Auditing-Meaning, Definition, Objective, and types

Meaning

Auditing is derived from the Latin word “Audire”, which means “to hear”. In earlier times, accounts were examined by listening to explaination.

In Modern times, auditing is the independent examination of financial statements to ascertain whether they present a true and fair view of the financial position and profit or loss of a business.

Definition

According to L. R. Dicksee, auditing is an examination of accounting records to establish whether they correctly and completely reflect the transactions.

Objective of Auditing

The objectives of auditing refer to the purpose for which an audit is conducted.

The Objectives of auditing are broadly classified into:

1. Main Objectives

2. Subsidiary Objectives

Main Objectives of Auditing

The main objectives of auditing are to determine the reliability of financial statements and ensure that the balance sheet and profit and loss account present a true and fair view of:

• The financial position of the business, and

• the profit or loss for the accounting period.

Subsidiary objectives of auditing

Subsidiary objectives support the main objectives. They are secondary, but heavily tested.

• Detection and Prevention of Fraud

• Detection and Prevention of Errors

Detection and Prevention of Frauds

Meaning of Fraud

Fraud refers to the intentional misrepresentation, manipulation, and concealment of accounting information with the objective of deceiving users of financial statements.

Examples of Fraud

1. Manipulation or falsification of records

2. Suppression of transactions

3. Recording fictitious transactions

4. Misappropriation of cash and assets

5. Misapplication of accounting policies

Role of Auditing

Auditing helps in detecting fraud through verification, vouching, and internal control evaluation.

Detection and Prevention of Error

Meaning of Error

Errors are unintentional mistakes committed in accounting records due to:

• Carelessness

• Ignorance

• Misunderstanding of accounting principles

Examples of Error

• Error of Omission

• Error of Commission

• Error of Principle

Role of Auditing

Auditing helps in detecting errors by:

• Detailed checking

• Vouching of the transaction

• Verification of accounts.

Types of Audit

1. Types of audit based on Legal Requirement

• Statutory Audit

• Internal Audit

2. Types of audit based on Ownership

• Companies Audit

• Government Audit

3. Types of audit based on Time

• Continuous Audit

4. Types of audit based on the objective

• Secretarial Audit

Statutory Audit

Statutory Audit is an audit that is compulsory under the law, especially under the Companies Act, 2013. Every Company is required to get its account audited by a qualified auditor.

Objectives:

• To ensure financial statements present a true and fair view.

• To protect the interests of shareholders.

Legal Provisions:

• Section 139: Appointment of Auditor

• Section 141: Qualification of Auditor

• Section 143: Power and duties of Auditor

Internal Audit

Internal Audit is an audit conducted by an Internal Auditor appointed by management to review Internal control, risk management, and operational efficiency.

Legal position:

As per section 138 of the Companies Act, 2019, certain companies must appoint an Internal Audit.

Objectives:

• Improve Internal Control

• Prevent errors and fraud

• Assist Management

Company Audit

Audit of Companies is a compulsory audit conducted under the Companies Act, 2013, by a Chartered Accountant.

Feature:

• Auditor appointed by a shareholder

• Auditor reports to shareholders

• Auditors ensure compliance with the law

Objective

• Safeguard shareholders’ interest

• ensure transparency and accountability

Government Audit

Government audit is conducted by the Comptroller and Auditor General of India (CAG).

Scope:

• Central Government

• State Government

• Government companies and bodies

Objectives:

• proper utilisation of public funds

• checks legality, efficiency, and economy.

Continuous Audit

Continuous audit is an audit conducted throughout the year at regular intervals.

Advantages:

• Early detection of errors and frauds

• up-to-date accounts

• better audit planning

Disadvantages:

• Costly

• Disturb routine work

Secretarial Audit

Secretarial Audit is a compliance audit conducted by a practising company secretary (PCS).

Purpose:

• Ensure compliance with laws and regulations

• Improve corporate governance