CONTENTS

➢INTRODUCTION OF AUDITING

❖ Meaning & Definition of auditing

❖ Origin of auditing

❖ Relation of Auditing with Accounting

❖ Relation with Financial Statements

❖ Aspects to be covered in Auditing

❖ Basic Concepts Of Auditing

❖ Concept of Materiality

❖ Concept of True & Fair

❖ Functions of Auditing

❖ Objectives of Auditing

❖ Principles governing an audit

❖ Advantages & Limitations of auditing

➢ AUDITOR.

Meaning

❖ Types of Auditor & Qualifications

❖ Powers of Auditor

❖ Duties Of Auditor

MEANING OF AUDITING
The word audit is derived from the Latin word audire which means to hear. It is an important tool of management. It
is concerned with making an analytical and critical analysis of the books of accounts, checking and verification of
evidence in support of entries appearing in the books of accounts, and ascertaining the authenticity of the financial
statements. It is also concerned with the examination of accounting data to determine the extent of an audit
examination is too made on the basis of evidential document such as invoice, money receipts and other records by
the authorized representative of the client. Auditor has used to send for the accountants and hear whatever they had
to say in connection with the accounts. The auditor has to look into the facts behind figures and he must certify their
accuracy. Auditing is to ascertain the balance sheet and profit and loss account that they show a true and fair view of
the financial state of affairs of a concern. The Institute of Charted Accountants of India has issued a number of
statements of standard auditing practices and accounting standards for guidance of Auditor of India.

DEFINITION OF AUDITING
According to DICKSEE, “An audit may be said to be such an examination of the books, accounts and vouchers of a
business, as will enable the auditor to satisfy himself that the balance sheet is properly drawn up, so as to exhibit a
true and fair value of the state of the affairs of the business, whether the profit and loss account gives a true and fair
value of the profit and loss for the financial year. According to the best of his information and explanations given to
him and as shown by the books, and if not, in what respect he is not satisfy.”

Origin of Auditing
Auditing has its origin in the necessity in the development of some system to put a check on the persons whose duties
were to record receipts and disbursements of money on the behalf of owners. In the ancient days auditing was
confined to public accounts only. With the development of trade and commerce, the need for recording transactions
was felt by businessman. This had necessitated the development of some system of check upon the persons who
recorded such transactions on the behalf of businessman.

The audit in its present shape is the result of large-scale production in consequence of Industrial Revolution during the
18th Century. With the development of banking facilities, communication and transport means, the concept of
corporate management has taken birth. It necessitated the investors to know whether their investment is safe or not.
Shareholders need an independent person having expert knowledge of accounts to report on the working of the
company and truthfulness of the profit or loss and financial position disclosed by the management.

a. statutory audit :
The term statutory audit refers to the review or the record of the company of the government organization
which is required by the law or the municipal authority of any particular region. This is done to monitor
the performance of the firm or the government organization. The company here the auditors who provide
the auditing report and submit those reports annually or semiannually to the law or the concerned
authority. The statutory auditors become elected when the board of directors vote them, those auditor
before being elected to this job must have some top position in the hierarchy level of that government
organization. Its required for company, co-operative societies, trust , banking , insurance company etc.
b. Private audit:
When the audit is not a statutory requirement, but is conducted at the desire of owners , such an audit is
private audit . The audit is conducted primarily for their own interest. At times the private audit may
become a requirement under tax laws, if the turnover exceeds a specified limit. Private audit is of the
following types:
1 audit of sole proprietorship
2 audit partnership firms
3 audit individuals’ accounts
4 audit institutions not covered by statutory audit
c. government audit :
Audit forms an indispensable part of the financial administration and is one of the important organs
necessary to ensure the sound functioning of a Parliamentary Democracy. It is the main instrument to
secure accountability of the Executive to the Legislature. Audit assists Parliament/Legislature in

RELATION OF ACCOUNTING AND AUDITING

Both accounting and auditing are closely related with each other as auditing reviews the financial statements which
are nothing but a result of the overall accounting process. It naturally calls on the part of the auditor to have a thorough
and sound knowledge of GAAP before he can review the financial statements.

