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AUDITING

(PART-4)
(UNIT-1)
MEANING AND OBJECTIVE OF AUDITING
(PART–1)

1. INTRODUCTION
Dear students I welcome you on the lecture series of auditing under
auditing we should start up with unit one and we will discuss in detail
about the subject. It’s the introductory part of auditing where we are
going to learn its meaning and the objective of auditing. So our
primary objective to learn from today’s lecture is to appreciate the
meaning of auditing that means what do we mean by auditing, why
there is the need doing the auditing, what does auditing tells us.

Secondly understanding the functional classification of auditor, Auditor


is a person a we know who is conducting the audit so as we will
advance in our lecture we will learn about auditor and how auditor is
being classified.

Thirdly we are going to do the appreciation our understanding of


essential qualities of auditors that means what are the essential
features or qualities which are being required for a auditor to conduct
the audit in an appropriate manner then we will learn the objective of
audit in the light SA’s being issued from time to time. The revise SA’s
in relation to objective audit is to be understood in our lecture. So first
of all we will start up our lecture with meaning of auditing.

2. MEANING OF AUDITING
According to the general guidelines on internal auditing issued by ICAI
i.e. Institute of Chartered Accountant of India, auditing is defined as a
systematic and independent examination of data, statements, records,
operations and performances, financial or otherwise of an enterprises
were stated purpose. Now net us highlights certain important terms
which are been used in the definition. First of all it’s a systematic and
independent examination, when we say it’s a systematic it means that
certain procedures and plans are being executed so when we conduct
an audit there should be a audit plan, there should be a certain
specific procedure to be followed for conducting the audit. It should
be independent that means auditor should give its opinion or express
its opinion on a very clear manner, it should not be biased, it should
not be effected by the person on behalf whom the audit is been
conducted.

Now what we are going to examine under audit, we are going to


examine the data or statements or records that means the financial
statements are being recorded and various evidences that is audit
evidences are to be examined to be gathered there should be
sufficient and appropriate so that the auditor can express its opinion
on the financial statements of an enterprise. Now again we are going
to examine the operations and performances when we examine
operations we will also look into the internal controls which are going
installed in a operating system of any enterprise. So in all it’s a big
exercise to be conducted so that the auditor can express his opinion on
the financial statement of an enterprise where a true and fair view of
an business activities can be analysed now why auditor is required to
express his opinion on the financial statements because financial
statements is a data which is going to impact the decision of the user
of those information.

Now let us understand certain essentials of audit. The first one is


auditing is an independent examination of financial information of an
entity that means it should not be biased it should move by any
specific purpose so that we can understand that the financial
statements of an organization are depicting a fair view. Now such
auditing is to be conducted for an entity whether it is for profit or not.

So second essential is whether is profit oriented or not audit has to be


conducted for that enterprise and irrespective size of legal form.
When we says that irrespective of the size of the organization on legal
form it means that whether it’s a sole proprietor or a company or a
partnership if its meeting up the requirement which is being given
under the statute it is required to carry out the audit.
Fourthly when such an examination is conducted with a view to
expressing an opinion there on which we have already discussed. Again
the fifth point is same systematic and independent examination which
is being carried out with the specific procedures to be followed there
should be proper documentation of what we are doing under audit it
does not confined to financial aspect only because we say that it’s a
examination not only of data statements but operations and
performances. So what happens that rather than restricting ourself to
the financial aspect we need to look into the internal controls also so
both substantive and the compliance test are to be carried by a
auditor.

Now who is auditor? A question comes to us. The person conducting


audit is known as auditor. He makes a report to the person appointing
him after due examination of accounting records and the accounting
statements in the form of an opinion. His duty is to express his opinion
as to whether financial statements reflect true and fair view so as to
influence the opinion of interested group of persons. So here again we
can conclude that the person who is a auditor that means who is
conducting the audit has to do such careful examination of the records
of the enterprises and he is being appointed either by the authorities
concerned or the enterprise itself. so depending on the functional
aspect for which a auditor is being appointed he has to carry out his
audits and the main premises of conducting an audit when auditor is
that he has to express his opinion.

3. FUNCTIONAL CLASSIFICATION OF AUDITOR


Now let us understand how the functional classification of auditor is
being done so there are two types of auditor’s external auditor and
internal auditor. Now let us understand who shall be external auditor
and who shall be internal auditor. So what we are going to do is that
we will find out certain basis of differences so that we can understand
the difference between the two. We have prepared a table where we
can understand the point of differences between the functional aspect
of internal auditor and external auditor.

First of all meaning of internal auditor and external auditor is to be


understood. Internal auditor is internal to the organization that means
he is the part of the organization while external auditor is external to
the organization. That means he is an outsider being appointed to
carry out certain audit function. Now what’s the status internal auditor
is considered as an employee of the enterprise while the external
auditor is wholly independent of the enterprise audited not an
employee that means when we say that a person is internal auditor he
has to work with the enterprise and his roles are altogether different
form the external auditor. To understand external auditor more clearly
we can say that being appointed is considered to be an external
auditor because he is a independent person being appointed by the
company to carry out the statutory audit so that he can express his
opinion in regard to the taxation provision or any other legal provision
and expresses opinion as to the compliance to the certain important
aspect and he also express his opinion as to the truth and fairness of
the financial statements.

