QUESTION: What do you mean by auditing? Discuss Objectives of Auditing.
AUDITING: Auditing refers to the verification of financial records by an authority known as an auditor. The word ‘audit’ is derived from the Latin word ‘audire’ which means to hear.
It is the examination of accounts to ascertain whether the balance sheet and profit and loss accounts give a true and fair view of the financial position or not.
ACCORDING TO RK MAUTZ
“Auditing is concerned with verification of accounting data determining the accuracy and reliability of accounting statements and reports.”
So, auditing is an intelligent and critical test of the accuracy, adequacy, and dependability of accounting data and accounting statements.
Features of auditing
Auditing is characterised as follows:
- It is a systematic and independent examination of records, statements, and performance of an enterprise.
- Auditing is concerned with the examination of books not the preparation of books.
- It should be performed in an unbiased manner.
- Auditing is done by a qualified person known as an auditor.
- It is concerned with the detection of errors and fraud.
- It is done on the basis of vouchers, documents, information, and related evidence.
- It involves the preparation of reports by the auditor.
- It is concerned with the checking of financial statements to tell whether it presents a true and fair view or not.
- Auditing is done throughout the year or periodically.
Objectives of Auditing
The main object of auditing is to give true and fair view of the financial statements of the company as per the companies act,2013. The other objects of auditing are as follows:
PRIMARY OBJECTIVES OF AUDITING
Verification of accounts and financial statements: the primary object is to check the accounts that whether they present true and fair view or not. The accounting statements should be reliable. To check out the accuracy of books of accounts, the auditor must:
- Assess the system of internal control
- Verify the accuracy of posting, balancing etc.
- Confirm the validity of transactions
- Confirm existence of assets and liabilities.
- Confirm that whether all the accounting standards are followed or not.
The accounts are verified by checking all the transactions with their supporting source documents, such as
- Cash memo
- Invoice or bill
- Promissory note
- Debit note
- Credit note
SUBSIDIARY OBJECTIVES OF AUDITING
The subsidiary objects are the other objects which are served by the auditing. These are as follows:
Detection and prevention of fraud
Fraud refers to intentional misrepresentation of financial information by the individuals among management, employees and third parties.
- Manipulation, falsification or alteration of records or documents.
- Misappropriation of assets
- Misapplication of accounting policies
- Omission of entries from records.
Misappropriation of cash
It is done by theft of cash receipts, petty cash, cheques, negotiable instrument etc.
Examples of misappropriation of cash are:
- Showing payment by wages to dummy workers
- The receipts like bad debts recovered sole of scrap etc may be concealed.
- Cash received from sales may be pocketed.
2. Misappropriation of goods
Misappropriation of goods leads to defalcation of products. It is done in the concerns which produces the goods and services. Defalcation of goods can be done by:
- Issuing false credit notes to customers for sale returns.
- Goods may be stolen by employees from the godowns.
3. Manipulation of accounts
Manipulation of accounts is done by upper level management. This fraud is done intentionally and involve large amount of funds.
The accounts are manipulated by for:
- Showing low profits than the actual ones.
- Showing more profits than the actual ones.
- Overvaluation or undervaluation of stock.
The above types of frauds are avoided by installing the system of record-keeping, periodical checking should be arranged.
Detection and prevention of errors
Errors are the result of carelessness on the part of the person preparing the accounts. It is an unintentional mistake on the part of the accountant.
1. Errors of principle
When principles of book-keeping and accountancy are not followed in the treatment and recording of item of a transaction, it is known as error of principle.
Example of error of principle are:
- Item of income posted to -personal account
- Revenue items treated as capital items.
- Wrong valuation of assets.
2. Errors of omission
When a transaction is omitted from the books of accounts, it is known as error of omission.
Omission may be
Examples of error of omission are:
- Omission of purchases from purchases day book.
- Omission of sales from sales day book.
3. Errors of commission
When entries made in the books of original entry or ledger are incorrect, wholly or partially, such errors are errors of commission. These errors may be intentional or otherwise.
Examples of errors of commission are:
- Goods purchases for ₹1000 recorded as ₹100.
- Sales of 1000 posted to customer’s account as ₹100.
4. Errors of duplication
Errors of duplication arises when the transaction is recorded twice in journal and posted twice in ledger. These errors can be rectified by comparing the entries with the vouchers.
5. Compensating errors
When an error offsets the effect of another error, such error is known as compensating error, these errors are not easy to find out as these are not reflected in the trail balance.
Examples of compensating errors are:
-X’s account is debited with ₹90 short and credit side of his account is under-totalled by ₹90.
These errors can be located by checking the totals, posting and casting.
The auditor can remove the errors by
- Checking the totals of trial balance.
- Checking the recording of all enteries in the journal.
- Maintaining self-balancing ledger system.
It may be concluded that the main object of auditing is to form an independent judgement and opinion about the reliability of accounts. It also aims at showing fair view of financial statements.