T Y B.Com Auditing

1. Auditing
By Radhika

2. Syllabus

3. Unit -1
1. Introduction to Auditing
2. Origin & Development of Auditing
3. Meaning, Definition & Characteristics of Auditing
4. Scope & Principles of Auditing
5. Functions & Limitations of Auditing
6. Objects of Auditing
7. Book keeping, Accountancy, Auditing &
investigation

4. Introduction
Economic decisions in every society must be based upon
the information available at the time the decision is made.
Unreliable information can cause inefficient use of resources
to the detriment of the society and to the decision makers
themselves.
As society become more complex, there is an increase
likelihood that unreliable information will be provided to
decision makers.

5. Cont.
There are several reasons for this: remoteness of
information, voluminous data and the existence of complex
exchange transactions.
As a means of overcoming the problem of unreliable
information, the decision-maker must develop a method of
assuring him that the information is sufficiently reliable for
these decisions. In doing this he must weigh the cost of
obtaining more reliable information against the expected
benefits.

6. Cont.
A common way to obtain such reliable information is to
have some type of verification (audit) performed by
independent persons. The audited information is then used in
the decision making process on the assumption that it is
reasonably complete, accurate and unbiased.

7. Origin And Development
The term audit is derived from the Latin term ‘audire,’ which
means to hear. In early days an auditor used to listen to the
accounts read over by an accountant in order to check them.
Auditing is as old as accounting. It was in use in all ancient
countries such as Greece, Egypt, Rome, U.K. and India. The
Vedas contain reference to accounts and auditing. Arthasashthra
by Kautilya detailed rules for accounting and auditing of public
finances.

8. Cont.
Auditing evolved and grew rapidly after the industrial
revolution in the 18th century with the growth of the joint stock
companies the ownership and management became separate. The
shareholders who were the owners needed a report from an
independent expert on the accounts of the company managed by
the board of directors who were the employees.
The original objective of auditing was to detect and
prevent errors and frauds.

9. Development
In India the companies Act 1913 made audit of company
accounts compulsory. With the increase in the size of the
companies and the volume of transactions the objective of audit
shifted and audit was expected to ascertain whether the accounts
were true and fair rather than detection of errors and frauds.
Hence the emphasis was not on arithmetical accuracy but on
a fair representation of the financial efforts the companies Act
1913 also prescribed for the first time the qualification of auditors.

10. Cont.
The later developments in auditing pertain to the use of
computers in accounting and auditing.
In conclusion it can be said that auditing has come a long
way from hearing of accounts to taking the help of computers to
examine computerized accounts.

11. Exercise

12. Meaning
The general meaning of an audit is a planned and documented
activity performed by qualified personnel to determine by
investigation, examination, or evaluation of objective evidence,
the adequacy and compliance with established procedures, or
applicable documents, and the effectiveness of implementation.

13. Definition
Simple Definition:-
“Audit is an examination of accounts & records which is
carried out by vouching the evidences, supporting various
transactions; by such an examination it is ascertained that the
Balance Sheet gives a true & fair view of the state of affairs of
business & the Profit & Loss Account gives a true & fair view
of the profit or loss of business.

14. Cont.
Spicer and Pegler:-
"Auditing is such an examination of books of accounts and
vouchers of business, as will enable the auditors to satisfy
himself that the balance sheet is properly drawn up, so as to give
a true and fair view of the state of affairs of the business and that
the profit and loss account gives true and fair view of the
profit/loss for the financial period, according to the best of
information and explanation given to him and as shown by the
books; and if not, in what respect he is not satisfied."

15. Cont.
Prof. L.R.Dicksee:-
“Auditing is an examination of accounting records undertaken
with a view to establish whether they correctly and completely
reflect the transactions to which they relate.”

16. Characteristics of Auditing
1. Systematic & Scientific Procedure
2. Essential Documents are integral part
3. It is done with the help of vouchers, documents, information
and explanations received from the authorities.
4. Undertaken by an Independent person or Body
5. Analytical approach

17. Cont.
6. Art & Science Both
7. Verification of the results
8. The Auditor has to satisfy himself with the authenticity
9. Compliance
10. The auditor has to inspect, compare, check, review,
scrutinize the vouchers supporting the transactions and
examine correspondence, Memorandum of Association and
Articles of association etc., in order to establish correctness
of the books of accounts.

18. Scope of Auditing
The scope of audit is increasing with the increase in the
complexities of the business. It is said that long range objectives of
an audit should be to serve as a guide to the management future
decisions.
Today most of the economic activities are largely conducted
through public finance. The auditor has to see whether these larger
funds are properly used. The scope of audit encompasses
verification of accounts with a intention of giving opinion on its
reliability. Hence it covers cost audit, management audit, social
audit etc. It should be remembered that an auditor just expressed
his opinion on the authenticity of the account. He has no power to
take action against anybody, in this regard its said that “an auditor
is a watch dog but not a blood hound”.

19. Cont.
1. Legal Requirements
2. Entity Aspects
3. Reliable Information
4. Proper Communication
5. Evaluation
6. Test
7. Comparison
8. Judgments
9. Work
10. Evidence
11. Misstatement

20. Principles of Auditing
Fundamental principles of Auditing
1. Integrity, Objectivity and Independence
2. Confidentiality
3. Skill & Competence
4. Responsibility of work performed by others
5. Documentation
6. Planning
7. Audit Evidence
8. Accounting system & Internal Control
9. Audit Conclusions
10. Audit Report

21. Functions of Auditing
1. Accounting control
Audit is an instrument of accounting control. The truth and
fairness of the accounting information is controlled and checked
by auditing activities.
2. Safeguard
Audit acts as a safeguard on behalf of the proprietor/s
(whether an individual or a group of persons) against cost
control, carelessness or fraud on the part of the proprietors’
agents or servants in the realisation and utilisation of his/their
money and other assets.

