Download - Chapter 2 : Objectives of Auditing
Chapter 2 : Chapter 2 : Objectives of AuditingObjectives of Auditing
T.Y. B com (Honours)
Academic Year : 2009-10
Trimester : V
The objectives of AuditingThe objectives of AuditingPrimary objectives :(to enable an auditor to express his opinion on….)
• Truth and fairness of the financial position as shown in balance sheet
• Truth and fairness of the trading results as depicted in profit & loss account
• Adequacy of information required to be disclosed
• Compliance and statutory requirements
• Accuracy and reliability of books of accounts and underlying records
The objectives of AuditingThe objectives of AuditingSecondary objectives :a) To detect errors and frauds if any
b) To prevent errors and frauds by the deterrent effect of audit
c) To provide allied services in the nature of consultancies on accounting treatment, accounting systems, taxation, financial problems etc.
Definition of FraudDefinition of FraudFraud can be defined as :
“ the successful practice of deception, with the intention of cheating another person. It involves trickery and deceitful action.”
Fraud maybe named in other words like embezzlement, defalcation and misappropriation or manipulation.
Some methods of Some methods of Manipulation of accountsManipulation of accounts
1. Overstatement of stock
2. Overstatement of sales
3. Understatement of purchases
4. Manipulation of expenses
5. Overstatement of Assets
6. Understatement of Liabilities
7. Misappropriation of cash or goods
8. Omission to record cash receipts
9. Teeming and Lading (Lapping)
10. Kiting
11. Intentional errors in balancing cash book
Some methods of Some methods of Manipulation of accountsManipulation of accounts
12. Payment by duplication of source documents
13. Cheque writing by leaving gap
14. Inclusion of dummies in the payroll
15. Payroll overcasting
16. Fraudulent adjustment entries
17. Forgery
Types of ErrorsTypes of Errors
9. Errors of omission-transaction has been omitted
10. Errors of commission – improper recording of transactions
11. Errors of principles – transactions not recorded as per accounting principles
12. Compensating Errors – Primarily wrong but offset by another wrong entry
Circumstances indicating Circumstances indicating errors or fraudserrors or frauds
Quality of Management
a) Mgt is dominated by one person or a small groupb) Internal control is absent or weakc) There is high turnover of accounting staffd) The accounts dept is overstaffede) Auditors and lawyers are changed frequently
Circumstances indicating Circumstances indicating errors or fraudserrors or frauds
Unusual pressures on the concern
a) The working capital is inadequateb) High credit sales to show income ignoring risk of bad debtsc) There is need to show a better position to succeed shares issued) there is heavy investment in a product which is subject to rapid obsolescencee) There is heavy dependence on few products or customers
Circumstances indicating Circumstances indicating errors or fraudserrors or frauds
Unusual transactions :
a) Many transactions near the year end that affect the profit
b) Many transactions with related parties, group concerns
c) There are excessive payments for services
Circumstances indicating Circumstances indicating errors or fraudserrors or frauds Problems in Audit :
a) There are inadequate records, incomplete files, untallied trial balances
b) Vouchers are not available or not duly authorised or supporting documents are altered.
c) Third party confirmations are not available or are absent, differences in quantity reconciliations, or unexplainable changes in ratios
d) there is lack of or inadequate explanations from management
Auditors responsibility for Auditors responsibility for errors and fraudserrors and frauds
Basic responsibility of Management – for good accounting and internal control
Incidental Objective of Audit – to ensure audit is free from major errors and frauds
Possibility of Non detection – not failure in duty as long as reasonable care has been taken
When circumstances indicate error or fraud – take additional steps to detect them and ensure proper closure or disclosure
CARO 2003 – reporting requirements for fraud or error in the new format of CARO 2003.