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AUDITING:

An Introduction

The Historical Background


The word audit comes from a Latin word
audire which means to hear. In the times
of Roman Empire, accounts were kept by
assigned workers who were asked to read
out their reports to an independent
person. The person would hear these
reports and give his opinion on the validity
of such reports. Hence the term auditor
came to be used for such independent
persons who specialized in verifying
accounting reports.
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Two Basic Terms

Audit
Auditing

Audit
An audit is:

a systematic and critical examination


of books of accounts and supporting
documents/records
of an enterprise
by an independent person
with a view to give an opinion
on accuracy or otherwise of financial
statements
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Auditing

Auditing as a subject may be defined as


the application of such principles and
methods as may be necessary for an
auditor to form an audit opinion.

The Difference

What an auditor carries out is called an


audit;
How he carries it out, or the knowledge or
skills he uses to carry it out, is called
auditing.

Why do we need Audits

Separation of ownership from management


Nowadays, a large number of persons like
owners, lenders, employees, government, etc. are
affected by the performance of a company.
Hence there is need for financial reporting.
And need for verification of the financial reports.

Incompetence of preparers leading to errors


Dishonesty of preparers leading to frauds

Objectives of an Audit

Primary Objective:

Secondary Objectives:

form an opinion on the financial statements.


Detect errors and frauds, and
Tell the management about the deficiencies in
the financial controls and systems.

Specific Objectives:

Investigations, procedure designing, etc.


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Advantages of Auditing

Accounts are of no use unless they are correct


and formally declared to be so.
Detection of errors and frauds
Psychological effect on managers and workers.
Improvement in internal control systems
Audited accounts are readily accepted by
outsiders like lenders, tax-man, insurers, etc.

Advantages of Auditing
(contd)

Settlement of disputes.
It is a noble and respectable profession.
Helps create trust between owners and
managers and thus promotes investment.
Helps improve companys image and reputation,
credit rating, etc.
Auditors often act as designers of systems and
procedures.

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Auditing and Accounting

Accounting

Keeping books
Preparing financial
statements
Accountant is a part of
management.
May have other
functions in the
company.

Auditing

Checking books
Checking financial
statements
Auditor is not a part of
management
Giving an audit report

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Limitations of Auditing

Auditor has to depend on what is given to


him.
Cannot audit what is not there.
He cannot possibly verify every thing, e.g.

Cannot contact every debtor


Cannot contact every supplier for each invoice

Lack of independence

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Criticism on Auditing

Too costly.
Benefits are less than the cost.
Too many unnecessary formalities.
Disturbance to normal accounting work
while audit is going on.
Less than honest auditors.

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Characteristics of Auditing

Independent exercise, by a qualified


outsider.
Scientific, systematic, intelligent and
critical examination of books & records.
Giving an opinion.
Detection of errors and frauds

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Qualities of an Auditor

Professionally competent

Knowledge of accounting, auditing, law, business, etc

Intelligent and with an inquiring mind


Disciplined and vigilant
Methodical and consistent in work
Independent and firm, but not obstinate
Honest and Ethical
Courteous and polite

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Professional Ethics
Auditor must:

Maintain his integrity and objectivity


Observe technical standards
Be fair and candid with his clients
Conduct himself properly
Maintain dignity of his profession
Not communicate with external parties without
seeking proper clearance
Not have financial dealings with clients (other than
audit work) like borrowing money.
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Auditing Concepts

Independence of the auditor.


Acceptable evidence.
Materiality
Accountability of the auditor

Answerable to the shareholders, not


managers.

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Thank you

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