What is Audit?

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What is Audit?

Audit is an independent examination of financial information of any entity, whether profit-oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.

Audit Definition

According to general guidelines on internal Auditing issued by ICAI, auditing is defined as a

Systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor receives and recognizes the propositions before him for examination, collects evidence, evaluates the same and on this basis, formulates his judgement which is communicated through his Audit ReportICAI

The above definitions of auditing have certain important elements. They are:

  1. Independence: The auditor has to express an opinion on the financial statements examined by him. Therefore, the auditor should be free from any interest which might detract his objectivity.

  2. Auditor’s opinion: The auditor has to express an opinion on the financial statements examined in the form of an audit report. The audit report is an expression of opinion rather than a statement of verified facts.

  3. Financial statements: The financial statements comprise of Balance Sheet, Profit and Loss Account, notes and other statements, which collectively are intended to give a proper understanding of the financial position. The auditor has to express an opinion on the financial statements.

These three elements are contained in any kind of audit, whether profit-oriented or not and irrespective of its size or legal form.


Objectives Of Auditing

  1. Reporting: The primary objective of auditing is reporting – whether the Financial Statements present a “true and fair view” of the financial position (Balance Sheet) and the financial performance (Profit and Loss Account) during the period.

  2. Expression of Opinion: The objective of an audit of Financial Statements, prepared within a framework of recognized accounting policies and relevant statutory requirements, is to enable an auditor to express an opinion on such Financial Statements.

  3. True and Fair View: The Auditor’s duty is to express an opinion on financial statements.
    (a) Auditor’s opinion helps to determine the true and fair view of the operating results & financial position of an enterprise.
    (b) The user, however, should not assume that the Auditor’s opinion is an assurance as to the future viability of the enterprise of the efficiency or effectiveness.

  4. Management Responsibility:

    (a) The Management of an enterprise is primarily responsible for the preparation of Financial Statements
    (b) Management’s responsibilities include maintenance of adequate accounting records and internal controls, selection and application of accounting policies and safeguarding the assets of the enterprise.
    (c) Hence, the audit of the Financial Statements does not relieve management of its responsibilities.

Scope of Audit

  • Scope: An auditor will be determined the scope of an audit of financial statements with regards to –
    a) The terms of the engagements
    b) The pronouncements of ICAI
    c) The requirements of relevant legislation

  • Coverage of work: The auditor should be organized to cover all operational aspects relevant to the financial statements. He has to make study & evaluate the accounting system & internal controls on which auditor wishes to rely.

  • Disclosure: Auditor should ensure whether all relevant information is properly disclosed in financial statements & as per statutory requirement. The disclosure requirement can be verified by performing-
    – Financial statement analysis
    – Evaluation of accounting policies

  • Judgment: Absolute certainty is not attainable in auditing because of the need to exercise judgment. The auditor is also required to examine the reasonableness of judgment.

  • Materiality: Material items are those, which might influence the decision of the users of financial statements. The auditor should exercise his professional experience & judgment with material items.

  • Technical aspects: Auditor is not expected to perform duties, which fall outside the scope of his competence. The auditor is not an expert in all fields. So, an auditor can take the advice of an expert for technical work.

Advantages of Audit

The principle advantage of audit is to get an informed, objectives & forthright opinion on financial statements of the enterprises.

  1. A proprietary concern accounts may be audited to get funds from banks.

  2. In case of partnership firm accounts may be audited for the decision making like valuation of the goodwill of firms or settlement of accounts at the time of admission, retirement or death of a partner.

  3. There is a separation of ownership & management in case of a company. Shareholders have no direct control of the administration on the company. So audited accounts may help to shareholders to get a complete understanding about the company’s affairs.

  4. An audit helps in locating the weaknesses, inadequacies in the financial statements.

  5. An audit also helps in the detection of wastages & losses and suggests ways by which they might be checked.

  6. Sometimes the government may require audited & certified statements for giving assistance or issue a license.

  7. An audit helps in setting liability of taxes, negotiating loans, determining purchase consideration of business, setting trade disputes for higher wages & bonus.

  8. An audit also helps to control over inefficiency.

Limitations of Audit

Limitations of Audit are mentioned below:

  1. An auditor has to depend on the books of accounts & other records presented before him. If these accounts are prepared with malafide intentions, the auditor may not fully detect them.