In fact, auditing as a discipline is also closely related with various other disciplines as there is lot of linkages in the work
which is done by an auditor in his day-to-day activities. To begin with, it may be noted that the discipline of auditing
itself is a logical construct and everything done in auditing must be bound by the rules of logic. The knowledge of
language is also considered essential in the field of auditing as the auditor shall be required to communicate, both in
writing as well as orally, in day-to-day work .For example, if the business has really earned a profit but because of
wrong accounting, the annual accounts show a loss, the proprietor may take the decision to sell the business at a loss.
Thus from the point of view of the management itself, authenticity of financial statements is essential. It is more
essential for those who have invested their money in the business but cannot take part in its management, for
example, shareholders in a company, such persons certainly need an assurance that the annual statements of accounts
sent to them are fully reliable. It is auditing which ensures that the accounting statements are authentic. In today’s
economic environment, information and accountability have assumed a larger role than ever before. As a result, the
independent audit of an entity’s financial statements is a vital service to investors, creditors, and other participants in
economic exchange.

Aspects to be covered in Audit

The principal aspects to be covered in an audit concerning final statements of accounts are as follows:-

➢ An examination of the system of accounting and integral controls to ascertain whether it is appropriate for
the business and helps in properly recording all transactions.

➢ Reviewing the systems and procedures to find out whether they are adequate and comprehensive.

➢ Check the arithmetical accuracy of books of accounts by the verification of postings, balances etc.

➢ Examine the documentary evidence to establish the accuracy, authenticity and validity of transactions
recorded.

➢ Verifying that a proper distinction is made between capital and revenue items.

➢ Verification of the title, existence and valuation of assets appearing in the balance sheet.

➢ Examination that the statutory requirements are complied with.

➢ Verifications of the liabilities stated in the balance sheet.

➢ Comparison of balance sheet and profit and loss account and other statements with underlying records in
order to see that they are in accordance there with.

➢ Checking the results shown by the balance sheet and profit and loss account to see whether the results shown
are true and fair.

➢ Reporting to the proper person as to what extent, accounts reveal a true and fair view of the state of affairs
and of the profit and loss account of the organization.

Functions of Auditing
Important functions of auditing can be summed up as follows:

➢ Reviewing systems and procedures of business.

➢ Examining documentary evidence to establish the accuracy of recorded transactions.

➢ Reviewing the system of accounting and Internal Controls.

➢ To verify the valuation and existence of assets.

➢ To examine the mathematical accuracy of accounting statements.

➢ To see whether the statutory requirements have been complied with.

➢ Reporting as to what extent, accounts exhibit true and fairness.

➢ To make recommendations for improvement in Internal Control and Accounting System.

➢ To verify the distinction between capital and revenue items.

Objectives of Auditing
(A) Verification of accounts and financial statement
The main objective of an audit is to verify and establish that at a given date balance sheet presents true and fair view
of financial position of the business and the profit and loss account gives the true and fair value of the profit or loss
for the accounting period.

The auditor must:-

Verify the accuracy of posting, balancing etc

Confirm the validity of transactions with supporting documents Confirm existence of assets and liabilities

Assess the system of internal control

Ascertain whether distinction has been made between capital and revenue items

(B) Fraud
Fraud is the word used to mean intentional error. This is done deliberately which implies that there is intent to deceive,
to mislead. These are more serious than intentional errors. A great variety of intentional errors may be found.
Intentional errors are the most difficult to detect and auditors generally devote greater attention to this type. Auditors
while studying the possibility and nature of fraud must keep this always in mind and should not take any exception for
those who held high offices. These things generally start in a non-consequential way after a subordinate staff member
first borrow small amounts from the cash box to meet his temporary difficulty and gradually it becomes his habit to
borrow in such a manner. Fraud also takes place in forms other than cash defalcations.

Frauds may be divided into the following categories:- Misappropriation of goods

In these types the businessman appropriates the goods to wrong accounts for committing frauds and escaping from
tax liabilities. Misappropriation of goods can be detected by thorough checking of records and physical verification of
stock as well as purchase and sale.

Misappropriation of cash

This system can be done by theft of cash receipts, petty cash cheques, creditors, purchases etc. The transaction relating
to the receipt of cash are omitted from the records or recorded with lesser amount in the cash book. Some of the
examples are as follows:-

Cash sale may not be recorded at all

Omitting credit not received from supplier and discount allowed to them

Manipulation of accounts

These frauds may be committed by manipulated wrong statement and accounts. These are made only to give fraud to
the higher authorities. This type of fraud is committees by manager, director or board of directors.

