What is Meant by Auditing?
The audit meaning or the concept of auditing can be defined as the verification of certain data of accounting by the determination of the accuracy and the reliability of the statements and reports of accounting.
Principles of Auditing
There are certain principles of auditing which must be governed properly. The proper procedural structure of inspection has principles and these are the basics of auditing or the Auditing and Assurance Standards (AAS). So the principles of auditing standardize the professional responsibility of the auditor which needs to be carried out. The basic principles governing an audit are namely integrity, objectivity and independence, skills and competence, confidentiality, work that are performed by others, planning, documentation, audit evidence, internal control and accounting system, and lastly, audit conclusions and reporting. These constitute the basic principles of auditing.
Features of Auditing
Some of the features of auditing are:
The basics of auditing is an orderly procedure. It is a coherent and logical strategy to analyse the records of an association for their precision. There are rules and strategies to follow.
The audit is constantly done by an autonomous position or an assemblage of people with important capabilities. They must be autonomous so that their perspectives and conclusions can be fair-minded.
Indeed, an audit is the assessment of the considerable number of books of records and money-related data of the organization. So it is a confirmation of the final accounts of the association, for example, the profit and loss articulation and the balance sheet toward the finish of the financial year.
One of the most important characteristics of auditing is that audit is not just the survey of the books of records but also the inside frameworks and interior control of the association.
To direct the audit we need the assistance of different sources of data. This incorporates vouchers, documents, endorsements, polls, clarifications and so on. The auditor may investigate some other reports he sees fit like Memorandum of Association, Articles of Associations, vouchers, minute books, investors register and so forth.
Features of auditing also consist of the fact that the auditor should associate himself with the precision and genuineness of the financial statements. At that point, he would be able to offer the input and confirm that they are valid and reasonable articulations.
Advantages and Disadvantages of Auditing
Some of the advantages of auditing are:
Assurance to the Investors:
The greatest preferred position of auditing is that it offers confirmations to the proprietors, financial specialists, investors etc. The proprietors of the business will be guaranteed about the precision of their books of records.
Errors and Frauds:
A blunder is something that is managed without the expectation of the organization’s extortion. It is a conscious misrepresentation. During the procedure of auditing, both errors and fakes are found. Auditing forestalls blunders and frauds like these. It makes a dread of being identified.
Moral Check:
One of the different points of auditing is that the staff of the organization do not attempt to swindle the organization. They are under consistent investigation since they realize that the records will be audited. Any anomalies can be distinguished during such an audit. This helps the staff in being straightforward and capable consistently.
Independent Viewpoint:
If the auditor is an external auditor, the business can hear the second point of view on their budget reports and the monetary remaining also.
Stakeholders’ Confidence:
In the wake of inspecting, partners like loan bosses, speculators, banks, debenture holders etc, can depend on the books of records with more certainty. Thus during auditing by an autonomous power, the budget reports have greater believability.
Limitations of Auditing or Disadvantages of Auditing
Some of the limitations of auditing are:
Cost Factor:
One of the main disadvantages of auditing is that an exceptionally intensive and detailed audit would be an expensive programme. So the auditor needs to constrain the extent of his audit and use strategies like examining and test checking.
Time Factor:
Auditors for the most part chip away at a certain course of events because of legal prerequisites. This implies that the auditor needs to audit an entire year's records in half a month. Thus deficient time is one of the fundamental restrictions of auditing.
Inconclusive Evidence:
The limitations of auditing include that the audit proofs the evaluator gathers are convincing in nature but not definitive. So there will never be a penny per cent convincing proof as a rule while auditing.
FAQs on Audit: Meaning and Definitions
1. What is the precise definition of auditing as per the Commerce syllabus?
Auditing is a systematic and independent examination of financial information of any entity, whether profit-oriented or not, irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon. In simpler terms, an auditor checks the accuracy of a company's financial records to ensure they present a true and fair view of its financial position.
2. What are the primary objectives or importance of conducting an audit?
The importance of auditing lies in its objectives, which enhance the credibility of financial statements. Key objectives include:
- Verification of Accounts: To check that the accounts are accurate and complete.
- Detection of Errors: To find and rectify unintentional mistakes in accounting records.
- Detection of Fraud: To identify and prevent deliberate misrepresentation of financial data.
- Statutory Compliance: To ensure the business adheres to legal requirements like the Companies Act, 2013.
- Independent Opinion: To provide stakeholders (investors, government, lenders) with an unbiased opinion on the financial health of the organisation.
3. What is the fundamental difference between an internal audit and an external audit?
The fundamental difference lies in the auditor's relationship with the company and the audit's purpose. An internal audit is conducted by employees of the company or a firm hired specifically for this purpose to review operational efficiency and internal controls. In contrast, an external audit is performed by an independent, third-party auditor to provide an unbiased opinion on the company's financial statements for external stakeholders, as required by law.
4. How does auditing differ from accounting? Are they the same activity?
No, auditing and accounting are distinct but related functions. Accounting involves recording, classifying, and summarising financial transactions to prepare financial statements. It is a constructive process. Auditing begins where accounting ends. It is an analytical and critical examination of the financial statements that have already been prepared by the accountant to verify their accuracy and fairness.
5. What are the key steps involved in the audit process?
The audit process is a structured sequence of actions. The key steps include:
- Audit Planning: Understanding the client's business and assessing risks to create an audit strategy.
- Internal Control Examination: Evaluating the company's internal control systems to determine the extent of testing required.
- Substantive Procedures: This involves detailed testing of transactions and balances, a process known as vouching and verification.
- Audit Reporting: Concluding the audit and forming an opinion, which is then communicated to stakeholders through the auditor's report.
6. Why is an audit not a guarantee of 100% accuracy in financial statements?
An audit provides 'reasonable assurance,' not an absolute guarantee, due to inherent limitations. The auditor does not check every single transaction; instead, they use test checking or sampling. Furthermore, audits can be limited by the possibility of collusion in fraud, the use of management estimates, and the persuasive (rather than conclusive) nature of audit evidence. The concept of materiality means auditors focus on errors significant enough to mislead a user, not every minor mistake.
7. Can you provide a simple, real-world example of what an auditor does?
Imagine a retail store claims to have sold 1,000 units of a product for ₹10,00,000. An auditor would perform checks like:
- Vouching: Matching the sales entry in the books with original evidence like sales invoices, cash memos, and bank statements to confirm the transactions actually occurred.
- Verification: Physically counting the remaining inventory to ensure it matches the records (Opening Stock + Purchases - Sales = Closing Stock).
If the records and physical evidence align, the auditor can confirm the sales figure is reliable.
8. What is the significance of the term 'true and fair view' in auditing?
The term 'true and fair view' is the cornerstone of an auditor's opinion. 'True' implies that the financial statements are free from material misstatements and accurately reflect the transactions that have occurred. 'Fair' implies that the information is classified, presented, and disclosed in accordance with the established accounting standards, providing an unbiased and clear picture of the company's financial status. It is the ultimate objective of an audit.
