Auditing

and
control
Lecture No. : - 1st

Lecturer Name: - Rahmatullah Hamidi

 Auditing
Book Recommended
1.Advance Auditing by Khawja Amjad
Saeed
2.Auditing A. H. Millichamp
3.Auditing By Saeed Khan
4.Auditing by Syed Nasir
Chapter No.01
Introduction
What is Auditing?
The word audit is taken from Latin word “Audire”
which means to hear. In old days the business people
living in Egypt, Greec and Rome used to appoint
auditors to hear accounts matters relating to business.

Montgomery says that auditing is a systematic

examination of the books and records of a business or
other organizations, in order to ascertain or verify,
and to report upon the other facts regarding its
financial operations and results thereof.
As per International Auditing Standards an audit is
the independent examination of financial information
of an entity whether profit oriented or not and
irrespective of size, or legal form, when such an
examination is conducted with a view to expressing an
opinion thereon.

It is clear that auditing is an independent checking of

statements, records, operations and performance of a
concern with a view to expressing an opinion in the
form of written report.
Characteristics of Auditing
Independent examination of facts and figures.
Financial information is examined to know validity of
data.
Audit is compulsory for limited liability companies.
Audit is suitable for any size of organization
Audit is conducted for expressing an opinion on
financial information.
 Objectives of Auditing
Fairness of financial statements
Prescribed laws followed
Accounting policies are followed.
Independent opinion on financial information of an entity.
Detection of errors from accounting records.
Detection of frauds from books of accounts.
Prevention of future errors.
Prevention of future frauds.
To assess the performance of the management.
To satisfy taxation officers.
To examine the business performance for social
responsibility.
To examine the proper use of resources.
To verify the correctives of cost accounts.
Audit can be done for loans, sale of business, admission of
new partner etc.
 Scope of Audit
Legal requirements:
Scope of audit will depend upon legal requirements or
regulations or relevant professional bodies.
Audit of all aspects of an entity:
The audit should cover all aspects of an entity to give an
opinion about fairness of transactions of an entity.
Reliable information:
The scope of audit work depend upon the availability of
reliable information.
Substantive test:
The reliability of information can known by carrying out
other tests, enquiries and other verification procedures of
accounting transactions and account balances.
Internal control:
If proper internal control is existed then smapling technique
can be used to examine accounting records instead of detail
investigation.
Difference Between Accounting and
Auditing
Accounting is concerned with preparing financial
statements but auditing checking these statements.
Accounting concerned with current and past data but
auditing about past data only.
Accounting shows financial performance and position
of an entity but auditing certify the true and fair view
of financial statements.
Work of accountant starts when book keeper work ends
and auditor work starts when accountant work ends
Accounting starts with journalizing and ends with final
accounts but auditing starts with verification of accounts
and ends with an opinion.
Accounting principles include going concern, accrual
basis, consistency and prudence but auditing principles
include full independence, objectivity, honest and free of
bias.
 Kinds of Audit
External Audit
Continuous audit
Final audit
Interim audit
Cost audit
Government audit
Internal audit
Propriety audit
Management audit
External Audit
It is that which is concerned with the critical review of
representations made in published financial statements.
It is compulsory for all public limited companies. It
may classified into :
Continuous audit
Final audit
Interim audit
 Continuous audit
Under continuous audit an auditor is required to attend at
regular intervals during financial year , say monthly or
quarterly and examine the books of accounts. This audit is
suitable for:
Where audit accounts are required immediately after close of
financial year.
Where monthly audited accounts are required.
Where no satisfactory internal control existed.
Where organization is large and numerous transactions are
to be checked.
 Advantages of Continuous audit
As books are checked at regular intervals, errors and
frauds can be easily discovered.
Audit work can be more effectively as sufficient time is
available.
Audited accounts can be presented to share holders at
annual general meeting very quickly after close of
accounting period.
Frequent visits of auditor can reduce the opportunity of
frauds.
Disadvantages of Continuous Audit
The dishonest staff can alter the figures after the audit
has been completed during the period.
The auditor may lost the thread of his work due to
which unchecked entries might be left.
The frequent visit of auditor may cause inconvenience
to the client and dislocate his work.
Interim audit
This type of audit is conducted when the management
of an organisation desires to know trading results of
business in order to declare interim dividend or where
audited financial statements are required to be issued
soon after the close of the financial year.
Final audit
A final audit is that which is commenced at the end of
accounting year when all accounts have been closed and
final accounts have been prepared and carried out until the
audit work for entire period is completed.
Advantages of final audit
Less chance of manipulation of figures after they have
been checked.
Auditor can perform his work more effectively as he
has been given all facts and figures at the same time.
Thread of work is not lost as work is completed in one
session.
Disadvantages of final audit
It is more expensive as it need more staff to complete
audit with in specific time period.
It is not effective in case of large organisation.
It is not possible to check each and every transaction in
case of large concern.
Cost audit
It is concerned with the verification and examination
of books of cost accounts in order to ensure whether
these have been correctly maintained in accordance
with the system of cost accounting employed by the
company. It aims at detection of errors and prevention
from frauds and misappropriation.
 Government audit
The government audit is an instrument of financial
control. It is mainly concerned with the audit of:
Receipts and payments
Expenditures
Sanctions
Provision of funds
Rules and auditors
Debt and remittance transactions
Stores and stock
Internal audit
It is a continuous process of reviewing and appraising
all business activities pertaining to accounting,
financial and other operations. It is conducted to
provide day to day information to the management, so
that an appropriate action can be taken for correct
decisions.
 Propriety audit
It is concerned with the assessment of executive actions
and plans bearing on the finance and expenditure side of
the company. The audit is basically an expenditure audit
as the auditor has to see the justification of expenditure
incurred by the company. He must ensure:
Whether the expenditure has been adequately planned
Whether the expenditure has produced best result or not
Management audit
It is an audit to examine, review and independently
appraise the various policies of the management on the
basis of objectives standards. Its aim is to reveal the
shortcomings or irregularities in management and
suggest ways and means to management for improving
operational profitability and organisation viability.
Advantages of Auditing
Advantages for Business
Errors are located
Frauds are discovered
Loans become easy
Advice about weakness
High moral values
Tax payments to government
 Advantages for owners
Efficiency improves
Dispute settles
Planning become possible
Improvement in internal control
To know fluctuation in profit
Increase credit rating of company
Listing of stock exchange is possible
Shareholders are protected
Donors are satisfied that their funds are properly utilized
Advantages for Government
Better performance of tax department
Exact revenue amount can be determined.
Progress of economy can be known exactly through
audited accounts.
State owned organizations can be sold at their actual
market bid prices.
It makes the work of tax authorities to determine the
tax amount on business incomes.
END