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Auditing Today
Unit 1
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Audit
The word audit is derived from the
Latin word audire, which means to
hear
Is a systematic examination of the booksand records of a business or otherorganization in order to ascertain orverify, and to report upon the facts
regarding its financial operations andthe results thereof.
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Nature of Auditing
An intelligent and a critical examination ofthe books of accounts of a business
Done by an independent person or body ofpersons qualified for the job
Help of vouchers, documents, information andexplanations received from the authorities
Satisfaction with the authenticity of financialaccounts
Prepared for a fixed term
Report for Financial Statements
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Key Phases
Economic informationa) Financial statements
b) Closing statements
c) Statements prepared to facilitate managerialcontrol
d) Stock records and stock statements
Reporting Collection and evaluation of
evidence
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Scope of Audit
Determination of the fairness andauthenticity of reported financialposition
Detection and prevention of errorsand fraud
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Objects of an Audit
Main objects :- Expression of expertopinion
Secondary objects :- Detection andprevention of Errors & Frauds
Specific objects
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Types Of Errors
Clerical Errors :- errors arecommitted in posting, totalingand balancing
(a) Errors of Omission
(b) Errors of Commission
Errors of Principle
Compensating Errors or off-setting errors
Errors of Duplication
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Location of errors
Scrutiny of the books of accounts
Castings of ledger accounts should be tallied withthose given in the trial balance
Ledger postings
The names of the accounts in the ledgershould be compared with names of accountsrecorded in the trial balance
The lists of debtors and creditors should betotalled
Trial balance tallied with previous years
Casts and carry forwards should be examined
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Detection of fraud
Embezzlement of cash
Misappropriation of goods
Fraudulent manipulation of accounts
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Types of audit
On the basis of legislative control Statutory audit,Govt. audit, Private audit.
On the basis of relation of auditor and Mgt. External audit and Internal audit.
On the basis of periodicity of audit
Continuous audit, Interim audit, Periodical audit,Occasional audit.
On the basis of subject matter of audit Financial audit, Operational audit, Cost audit,Management audit.
On the basis of coverage of audit Complete
audit, Partial audit. On the basis of manner of checking Standard
audit, Balance sheet audit, Post and Vouch audit
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Relations of auditor vis--visManagement
External audit
Internal audit
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Qualities of an Auditor
Professional or StatutoryQualities
Personal qualities or GeneralQualities
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Professional or Statutory Qualities
Knowledge of principles and practice ofgeneral accounting
Cost accounting Management Accounting
Knowledge of techniques of auditing Provisions relating to different taxes Economics Business Laws or Commercial Law and
Company Law
Business management and organizationand financial administration Mathematics and statistics Report writing
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Personal qualities or GeneralQualities
Honesty and Integrity
Impartial
Vigilance
Methodical
An Enquiring Mind
Diligence
Ability to trace out the facts and figures
Ability to maintain secrets
Courtesy Other Qualities
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Business where Continuous Audit isApplied
Where final accounts are prepared justafter the close of the financial year. LikeBanks, Railways etc.
Transactions are many in numbers. System of internal check in operation is
not satisfactory.
Statements of accounts are prepared
after every month or quarter to bepresented to the management.
Sales affected are very Large.
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Auditing is Luxury
Forsmaller concerns
For small vendors, shopkeepers,vegetable or fruit sellers etc.
Which cannot afford high cost ofauditing.
It results in unnecessary wastage of time.
If it is undertaken merely to increase the
prestige and credibility of the concern Lack of competent and independent
auditor
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Development of Auditing in India
Compulsory audit in case of companies was introduced by theCompanies Act of1913
In 1930, the accounting profession was brought under thecontrol of Central Government to ensure uniformity instandards throughout the country.
1949, the Parliament enacted the Chartered Accountants Actand the Institute of Chartered Accountants of India (ICAI)was established.
1956, a new Companies Act replaced the Act of 1913 The Companies Act, 1956 prescribed a cost audit in the case
of specified companies to be conducted by a Cost and WorksAccountants within the meaning of the Cost and WorksAccountants Act of1959.
In 1984, the Income Tax Act, 1961 was amended to providefor compulsory audit of accounts of certain assesses, whichhas further contributed to the growth of auditing profession inIndia.