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Auditing Short Note

The document defines auditing and describes its key principles and objectives. It discusses the types of audits, auditors' roles and responsibilities, and the audit process including planning, evidence, reports, and controls. The overall purpose is to establish guidelines for effective auditing practices.

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etebark h/michale
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147 views27 pages

Auditing Short Note

The document defines auditing and describes its key principles and objectives. It discusses the types of audits, auditors' roles and responsibilities, and the audit process including planning, evidence, reports, and controls. The overall purpose is to establish guidelines for effective auditing practices.

Uploaded by

etebark h/michale
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Auditing Practices and Principles

By

Etebark H.
Definition of Auditing
Auditing is defined as a systematic and independent
examination of data, statements, records, operations
and performances of an enterprise for a stated
purpose.
In any auditing situation the auditor perceives and
recognises the propositions before him for
examination, collects evidence, evaluate the same
on this basis formulates his judgement which is
communicated through his audit report.”
Auditing is

• The accumulation and evaluation of evidence


• Against established criteria
• Done by a competent and independent party
• To express an opinion
Auditors
➢ Internal and External Auditors
➢ External auditors come in from outside the organization to
examine accounting and financial records and provide an
independent opinion on these records. Law requires that all
public companies have their financial statements externally
audited.
➢ Internal auditors work for the organization as internal
employees to examine records and help improve internal
processes such as operations, internal controls, risk
management and governance.
Origin of Auditing
➢ Auditing is derived from Latin word “audire” which means
to hear.
➢ The system of checking public accounts has been in
existence for a long time.
➢ Luca Pacioli in 1494 had given Two aspects that is
receiving and giving aspects.
➢ Luca also defined the duties and responsibilities of an
auditor since then it is evolving.
➢ 16th, 17th and 18th century
➢ 19th century Joint stock companies
➢ 1913, Companies Act-made it obligatory
➢ 1918, Govt. of Bombay-training professional accountants
➢ 1949- Chartered Accountants Act-ICAI was set up
Features of Auditing

➢ Verification of activity – In auditing the auditor can


verify the activity of company and before auditing of
company accounts by qualified person the company
examine their own accounts which is known as
internal audit.
➢ Examination of Accounts – In auditing process their
is systematic and scientific process of examination of
books of accounts by a qualified person.
➢ Ascertain financial statements – The Auditor has to
ascertain financial statements of the company by
inspect, compare, check and review all financial
vouchers.
➢ Review of accounting system – Auditing is a review
of accounting system and Internal control.
Principles of Auditing.

➢Auditor should be sincere.


➢Auditor should follow principle of auditing.
➢Auditor should properly examine company
accounts.
➢Prevention and Detection of errors and frauds.
Objectives of
Auditing

Primary Subsidiary Other


Objectives Objectives Objectives
Primary Objective
➢ Examining the system of internal check.
➢ Checking arithmetical accuracy of books of
accounts, verifying posting, casting, balancing etc.
➢ Verifying the authenticity and validity of
transactions.
➢ Checking the proper distinction between capital
and revenue nature of transactions.
➢ Confirming the existence and value of assets and
liabilities.
Subsidiary Objectives

➢Detection and prevention of errors


Errors of principle.
Errors of omission.
Errors of commission.
Compensating errors.
➢Detection and prevention of frauds
Misappropriation of cash.
Misappropriation of goods.
Manipulation of accounts.
➢Under-or over-valuation of stock
Other objectives
• To provide information to income tax
authority.
• To satisfy the provisions of Companies Act.
• To have a moral effect.
Types of Audits
1. Financial Statement Audits
Evaluates correspondence between financial
statements and GAAP
2. Operational Audits
Evaluates correspondence between org’s procedures
and methods and criteria of efficiency and effectiveness
3. Compliance Audits
Evaluates correspondence between org’s operations
and specific procedures or rules
4. Comprehensive Audits
An audit of all the major functional areas within a
utility.
Types of Audits

• Independent (External) auditors

• Internal auditors

• Government auditors
Types of Errors
• Error of Principle
• Error of Omission
• Error of Commission
• Compensating Error
Fraud
• Misappropriation of Asset
• Misappropriation of goods
• Misappropriation of cash
Principles governing An Audit
• Integrity
• Confidentiality
• Skill and Competence
• Work performed by others
• Documentation
• Planning
• Audit evidence
• Accounting System and internal control
• Planning
• Audit conclusions and Reporting
Advantages of Audit
• Access to Capital Market
• Lower Cost of Capital
• Deterrent to Inefficiency and Fraud
• Control and Operational Improvements
• Authenticity of Accounts
• Detection of errors and frauds
• Identification of loopholes
• Acceptable to taxation authorities
• Increased creditworthiness
• Settlement of dispute among partners
• Settlement of insurance claims
• Helpful in making comparisons
• Accounts department becomes vigilant
Limitations
• Time consuming
• Frauds not detected
• Costly
• Depends on judgement
• All frauds can not be detected
• Dependence on others
Qualities of an Auditor

• Integrity
• Objectivity
• Independence
• Confidentiality
• Skills
• Responsible
• Intelligent
• Vigilant
• Communication skills
An Auditor is a watchdog and not a
blood hound
Difference Between Accounting
and Auditing
• Accounting is Constructive
– Creating Reports

• Auditing is Analytical
– Determine “Fairness” of Reports
Audit Planning Procedures

▪ Planning is one of the basic principles.


▪ Plans should be further developed and revised
as necessary during the course of the audit
▪ Audit planning process includes:
• Pre-plan
• Obtained back ground information
• Obtain information about client’s legal documents
• Develop overall audit programs
• Schedule the audit work
• Assigning professional staff to engagement.
Internal control
• Internal control is a process effected by the entity’s board
of directors, management and other personnel designed
to provide reasonable assurance regarding the
achievement of objectives in the following categories:
• Effectiveness and efficiency of operations,
• Reliability of financial reporting, and
• Compliance with applicable laws and regulations.
Four objectives of internal control system of an organization
are;
• to safe-guard the assets and records of the organization,
• to ensure the accuracy and reliability of the accounting data and
information,
• to promote efficiency in all the organizations operations,
• to encourage adherence to managements prescribed policies and
procedures.
Audit Evidence
• During the course of the audit, the auditor should obtain
sufficient, reliable, relevant and useful evidence to
achieve the audit objectives effectively.

• This helps the auditor support his/her findings and


conclusions by appropriate analysis and interpretation of
this evidence.
Auditor's report

The Auditor's report is a formal opinion by either


an internal auditor or an independent external
auditor as a result of an internal or external audit
performed on a legal entity or subdivision thereof
(called an ―auditee).
Types of audit reports
• There are four types of audit opinions namely:
• Unqualified opinion
• Qualified opinion
• Adverse opinion
• Disclaimer opinion
Contents of standardized audit reports

Regardless of the auditor, the following are the


seven parts of the standardized audit report.
• Report title
• Audit report address
• Introductory paragraph
• Scope paragraph
• Opinion paragraph
• Name of the audit firm
• Audit report date

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