Objectives of Auditing

Meaning and objectives of auditing

The word audit is derived from the latin word "audire" which means to hear.

according to Spicer and peglar auditing is defined as " such examination of the books, accounts and vouchers of a business as will enable the auditor to satisfy himself that the balance sheet is properly drawn up. so as to give a true and fair view of profit and loss for the financial period, according to the best of his information and the explanation given to him and as shown by the books and if not in what respect he is not satisfied".

Objects of audit:- 

       " The statement on standard auditing practices: objectives and scope of audit of financial statements" of the Institute if Chartered Accountants of India specifies that the objectives of an audit is to express an opinion on financial statements. To give the opinion about the financial statements, the auditors examines the financial statements to satisfy himself about the truth and fairness of financial position and operating results of the enterprise.

           The main objective of audit is to express expert opinion on financial statements. The secondary objectives are detection and prevention of errors and detection and prevention of frauds.

1. Main objective

              Expression of expert opinion:

                   An entity prepares balance sheet to protray its financial position. It also prepares P&L account to disclose the operating results of the period covered in the statement. These financial statements are submitted to the auditor for his checking and comment. The auditor checks them in a careful manner with utmost diligence and professional competence. He verifies that the accounts are prepared within the framework of recognised accounting policies and practices and relevant statutory requirements if any. He checks whether the facts as represented in the balance sheet and profit and loss account are true. Based on his checking in these respects, the auditor expresses his opinion about the quality of the financial statements concerning proper disclosure of facts in the financial statements and the truth and fairness of the financial position and operating results of the enterprise as disclosed in the balance sheet and profit and loss account respectively.

     2. Secondary objectives

• Detection and prevention of errors:-  Errors are generally innocent but sometimes errors which might appear at first sight, as innocent are ultimately found to be due to fradulent manipulation and therefore an auditor must pay particular attention to every error, however innocent it may be at first sight. the following are the various types of errors

                   1. Clerical errors: This errors can be further sub divided into-

                         (a) Error of omission

                         (b) Error of commission

                   2. Error of principle

                   3. Compensating errors

                   4. Errors of duplication

1. (a) Error of omission

               As the name indicates, the errors of omission is one where a transaction has not been          recorded in the books of account either wholly or partially. In the former case it will not be easy to detect the error and it will not affect the trial balance. But sometimes it is apparent from the balance of an account that an entry has been omitted. This type of error can be detected by careful observation. But there are many other cases where it may not be possible to detect the omission. But if one aspect of the entry has been entered in the books, it will affect the trial balance and the omission will be easily detectable.

           (b) Error of commission

                When a transaction has been recorded but has been wrongly entered in the books of original entry or posted in the ledger, error of commission is said to have been made for e.g: a purchase invoice for Rs 1250 was entered as 1520. Such an error may be intentional or un-intentional.

      2. Error of principle

                Such errors arise when the entries are not recorded according to the fundamental principles of accountancy such as wrong allocation of expenditure between capital and revenue. Such errors may be committed either intentionally or un- intentionally. If they are committed intentionally, the object is to falsify and manipulate the accounts either to show more profits or less profits then they actually are. Such errors ultimately affect the profit and loss account and the balance sheet. Therefore, it is very important for an auditor to pay particular attention towards this type of error.

       3. Compensating errors or off - setting errors

                A compensating error or off - setting error is one which is counter balanced by any other error or errors such as if A's account was to be debited for Rs 100 but was debited for Rs 10 while B's account which was to be debited for Rs 10 was debited for Rs 100. These errors are most dangerous and are difficult to guard against. This type of error will not be detected by the trial balance. Such an error will not affect the trail balance and will not be easily detected. This error may or may not effect the profit and loss account.

        4. Error of duplication

                Such error arise when an entry in a book of original entry has been made twice and has also been posted twice

• Detection and prevention of Fraud      

          Following are the chief ways in which fraud may be perpetrated:- 

        

          1. Embezzlement of cash

         

               There is a greater possibility of defalcation of money in a big business house then in small business where the proprietor has a direct control over the receipts and payments of cash. In a big business house, the system of receipt and payment of cash should be such that the work of one clerk is automatically checked by another clerk. Cash may be misappropriated by -

           

                 a. omitting to enter any cash which has been received or 

                 b. entering less amount than what has been actually received

                 c. making fictitious entries on the payment side of the cash book or

                 d. entering more amount on the payment side of the cash book than what has been actually                       paid.

         2. Misappropriation of goods

               Again fraud may be in respect of goods i.e misappropriation of goods. This type of fraud is very difficult to detect especially when the goods are less bulky and are of higher value. Proper methods of keeping accounts in regard to purchase and sales stock taking, periodical checking of stocks, comparing the percentage of gross profit to sales of two periods, necessity for collusion will help to avoid misappropriation of goods.

       3. Fraudulent manipulation of accounts

            This type of fraud is more difficult to detect as it is usually committed by directors or managers or other responsible officials with the objects of showing more profits than what actually they are so that if they get commission on profits, they may get more commission, or their service ,may be retained by showing to the shareholders that because of there efficiency they have shown more profits and thus maintain the confidence of the shareholders or if they hold the shares, they may sell them at higher price by declaring higher dividends or to obtain further credit by showing the financial position of the business better than what actually is.

            They may show less profits then what actually it is in order to purchase shares in the market at a lower price or to reduce or avoid payment of income tax or to give wrong impression about the success of the business to the competitors etc.

      

        3. Specific objectives:

           The audit may encompass such other areas like review of operation, performance management policy, cost records and so on. Accordingly, there will be specific objective in respect of each type of such specific audits. Depending upon the nature of specific audit engagement and terms of engagement, there may be different objective in respect of each specific audit.