  2. An auditor is not expected to be an expert in all the fields. He has to depend upon the opinion of the expert.

  3. Auditor has to depend upon the explanations & information given by the client. But it is possible that such information & explanations may not be correct.

  4. Audit evidence persuasive rather than conclusive in nature. Eg. Confirmation of a debt by a customer is not conclusive that the debt is good & recoverable.

  5. The auditor’s independence is necessary to serve the purpose of an audit. Though under law shareholders appoint the auditor. In reality, directors appoint the auditors.

  6. Auditor has to make an assessment of the internal control system & rely on them if they are effective. However, there will always some risk of internal control; it may be ineffective against fraud involving collusion among employees.

Audit Programme

An audit programme is a predetermined plan of the auditing work to be performed, specifying the procedure to be followed in the verification of each item in the financial statement, allocation of the audit staff and the time framed to be followed in conducting an audit. The audit programme is the written plan of audit work which contains the audit objectives It also specifying what work to be done when Introduction of Audit to be done, & by whom to be done.

  • An Audit programme is a detailed plan of work, prepared by the auditor for carrying out an audit.
  • It constitutes the plan of the work which provides a basis for supervision & control of work. It is a set of techniques & procedures which auditor applies for forming an opinion on financial statements.

Contents of Audit Programme

Contents of an audit programme may be divided as under:

  1. A review of the system of internal check.
  2. Audit of Balance Sheet accounts.
  3. Audit of Profit and Loss account items.
  4. Preparation of the audit report and co-ordination of all the above-mentioned items.

Advantages of Audit Programme

  1. Instructions: The audit programme specifies the extent & manner of checking & verification of different aspects of the accounting records.

  2. Checklist: It serves as a ready checklist of procedures and techniques to be applied and minimizes the possibility of overlooking any of the important audit steps.

  3. Phasing work: The work can be planned and phased properly.

  4. Selection of Team Members: The audit programme helps in the selection of assistants for jobs on the basis of their capability.

  5. Supervision: The work can be supervised and controlled better by periodic reference to the programme.

  6. Work Review: The progress of the work at any point of time can be readily known by reference to the entries on the audit programme.

  7. Future Planning: It serves as a guide for carrying out the current audit and as a basis for drawing the future audit programmer.

  8. Responsibility: Responsibility for an audit examination is fixed on the team member who has signed after completing a particular procedure under the programme.

  9. Basis for opinion: It serves as evidence of the work performed and provides a sound basis for the expression of the Auditor’s opinion.

  10. Record of Work: All work performed by the auditor should be recorded. It is sufficient proof that the work was carried out with reasonable skill & care that is of expected a professional.

Disadvantages of Audit Programme

Following are the disadvantages of Audit Programme

  1. Mechanical work: The audit may be performed mechanically without reference to the special circumstances of the client or to the development of any new or unusual features in the client’s business.

  2. Rigidity: Additional procedures or techniques may be called for by special circumstances.

  3. False sense of security: Audit members may feel that everything is taken care of by the audit programme. They may fail to apply their mind in circumstances that arise during the course of work.

  4. Lack of Initiative: Independent judgment and initiative of the staff may be restricted. It may frustrate talented and efficient audit staff.

  5. Lack of Suitability: Procedures may be undertaken which may be inappropriate to the circumstances of the client’s business.

Audit working papers

The audit working paper constitutes the link between the auditor’s report and the client’s records.SA 230 on “Documentation” refers to working papers prepared or obtained by the auditor and retained by him in connection with the performance of his audit. Working papers should record audit plans. The working papers should provide for

  1. Means of controlling current audit work
  2. Supervision and review of the audit work
  3. Evidence of audit work performed to support the auditor’s opinion

Summary

Audit is an independent examination of financial information of any entity, whether profit-oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.

Audit programme is the written plan of audit work which contains the audit objectives It also specifying what work to be done when to be done, & by whom to be done.

Audit Working Paper constitutes the link between the auditor’s report and the client’s records.


FAQ

What are 3 types of audits?

3 types of audits: external audits, internal audits, and Internal Revenue Service (IRS) audits.

What is audit?

Audit is an independent examination of financial information of any entity, whether profit-oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon. (Read More)

What is the main purpose of an audit?

The purpose of an audit is for an independent third party to examine the financial statements of an entity. This examination is an objective evaluation of the statements, which results in an audit opinion regarding whether the statements have been presented fairly and in accordance with the applicable accounting framework (such as GAAP or IFRS).

References and Further Reading

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