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Audit, its Meaning, its Scope + Objective + Advantages

HI guys, today we are talking about the Audit, its Meaning its Scope, + Objective +Advantages. After this lesson one enables the basic concepts of the audit.

An audit, its Meaning is as follows

The word audit is derived from the Latin word “AUDIRE” which means to hear. Initially, the auditor was a person appointed by the owners to check account whenever the suspected fraud, he was to hear explanation given by the person responsible for financial transactions. The scope of the audit was quite limited as during those days most businesses were small and owner-operated. Since these owners-managers had extensive first-hand knowledge of the business and its operations, they had little need for the independent auditor. The owners were chiefly interested in ascertaining whether all cash receipts and payments had been properly accounted for and checking the records for possible employee fraud. Put differently, initially, the aim of the audit was to know whether any cash had been embezzled and if so, who embezzled it and what amount was involved. But as the businesses grew both in size and complexity,

the owners found it more difficult to maintain complete knowledge of all aspect of their business. Especially emergence of joint stock companies changed the approach of auditing as ownership was pestered from management. The emphasis now is clearly on the verification of accounting data with a view on the reliability of accounting statement.

 

Audit, its Meaning, its Scope + Objective + Advantages

Audit, its Meaning, its Scope + Objective + Advantages

Definition:

An audit is an unbiased examination and valuation of the financial statements of an organization to form an independent opinion.

Spicer and Pegler define auditing as “An examination of the books, accounts, and vouchers of a businesses shall enable the auditor to satisfy himself whether or not the balance sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of the business according to his best of the information given to him and as shown by the book.

Mautz: defines auditing as being “Concerned with the verification of accounting data with determining the accuracy and reliability of accounting statements and reports.”

The international auditing practices committee defines auditing as “the independent examination of financial information of any entity whether profit oriented or not and irrespective of size/legal form when such an examination is conducted with a view to express an opinion thereon”.

The scope of Audit.

The audit, its Scope 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 an intention of giving an 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, it’s said that “an auditor is a watchdog but not a bloodhound”.

Audit its Objective + Advantages are as follows

Objectives of Auditing.

Auditors are basically concerned with verifying whether the account exhibits a true and fair view of the business. The objective of auditing depends upon the purpose of his appointment.

Primary Objective.

The primary objective of an auditor is to respect to the owners of his business expressing his opinion whether account exhibits a true and fair view of the state of affairs of the business. It should be remembered that in case of a company, he reports to the shareholders who are the owners of the company and not to the director. The auditor is also concerned with verifying how far the accounting system is successful in correctly recording transactions. He had to see whether accounts are prepared in accordance with recognized accounting policies and practices and as per statutory requirements.

Secondary Objective:

The following objectives are incidental to the main objective of auditing.

  1. Detection and prevention of errors: errors are mistakes committed unintentionally because of ignorance, carelessness. Errors are of many types:
    1. Errors of Omission: These are the errors which arise on account of the transaction into being recorded in the books of accounts either wholly partially. If a transaction has been totally omitted it will not affect trial balance and hence it is more difficult to detect. On the other hand, if a transaction is partially recorded, the trial balance will not agree and hence it can be easily detected.
    2. Errors of Commission: When incorrect entries are made in the books of accounts either wholly, partially such errors are known as errors of commission. g.: wrong entries, wrong Calculations, postings, carryforwards etc. such errors can be located while verifying.
    3. Compensating Errors: when two/more mistakes are committed which counterbalances each other. Such an error is known as Compensating Error. E.g.: if the amount is wrongly debited by Rs 100 less and Wrongly Credited by Rs. 100 such a mistake is known as compensating error.
    4. An error of Principle: These are the errors committed by not properly following the accounting principles. These arise mainly due to the lack of knowledge of accounting.  Eg: Revenue expenditure may be treated as Capital Expenditure.
    5. Clerical Errors; A clerical error is one which arises on account of ignorance, carelessness, negligence etc.

Location of Errors: It is not the duty of the auditor to identify the errors but in the process of verifying accounts, he may discover the errors in the accounts. The auditor should follow the following procedure in this regard.

  1. Check the trial balance.
  2. Compare a list of debtors and creditors with the trial balance.
  3. Compare the names of account appearing in the ledger with the names of accounting in the trial balance.
  4. Check the totals and balances of all accounts and see that they have been properly shown in the trial balance
  5. Check the posting of entries from various books into a ledger.
  6. Deduction and Prevention of Fraud: A fraud is an Error committed intentionally to deceive/ to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.
    1. Misappropriation of Cash: This is one of the majored frauds in any organization it normally occurs in the cash department. This kind of fraud is either by showing more payments/ less receipt.

The cashier may show more expenses than what is actually incurred and misuse the extra cash. E.g.: showing wages to dummy workers. Cash can also be misappropriated by showing fewer receipts

E.g.: not recording cash sales. Not allowing discounts to customers. The cashier may also misappropriate the cash when it is received. Cash received from the 1st customer is misused when the 2nd customer pays it is transferred to the 1st customer’s account. When the 3rd customer pays it goes forever. Such a fraud is known as “Teaming and Lading”. To prevent such frauds the auditor must check in detail all books and documents, vouchers, invoices etc.

  1. Misappropriation of Goods: here records may be made for the goods that are not purchased and not issued to production Department; goods may be used for personal purpose. Such a fraud can be deducted by checking stock records and physical verification of goods.
  2. Manipulation of Accounts: this is finalizing accounts with the intention of misleading others. This is also known as “WINDOWS DRESSING”. It is very difficult to locate because it’s usually committed to higher level management such as directors. The objective of WD may be to evade tax, to borrow money from the bank, to increase the share price etc.

to conclude it can be said that, it is not the main objective of the auditor to discover frauds and irregularities. He is not an insurance against frauds and errors. But if he finds anything of a suspicious nature, he should propel it to the full.

Specific Objectives:

The area of operation of the audit is quite wide and such others areas like a review of cost, operations, efficiency, management, and tax liability etc. fall under the purview of the audit. Accordingly, there will be specific objectives in respect of each type of such specified audit.

ADVANTAGES OF AUDIT:

Audit Advantage are as follows

  1. Audited accounts are detected as an authentic record of the 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.
  7. In case of any claim is to be made by 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. Audited account helps in managerial decisions.
  10. They are used to secure a loan at the time 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.

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