

review its production costs, such as raw materials, labor, and
overhead, ensuring that the cost calculations are accurate
and efficient.

• Operational Audit: Operational audit is review of operations

of an entity. It is generally carried out by internal audit.
• Management Audit: Management audit is critical review of
policy and practices of management. It is involves review of
various process of management.
• Complete audit: In complete audit, there
is no restriction placed on auditor in the
matter of coverage of audit.
• Partial audit: In case of partial audit,
usually the areas to be covered in audit
are defined by specific agreement to this
effect.
Standard Audit: This is a general audit where all financial
records, transactions, and statements are checked for
accuracy and compliance with accounting standards.

Balance Sheet Audit: In this type of audit, the focus is

specifically on verifying the accuracy of the company’s
balance sheet, ensuring that assets, liabilities, and equity
are properly reported.

Post and Vouch Audit: This audit checks individual

transactions by verifying supporting documents (vouchers)
and confirming that they are properly recorded in the
books. It focuses on the details of each transaction.
 Business where continuous audit is applicable

1. Where it is desired to present the accounts just after the close

of the financial year as in the case of a bank.

2. Where the volume of the transaction is very large

3. Where the statement of accounts is required to be presented to

the management after every month.

4. Where no satisfactory system of internal check is in

operations.
 Types of auditor:
External Auditor: If auditor is appointed by the share-holder of the company to do the
audit independently and unbiasedly, that auditor is called external auditor. This type of
auditor is neither the employee of the company nor a part of the management. This auditor
works for the interest of shareholder.

Internal Auditor: Internal auditor is appointed by the management as an employee of a

company. This auditor acts for preparing financial, evaluating the financial statement, and to
ensure internal control system. This auditor works for achieving management interest.

Government Auditor: Auditor is employed by the government or state or local agencies.

When the appointment of auditor is made by the government to do the audit of government
organization that audit is called GA.

Forensic Auditor: They are employed by the corporation, government agencies, public
accounting firms, and consulting & investigative services firm. They are trained in detecting,
investigating, and preventing fraud and white-collar crime.
 Qualifications of auditor:
For statutory audit and audit of joint stock companies,
auditor needs to have formal educational qualification.
Auditor must be a professionally qualified Certified
Accountants, in Bangladesh chartered Accountant’s
order, 1973.