Meaning| Definition and Objective of Auditing

    Meaning and Definition of auditing

    Meaning and Definition of Auditing


    The Word Auditing has got its origin from the Latin word 'Audire' which mean 'To hear'. In olden days whenever a trader had suspicion in his mind about the account books, he appointed a person to hear the accounts from the Accountant and give his decision about its justification. But in 1494,

    During those days the transactions used to take place in cash. Therefore, Audit meant, the examination of cash i.e., whether the cash balance in the cash box is correct or not. However, with the development of Trade and Commerce, the number of transactions also increased and credit transactions also took place alongwith cash transactions. The formation of Joint Stock Companies created a problem before the authorities. This problem was of proving truthfulness and verifiability of Balance Sheet and Profit and Loss Account.


    Definitions of Auditing:


    "An Audit may be said to be such examination of the books, accounts and vouchers of a business, as 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 the affairs of the business according to the best of his information and the explanations given to him and as shown by the books; and if not, in what respect he is not satisfied or the Balance Sheet is untrue or incorrect."

    Spicer and Pegler

    "Auditing in its modern concept is a scientific and systematic examination of books, vouchers and other financial and legal records in order to verify and report upon the facts regarding the financial condition disclosed by the Balance Sheet and the Net Income revealed by the Profit & Loss Account."

    Ronald A. Irish,

    "Auditing is a systematic examination of the books and records of a business or other organisation, in order to ascertain or verify and to report upon the facts regarding its financial operation and the result thereof."


    "Audit is not an inquisition and its mission is not one of fault-finding. Its purpose is to bring to the notice of the administration lacunae in the rules and regulation and lapses and to suggest possible ways and means for the execution of plans and projects with greater expendition, efficiency and economy.'"

    A. K. Chanda,



    Features of Auditing


    The following features of Auditing:

            I.          It is a scientific and systematic examination of books, and financial and legal records of an organisation.

          II.         The purpose of this examination is to ascertain how far they present a true and correct view of the state of affairs of a particular concern.

        III.        The auditor must satisfy himself with the authenticity of financial accounts prepared for a fixed term and ultimately report that:

    1.      The Balance Sheet exhibits a true and fair view of the state of affairs of the concern;

    2.      The Profit and Loss Account reveals the true and fair view of the profit or loss for the financial period; and

    3.      The accounts have been prepared in conformity with theLaw and accounting standards.


    Objects of Auditing

    Auditing- Objective of Auditing

    The object of auditing is not only examine the correctness and truthfulness of the accounting books, but also to verify that the Profit & Loss Account and Balance Sheet of the firm is in conformity with the laws of country. It has some other objects the which can be classified under three heads

    [I] Main Objects;

    [II] Secondary Objects

    [III] Other Objects.



    [I] Main Objects of Auditing

    The main object of audit is to know whether the accounts are true and complete and have been maintained according to rules.

    The primary objectives of auditing may be stated as under:

    [II] Secondary Object of Auditing


    The accounts books maintained in the business enterprises are not free from error, sometimes due to negligence of the concerned employees or due to their ignorance. These errors are detected by an auditor during the courses of his audit and he can know whether such error are intentional or unintentional. If they are made intentionally or deliberately then they are called as Frauds.

    A. Detection of Errors

    B. Detection of Frauds

    C. Detection of Manipulation of Accounts


    (A) Detection of Errors.

    Errors or ordinary errors may take the following forms: 

    (1) Errors of Omission;

    (2) Errors of Posting;

    (3) Clerical Errors;

    (4) Compensatory Errors;

    (5) Errors of Principle.


    (1) Errors of Omission: Sometimes some entries are left out from recording in the account books. In such a case the errors are named as errors of omission. Such errors do not affect the agreement of a trial balance.Therefore, it becomes difficult for the Auditor to find out these errors. Sometimes an entry is left from recording in the account books in part then it is called partial error. The auditor has to take special care in the detection of such errors.


    (2) Errors of Posting: When entries are not recorded in the book of original entry correctly and their posting in the ledger book or subsidiary book creates an error. There may be error in totalling or balancing of the ledger accounts. In such a case such errors are called errors of posting.Auditor can deduct such errors by Routine Checking.


    (3) Clerical Errors: The cause of such errors is the ignorance or carelessness on the part of employees. Examples of such errors writing wrong amounts in the accounts, writing correct amounts in the wrong accounts, writing amounts on the wrong side of the accounts, committing error in carrying forward the balance. Clerical errors can be easily deducted by Routine Checking.


    (4) Compensatory Errors: Such errors cancel the effect of other errors. Such errors also do not affect the agreement of the trial balance. For example- Rs. 10/- instead of Rs. 100/- are debited in an account and Rs. 100/- instead of Rs. 10/- are debited in the same account. Now the total debit will be Rs. 110/of the same account. Compensatory errors create difficulty in deduction and the auditor has to be very careful in such cases.


