Professional Documents
Culture Documents
Chapter 1
An Overview of Auditing
Learning Objectives
Explain the general nature of auditing, and its historical development
Distinguish between financial statement audits, compliance audits and operational
audits
Distinguish between external and internal audits
Distinguish between different types of auditors
Describe how auditing differs from accounting
Explain why financial statement audits are necessary
Introduction
The word auditing is derived from the Latin 'audire', meaning 'to listen'. Governmental
accounting records were approved only after a public hearing in which the accounts were read
aloud. A wise man – the auditor – listened carefully to a spoken description of a situation,
applied his wisdom, his professional judgment, and came to an opinion. In the course of time,
auditing has developed into a systematic undertaking that is carried out in both the private and
the public sectors and both internally and externally.
Definition of Auditing
Various authors have defined auditing, some of the definitions are the following:
Auditing is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and communicating the
results to interested users (A comprehensive definition cited in Ricchiute 1982).
Auditing is the examination of accounting records with a view to ascertaining their
accuracy and compliance with relevant statutory provisions, accounting standards,
professional pronouncements, and the organisational policies. The Chartered Institute of
Public Finance and Accountancy (CIPFA), as cited by Johnson (1996:47), .
Auditing is a process of reducing to a socially acceptable level the information risk to
users of financial statements (Robertson 1990).
Auditing is a systematic examination of financial statements, records and related
operations, to determine adherence to GAAPs, management policies or stated
requirements (Robert E. Schlosser cited in Jain 1993).
Auditing is the accumulation and evaluation of evidence about information to determine
and report on the degree of correspondence between the information and established
criteria. Auditing should be done by competent and independent person (Arens et al
2006).
Many users consider auditing and accounting as similar mainly due to the following:
Most auditing is usually concerned with accounting information
Many auditors have considerable expertise in accounting matters
The title “Certified Public Accountants”, is given to individuals performing audit
title
The major raw material for auditing work comes from the accounting data and the
accounting systems which capture and process this data, Thus, understanding
these data and systems require the auditor to be a qualified accountant.
However, the processes involved in auditing and accounting are different.
Accounting is essentially a constructive process which involves identifying, measuring,
recording, organizing, summarizing and communicating information about economic
events.
Auditing, on the other hand, is a critical (evaluative) process involving gathering and
evaluating audit evidences and communicating findings (about fairness of financial
statements) based on these evidences
The following points are helpful in understanding the difference between accounting and
auditing.
Main purpose - to aid management in achieving the Main purpose - the expression of opinion on
Forensic audit
The purpose of forensic audit is the detection or deterrence of a wide variety of
fraudulent activities. The use of auditors to conduct forensic audits has grown
significantly, especially where the fraud involves financial issues. Some examples where
a forensic audit might be conducted include:
Business or employee fraud,
Criminal investigation, Shareholder or partnership disputes,
Business economic losses and Matrimonial disputes (divorce proceedings).
For example, in a business fraud engagement, an audit might involve tracing funds or
asset identification and recovery. An employee fraud investigation might involve the
existence, nature, extent, and identification of the perpetrator of asset misappropriation.
A forensic audit can also be conducted to trace and locate assets in a divorce proceedings.