Introduction to AuditingQ.1. D d r U 3 d m A u d ' I t :(4M)
Ans.: M n e : As pw AAS-1 by lCAl "Auditing is the independent examination of financialhfwmation of any entity, whether profit oriented o not, and irmpecWe o its size or' r fY'
legal f m , when such an examination is canduded with a vkw to express an opinion thereon. r,
Analysis of the above definition brings out clearly the following features ofIt is the systematic and scientific examination of the account of a business whether
such business is profit oriented or not.It is the intelligent critical checking of the accounts of business.
It is done by Independent persons or body of persons qualified for the job. (Eg: Chartered Accountant)It
i done with the help of vouchers, documents, information and explanation s
received from the authorities.
What are the Advantages and ~isadvantages Audit? o f
Advantabes: True and Fair Accounts:- Audit provides an assurance to the various users of flnalPVc's such as owners, management, creditors, lenders, investors, government etcthat the Nc's are true and fair. Audit ensures that the final Nc's are reliable and authentic.
True and Fair Balance Sheet:- The user of Accounts can be sure that the Assets
and Liabilities shown in the audited balance sheet show the true financial position of
the concern as it is i.e. neither more or less. Thus, there is neither any windowdressing nor any secret resews in an audited Balance Sheet
6 A C I ~ M M E ..R C E C E ~ S 2 . . .(c)
~ ~ ~ s h o w s ~ b u e ~ d M a n d ~ m i t i s ~ m o r e n o r l
~ e ~ a n d ~ t h a t a x a h l e ~ . A n ~ e u g a r n e e d n o t g
through the entire books-
~ ~ - ~ w d t h e ~ n i w G i .
As per AdUng and Asmmm Sandmb (
W E - T b a u d M final accounts follow
theAAS~dcnmrby~~.Theauditedaerx#lnsacr,basedon objective s ~ and nd on pabmd wMms and fandm a4 a pftieutar audiir &waccomms.(g)Digckse all ma8erfal facts-
user can &yon the w d k i
any decision o M n g itlwm. . f
D e W h and PlcnnnYon d bron ad ~muck-hdited accounts a be assumed m
to be reasorlab& free from errors and frat&. The auditor with his exp& knowl*would take due care t see that enus and frauds are detected so ttrat accounts o
show a true and bir view.(i)
Mod check on E q h y m x - AucM techniques such as wxlching v m o n ofCash,
Sock, Assets, etc act as a moral check on employees fwclng them to keep the amounts regular up-to-date and free from any maw feaud.)
Advke on System, Taxatbn, Fhmca- The audb can a h advice the accounting system* internal cantml, intempl check, hteml a m f h m a , W o n , etc.
~ ~ h e d ~ - ~ e ~ t o ~ t m t y t t w ~ ~ ~ , t r m c r e ( k n s m a r babis.
kjst~ S E -
~ ~ ~ ~ e v i d e n c e t h a t t h e a m o u n t e. 3 1 1 bw -
:-Dueb~~ti.re~ofafirmdonotshowthe h m m t I in)ama8kn abaut the p m m m r ~ d the partner. MCDWS are tmsm~on ~ l hbbdcd ash and do not show the current value of Asseb and UabilMm. The m t s do not reveal fads which cannot be measured In terms of money. An Auditor may not b Indecmdent- He is appointed by the owners and hence e
not andwive h nabre:- (AAS-5):- Thus, a
o n ( i m by a debtor
cannot be expect&(5)
6 report to the owners their own wrong doings.
Frauds:- Frauds usually involve ads designed b control them suctr as forgay, deliberate failure to record transactions, false explamtions and so on and hence amdicutt to detect.
Auditor has to rely upon Exoerts (AAS-9):- Auditor may have to rely upon experts inrelated fields such as lawyers, engineers, valuers, etc for estimating contingent tiabitities, valuation of fixed assets, etc.
Cannot assure W e P@M&jj&-
Just because the accounts are audited doeo mb
mean that the user can take for granted the future profitability or pm-
o the f
concern. Audit does not comment on whether the management is efficient or not.
