7/29/2019 audit mcs

1/5

auditing is a specialized function having complex legal, economic and ethicalimplications, The auditors examine and report on economic information aboutorganizations where millions ol people have a stake. Auditors now enjoy a distinctiveproteseiertal status in a modern society The practice of auditing accounts is as old ashuman civilization. ln earlymdays, audit was mainly undertaken for state or publicaccounts. Modern auditing practices originated with the introduction of large scale

production processes\ tolrowing the industrial Revolution during 18th century,andvdeveloped along with the development of trade commerce and industries. Thedevelopment of joint stock organisation widened scope of investment and businessactivities under the cornpany form of organisation, the shareholders delegate authorityot management to the Ecard ct Directors elected by them and they are interested inthe safetyvotnvestments. They are also interested in finding out real financial positionof the company. Hence it became necessary to audit accounts of the joint stockcompanies for assuring the shareholders that their investments are sale and theaccounts are accurate and reliable. introduction of double entry book keeping systemincreased complications in the accounting system. Hencehin order to have effectivecheck on the accounts ofthe company, a custom was developed to appoint aprofessional auditor to see that the audit can be done properly and the investors canput full confidence in the audit repor1s.Thus audit implies a written report about theaccuracy and reliability of accounts by a qualified auditors. The Indian Companies Acthad made it compulsory for ail the registered companies to get their accounts auditedby qualified professional accountants. Under section 233 - B of the companies Act1956, the central government has been empowered to order compulsory cost audit incase of some specified companies. ln 1985 the Reserve Bank of lncha through acircular have directed all the commercial banks to ask their borrowers to get theiraccounts audited. Even the Income Tax Act since 1984 provided for the compulsoryaudit of accounts ol certain assesses. Thus the scope of traditional auoit has beenwidened beyond financial audit and now auditors are appointed to conduct tax audit,cost audit, management audit, Operational audit as well asm social audit.

Meaning of Audit: -

The term audit has been derived from Latin word "ai dire" which means to hear. Audithas been defined as follows.

1) Montgomery has defined auditing as a systematic examination of the books andrecords of a business or other orrYEan7n`ev@@iigr ;;t uporLthe@@Eingthefinanclaliopgationsanggil _ V" i"`T i Ti

2) According to Spicer and Peglar, suchjirtiexamination ofthe books,hacE%r_ and\LQui3Ers'oE'BGin'essinas snail enable the auditor to sa5y_Vn@U ; whetherornotthgalancesheet is properly drawn up, so as_to_e>5nibi_t a true ~ and correctview

ofthe state of affairs of the business, according to_thebes_tot his inlormationrandexplanation given to him and as shown by the books, and if not, inyvhat respect it isuntrue or incorrect' Thus auditing is the process of systematic and scientificexamination of the accounts ofa business. An auditor not only examines entries in thebooks of accounts or numerical accuracy ofthe books but also finds outwhethertransactions entered in.the books of original entry are correct or not. u 4' ` __,_

7/29/2019 audit mcs

2/5

The institute of chartered Accountants ol India has defined modern auditing as asystematic and independent examination ol data, statements, records, operations andperformance (financial and other wise) of an enterprise for a stated

r

i

l

i

l

i

pose,"

Sclrlosssr stated that "auditing is a systematic examination of ttn;tr.ci\xl statements,

records and related operations to determine adherence to generally acceptedaccounting principles, rnanagerrrent policies or stated requirements.

Acr:ountancyV Auditing

Accountancy is a work ol accountant and is confined to the waiting and balancing olfinancial books checking otnumerical accuracy of the books ol accounts. extraction olagreed trial balance, preparation oi the trading account, prottt and loss account, andbalance sheet in such a way that one can get clearly an essence ot the state ot allairsol the business, Auditing involves a detailed and critical examination and verificationot these ccounts by an independent accountarrt lor the purpose of ascertaining thefitniris ot a concern. Ttrtis auditing does not deal with the preparation ot account. Butdenotes something much wider as it includes the examination ol those accounts andthe subsequent submission ol a report there onf'

(B) Objective of an Audit :~

Objectives of an audit may be discussed as priman/ obrective and secorrizary

objectives()

l

Theiprima obective oi an audit is to examine the books ot account, vouchers and otherappropriate records and establish t.tat, the balance sheet, at a given data _ is properlydrawn upr so as to exhibit a true and lair view ol the state ol frltairs ot the businessand U19 protit and loss account also discloses a true and lzirr view ol proltt or loss lorthe financial period ending at that date.Thus the obiective ot an audit financialstatements, prepared within a lramework of recognized accounting policies andpractices and relevant statutary requirements il any, is to enable an auditor to expressan opinion on such financial statement. The auditor's opinion helps in determinationof true and lair view ol the financial position and operating resutts oi an organization. ,

Suosidiary objectives include the lollowing

7/29/2019 audit mcs

3/5

a) Detection and Prevention of errors especially Clerical errors which include (ii errorsot omission, (ir) errors ol commission (iii) compensating errors and (iv) errors olduplication _ D) Errors of principlesDetection of these frauds needs careful andsearching enqutries as they are amrnttted by responsible oflicers.Thus the primaryfunction of an auditor is not rn rscover frauds and irregularities unless he isspecifically appointed for detecting

l'1|catrons_ *

(C iAdvantages of Auditing :- -

Auditing is very useful activity for the organization or account of its several

dvantages as stated below.

Audited accounts are readily accepted as a correct and authentic record of

the financial transactions

It helps is detecting and rectifying errors and frauds ,

It has a great moral influence on the client s staff that helps in preventing

frauds and errors to keep books of accounts up to date. -

An auditor has a practical knowledge of business finance, taxation laws,

contract act, etc legal and financial matters. Hence he can advise his clients

on these matter-which is advantageous to the clients, '

ln case of a joint stock company, an auditor acts like a trustee of the share

holders and hence protects their interests. _

Auditied accounts have more reliability lor the purpose ol taxation, raising

loans etc. 4

For the purpose of claiming reasonable compensation from the insurance

company in case of loss by fire etc, audited accounts are helpful.

Audited accounts are useful in settlement of accounts between partners at

the time of retirement or death of a partner,

lt helps in comparision between the accounts of the current year with other

years, g V Y .

Audited accounts are useful for extension of credit , admitting a parrrer,

selling a business or converting it into a company etc.

7/29/2019 audit mcs

4/5

lt helps in carrying out appraisal function effectively through-audit reviews

and operation of various controls in the organization for detecting \.treakr=esses

and deficiencies in them.

Auditing process is useful in protecting interests of owners, creditors,

employees, investorsgetc, _

Audit Function as Control Tool :-

The institute of Chartered Accountants of India, in the statement on auditing

nractices has stated that, The study of sale guarding the assets of a company is

wrrmariiy that of the management and the auditor is entitle to rely on thesafeguardsnd internal controls instituted by the management , although he will olcourse

1til

7/29/2019 audit mcs

5/5

operations of the organization and also to ascertain the effectiveness ol

management. The internal auditor should be independent so as to discharge his

functions elliciently and effectively. ~ -