Now what’s the scope of the work? Internal auditors scope of work is
determined by management while the scope of work of external
auditor is being determine by statute that means legal aspect has to be
considered. The law going to take care of these scope of work of
external auditor so wherever there is legal requirement or legal
provisions external auditor has to be abide by the legal requirement to
conduct the audit of the enterprise.

Now what’s the approach of internal auditor and that of the external
auditor? When we talk about the internal auditor his main concern is to
ensure the compliance with the policies, procedures, rules of
enterprises. Then he has to also take care of legal and govt.
regulations that means from time to time the legal requirement of an
enterprise has to be complied with so it’s the responsibility of internal
auditor to ensure that legal compliances are being done.

Thirdly generally accepting accounting principles have to be taken care


by the internal auditor when there is a finalization of the financial
statement of enterprise. Now when we come to external auditor his
main concern is to collect, adequate and reliable evidence to support
his opinion regarding truth and fairness of financial statement. So he is
not going to look into the legal and govt. regulations i.e. day to day or
the regular compliance is to be carried out by the internal auditor
while such compliances are being carried out or not it’s the concern of
external auditor to collect such data’s for example there is a
requirement to collet TDS to deposit TDS all time so the requirement
of doing the compliance is to be carried out by internal auditor while
the external auditor will look after the compliance being carried out or
not is there required evidences that means is there proper filing up
there returns, proper records are being maintain by the enterprise or
not such work is to be carried out by external auditor so approach of
both auditors are quite different.

Now the next one is appointment. Internal auditor is being appointed


directly by management or the person directly responsible to the
management that means board of directors or the directors or
management can appoint an internal auditor while the external auditor
is appointed by the owners or the person directly responsible to the
owners.

4. QUALITIES OF AUDITOR
Now let us understand other important feature of auditing i.e.
qualities of auditors. What should be the qualities of auditor when he
conducts the audit so these are the general qualities and not the
person specific every auditor should have these peculiar characteristics
of qualities so that he can be independent integrated and skilful and
competent auditor.

So first is independence, when we shay independence it means that he


should not be biased by any opinion he should be straight forward in
his approach and should take care of the legal compliance.

Objectivity: - objectivity means that he should be very particular as to


what is right and what is wrong and should rationally give his opinion
on the financial statements of an enterprise. Integrity means honesty
and straight forwardness and sincerity means professional approach.
He should be cautious that means any changes or amendments which
are being carried out he should be very much aware about it he should
be cautious about the compliance procedures to be conducted, clear
headedness that means there should not be any scope of ambiguity
professional approach as well his hope of work. The person who is
conduction the audit should be very clear about the scope of this audit
and he should be independent in his approach.

Reliability: - when we say that a specific quality of auditor is that he


should be reliable that means he should not be dishonest or he should
not give the confidential information to any other person unless
required by any legal authority or any such person for whom it is
responsibility for the auditor to given him such information.

Next one is having thorough knowledge of general principles of law,


ignorance of law is not a excuse that means a auditor should be well
equipped and well versed with all the legal compliances and he should
apply the legal requirement as an when required. He should hold a
position of trust that means neither the property of the enterprise
should be misused by the auditor nor any important information or
confidential data is being leaked by him.

Alertness of mind that means he should be aware about the various


environmental changes whether such changes are external or internal
to the enterprise concerned. He should be expert; expert here means
again that professional knowledge and up gradation of the latest
changes should be very much with him.

Skill and competence, when we say that skill and competence he


should have adequate skill, he should have adequate qualification as to
be an auditor and with his competence he should carry out the audit
on time and his professionalism and governance aspect should be very
high. Confidentiality we have already discussed and knowledge of the
business & industry should be there because the person who is
conducting the audit of an enterprise he should be very much clear
about the trends, about the knowledge of the business for which he is
conducting the audit. For example there is a handicraft industry for
which a auditor is being appointed so he should have the knowledge of
the entire handicraft business turnover the exporting whole
procedure, what are the requirements for taking up the license, how
the foreign exchange is going to be converted what are the FEMA
provisions which are being governed or which are being attracted
under the such industry so these are the things which a auditor should
have in mind when he conducts an audit he should be analytical and
patient in doing the audit.

Now let us understand the objective of conducting an audit or we can


say that they are the objective of auditing so as per SA 200 which is
revised one basic principle governing and audit it’s the nomenclature
of SA 200 basic principles governing an audit which is now read as
overall objective of the independent auditor and conduct of audit in
accordance with standard of audit. This is the heading under which
objective of auditor is being defined. Here we say that objective of
auditor is to obtain reasonable assurance whether the financial
statement as a whole are free from material misstatement and to
report on the financial statements as communicates as required by SA
in accordance with auditor finding.