(C) Detection and Prevention of Errors

Accounting is the device for collecting and presenting useful information in financial terms about a business enterprise.
It should as well be recognized that accounting data may contain errors for a variety of reasons. Even today human
element is the most important element of recording and processing the accounting data. It is the management that is
responsible for prevention of errors and fraud.

Principles governing an Audit Principle of Independence

The audit work should be independent from accountancy and the auditor should examine the books of accounts
indifferently and independently. He should be free from any such interests which may affect his integrity and
objectivity.

Principle of Objectivity

The audit work should be based on evidence and should be done impartially and in an unbiased way.

Principle of Materiality

The principle of materiality is and has always been fundamental to the whole process of counting. An auditor has also
to be quiet concerned regarding the concept of materiality. The auditor has to analyze and take decisions regarding
various items whether they are material or not during the course of audit. In case the auditor finds that an item is
quiet material in nature he would have to give careful consideration to its checking and would care for more evidence
in support.

Confidentiality

The auditor should maintain the confidentiality of the client’s information. It is well said that an auditor keeps his ears
and eyes open, but his mouth shut. He should disclose the information only when:-

He has obtained permission of his client. There is legal or professional duty to do so.

Documentation

Documentation is an important aspect of any audit. An auditor should maintain sufficient working papers for each
audit assignment. Such documentation is very important in providing evidence that the audit was carried out in
accordance with the basic principles. Planning

The Auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans
should be based on knowledge of business client. Plans should be revised as necessary during the course of audit.

ADVANTAGES AND LIMITATIONS OF AUDITING:- ADVANTAGES :-

The fact that audit is compulsory by law, in certain cases by itself should show that there must be some positive utility
in it. The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy
to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of
considerable value even to those enterprises and organizations where audit is not compulsory, these Advantages are
given below:-

(a) It safeguards the financial interest of persons who are not associated with the management of the entity,
whether they are partners or shareholders.

(b) It acts as a moral check on the employees from committing defalcations or embezzlement.

(c) Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining
the purchase consideration for a business.

(d) These are also useful for settling trade disputes for higher wages or bonus as well as claims in respect of
damage suffered by property, by fire or some other calamity.

(e) An audit can also help in the detection of wastages and losses to show the different ways by which these might
be checked, especially those that occur due to the absence or inadequacy of internal checks or internal control
measures.

(g) Audit ascertains whether the necessary books of account and allied records have been properly kept and helps
the client in making good deficiencies or inadequacies in this respect

(h) As an appraisal function, audit reviews the existence and operations of various controls in the organizations
and reports weaknesses, inadequacies, etc., in them.
LIMITATIONS OF AUDIT
At this stage, it must be clear that the objective of an audit of financial statements is to enable an auditor to express
an opinion on such financial statements.

In fact, it is the auditor’s opinion which helps determination of the true and fair view of the financial position and
operating results of an enterprise. It is very significant to note that the AAS-2 makes it a subtle point that such an
opinion expressed by the auditor is neither an assurance as to the future viability of the enterprise nor the efficiency
or effectiveness with which management has conducted affairs of the enterprise. Further, the process of auditing is
such that it suffers from certain inherent limitations, i.e., the limitation which cannot be overcome irrespective of the
nature and extent of audit procedures. It is very important to understand these inherent limitations of an audit since
understanding of the same would only provide clarity as to the overall objectives of an audit. The inherent limitations
are :-

(i) First of all, auditor’s work involves exercise of judgment, for example, in deciding the extent of audit
procedures and in assessing the reasonableness of the judgment and estimates made by the management in preparing
the financial statements. Further much of the evidence available to the auditor can enable him to draw only reasonable
conclusions there from. The audit evidence obtained by an auditor is generally persuasive in nature rather than
conclusive in nature. Because of these factors, the auditor can only express an opinion. Therefore, absolute certainty
in auditing is rarely attainable. There is also likelihood that some material misstatements of the financial information
resulting from fraud or error, if either exists, may not be detected

MEANING OF AUDITOR ;-
The person conducting audit is known as the Auditor;

he makes a report to the person appointing him after due examination of the accounting records and the accounting
statement in the form of an opinion on the financial statements. The opinion that he is called upon to express is
whether the financial statement reflect a true and fair view. Auditing, especially of companies and for public purposes
has become the preserve of persons having recognized professional training and qualification. In India, under the
authority of the Companies Act, 1956, only Chartered Accountants are professionally qualified for the audit of the
accounts of companies... Chartered Accountants are in a position to undertake auditing of almost any accounting
aspect, unlike cost accountants whose sphere has been restricted to audit of the cost accounting records and
statements. It is C.A. or a firm whose all partners are Chartered Accountants who act as auditors in India.

