PRINCIPLES OF AUDITING

INTRODUCTION

Any subject matter may be audited. Audits provide third party assurance to various
stakeholders that the subject matter is free from material misstatement. The term is most
frequently applied to audits of the financial information relating to a legal person. Other areas
which are commonly audited include: secretarial & compliance audit, internal controls,
quality management, project management, water management, and energy conservation.

As a result of an audit, stakeholders may effectively evaluate and improve the

effectiveness of risk management, control, and the governance process over the subject
matter. The word audit is derived from a Latin word "audire" which means "to hear". During
the medieval times when manual book-keeping was prevalent, auditors in Britain used to hear
the accounts read out for them and checked that the organisation's personnel were not
negligent or fraudulent.

MEANING

Auditing is to examine and verify an account or accounts by reference to vouchers.

DEFINITION

Auditing is an inspection, correction, and verification of business accounts, conducted

by an independent qualified accountant.

AUDITOR POSITION

As auditor in training, these individuals conduct independent audits of mineral

industry companies, requiring a basic level of knowledge to ensure that they are abiding by
applicable state and federal laws and regulations. They may participate in audits, projects or
committees that are of varying complexity, priority, sensitivity, and problematic in nature.
These positions do not have supervisory responsibilities and may be required to stay within
an assigned budget.

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ESSENTIAL FUNCTIONS: The listed functions are illustrative only and are not intended to
describe every function which may be performed in the job level.

VALUATION & VERIFICATION OF ASSETS & LIABILITIES

To show correct valuation of assets and liabilities.

To know whether the balance sheet exhibits a true and fair view of the state of
affairs of the business
To find out the ownership and title of the assets
To find out whether assets were in existence
To detect frauds and errors, if any
To find out whether there is an adequate internal control regarding acquisition,
utilization and disposal of assets.
To verify the arithmetic accuracy of the accounts
To ensure that the assets have been recorded properly

DEPRECIATION

In determining the profits (net income) from an activity, the receipts from the activity
must be reduced by appropriate costs. One such cost is the cost of assets used but not
immediately consumed in the activity. Such cost so allocated in a given period is equal to the
reduction in the value placed on the asset, which is initially equal to the amount paid for the
asset and subsequently may or may not be related to the amount expected to be received upon
its disposal. Depreciation is any method of allocating such net cost to those periods in which
the organization is expected to benefit from use of the asset.

The asset is referred to as a depreciable asset. Depreciation is technically a method of

allocation, not valuation, even though it determines the value placed on the asset in the
balance sheet. Any business or income producing activity using tangible assets may incur
costs related to those assets. If an asset is expected to produce a benefit in future periods,
some of these costs must be deferred rather than treated as a current expense. The business
then records depreciation expense in its financial reporting as the current period's allocation
of such costs. This is usually done in a rational and systematic manner.

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 Generally this involves four criteria:
cost of the asset,
expected salvage value, also known as residual value of the assets,
estimated useful life of the asset, and
a method of apportioning the cost over such life
RESERVE AND PROVISIONS
The points of difference between provision and reserve are stated in the tabular form:
1. It is a possible loss so it is created
by debiting profit and loss
account. It is a charge against
profit
2. Profit and loss account will not
disclose true profit/loss, unless
provision is created.
3. It is created to meet specific loss
or liability. But the amount of
loss or liability cannot be
determined exactly. So the
amount of provision is an
estimated amount.
4. It must be created irrespective of
whether there is a profit or loss.
In other words its creation is
obligatory.
5. Profit or loss is effected by its
creation - profit decreases or loss
increases.
6. Dividend cannot be paid out of it.
1. It is a portion of profit earned by
business. It is created by debiting
profit and loss appropriation
account. It is an appropriation of
profit.
2. Profit and loss account discloses true
profit/loss, even if no reserve is
created.
3. It is meant for meeting any unknown
loss or liability. It is generally
created with a portion of profit
earned by business.
4. It cannot be created unless there is a
sufficient profit. Its creation is the
discretion of management. In other
words, it is not obligatory.
5. It does not effect profit or loss, since
it is created after ascertaining profit.
6. Dividend can be paid out of it.
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 7. Its amount must be sufficient to
meet the loss or liability.
8. It cannot increase working capital
- it is utilized for meeting the
specific loss or liability.
9. The owner of the business cannot
have any claim over it, since it is
created for meeting a specific loss
or liability.
10. It is shown on asset side of the
balance sheet as deduction from
the concerned asset, e.g.,
provision for doubtful debts is
shown as deduction from sundry
debtors.
11. It is used for the specific purpose
for which is has been created.
12. Auditors must check its
adequacy.
7. Its amount is generally determined
by management on the basis of the
amount of profit earned.
8. It increases working capital and
thereby strengthen the financial
position of the business concern.
9. The owner can claim it, since it is
created out of profit.
10. It is shown on liability side of the
balance sheet as a separate item.
11. It can be used for the purpose
whatsoever.
12. Auditors are not required to check
adequacy.

SECRET RESERVE

Secret reserve helps in strengthening the financial position of the business.

Secret reserve gives the sense of financial stability to the shareholders and
creditors by equalizing the rate of dividend.
Secret reserve helps in eliminating unhealthy competition by not showing true
profit to the competitors.
Secret reserve provides additional working capital.
The existence of secret reserve is known to the management only and not to the
real owners or shareholders.
Secret reserve makes the information of financial statements false and inaccurate.

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 Secret reserve may be the strong cause of loosing trust and confidence of the
shareholders and outsiders.
Secret reserve may cover up the inefficiency and fraud committed by the
managers and directors.

CONTENTS OF AUDIT NOTE BOOK

Generally the following information is incorporated in audit note book

Routine queries not cleared, i.e., missing receipts and vouchers etc.
Details of mistakes and errors discovered.
The points raised during the course of audit, to which the attention of the auditor
must be drawn, i.e. failure of the company to comply with the provisions of the
Companies Act or of the Memorandum of Association and other legal
requirements.
Extracts from minutes books and contracts and other correspondence with various
government agencies, financial institutions, debtors, creditors etc.
The points to be incorporate in the audit report.
The points which needs further explanation and clarification e.g., a change in the
basis of valuation of finished stocks or in the computation of depreciation, etc.
Date of commencement and completion of the audit.

TYPES OF AUDITS

Product audit
Process audit
System audit

CONCLUSION

Due to strong incentives (including taxation, misselling and other forms of fraud) to
misstate financial information, auditing has become a legal requirement for many entities
who have the power to exploit financial information for personal gain.

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 Traditionally, audits were mainly associated with gaining information about financial
systems and the financial records of a company or a business. Financial audits are performed
to ascertain the validity and reliability of information, as well as to provide an assessment of
a system's internal control. As a result of this, a third party can express an opinion of the
person / organisation / system (etc.) in question. The opinion given on financial statements
will depends on the audit evidence obtained.

REFERENCES

http://www.investopedia.com/terms/d/depreciation.asp
https://www.accountingtools.com/articles/what-is-the-distinction-between-a-
reserve-and-a-provision.html
http://accountlearning.blogspot.in/2010/07/concept-of-secret-reserve-its.html
http://asq.org/learn-about-quality/auditing/
http://www.accountingexplanation.com/difference_between_provision_and_reser
ve.htm