ow 09 09 10) 0 im HW i 12 12 13 production to Auditing (Unit 1) 7 _——— 1.1.1. Introduction The development of modern accountancy and the growth of auditing profession in India, and, indeed, in the world as a whole, must be seen in the context of the enormous expansion of industry and commerce, which has taken place since the Industrial Revolution. While business enterprises were comparatively small, and acre managed by theit proprietors, there was little need for the development of Complex accounting procedures. When the scale of operations increased and capital was invested in joint stock companies Py shareholders who took no part in the management of such companies, it became nesessi’y for the managers to © shareholders at regular intervals by means of annual present accounts to th accounts. of unsuecessful companies had an obvious of success of their companies from the accounting and resultant scandals. However, the managers (or directors) vested interest in hiding the lack shareholders: this led to fraudulent Governments therefore made provisions for the accounts of companies to be reported by persons other than the directors. In this way auditing was developed. ‘The continuing increase in the size of enterprises and the greater complexity of their accounting procedures, have made increasing demands on the skill of ations, Hence, it 18 required that accounts shall only be audited by qualified accountants, who are members of recognised professional bodies. 1.1.2. Origin of Auditing The term “Audit” is derived from the Latin word “audire’, which literally means, In the olden days whenever the proprietor of a business enterprise dependent persons were appointed to hear verbal explanations from those responsible for keeping the books of account, judge the facts, and thereafter on the basis of their examination announce the results of the enterprise to the owners. This practice was known to have existed in the ancient Feyptian, Greek, and the Roman civilisations. ‘to hear’. suspected a fraud, some ini Scope of audit was quite limited as during those days most businesses were small and owner-operated. Since these owners-managers had extensive first-hand knowledge of the business and its operations. they had little need for independent ait Ges chiefly interested in ascertaining whether all cash receipts and payments had been properly accounted for and checkin: possible employee fraud. shadjew of eax, operations, efficiency, der the purview of aude, Accoringly pect of each type of sh specified aut concerned with vetifieation of cost revonds procedures the objet of audit is to verify the ‘data and fo ser as a effective ol of the aim of aie to promote the Fg Soletrade,parsership fir ‘Thee ey be thee types of such ni “Audit of the Accounts of Sole Trader: A. sole proprietors. aio Jon as the sol ae or simply proprictrship sx ee of ins tot owned and un by oe sidan apd in which there m0are fs that husan, financial and piysical resoure®* manner, Under effeetiveness. apditor appraise ‘Ssh predetermined objesivesbenefits 6 the ‘8° Te, he whole year ound. fixed or otherwise, during the ae op interim audit such audits are iJerable, and have many poiats > dain disadvantages” curren doped where the ¥ altho areas unde? this type of aut rr e_ So errors ave located avearly SABE rings checking 8 very god ie coating De Cominuetmined ater certain regular of imeeMlat 4) Early Location of soon after the entries 8 frauds because boo intervalsavait becomes to mechanical becaus: terval is long, then © Disadvantages of Annual or Fi ‘he dsadvaniages of smnual or Delay in Andit Reports The de submitied in time. The decision wt nade on the basis of audited accoun ‘Complete Checking not Posse: nd every entry made checks fo save the tsiy Paria provides 0 particu area hich hp aim in elemento any dither reason, Useful t0 Compare the Fin Satemen are considered ine so ‘fa business concern oer the so 1.1.7. Advantages of Auditing Obasogs of sate ae pron bow 1D Detection and Drevenon of Ero 11.8, Disadvantages of Auditing ‘The disadvantages of auditing ae as under 1) Planned Frauds, eat: Som limped flab And forth aie ts noe ase th audited account can describe he toe un 2) Audited Accounting Informati Management exercises great “statements and alloesting resaut dit provides reasonable assurance these sctivi 3) Acceptability by the Authorities: Adied accounts are readily accepable ‘by the income iat, sales nx, another ethos, 3 ding Carte: sing Becearc eonpeeacern: in To veh anager eo PE omnia tol pour ae a Paves ane By tees Piscine oral A ig nsec sl fs en gen ees EE | ele doe mp ne ‘fl The management top many persons 4) No True Plture: The auditor is concerned with he fat figtes shown ja the books of accouns. When figures have heen manipulate, tbe ating ron i peuaucliedascouos | fals to dclose we picne. The pps of ole lele ote Te aff, LaHigh Costs The audit work should no8 exceed the cost taleeprise considers it as burde million of usiness enstien. 