AUDITING:

An Introduction
 The Historical Background
The word audit comes from a Latin word
audire which means to hear. In the times
of Roman Empire, accounts were kept by
assigned workers who were asked to
read out their reports to an independent
person. The person would “hear” these
reports and give his opinion on the
validity of such reports. Hence the term
auditor came to be used for such
independent persons who specialized in
verifying accounting reports.
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 Two Basic Terms
 Audit
 Auditing

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 Audit
An audit is:
 a systematic and critical examination
 of books of accounts and supporting
documents/records
 of an enterprise
 by an independent person
 with a view to give an opinion
 on accuracy or otherwise of financial
statements
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 Auditing
 Auditing as a subject may be defined
as the application of such principles
and methods as may be necessary
for an auditor to form an audit
opinion.

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 The Difference
 What an auditor carries out is called
an audit;
 How he carries it out, or the
knowledge or skills he uses to carry
it out, is called auditing.

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 Why do we need Audits
 Separation of ownership from management
 Nowadays, a large number of persons like
owners, lenders, employees, government,
etc. are affected by the performance of a
company.
 Hence there is need for financial reporting.
 And need for verification of the financial
reports.
 Incompetence of preparers leading to errors
 Dishonesty of preparers leading to frauds

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 Objectives of an Audit
 Primary Objective:
 form an opinion on the financial statements.
 Secondary Objectives:
 Detect errors and frauds, and
 Tell the management about the deficiencies
in the financial controls and systems.
 Specific Objectives:
 Investigations, procedure designing, etc.

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 Advantages of Auditing
 Accounts are of no use unless they are
correct and formally declared to be so.
 Detection of errors and frauds
 Psychological effect on managers and
workers.
 Improvement in internal control systems
 Audited accounts are readily accepted by
outsiders like lenders, tax-man, insurers,
etc.

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 Advantages of Auditing
(contd)

 Settlement of disputes.
 It is a noble and respectable profession.
 Helps create trust between owners and
managers and thus promotes investment.
 Helps improve company’s image and
reputation, credit rating, etc.
 Auditors often act as designers of systems
and procedures.

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 Auditing and Accounting
 Accounting  Auditing
 Keeping books  Checking books
 Preparing financial  Checking financial
statements statements
 Accountant is a  Auditor is not a
part of part of
management. management
 May have other  Giving an audit
functions in the report
company.

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 Limitations of Auditing
 Auditor has to depend on what is
given to him.
 Cannot audit what is not there.
 He cannot possibly verify every thing,
e.g.
 Cannot contact every debtor
 Cannot contact every supplier for each
invoice
 Lack of independence
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 Criticism on Auditing
 Too costly.
 Benefits are less than the cost.
 Too many unnecessary formalities.
 Disturbance to normal accounting
work while audit is going on.
 Less than honest auditors.

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Characteristics of Auditing
 Independent exercise, by a qualified
outsider.
 Scientific, systematic, intelligent and
critical examination of books &
records.
 Giving an opinion.
 Detection of errors and frauds

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 Qualities of an Auditor
 Professionally competent
 Knowledge of accounting, auditing, law,
business, etc
 Intelligent and with an inquiring mind
 Disciplined and vigilant
 Methodical and consistent in work
 Independent and firm, but not obstinate
 Honest and Ethical
 Courteous and polite

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 Professional Ethics
Auditor must:
 Maintain his integrity and objectivity
 Observe technical standards
 Be fair and candid with his clients
 Conduct himself properly
 Maintain dignity of his profession
 Not communicate with external parties
without seeking proper clearance
 Not have financial dealings with clients (other
than audit work) like borrowing money.

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 Auditing Concepts
 Independence of the auditor.
 Acceptable evidence.
 Materiality
 Accountability of the auditor
 Answerable to the shareholders, not
managers.

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Thank you

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