Auditing

The term audit derived from the latin word "Audire" which means "to hear". In the middle ages, the auditor was a person appointed by the owner whenever they suspected fraud to checks account and to hear explanations given by persons responsible for financial transaction. Nowadays, auditing is the verification of accounting data with a view to report on the reliability of the accounting statement. An auditor is an independent person who checks the books of accounting.

The auditing is related to the following facts;

1. An examination of books of accounts.
2. An examination of books of account whether the results presented by profit and loss and financial position presented by balance sheet are true and fair or not.
3. Preparation of audit report.

Objectives of Auditing

Generally, there are two types of objectives of auditing. They are;

1. Primary Objectives
2. Secondary Objectives

1. The Primary Objectives of an auditing are as follow:
a) Examining the system of internal check.
b) Examining the arithmetical accuracy of books of account by verification of posting, casting and balancing.
c) Verifying the reality and validity of the transaction.
d) Confirming the existence and value of assets and liabilities.
e) Verifying whether all the statutory requirements are fulfilled or not.
f) Reporting true and fairness of accounting and financial position.
g) Examining the proper distinction of capital and revenue nature of transaction.

2. The Secondary Objectives (Subsidiary objectives) of an auditing are as follows:
a) Detention and prevention of errors.
b) Detention and prevention of frauds.
c) Other objectives.

• To prepare audit report of company.
• To provide information to income tax authority.
• To satisfy the provision of company acts.

Fraud

Fraud is an intentional and those mistake which are committed knowingly with some vested interest. It is difficult to detect fraud. Fraud may be the following types:

a) Misappropriation or Embezzlement of Cash:

In small types of business, the possibility of misappropriation of cash can be easily detected because of direct control owner in cash but in big business, there is no direct control of owners and chances of misappropriation of cash is more. The misappropriation of cash can be made in the following ways:

1. By omitting to enter receipt.
2. Cancelling the purchase returns.

Such frauds can be detected by;

1. By examining the cash book.
2. By checking receipt.
3. By checking debtors account and cash account.

b) Misappropriation of goods:

Fraud may be in respect of goods. This types of fraud is difficult to detect unless a proper stock record is kept. The goods may be removed by junior staff or by senior officers. The auditor can detect these types of fraud by undertaking through record checking and the physical verification of the goods.

c) Manipulation of accounts:

These types of fraud is always intentional, pre-determined and is more difficult to detect as it is usually committed by higher managerial person such as directors and managers. Some examples are as follows:

1. Recording fictitious purchase.
2. By undervaluation or overvaluation of assets and liabilities.

The detection of these frauds requires careful and searching enquiries as they are committed by responsible officials.

Methods of Detecting Errors

The term error in accounting refers to an unintentional mistakes committed in the statement of financial statement. Errors and mistakes are of various kind such as errors of principle, errors of omission, errors of commission and compensative errors. Generally an auditor should perform the following functions to detect errors:

1. Auditor should check the total of trial balance.
2. Auditor should compare the balance of last year with the opening balance of this year.
3. Auditor should check the balance of accounts.
4. Auditor should compare the data of books and account with the amount of trial balance.
5. Auditor should check the primary books of account.
6. Auditor should prepare the list of debtors and creditor and should compare with the amount of trial balance.
7. Auditor should check carefully check in those areas where there are more chances of frauds and errors.