Escolar Documentos
Profissional Documentos
Cultura Documentos
Course Teacher:
Shish Haider Chowdhury
shishchowdhury@yahoo.co.uk
31 July 2010
1. Audit, Auditing
The word ‘audit’ has been defined by many distinguished authors and every one of
them has attempted to highlight one aspect or the other. Definitions of the word
‘audit’ given by authorities on the subject are as follows:
“An audit is such an examination of the books, accounts and vouchers of 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 the profit or loss
for financial period, according to the best of his information and explanations given
to him and as shown by the books; and if not, in what respects he is not satisfied”
Spicer and Pegler
L. R. Dicksee
“Auditing is connected with the verification of accounting data with determining the
accuracy and reliability of accounting statements and reports.” R. K. Mautz
It can be concluded that, the audit means critical and intelligent examination of
facts- financial or otherwise to give in the form of certificate or report an
attestation, an expert opinion or expert advice.
2. Origin of Audit
The word ‘audit’ is derived from the Latin word “audire” which means to hear. In the
good old days whenever the proprietors of a concern suspected a fraud, certain
people were appointed to hear verbal evidence of transactions of barter etc., and to
judge the facts. They ‘heard’ the points of view of those who maintained the
accounts. Lucas Pacilio who is commonly considered as the father of double entry
book-keeping wrote his treatise on the double entry book-keeping and described
the duties and responsibilities of an auditor in it. The roots of ‘modern audit’ lie
deep in the birth of ‘Industrial Revolution’, which brought large-scale production in
its wake. The rapid growth of banking, transport & insurance development, use of
mechanical appliances and computers in business concerns and gigantic growth of
joint stock companies have resulted in the growing importance of audit. The need of
audit became imminent when the management and ownership of business was
divided among different groups of people. The investor would naturally like to see
that his investment is safe. For this purpose, the accountants must be checked and
audited, especially in case of joint stock companies. As it is not possible for
shareholders to check the accounts of the company they appoint a person who
would audit the accounts on their behalf. Formerly such a person used to be one of
the shareholders who might not technical knowledge of accountancy. To have an
effective check, the custom to appoint professional accountant began to develop.
3. Advantages of audit
1. Errors and frauds are located at an early date and in future no attempt is
made to commit such frauds or one is rather careful not to commit an error
or fraud as accounts are subject to regular audit.
2. The auditing of accounts keeps the accounts department regular and
vigilant as they know that the auditors would complain against them if the
account is not prepared up-to date or there is any irregularity.
3. Fund can be borrowed easily on the basis of previous audited Balance
Sheet.
4. If the accounts have been prepared on a uniform basis, accounts of one year
can be compared with other years and if there is any discrepancy, the cause
may be enquired into.
5. In case of any accident/mishap/untoward event, the insurance company
may settle the claim on the basis of audited accounts of the previous years.
4. What is accounting
Accountancy and auditing is specially related the work of auditing begins after that
of accounting.
Accountant examines whether transactions are written accurately following the
accounting theory or rules and prepares financial statements with the help of books
of accounts and other financial information. And he presents and describes these to
the owner or director in such a way, so that they can be well informed about the
financial condition of the business and can decide what to do in future.
Although an auditor does not prepare the accounts, he examines whether
accounting rules are properly followed to prepare these. However, it is not his
principal duty. His main duty is to give his expert opinion after judging
independently and neutrally, the accounts and descriptions of business prepared
earlier, whether the financial condition of the business is presented logically.
From the above discussion it is clear that, there is a close relation between
Auditing and Accounting. Because it is the job of an accountant to assess the reality
and dependability of financial statements prepared and described by accountants
on the basis of financial transactions written in accounting books. The spade work is
done by the accountant to enable the auditor to give a finishing touch. It has been
said that , where the work of an accountant ends, the work of an auditor begins.
Accounting Auditing
7. Audit Planning
An audit plan is a detailed outline of the auditor's plans and procedures used in
conducting an audit. The importance of good detailed documentation in the audit
plan cannot be stressed enough. An audit plan will include the following items:
The Record of Audit Planning, Activities, and Results are the form which documents
the audit plan for every audit performed. This form, which can be completed
manually or on the computer, should be completed as the audit progresses. The
computerized audit plan can be accessed through the MS Word program in
Windows.
8. Audit Programme
Typically, it specifies the name of the auditor responsible for a given job including
the estimated time to conduct the audit task. The audit program guides and
controls the work of staff assistants. When a task is conducted, identification is
made of who performed it and the date.
Audit working papers are the documents which keeping all audit evidences obtained
during financial statements auditing. Audit working paper is to be able to support
the audit works done in order, sufficient and assurance audit evidences have been
obtained and reasonable assurance audit conclusion can be made in due course.
Audit working papers are the property of the auditor. In order to keep professional
ethic, it cannot discover to third party without consent of the client unless limited
specified situations mentioned in ISA 230 Documentation and required by law, the
examples are court order, for public interest and so one.
Permanent
Current
Internal control refers to the whole system of control in conducting a business and
includes internal check, internal audit and any other form of control.
Control in Organizations
• Controls are restraining and directive influences over the activities of a
system
• General principles of control are applied in business organizations
• Accounting systems assist management in controlling operations
• Accounting internal controls assure that all transactions are authorized, all
transactions are recorded, access to assets is allowed only for authorized
purposes and accounting records describe only real assets.
"Administrative control includes but is not limited to, the plan of
organization and the procedures and records that are concerned with the decision
processes leading to management's authorization of transactions. Such
authorization is a management function directly associated with the responsibility
for achieving the objectives of the organization and is the starting point for
establishing accounting control of transactions." (AU320.27)
"Accounting control comprises the plan of organization and the procedures
and records that are concerned with the safeguarding of assets and reliability of
financial records and consequently are designed to provide reasonable assurance
that:
Control risk
"Control risk is the risk that error that could occur in an account balance or class
of transactions and could be material, when aggregated with error in other balances
or classes, will not be prevented or detected on a timely basis by the system
of internal accounting controls."
Control Weakness
Cost and Benefits of Internal Control -The benefit of an internal control must
exceed its cost
• Primary cost is personnel
• Benefits stem from reductions in expected loss
Reliability analysis
• assess effectiveness of specific control procedure in detecting and correcting
a specific type of error
• system reliability is probability that process will be completed with no errors
• risk is complement of system reliability
There are many key differences between internal and external audit and these are
matters of basic principle that should be fully recognized:
The main similarities between internal and external audit are as follows:
1. Both the external and internal auditor carry out testing routines and this may
involve examining and analyzing many transactions.
2. Both the internal auditor and the external auditor will be worried if
procedures were very poor and/or there was a basic ignorance of the
importance of adhering to them.
3. Both tend to be deeply involved in information systems since this is a major
element of managerial control as well as being fundamental to the financial
reporting process.
4. Both are based in a professional discipline and operate to professional
standards.
5. Both seek active co-operation between the two functions.
6. Both are intimately tied up with the organization’s systems of internal
control.
7. Both are concerned with the occurrence and effect of errors and
misstatement that affect the final accounts.
8. Both produce reports on their activities.