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What is Auditing ?
Most authoritative definition on auditing is “An audit is an independent examination of financial information of any entity, whether profits oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to express an opinion thereon. (These matches with the famous definition given by Mr. Dick see). Auditing is the process of assessment and ascertaining of financial, operational, and strategic goals and processes in organizations to determine whether they are in compliance with the stated principles in addition to them being in conformity with organizational and more importantly, regulatory requirements.
In general, an audit is an investigation of an existing system, report, or entity. An audit is a “systematic, independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which the audit criteria are fulfilled.” Several audit methods may be employed to achieve the audit purpose.
In General, an audit is an investigation of an existing system, report, or entity.
Need for Audit
a) The external agencies who use the Financial Statements need an assurance that Financial Statements:
i) have been prepared and presented correctly, and
ii) Reflect the “true and fair” view of the enterprise.
b) Hence, an independent examination of the financial statements is needed. This gives
rises to the need for Auditing.
Types of Audits
There are a number of types of audits that can be conducted, including the following:
- Financial audit
- Compliance audit
- Construction audit
- Information systems audit
- Operational audit
- Investigative audit
- Tax audit
Definition of an Auditor
An auditor is a professional that accumulates and evaluates evidence to report on the degree a company’s assertions that they comply with an established set of procedures or standards (criteria).
Objectives of an Audit?
The primary objective of audit is to enable an auditor to express an opinion on Financial Statements, prepared within a framework of recognised accounting policies and practices and relevant statutory requirements.
1. Main objective:
The main objective of auditing is to report whether the financial statements are showing true and fair view or not. This is done by comparing the B/S and profit and loss a/c with the books of accounts.
2. Other objectives:
a) Detection and prevention of frauds, and
b) Detection and prevention of errors.
What are the aspects to be covered in an audit ?
a) Checking the arithmetical accuracy of the books of accounts.
b) Vouching the authenticity of the transactions entered into during the course of business by the examination of various supporting evidences.
c) Ascertaining that proper distinction has been made between capital and revenue items.
d) Comparison of the Balance Sheet and Profit and Loss items with the books of accounts to confirm whether they are in accordance therewith.
e) Checking whether the Balance sheet and P&L account are showing true and fair view.
f) Verification and valuation of assets & liabilities.
g) In case of company audit, confirming whether the legal requirements have been complied with.
h) Cut-off – Ascertaining that amounts of various incomes and expenditures adjusted in the accounts correspond to the accounting period. (i.e. ascertaining whether proper adjustments for accrued / prepaid expenses and income received in advance / outstanding was made).
i) Examination of the internal control system.
j) Reporting to the appropriate authority (i.e. audit report).
What are the different auditing techniques?
The term audit techniques mean the tools adopted by the auditor to check the true and fair view shown by the financial statements. The following are the examples of auditing techniques:
a) Vouching: Vouching consists of comparing the entries in the books with the particulars in the voucher as regards date, amount, name of the party etc. (checking the validity and authenticity of the transactions).
b) Posting: Means checking the process of recording the transaction in the appropriate books, records and documents.
c) Casting: Means checking the totaling of accounts selected on test basis.
d) Confirmation: Means the process of obtaining response either in written or oral forms.
e) Physical examination: Means the process of examining in personal.
f) Year-end scrutiny: Means checking the accounts and the transactions at the end of the period with a view to find out the genuineness of the transactions.
g) Tracing: Means checking the amounts from one statement to another.
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