~ - ~ m l h n D b l ~ ~ a i w s n d . l l i r v l r w r d m f l n r w i d - ~ ( t ~ * r r , ~ h # ~ r d ~ w * - ~ & ~ L ~ l c )
s E ~ o & I E m - ~ & F F c w e r r S k r r o C F ~ a n d ~ .
T h e ~ ~ ~ t h a t e f f e d d m e r r w o r ~ o n t h e ~
IWponsiMlities and which shoutd be oomplied with dwng AudA we as f H ; d m -
ObjedMty and ndndep8ndema:- The auditor a t q l d be honest, straight
fonvarc! and s
i m In h/g ac -h
to his professional wwk. He must be fair and\
m u s t n d a l l o w b l a s ~ a r e r r i d e ~ o b j ~ . ~ ~ e ~ d o * ~ f ~ favour. \
1(2ConfidmWi:- The Auditor should m e the confidentiality of inbmatbn acquired pdin tfie course of his work and s h l d noQ dselose any such inbmation t tfie third o
party without qmdfk authority.
SMlis and Competenee:- The Audit should be performed and the report should be
prepared with the-.
cam by persons who have adequate training,
expeflenca and cornpeten- in auditing.i
Work performed by others:- When Auditor delegates worlc to assistants or other
auditor. he will continue to be responsible for M n g and expressing hk, opinion on the financial statements. The Auditor should carefully direct supervise and reviewwork delegated to assistants.(5) Audit Evidence:- h e auditor should obtain sufficient appmpfhte audit evidence
through the perfomce of compliance and substantive procedures to enable him t o
draw.reasonable conclusions thereon. On which t base his opinion on the financing o
Planning:- Planning enables the audiia to m d u d an eflecthre audit in an eRident and timely manner. Primarily planning should be based on the knowledge of the dients business. Plans should be furttrer developed and revised as tt8cessary during the course of the audi .
ooarnemrum-mAuata~~.ms(tenwhlohrshrpabntinprovldblp~~theaudit~~in~withthebssicprtrrdplgs. (8) Audit snd . T b Au&W should d~at ttb WI the ~ d n t h e b s s l s d a u d # e v l d e n e e ~ ~ ~ ~ T h e
A ccwnpany auditor must be a pracb'dng
S l and Cmpebxx- An kdRa must be an @pert kb having p m f e s s d training, ~uperlence and c p ~ n ein ihe field o accounting, auditing, mercantile law, mabo fm m n y law, Ino#ne Tax, costing, etc.
auditor must know how to judge people. He has to judge and weigh the evidence
Honest- An audi& must be hamst Further he must exercise ~"8880n8ble and care skill before he believes that M . h ecmtifh is t . m
Independent:- An Auditor must be Wependmt. H8 shwld be impartial as well asfeadess in the discharge 04 his . d u b . Ha should not have any vested interest thatwwlld affed hb independence as an auditw.I
Watch dog but not Bbad hound:- It is said that an auditor should act like a watchdog but not like blood hound. He st.lwld be alert but not swpldous. He has to safeguard the interest of the owners.-1
Confidential:- He should kdep the information obtained during the murse of audit confidential and not divulge it t outsiders. o
Q. 6. What are the d i i typesof frauds? What are the duties o an a u d i r in respect o f ffad?Ans:. Types o Fm&f
(8M) "Fraud* means intentional misrepresentation of financial
infomation by management. employees o third parties. It is a deliberate and r
malafide act to cheat or deceive someone.
Transaction may not be recorded at all:.Eg:- Goads may be sdd but not recorded in the books.
Dummy transactions may be recorded.~ 9 : - ' ~ o o d s cm Consignment may be shown as sales. sent
Accounting pdicies may be applied wrongly:-
Eg:- Rent received may be shown as depositwcL
Cash may be misappropriated or stolen out ot-
(a) Cash received (b) Cash paid (c) Cash balance.(a) Cash received may be misappropriated:(*) by not recording cash received at all or recording only pact amount as received
and pocketing h e balance
6AUTAM CQMERcf: CUSSES~->)bYU~Leding.