Basic Principles of Governing Audit, Advantages of Audit

Basic Principles of Governing Audit

1. Integrity

Integrity

Integrity requires an auditor to be honest, truthful, and straightforward while performing audit work.

Explaination:

• An auditor must maintain high moral and ethical standards.

• He should not be associated with misleading or false information.

Integrity forms the foundation of trust in the auditing profession.

Objectivity

Objectivity means an auditor must remain impartial and unbiased.

Explaination:

Judgment should not be influenced by:

• Personal Relationship

• financial interests

• management pressure

Independence

Independence means freedom from conditions that may compromise professional judgment.

Types of Independence:

1. Independence in Fact: Actual independence of mind.

2. Independence in Appearance: The auditor should appear independent to users.

Confidentiality

The auditor must maintain strict confidentiality of information obtained during the audit.

Explaination:

• Information should not be disclosed without authority.

• Disclosure allowed only if required by law or professional duty.

Professional Competence and due care

The auditor should have adequate knowledge, skills, and experience and must perform work with due care.

Audit Evidence

The auditor should have sufficient and appropriate audit evidence to support their opinion.

Sources of Evidence:

• Inspection

• Observation

• Inquiry

• Conformation

• Analytical Procedure

Strong Evidence = Strong Audit Opinion

Advantages of Audit

1. Assurance of true and fair view

2. Detection and prevention of frauds

3. Detection and prevention of errors

4. Helpful to management

5. Legal requirement

6. Reliability of financial statements

Assurance of True and Fair View

An auditor must have reasonable assurance that the financial statements present a true and fair view of the financial positions and performance of the business.

Detection and Prevention of Errors

An auditor helps in identifying accounting errors.

Types of errors

• Error of Omission

• Error of Commission

• Error of Principle

Detection and Prevention of Fraud

An auditor helps in detecting fraud such as misappropriation, manipulation of accounts, and falsification of records.

Helpful to management

How audit helps management:

• Improve the internal control system

• Identifies weaknesses in procedures

• Provides suggestions for efficiency

Increase in the Reliability of Financial Statement

Audited accounts are trusted more than the unaudited accounts.

Users benefited:

• Shareholders

• Creditors

• Bank

• Investors

• Government authorities

Legal requirement

Audit is compulsory for companies and certain entities under the Companies Act, 2013.

Role of the Auditor in checking Corporate Funds

• Verification of capital funds

• Utilization of funds

• Legal compliance (Companies Act)

• Detection of misappropriation

• Reporting irregularities

• True and fair view

Verification of Capital Funds

The auditor verified that funds raised through:

• Equity shares

• Preference shares

• Debentures

• Loans and borrowing

are properly authorised, recorded, and utilised.