Auditing: Introduction, Scope, Explanation

Auditing

Auditing in the ordinary sense means the official examination of accounts. It is checking of the accounts of the business for a particular purpose.

Auditing is the checking of the transactions of the business with its books of accounts and evidences with a view to find out the arithmetical accuracy of the accounts, the correctness and truthfulness of the transactions recorded in the books and of their results thereon.

Auditing is the systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) for a stated purpose.

Introduction to Auditing

The word ‘audit’ is derived from the Latin word audire, which means to hear. In the early civilization. The method of accounting was so crude and the number of transaction recorded were so small. Whenever the owner of a concern suspected fraud, certain people were appointed to hear verbal evidence of barter transactions etc, and to judge the facts. In fact they would conduct an oral examination. The persons so appointed to examine the accounts came be to known as auditor.

The current status of auditing as a profession has emerged out of evolutionary process. Auditing in a simple form developed with the organised system of accounting. Auditing as a system of check upon persons, who in the course of their work had to handle receipts and payments of money belonging to others was practiced even in the ancient time.

However accounting on a systematical basis has been traced to fifteenth century. In 1494, the publication by an Italian Mathematician Luca Pacioli of the principles of Double Entry Book-keeping led to the beginning of a systematic accounting and recording business transactions. He also defined for the first time the duties and responsibilities of an auditor in detail. Since then the duties and responsibilities of an auditor have increased enormously.

Some important definitions by different authors:

SPICER AND PEGLER HAS DEFINED AS,

“Such an examination of the books of accounts and voucher 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 the state of the affairs of the business, and whether the profit and loss account gives a true and fair view of profit or loss for the financial period, according to the best of his information and the explanations given to him and as shown by the books: and if not, in what respect he is not satisfied”.

R. DICKSES DEFINES,

“Auditing is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate.”

SIR RONALD IRISH

“A critical examination of books, documents and records so that the auditor may report his opinion as to whether the balance sheet gives a true and fair view of the state of affairs at balance sheet date and whether the profit and loss account gives a true and fair view of the results for the period it covers”.

MONTGOMERY, A LEADING AMERICAN ACCOUNTANT DEFINED:

“Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and to report upon the facts regarding its financial operation and the results thereof.

INTERNATIONAL AUDITING PRACTICE COMMITTEE

“An audit is an examination of financial information of an entity, whether profit oriented or not and irrespective to its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.”

Scope

An analysis of the various definitions reveals that an audit means and includes the following:

  1. Critical review of book-keeping system:

A critical review of the system of bookkeeping accounting and internal control and its design and operations in a business enterprise to ascertain its adequacy and appropriateness to the enterprise.

  1. Agreement of financial statement with record:

A comparison of Profit and Loss Account and Balance Sheet with the underlying record to ensure that they are in agreement therewith.

  1. True and fair view:

Verification of results shown by the profit and loss account and the state of affairs disclosed by the balance sheet.

  1. Compliance with the company ordinance:

Confirmation as to the compliance with the statutory requirement relevant to joint stock companies.

  1. Expert opinion:

Finally expression of opinion by the auditor by way of report to the chents stating whether in his opinion the accounts presents a true and fair view or not.

Explanation

From the above detail it is clear that audit is systematic and scientific examination of the books of accounts of a business. It is not merely a comparison of Balance Sheet and accounts with the books in order to see that they agree therewith The auditor has to do much more. He has to satisfy himself that;

  • The transactions entered in the books of original entry are Correct.
  • The general accepted principles of accountancy have been followed in recording the transactions.

In order to satisfy himself about the above the auditor examines the following:

(a) Internal documentary evidence, ie, records, vouchers books of accounts etc. To assess the quality of internal evidence he should also test the various systems of control.

(b) External evidences e.g. confirmation balances from debtors and creditors physical count and survey, seeking independent expert opinion regarding technical matter etc.

In brief auditing involves testing the reliability competency and adequacy of evidence in support of monetary transaction.

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