5. OBJECTIVE OF AUDITING & ERRORS OF AUDITOR


Now again when we talk about objective of auditing there are two
objectives one is the primary another is the subsidiary or secondary
objective. Primary objective is again the same expressing opinion such
opinion should be on the truth and fairness of the financial statement
of the enterprise while the subsidiary is that detection of errors and
frauds and making recommendation to prevent them. So here we can
say that primary objective of auditor is not to detect errors in the
financial statement his primary objective is to express the opinion as
to truth and fairness, however while conducting an audit they can be
detection of errors and he can suggests or prevent such sort of errors
and recommend the preventive aspect to the management.

Now what sort of errors are there when an audit is being conducted so
auditor come across various errors now let us understand what are
these errors. The term error refers to an unintentional misstatement in
the financial statement by way of clerical mistake on record or
misinterpretation of facts or stake in application of accounting
principles so what happens that when accounting data’s are being
recorded there can be clerical mistakes in recording the transaction,
there can misinterpretation of facts, misinterpretation of facts means
that if there was certain goods in transit and we considered as goods
and there is not proper interpretation of the fact whether the sale has
taken place or not. Such sort of errors are known as misinterpretation
of facts. Mistakes in application of accounting principle there are
certain accounting principles which we need to abide by so while
applying such accounting principle if there is a mistakes, such mistakes
are also known as errors and they are unintentional nobody is going to
intentionally make such errors they are inherent in the nature of audit
to some extent they can be avoided also.

Now let us understand the types of errors first one is error of omission,
the word omission in its little term is that we have forgotten or
omitted to do something where certain accounting aspect is not at all
been recorded or partially recorded it is known error or omission. Now
error of commission is the second types of error, commission means to
do where certain thing is being done in a wrong way, a wrong entry
can be passed or wrong posting can be done so such errors are known
as errors of commission both errors of omission and commission can be
prevented by careful analysis of the data and there we can cross check
that the posting is not being done properly. Now error of duplication
that means two times entry is being passed so such errors can also be
prevented where control check sheets are being used.

Compensating error is the next sort of error by compensating error we


mean that one error has compensated the effect of other error. For
example a sales transaction is recorded by rupees hundred extra while
the purchase transaction is being recorded on a lower side by Rs 100 so
both on debit and credit side the similar sort of mistake has taken
place as to record transaction by Rs 100 on a lower side so both the
errors have compensated each other while there is no effect on the
final transaction however the transaction is being recorded incorrectly.

The next one is error of principle means that there is an importer


classification of the transaction which amounts to capital or revenue
that means capital expenditure is being recorded as revenue
expenditure or vice versa so wherever there is improper classification
between capital items and revenue items we consider them as error of
principle. So these sort of errors are coming across to an auditor when
he conducts the audit and his duty is to suggest the management to
prevent such sort of errors by guiding the proper methodology to find
out such errors by careful analysis of the balance sheets and the
proper books of accounts as well as doing the analysis of subsidiary
books of account from where such entries is being posted and in a way
he can help to prevent the data entry errors.

Now next one is fraud: - it’s not that only errors will be there in the
financial statements sometimes there are chances of fraud so let us
understand what the difference between error and fraud. Fraud means
the intentional act while error was an unintentional act. So when there
is a intention act it amounts to fraud. Now what does it includes it is
wilful misrepresentation, wilful means willingly certain thing is being
misrepresented, second is the deliberate concealment of material
pact. There was a material transection but it has been concealed so
that its impact will not common the financial statement. For example
there is a certain expenditure or a big loss is being incurred on certain
items but it has been concealed so that profits could be reflected on a
higher side such concealment of material fact and that to deliberate
would amount to fraud on the part of the enterprise. C is failure to
disclose the material fact for the purpose of inducing another person
or putting him at a disadvantage. Here C point is different from B
because here another person is being put in disadvantages position by
cancelling the data;

Now another of fraud is misappropriation of cash, misappropriation of


cash means there is certain dis-calculation of cash or various certain
stealing in the cash let us understand what exactly misappropriation of
cash means it can take place in the following manner by acknowledging
less amount than actually received so what happens that such amount
which is being received certain part is being misappropriated and
lesser amount is being shown. By omission of receipt the receipt is not
being given and there is defalcation or misappropriation of cash by
inclusion fictitious payment that means if the payments are being not
made but they are being shown just in the form of a book entry so that
defalcation of the cash and misappropriation of cash can be covered up
such amounts to misappropriation of cash by recording more payments
then actual if we record more payments then actual what happens that
outflow would be reflect more while we can say that such amount is
being spended or expended and cash can be misappropriated. Now how
to detected it by careful comparison of records in the cash book with
other subsidiary books and original vouchers.

6. SUMMARY
Now we are summing up our lecture of today certain other features in
relation to the fraud will be continued in our next lecture. In today’s
lecture we have learned about the meaning of auditing and objective
of auditor as well as the functional classification of auditor. With this
we are ending up our lecture of today.

Thank you