22. Cont.
3. Assurance
Audit assures on the proprietors’ behalf that the accounts
maintained truly represent facts and expenditure has been incurred
with due regularity and propriety.
4. Assessment
Audit assesses the adequacy of the accounting system in
order to ascertain its effectiveness in maintaining accounting
records of an organization.
5. Review
Audit carries out a review of the financial statements to know
whether the accounting records are in agreement with those
statements.

23. Cont.
6. Reporting tool
Audit is a tool for reporting on the financial statements as
required by the terms of the auditors’ appointment and in
compliance with the relevant statutory obligations.
7. Practical subject
Auditing is a practical subject. It is something that people do.
How it is done today is a result of long history of marginal
changes and responses to new commercial and legal developments
over the centuries with the most rapid progress in the last few
years.

24. Advantages of Auditing
A. Businessman's point of view:-
1. Detection of errors and frauds
2 . Loan from banks
3. Proper valuation of investments
4 . Proper valuation of assets
5. Government acceptance
6. Suggestions for improvement
7. Better Reputation
8. Uniformity in accounts
B. Investor's point of view
1 . Protects interest
2. Moral check
3. Builds reputation
4. Good security

25. Cont.
C. Other Advantages
1. Audited account are detected as an authentic record of
transaction.
2. Errors and frauds are detected and rectified.
3. It increases the morale of the staff and thus it prevents frauds
and errors.
4. Because of his expertise the auditor may advise on various
matters to his clients.
5. An auditor acts as a trustee of his shareholders. Hence he
safeguards their financial interest.
6. For taxation purpose auditing of account is a must.

26. Cont.
7. In case of any claim is to be made from the insurance
company only audited account should be submitted.
8. Even in case of partnership firm auditing of accounts helps in
the settlement of claim at the time of retirement/death of a
partner.
9. Auditor account helps in managerial decisions.
10. They are useful to secure loan at the of amalgamation,
absorption, reconstruction etc.
11. Auditing safeguards the interest of owners, creditors,
investors, and workers.
12. It is useful to take certain financial decisions like issuing of
shares, payment of dividend etc.

27. Limitations of Auditing
Truly speaking, an audit should have no limitations of its
own. It is designed to protect the interest of all parties who are
interested in the affairs of the business. If there be any
shortcoming arising there from, it may be due to its narrow
scope of application in its related field of operation and
unextended definition of the concept.
Auditing suffers from the following shortcomings:
1. Want of complete picture
The audit may not give complete picture. If the accounts are
prepared with the intention to defraud others, auditor may not be
able to detect them.

28. Limitations of Auditing
Truly speaking, an audit should have no limitations of its
own. It is designed to protect the interest of all parties who are
interested in the affairs of the business. If there be any
shortcoming arising there from, it may be due to its narrow
scope of application in its related field of operation and
unextended definition of the concept.
Auditing suffers from the following shortcomings:
1. Want of complete picture
The audit may not give complete picture. If the accounts are
prepared with the intention to defraud others, auditor may not be
able to detect them.

29. Cont.
2. Problems of dependence:
Sometimes the auditor has to depend on explanations,
clarification and information from staff and the client. He may or
may not get correct or complete information.
3. Post-mortem examination:
Auditing is a post-mortem examination. There is no use of
such examination when events have already been occurred.
4. Existence of errors in the audited accounts:
It is not possible for the auditor in all cases, to check each
and every transaction of an organization. As a result, there may
be error in the audited accounts even after the checking by the
auditor.

30. Cont.
5. Lack of expertise:
Auditor has to seek opinion of experts on certain matters on
which he may not have experts knowledge. The auditor has to
depend upon such reports which may not always be correct.
6. Diversified situations:
Auditing is considered to be a mechanical work. Auditors
may not be in a position to frame audit programme, which can be
followed in all situations.
7. Quality of the auditor:
Success of audit depends on the sincerity with which the
auditor has performed his duties. The same audit work can be
done by two different auditors with difference in sincerity.

31. Cont.
8. Existence of defective policies
The auditor can only report on the truth and fairness of the
financial statements. But other defects, i.e. defects relating to
management and control may not be possible to be covered by
the auditor.

32. Objects of Auditing
Primary
Objective
Varification
of a/c
B/s shows
true & fair
state
P & L a/c
shows true
& fair state
Secondary
Objective
Detection &
Prevention
of Errors
Detection &
Prevention
of Frauds
Other
Objectives
Moral
Check
Complaince
of Co.'s Act
to create
trust in
govt.

33. Detection & Prevention of Errors
• trasanction is to be left out to register,
Error of Omission partial entry of one transaction
Error of • Rs. 1500 recorded as Rs. 5100
Commission
• ommission to post,posting wrong side & amount to
an a/c, double posting,totalling mistake, balance
b/d & c/f
Clerical Error
• fundamental principle of Accountancy
Error of Principle & Auditing
• two errors togather which will be
resulted in trial balance sheet will agree
Compensating
Error

34. Detection & Prevention of Frauds
Misappropriation
Of Cash
Of Goods
By Employees
Manipulation of
A/c
Showing more
Profits
Showing less
profit
By Top
Management