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Objective Audit
Objective Audit
Objectives of Audit
For a better understanding we could classify the objective of audit as:
1. Primary Objectives
2. Secondary Objectives.
Primary Objectives: To determine and judge the reliability of the financial statement
and the supporting accounting records of a particular financial period is the main purpose
of the audit. As per the Indian Companies Act, 1956 it is mandatory for the organizations
to appoint a auditor who, after the examination and verification of the books of account,
disclose his opinion that whether the audited books of accounts, Profit and Loss Account
and Balance Sheet are showing the true and fair view of the state of affairs of the
company's business. To get a true and fair view of the companies affairs and express his
opinion, he has to throughly check all the transactions and relevant documents of the
company made during the audited period. Which will help the auditor to report
the financial condition and working result of the organization. While carrying out the
process of audit, the auditor may come across certain errors and frauds. But detection of
fraud or errors are not the primary objective of the audit. They are come under
the secondary objectives of audit.
Audit also disclose whether the Accounting system adopted in the organization is
adequate and appropriate in recording the various transactions as well as the setbacks
of the system.
Secondary Objectives:
In order to report the financial condition of the business, auditor has to examine the
books of accounts and the relevant documents. In that process he may come across
some errors and frauds. We may classify these errors and frauds as below:
1 Detection and prevention of Errors
2. Detection and prevention of Frauds.
Detection and prevention of Errors: Following types of errors can be detected in the
process of auditing.
1. Clerical Errors
2. Errors of Principle
Clerical Errors: Due to wrong posting such errors may occur. Money received from
Microsoft credited to the Semens's account is an example of clerical error. Even though
the account was posted wrongly, the trial balance will agree. We can classify clerical
errors as below:
i. Errors of Commission
ii. Errors of Omission
iii. Compensating Errors.
i. Errors of Commission: These errors are errors caused due to wrong posting either
wholly or partially of in the books of original entry or ledger accounts or wrong totaling,
wrong calculations, wrong balancing and wrong casting of subsidiary books. For example
Rs. 5000 is paid to Microsoft for the supply of windows program and the same is
recorded in the cash book. While posting the ledger the Microsoft's account is debited by
Rs. 500. It may be due to the carelessness of the accountant. Most of these errors of
commission are reflected in the trial balance and can be identified by routine checking of
the books.
ii. Errors of Omission: When there is no record of transactions in the books of original
entry or omission of posting in the ledger could lead to such errors. Sales not recorded in
the sales book or omission to enter invoices in the purchase book are examples of Errors
of Omission. Errors due to entire omission will not affect the trial balance. Errors due to
partial omission will affect the trial balance and can be detected.
iii. Compensating Errors are errors committed in such a way that the net result of these
errors on the debit side and credit side would be nullify the net effect of the error. For
example, Ram's account which was to be debited for Rs. 5000 was credited for Rs. 5000
and similarly, Sita's Account which was to be credited for Rs. 5000 was debited for Rs.
5000. These two mistakes will nullify the effect of each other. Unless detailed
investigation is undertaken such errors are difficult to locate as both the sides of the trial
balance are equally affected.
2. Errors of Principle: While recording a transaction, the fundamental principles of
accounting is not properly observed, these types of errors could occur. Over valuation of
closing stock or incorrect allocation of expenditure or receipt between capital and
revenue are some of the examples of such errors. Such errors will not affect the trial
balance but will affect the Profit and Loss account. It may occur due to lack of knowledge
of sound principles of accounting or can be committed deliberately to falsify the
accounts. To detect such errors, the auditor has to do a careful examination of the books
of account.
Detection and Prevention of frauds: To get money illegally from the organization or
from the proprietor frauds are committed intentionally and deliberately. If it remain
undetected, it could affect the opinion of the auditor on the financial condition and the
working results of the organization. Therefore, it is necessary for the auditor to exercise
utmost care to detect such frauds. It can be committed by the top management or by the
employees of the organization. Frauds could be of the following types:
1. Misappropriation of cash
2. Misappropriation of goods
Window dressing: is the way of presenting the financial data in a much better position
than the original position. It is known as window dressing. Some of the reasons for doing
window dressing are as follows:
1. To win the confidence of share holders
2. To obtain further credit
3. To raise the price of shares in the market by paying higher dividend so that shares
held may be sold
4. To attract prospective parters or shareholders.