The term Auditing refers to the process of examination of books and records together with the evidence relating to enterprises, whether profit - oriented or not and whether it is required by law or not, for the purpose of formation of opinion with regard to true and fair view disclosed by financial statements.
Independent examination of financial information of any entity, whether profit oriented or not when such an examination is conducted with a view to express an opinion there on.
Advantages of Auditing
- Unbiased professional opinion
- Acts as a moral check on employees
- Highlighting of weakness in the internal control system
- Enables timely tax assessments and quick disposal of tax returns.
- Financial assistance made easier.
- Solutions to trade disputes and labour disputes
- Enables sanctioning of license by Govt.
- Enables early settlement of Insurance claims
B. From the point of view of partnership Firms
- Mutual settlement of Accounts among the partners
- Protects the interest of minors and non-resident partners
- Determination of goodwill at the time of admission, retirement and death.
- Determination of purchase consideration at the time of Amalgamation,
Limitation of Audit
- Excessive dependence in ICS which suffers from inherent weakness
- Application of test check makes it less reliable
- It only enables formation of overall opinion about state of health of entity and does not give assurance about the future viability of entity or the effectiveness of management by owners.
- Audit evidence is more persuasive in nature rather than conclusive in nature
Qualities of a Good Auditor
- Integrity, confidentiality, objectivity,
- Independent in his approach
- Posses technical skill in accounting and Auditing
- Thorough knowledge of legal provisions and statutes
- Common sense
- Communication skill
- Supervisory abilities
- Inter personal skills
Kinds of Audit
1. Audit can be classified as
a) Statutory Audit
b) Non-Statutory Audit
This refers to audits which are mandatory in nature.
i. Audit of companies under law provision of company act
ii. Audit of insurance company
iii. Audit of Banking company
iv. Audit of co-operative societies
Audit to be performed by CA’s and not by any other person
i. These are other than statutory audits
ii. No statutory requirement for Audit
E.g. Sole trader, partnership firm
Object of Audit
i) Refers to the purpose or the ultimate end audit
ii) Knowledge of object relevant for audit
iii) Common for both statutory and non statutory audit
Can be classified as
i) Primary object
ii) Secondary object
Primary object is to form opinion on the true and fair view disclosed by financial statements. Financial statements include Balance Sheet, P & L accounts and cash flow statements.
Secondary object is to detect fraud and error
The auditor should ensure that the financial statements do not contain misstatement on a/c of fraud and error. Both objectives are interdependent and not independent.
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