Auditing principles, standards and procedures

Auditing principles: The principles of auditing are not finely developed as the principle of accounting. However, certain fundamental principles of auditing have evolved over the years.

Auditing principles

According to the Webster’s New International Dictionary, the word ‘principle’ is defined as a fundamental truth: a primary or basic law or doctrine: a settled rule of action. Applied to auditing ‘principle’ is the fundamental truth necessary for the affective accomplishment of the auditing objectives.

The principles of auditing are as under:

1. Principle of independence:

The objectives of auditing cannot be obtained without fairness, if the principle of independence is not resorted to. The principle of independence states that the audit work should be independent from accounting work. The auditor should examine the books of accounts independently, freely, without bias and prejudice.

The audit work should be based on evidences and should be done impartially.

2. Principle of objectivity:

Auditing must be conducted objectively; i.e. the auditor must be free from bias and emotions while auditing. It also demands verification of the transaction and the use of reasonable care and skill.

3. Principle of full disclosure:

This principle states that the client should provide to the auditor all possible evidence, explanations and records. From the auditor’s angle the principle implies that he should make full disclosure of his finding i.e. clear declaration of result of audit.

4. Principle of materiality:

This principle indicates that more attention must be paid to those items, which are materially important, and in the areas where the risk of error and fraud is relatively more. The fact of materiality has to be determined in accordance with the situation.

Auditing standards

The term standard refers to an acceptable level of quality which must be maintained in ten basic different areas, these are as follows

General standards:

1. The examination is to be conducted by a person or persons having adequate technical training and proficiency as an auditor.
2.  In all matters relating to the assignment independency mental attitude is to be maintained by the auditor.

3. Due to professional case is to be exercised in the performance of the examination and preparation of the report.

Standards of field work:

1. This is to be adequately planned and assistants, if any, are to be properly supervised.
2. There must be a proper study and evaluation of the existing internal control a basis for reliance thereon and for the determination of the resultant extent of the tests to which auditing procedures are to be restricted.
3. Sufficient competent evidential matter to be obtained through inspection observation, inquires and conformations to afford a reasonable basis for an opinion regarding the financial statements under examination.

Standard of reporting:

1. The report shall state whether the financial statement is presented in accordance with the generally accepted rules of accounting.
2. The report shall state whether such opinion has been consistently observed in the current period in relation to the preceding period
3. Informative disclosure in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
4. The report shall either contain an expression of opinion regarding the financial statement as a whole. When an overall opinion cannot be expressed reasons therefore should be stated.

Auditing procedures

The essential procedures of auditing are as under:

1. Internal control system:

Examination of the nature, extent and efficiency of the system of internal checks and controls.

2. Arithmetical accuracy:

Ascertaining the arithmetical accuracy of the books of account by check postings, castings carry forward opening and closing balances etc.

3. Capital & revenue:

Ensuring that the entries have been made and the profit and loss account and balance sheet prepared in accordance with well recognised accounting principles and practices e.g. the distinction between capital and revenue accrual system of accounting valuation system etc.

4. Documentary evidence:

Examining the documentary evidence (internal control) in support  the transaction e.g., that is vouching third party conformation etc.

5. Validity:

Checking the validity of the transactions with reference to

(a) Provision effecting the accounts and audit in an act.

(b) Rules and regulation governing the constitution and management of the organization, e.g., the memorandum or articles of association in the case of a firm and trust deed in the case of trust,

(c) Minute books for appropriate sanctions of the transaction by competent authority

(d) Other legal documents such as the authority contract and agreements e.g., lease agreement, vendor agreement, technical collaboration agreements etc, if any.

6. Adequate disclosure:

To see that there is adequate disclosure of information and particulars in the annual accounts in such a manner as to convey the real picture of the net worth and earning capacity of the undertaking.

7. Application of test:

Application of various types of overall test: checks and counter checks reconciliation methods etc. in order to test the integrity of the accounting records.

8. Verification:

Verification of existence, title and value of the assets and determination of the extent and nature of the liabilities.