Objectives of Auditing

KULBIR SINGH
Asst. Prof.
 Introduction
The word, ‘Audit’ is derived from the Latin term
“audire” which means to hear. Audit is a thorough
review of a department’s records and reports, in order to
verify that assets and liabilities are properly recorded on
the balance sheet and all profits and losses are properly
assessed. To meet the objectives of Audit, verification of
revenue, expenditure, bank deposits, bank
reconciliations, accounts payable and accounts
receivable, cash, loans and advances, disbursement and
regular transactions is very necessary.
Auditing refers to a systematic and independent examination
and verification of books, accounts, documents and vouchers
of an organization to ascertain how far the financial statements
present a true and fair view of the concern. It also attempts to
ensure that the books of accounts are properly maintained by
the concern as required by law.
 Definitions of Auditing
• According to the ICAI, “Auditing is defined
as a systematic and independent examination
of data, statements, records, operations and
(financial or otherwise) of an enterprise for a
stated purpose.
• According to R. K. Moutz, "Auditing is
concerned with the verification of accounting
data with determining the accuracy and
reliability of accounting statement and record."
 Objects of Auditing
• A. Primary Objectives of Audit
• B. Subsidiary Objectives of Audit
A. Primary Objectives of Audit
The main objectives of Audit are known as primary objectives
of Audit. They are as follows:

• Checking arithmetical accuracy of books of accounts,

verifying posting, costing, balancing etc.
• Verifying the authenticity and validity of transactions.
• Checking the proper distinction of capital and revenue
nature of transactions.
• Confirming the existence and value of assets and liabilities.
• Verifying whether all the statutory requirements are
fulfilled or not.
• Proving true and fairness of operating results presented by
income statement and financial position presented by
balance sheet.
B. Subsidiary Objectives of Audit:-
i. Detection and prevention of errors:
The majority of errors are those mistakes which are committed
due to carelessness or negligence or lack of knowledge or
without having vested interest. Errors may be committed
without or with any vested interest. So, they are to be checked
carefully.
Following are the errors:-
Errors of principle
Errors of omission
Errors of commission
Compensating errors
Errors of Duplication
 Errors of principle
• Such errors occur due to lack of knowledge about the
Accounting principles
• Such errors include wrong posting of entries
• Wrong valuation of assets, wrong allocation of income and
capital
 Errors of omission
• When any transaction is completely omitted from being
recorded in the primary books of accounts
• This will not affect the trial balance
• The entry doesn’t appear in the books of accounts
• Its very difficult to deduct such type of error
 Errors of commission
• Such errors occur when a transaction is wholly or partially recorded
in the wrong books of accounts
• This error include wrong entries, wrong balancing, wrong posting etc
• It is very difficult to deduct the error as the trial balance remains
tallied
 Compensating errors
• When two or more error disappear the effect of each other.
• When the error in one account balance out an error in another
account, then such error are referred to as compensatory errors.
• This type of error will be deducted only through in-depth
examination by the Auditor
 Errors of Duplication
• Errors occur when the same transaction is entered twice in the books
of accounts
• And same posted in the Ledger
• This type of error occurred due to the lack of knowledge and
confusion of the clerk
The above mentioned errors can be deducted in the
following way
• Checking the Totals of trial balance
• Finding the amount of difference by totaling the both sides
• Halving the amount of difference
• Checking of journal and ledger
• Checking of subsidiary books
• Checking the balance of ledger
• Checking the posting of subsidiary book like, purchase
book, sales book etc
• Checking the opening entries
• Checking the allocation or division of capital income and
revenue income.
ii. Detection and prevention of frauds
Frauds are those mistakes which are committed
intentionally and with the aim of harming the
organization and with some vested interest on the
direction of top level management. Mistakes and
errors in the books of account which have been
committed in a planned manner and with the view of
deceiving others are known as frauds. Frauds always
committed by intelligent and smart person.
Such frauds are as follows:-
Misappropriation of cash
Misappropriation of goods
Manipulation of accounts or falsification of accounts
without any misappropriation:
Misappropriation of cash
• Not recording cash sales in the books of accounts
• Not recording extraordinary receipt of cash in the books of
accounts
• Making fictitious entries the customer account relating to
discounts, returns, bad debts etc.
• Teeming and lading.
• Recording fictitious cash purchase
• Making false entries in the account book
• Making entries for false donation, charity.
• Making false bill or over amounted bill for purchased goods
and other expenses
• Not recording discounts received from creditors
Misappropriation of goods
• Using the organization’s goods for personal purpose
• Stealing goods from the store
• Not entering the goods received as sales return
• Over issue of goods
• Removing certain goods on accounts of purchase return
Manipulation of accounts or falsification of
accounts without any misappropriation:
• Provision of less depreciation on fixed assets
• Non provision of depreciation on fixed assets
• Over valuation or under valuation of fixed assets
• Providing inadequate provision for bad debts
• Not recording current year’s accrued expenses etc.
• Not included income in the books of accounts
• Creating secret reserves
• Recording revenue expenditure as capital
expenditure
iii Under or over valuation of stock:- Normally such
frauds are committed by the top level executives of the
business. So, the explanation given to the Auditor also
remains false. So, an Auditor should detect such
frauds using skill, knowledge and proper examining
the books of accounts and facts.
iv Other objectives:-
• To provide information to income tax authority
• To satisfy the provision of company Act
• To have moral effect on employees
• Prevention of frauds and errors
Thanks