INTRODUCTION TO AUDITING

1. INTRODUCTION TO AUDITING R. RAMARAJ ASSISTANT PROFESSOR OF COMMERCE

2. ORIGIN The term audit is derived from the latin word “audire” which means to hear In olden days (barter system) whenever proprietors suspected a fraud or error, certain people were appointed to hear verbal evidence of transaction. 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 In india companies Act 1913 made audit of company accounts compulsory. The emphasis was not on arithmetical accuracy but on a fair representation of the financial efforts the companies Act 1913 also prescribed for the qualification of auditors

3. DEFINITION • Auditing refers to a systematic examination of books, accounts, documents and vouchers of an organisation to ascertain how far the financial statements present a true and fair view of the concern. • An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate

4. FEATURES • Audit is a systematic and scientific examination of the books of accounts of a business • Audit is undertaken by an independent person or body of persons who are duly qualified for the job • Audit is a verification of the results shown by the profit and loss accounts and the state of affairs as shown by the balance sheet • Audit is a critical review of the system of accounting and internal control

5. Audit is done with the help of vouchers, documents information and explanations received from the authorities • The auditor has to satisfy himself with the authenticity of the financial statements and report that exhibit a true and fair view of the state of affairs of the concern • The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the transactions and examine correspondence, minutes books of share holders, directors, memorandum of association and articles of association etc.. In order to establish correctness of the books of accounts

6. QUALITIES OF AN AUDITOR • An auditor must have a complete and thorough knowledge of the accountancy. • He must know mercantile law, company law and principles of audit • He must be honest and tactful. • He must have training in business management organisation and finance • He must be accurate, cautions and intelligent • He should be impartial and must not be influenced by others • He should be able to understand the technical details of business • He must be fair with cost accounting • He shall be bold enough to discharge his duties honestly and faithfully • He should not disclose the secret of his client

7. OBJECTS OF AUDIT MAIN OBJECTS • Assess the system of internal control • Verify the accuracy of posting and balancing • Check the validity of transaction • Check the distinction between capital and revenue SUBSIDIARY • Detection and prevention of fraud • Misappropriation of goods • Manipulation of accounts • Detection and prevention of errors • Errors of principle • Errors of omission • Errors of commission • Errors of duplication • Compensating errors

8. ADVANTAGES OF AUDIT • For owners and shareholers • For the management • For the creditors • For the government • For others

9. CLASSIFICATION OF AUDITS On the basis of scope • Partial audit • Occasional audit • Interim audit • Cost audit • Management audit • Performance audit • Standard audit • Audit indepth • Operational audit • Cash audit

10. On the basis of nature • Commercial and Non commercial On the basis of form or organization • Private and government On the basis of who conduct • Internal and external Legal basis • Statutory and non statutory audit On the basis of examination • Private audit • Government audit • Internal audit