Chapter 2 : Objectives of Auditing

1. Chapter 2 : Objectives of Auditing T.Y. B com (Honours) Academic Year : 2009-10 Trimester : V

2. The objectives of Auditing Primary 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

3. The objectives of Auditing Secondary objectives : To detect errors and frauds if any To prevent errors and frauds by the deterrent effect of audit To provide allied services in the nature of consultancies on accounting treatment, accounting systems, taxation, financial problems etc.

4. Definition of Fraud Fraud 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.

5. Some methods of Manipulation of accounts • Overstatement of stock • Overstatement of sales • Understatement of purchases • Manipulation of expenses • Overstatement of Assets • Understatement of Liabilities • Misappropriation of cash or goods • Omission to record cash receipts • Teeming and Lading (Lapping) • Kiting • Intentional errors in balancing cash book

6. Some methods of Manipulation of accounts • Payment by duplication of source documents • Cheque writing by leaving gap • Inclusion of dummies in the payroll • Payroll overcasting • Fraudulent adjustment entries • Forgery

7. Types of Errors • Errors of omission-transaction has been omitted • Errors of commission – improper recording of transactions • Errors of principles – transactions not recorded as per accounting principles • Compensating Errors – Primarily wrong but offset by another wrong entry

8. Circumstances indicating errors or frauds • Quality of Management a) Mgt is dominated by one person or a small group b) Internal control is absent or weak c) There is high turnover of accounting staff d) The accounts dept is overstaffed e) Auditors and lawyers are changed frequently

9. Circumstances indicating errors or frauds • Unusual pressures on the concern a) The working capital is inadequate b) High credit sales to show income ignoring risk of bad debts c) There is need to show a better position to succeed shares issue d) there is heavy investment in a product which is subject to rapid obsolescence e) There is heavy dependence on few products or customers

10. Circumstances indicating errors 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

11. Circumstances indicating errors 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

12. Auditors responsibility for errors 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.