    (5) Errors of Principle: Many time Accountants forget to follow the principle of accountancy whereby they commit errors. Such errors are named as errors of principle. The examples of such errors are- Purchase of Machinery is debited to Purchases Account instead of Machinery Account or legal expenses are capitalised instead of charging them to the Profit & Loss Account of the year in question. Errors of principle also do not affect the agreement of a trial balance. Auditor must take a special care in detecting such errors.


    (B) Detection of Frauds

    Misuse of goods, assets and money deliberately or intentionally done to put enterprise to loss is called fraud. Detection of frauds requires sufficient skill on the part of an auditor. Frauds may be of the following nature:

    (1) Embezzlement of Cash;

    (2) Mis-appropriation of Goods;

    (3) Manipulation in Account Books.

    (1) Embezzlement of Cash: In big organisation misappropriation of cash can be easily done. Therefore, an Auditor should carefully examine all the cash transactions. Cash may be misappropriated in one or more of the following ways:

                                    i.            Not entering in the account books of cash receipts.

                                  ii.            Entering lesser amount of cash than the actually receipt.

                                iii.            Making false entries on the payment side of the cash book.

                                 iv.            Not recording in the cash book the amount of cash sales or receipts from debtors.

    (2) Mis-appropriation of Goods: When the inventory is not maintained correctly in the business enterprise, the mis-appropriation of goods can be easily done. Under such circumstances detection of fraud and mis-appropriation of goods becomes difficult. Costly and lighter goods can be easily mis-appropriated. Ordinarily mis-appropriation of goods can take place in one or more of the following manners:

                                    i.            Stealing of goods from the godown and adjusting the records accordingly.

                                  ii.            Not recording anywhere the purchases of the goods.

                                iii.            Usurping sales returns and not recording them anywhere or recording with lesser amount.

    To check fraud and mis-appropriation of goods an Auditor should make an extensive examination of goods in and goods out. The Auditor should compare the closing stock of the year that of the last year and also enquire about the character of the employees concerned with the maintenance

    (C) Detection of Manipulation in Accounts,

    Fraud of cash and goods is also done through manipulating accounts. But sometimes the Directors Managers of the Companies also falsify the accounts due to one reason or the other. Such frauds become difficult to detect.

    (1) By Showing More than the Actual Profit: The account books can be manipulated in one or more of the following manners:

                                    i.            To get more commission on profits.

                                  ii.            To create goodwill among the public and shareholders so that their directors/managers remain in their office.

                                iii.            To raise the price of the share in the market.

                                 iv.            To sell the business at a higher price.


    (2) By Showing Less than the Actual Profit: The account books can be manipulated in one or more of the following manners:

                                    i.            To buy shares in the market at a lower price.

                                  ii.            To avoid income-tax and other taxes.

                                iii.            To discourage other entrepreneurial units to enter the industry to check the unnecessary competition.


    (3) Methods of Falsification in Account Books: The account books can be falsified in one or more of the following manners:

            i.            Not to charge depreciation on assets or to charge under or over depreciation.

          ii.            Showing assets at a lower or higher value.

        iii.            Showing fictitious purchase or sale or purchases returns or sales returns in order to show higher profits or lower profits.

         iv.            Creating secret reserve and utilise them when the profits are low or nil.

           v.            Not to maintain distinction between capital and revenue expenditures.

         vi.            Treat income of future year as income for the show accrued income in the Profit present year or not to& Loss Account of the current year.


     [III] Other Objects of Auditing

    Apart from main and secondary objectives of auditing the following subjects can be stated under the head other objects. This group include:

    1.      Creation of Healthy of other objects Environment;

    2.      Implementation of Statutory Provisions;

    3.      Satisfying Government Officials.

    (1) Creation of Healthy Environment: The object of audit is also to create healthy environment in and around the enterprise. When employees know that their work and activities are to be examined by some experts or specialists (Auditors) the possibility of errors and frauds is minimised. The auditor creates healthy fear psychosis among employees and accountants so that the environment of honesty, responsibility and truthfulness is created.


    (2) Implementation of Statutory Provisions: An audit also emphasises the implementation of statutory provisions i.e., the laws under which the company has to work. In certain cases legal provisions must be faithfully honoured. For example, the Companies Act, 1956 of financial accounts of every joint has made compulsory audit stock company.


    (3) Satisfying Government Officials. The object of the audit is also to satisfy government officials in respect of the account books and the statements prepared by the organisation. The audit statements and accounts are treated to be trustworthy and there is no room left for suspicion about them. Therefore excise-duty, sales-tax and income-tax are computed by the officials on the basis of these audited accounts. These officials have to work with the assumption that the accounts and statements prepared by the organisation have been audited by a qualified and competent accountant and therefore must be true and correct.

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