10) Concern with Past Actions: Auditing ih poesent or ness concem. Suc tost does ‘emerprise, It fails 10 suasest INTERNAL AUDIT am of audit by the internal auditor who 3 2 put me dos not work under any sort of MAnI ca dear understanding, of the duties 4.2.3. Objectives of Internal Audit “The abectvesof the ntermat audit canbe sursmarze 1) Independence: Tee intemal actor choalé organisational satu and personal bjeeiity performance of his duties, i tema audit unit should be appropitely salifeations and, caper, Daving itor should Be‘Step $: Communication: Throughout the proces, ‘aformed, and they will have an opportunity 10 «1 EE, een Aatg (0 Bese ks oe sia tn wee pe Seek ame tall to fespect af the vious of cheeckeng © 1.3.1. Meaning: cnet oe aie oe a ras a ome wee Se? me oa ‘ie eS carat po voll 8 Ser ar, fo pad te ing ei Sis fk divema, ee appara ae “ anon ; t t tt ¥ i i i ' 4 ft ‘teorng to Bomar Sate, "AR ull RRORRINDS 2 OWES ot pra Seerer bare # #8 OPS EMCETINE A is, 2 “s Recon weet omen Ses emi =e Se Saket {5 Pen pces yes Theat prraene inti Be dee oo ae ec foe ng tv st ne, em Soe erred “ eoand Te nt rogue oan ee SS ie Bese ten ton peed ar be ene mon TH ‘Bra won becomes es ors reat checking de wera seeeec meears Angi} Syst presi poy pep cm sn poo i ne Grete ace ad sche fringe. I Geay somrce proces Yo a Ge ICY Ad hee ‘Sein auRou! ue sl ons Complex Errors and Frauds Remal Routine checking is not economic ases; Routine checking is considered sed ‘Monotony: The wok is routine checking is beting and time consuming, flerks go on checking the totals and sub improve the performance of emplayee rather itformar im Be OAT WH oye a 4) Prenat and isla of inform Scam lees ch have aerial EERE On digg, final Stee srl i-aumber but may be importa, 1 Dg rs ae) peace n , Cereal the aide shoul! Mot esa to et hes ere cepion Wanton Sie) 166, Factors to be Considered before Starting to 74 Checking oe ie aaa. peop ee ooo Supe ee a once ee Soa see caren Se je eee eis Se eee Sood eee mini ne race ct ie Seatee tN ase 1 Mater of fm: ten Senos msl hed any mista ‘adog Bly o tens the dems of th tee of fn ‘etemin, The ena fchecting 6 bs adel oald epee an uray of te 4 ‘Trevioas Experience: Ki dhould ato be somsiders while det xan fe csi tec ae Spm existing ost at at he ange ha th ‘noses: tee Ba ‘etn Beegcoe eae checking ofthe details af valuation of i ‘oct encase 126% Auditor's Duty Regarding Test {es checking shot seth and tex bat i elves risk om thea f fhe ade. cesped the notice of the site Recaae eh ee Aico Ang Materia of tern =ust no escape iy ems seleciet shoul be vere in dat am im enna electing il hen eect. Tee il beam ate ‘Frauds rernniai oa nde te aur exci eumstances in combuetng et checkin, ‘He mast ean in thal eeckng ct ike dole ves Sid popety and with eons cae and cation nd ea es the ator will ot beheld sepa ar any ato he However, ithe tons sptiod inacrinimicy a Ce sputed fo ens sl fads dete abnequcy, 1.6.8. Advantages of Test Checking Tolling ar ibe advantages oftest checkin 1) Time Saving: he tent of test ehechng i avalale in the shape oF in svng. 4 simple of ems is chected awd reining item sre weed ‘hese Ia ths way hee ssi in ine, 2) ‘ese Ubon: The st choking is sf or vig in abou: lot of wok gues rn clerks fox comptes the dui Bt sl checking pal es fees 9 here ss nb ek, 9) Accurmiteaks: The tst checking is wif 19 moo the accuny of ‘couthier-noka and ctr recom. The a demand of tuts fice hehe Te watering is ep inherit anwton opens sey ‘Stal HeMicleney: Th effccney of arewnatg sa improves doe 1 test sfeckits, The weakness of employes reported te munepumens ee Employees ty fo impeove her work ty overcoming the defoeeee ‘Timely Report: The best of test chesking is ist teely epart an be ‘shit ode mangement The rg arte guns tan Recheck stot peso oft xb fhek no lay ‘Many Ault: Tes checking is weft compete many ass io es, ‘a8 lice time, which canbe vse to check the bouks of now eats ‘The audios able rake ore incre. ‘Special Adtentii: The seditr can poy special stention wy raporont ‘mater Test checking redues the Ishoor werk on the pt of so sal ‘Thee sistent me piod wo sete the porters, 16.9. Disadvs of Test Che Te ducvige sen gee Stare 2) Errors: The demerit of tet chocking ist cos are nat ath the pecs feet anf ee ac Om ferris te day of manage bt tek Frauds: The demerit of ws cheking is tht dicosed. The fant Ascovers is the =saec ‘ttl sve care sow ad ere a ee a 53) 8) %» 10) Auditing cannot shift Responsibility; ered hi auditor The demerit of test checking is that aS Fesponsibi is eront r ibility Of Management, The errors and frauds can Dor test cent per ce ‘ ; sible sean, Per cent checking, So auditor is responsibl Report: The aud jew of business auditor report may fail o disclose true and fair view of Bu rea port may fail to disclose true and ay auditor is After test the auditor si it : a igns checking the auditor report. responsible for audit report based on test cel Very Short Answer Type Questions do you mean by the term auditing? where docs the term audit origin? Define statutory audit? Whiat is private audit? What do you m an by window dressing? Define internal audit? What does audit programme mean? Whiat is audit notebook? Define routine checking? What do you mean by test checking? 1.7.2. Short Answer Type Questions 1) 2» 9) What are the features of auditing? What are the features of internal audit? Give the difference between internal audit and statutory audit? Define the contents of audit programme? What are the essentials of a good audit programme? Draw the specimen of audit notebook? Give the features of routine checking? What are the objectives of routine checking 8 are not suitable for tg 10) What are the auditoss duty regarding te i Detail the advantages and dis ‘Mustrate the types of