TYPES OF AUDITORS:-
Functional Classification of Auditors : □ Internal vs. External Auditors

External auditors are the persons who practice the profession of accountancy having qualified in the professional
examination and are external vis-à-vis the organizational which they audit the accounts. The Internal auditors, on the
other hand, may also be professionally qualified and are internal vis-à-vis the organization in which they are appointed
to perform specific work.

Powers of Auditors
The rights of the company auditor can not be limited or abridged in any way. Any resolution limiting the powers of the
auditor or any such provision in articles of association will be void. Following are powers/rights of auditors:-

Access to books and vouchers

Every auditor of company shall have a right to access at all times to the books and accounts and vouchers, whether
kept at head office of company or elsewhere. Auditor is not required to wait for the closing of accounts for conducting
the audit. The words all times means only the normal business hours. All types of documents, agreements,
correspondences, financial books, statistical books, memorandum books, etc are covered.

Right to obtain information and explanations

Auditor may require the officers of the company to provide such information as he may think necessary for the
permanence of his duties. It will be obligatory for the officers of the company to furnish without delay the relevant
information to the auditors.

Right to visit branch offices and access to branch accounts

Where accounts of any branch office are audited by another person, the company auditor:-

Shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor

Shall have a right to access at all times to books and accounts and vouchers of the company maintained at the branch
office.

Right to attend General Meeting

All the notices and other communications relating to any general meeting also be forwarded to the auditors of a
company along with shareholders/members. Auditors shall be entitled to attend any general meeting and to be heard
at any general meeting which he attends on any part of the business which concerns him as auditor.

Auditor’s lien

Auditor’s lien on his client’s books and records is unconditional. Auditor can exercise lien on books and documents
subject to following conditions:-

Documents retained must belong to client

Such documents must be in possession of auditor on client’s authority On such documents, some work must have
been done

The fees for work performed must be outstanding.

Right to receive remuneration

Remuneration of the auditor of a company may be fixed by the authority which appoints him. Therefore, Board of
Directors will fix remuneration in case of first auditors or auditors appointed to fill up casual vacancy. If he is appointed
at the annual general meeting his remuneration will be fixed by the company at the general meeting.

A separate disclosure of all the amounts paid to the auditor in whatever capacity and whether as fees or expenses, is
required to be made in profit and loss account, classified as follows:-

(a) As auditor

(b) As advisor or in any other capacity in respect of:

Duties of Auditor

The statutory duties of an auditor cannot be limited in any way either by Articles of Association or Directors or by
members. However, a company may extend them. The following are the duties that the auditor has to perform:-

➢ Auditor has to state whether in his opinion and to the best of his information and according to the explanations
given to him, the accounts, give a fair and true view in the case of the balance sheet, of the state of the company’s
affairs as at the end of its financial year and in the case of the profits and loss account, of the profits and losses for its
financial year. Following guidelines may be laid down in this regard:

➢ Balance sheet and profit and loss account should be as per requirements of The Companies Act, 1956

➢ There should be no window dressing

➢ All material facts should be properly disclosed

➢ All usual, exceptional or non recurring items should be disclosed separately

➢ The financial statements should convey the required information clearly

➢ Auditor has to state whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit.

➢ He is required to state whether in his opinion, proper books of accounts as required by law have been kept by
the company, so far as appears from his examination of these books, and proper returns adequate for the purpose of
his audit have been received from branches not visited by him.

➢ Whether in his opinion the balance sheet and profit and loss account comply with the accounting standards
referred in Section 211 of The Companies Act, 1956.

➢ Auditor is required to state whether any director is disqualified from being appointed as director under Section
274

➢ He will state whether the cess payable under Section 441A of the act has been paid by the company and if the
same remains to be paid, details thereof.

➢ Whether the company’s balance sheet and profit and loss account dealt with by the reports are in agreement
with the books of accounts and returns.

➢ He will state whether the report on the account of any branch office audited under Section 228 by a person
other than the company auditor has been forwarded to him and how he was dealt with the same in preparing auditors
report.