Verification in Auditing
Auditing is a systematic examination or verification of assets and liabilities involved in the accounting process. It is usually performed by an auditor to make sure every department records documented transactions and specifically free from any fraudulent activity. Auditing can be done internally and externally. Intra department auditing is more frequently done within the department by either the chief of the particular department or any trustworthy employee.
In the case of external auditing, an outsider is preferred to cross-check the account books modestly. Importantly, an auditor has to be remarkably sterile in his job without rendering any kind of partiality towards an organization. Verification of assets and liabilities doesn't only mean reviewing account books but also internal systems or control of an organization.
Who Should Initiate Auditing?
However, in India, anyone who is professionally a chartered accountant from The Institute of Chartered Accountants of India (ICAI) can do the auditing independently in any firm. Vouching is reckoned to be the backbone of auditing since it aids in detecting frauds or fallacies to provide enhanced results in balance sheets or income statements. Therefore, this proves the importance of vouching in auditing
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Basic Principles in Auditing
There are 7 basic principles which the auditors prominently adhere for a better and profound audition:
1. Morality, Objectivity, and Independence.
It is the responsibility of the auditor, to be honest, and sincere while he is auditing and importantly he is not allowed to favour the organization. He must not indulge himself in any kind of malpractices and must remain unbiased throughout the whole process of auditing. The next major principle is independence. So the auditor is independent and unbiased the whole process of auditing.
2. Confidentiality or Non-disclosure.
The auditor gets full access to the organization's sensitive financial information. So he needs to respect it.
He cannot let any other party get access to this information unless the law allows it. The organization trusts him entirely so he has to be more careful with their certificates and documents.
3. Capabilities and Skill
The auditor must be qualified in the field of auditing and he must be updating himself about the new announcements and changes. If required he can take training and workshops to know the procedures in a better way.
4. Work Performed By Others
The auditor has many employees who work under him. But then the auditor will be fully responsible even if his workers had worked for him. And so he must be accurate in his work and review it properly.
5. Documentation
The auditor needs to maintain a record of his auditing files concerning his auditing work as it may serve as evidence that the auditor has done his work. And also the clients can check on his work.
6. Assurance and Controls
The auditor must be sure that the financial status of the company is fair and true. He also must ensure all the material information has been recorded properly in the respective accounts.
7. Audit Evidence
To support his final opinion, the auditor himself must collect the required evidence. This collection is made from compliance and substantive procedures
And there are two sources of this evidence, they are internal and external. The external evidence is always more dependable.
Verification in Auditing
Verification in auditing is a mandatory process, which involves active verification of assets and liabilities. For instance, it may demand weighing, identification, and counting of assets. Verification of assets and liabilities verifies the following conditions:
Precise recording
Validity
Legal ownership and possession
Freedom from hindrance or encumbrance
Valuation of the asset.
Solved Example
Q. Explain the physical verification process involved in Auditing.
Answer: Certain things has to be physically verified to preserve the same which many include
Capital-in-hand
Stock-in-hand
Land and building details
Plant and machinery
Depositions and investments
Security
Bill details
This process is legislated by law in certain countries. Verification in auditing can be done either on-site or off-site. On-site verification requires the physical presence of the auditor. In off-site verification, the auditor may not be physically present but the investigation or enquiring ought to take place in any online mode.
Did You Know?
Walter Diemer was an accountant who invented chewing gum in the year 1928. Before manufacturing the successful athletic shoe, Nike co-founder, Phil Knight conferred suggestions with his accountant. History ascertains that double-entry bookkeeping was invented in the 13th century. Likewise, internal auditors were auditing their own company even before the 15th century. As soon as commerce and industry evolved, control measures and audits came into action.
FAQs on Key Aspects Covered by Auditing Principles
1. What are the fundamental principles that govern an audit?
An audit is governed by several core principles to ensure its quality and reliability. The key principles, as per professional standards, include:
- Integrity: The auditor must be straightforward and honest in all professional and business relationships.
- Objectivity: An auditor must not allow bias, conflict of interest, or undue influence of others to override professional judgments.
- Professional Competence and Due Care: The auditor has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client receives competent professional service.
- Confidentiality: Auditors must respect the confidentiality of information acquired as a result of professional and business relationships.
- Professional Behaviour: An auditor must comply with relevant laws and regulations and avoid any action that discredits the profession.
- Independence: This is a cornerstone of auditing, requiring the auditor to be, and to be seen as, free from any interests that might be regarded as incompatible with integrity and objectivity.
2. What is the primary difference between Vouching and Verification in auditing?
While both are crucial aspects of an audit, vouching and verification serve different purposes. Vouching is the process of examining documentary evidence (like invoices, receipts, and vouchers) to confirm the authenticity and accuracy of transactions recorded in the books of accounts, primarily focusing on Profit & Loss account items. In contrast, Verification is a broader process that aims to confirm the existence, ownership, valuation, and possession of assets and liabilities listed on the Balance Sheet. Vouching checks the transaction; verification confirms the asset's reality.
3. What are the main stages involved in conducting a financial audit?
A typical financial audit process is conducted in four key stages:
- Audit Planning: In this initial phase, the auditor gains an understanding of the client's business, assesses risks, and develops an overall audit strategy and plan.
- Internal Control Assessment: The auditor evaluates the effectiveness of the company's internal control systems to determine the extent of testing required.
- Substantive Procedures: This is the evidence-gathering stage, where the auditor performs detailed tests of transactions and account balances. This includes procedures like vouching and verification.
- Audit Reporting: In the final stage, the auditor evaluates the findings, forms an opinion on the financial statements, and issues a formal audit report that communicates this opinion to shareholders and stakeholders.
4. Why is 'professional scepticism' considered a crucial aspect for an auditor?
Professional scepticism is a critical mindset for an auditor, not just a procedure. It means having a questioning mind and being alert to conditions that may indicate possible misstatement due to error or fraud. It is crucial because it prevents the auditor from being overly reliant on management's explanations and encourages a thorough, critical assessment of audit evidence. Without this scepticism, an auditor might overlook red flags or accept incomplete evidence, ultimately failing to identify significant issues in the financial statements.
5. How do auditing principles provide assurance to investors and other stakeholders?
Auditing principles are the bedrock of trust in financial markets. They provide assurance by ensuring that the audit is conducted with a high level of professionalism and objectivity. For an investor, knowing that an independent auditor has examined the financial statements according to principles like Integrity, Objectivity, and Independence gives them confidence that the information is free from material bias and represents a fair view of the company's financial health. This credibility is essential for making informed investment decisions.
6. What is the importance of 'audit evidence' and what are its different types?
Audit evidence is the foundation upon which an auditor's opinion is built. Its importance lies in the fact that it substantiates the auditor's findings and conclusions about the financial statements. An audit opinion without sufficient and appropriate evidence is worthless. Key types of audit evidence include:
- Documentary Evidence: Invoices, contracts, and bank statements.
- Physical Evidence: Gained from the physical inspection of tangible assets, like inventory or equipment.
- Testimonial Evidence: Written or oral statements from the client's management and employees (e.g., representation letters).
- Analytical Evidence: Derived from analysing relationships and trends in financial and non-financial data.
7. Can an audit guarantee that a company is completely free from fraud?
No, an audit cannot provide an absolute guarantee that a company is free from all fraud. An audit provides reasonable assurance, which is a high but not absolute level of assurance. This is due to the inherent limitations of an audit, such as:
- The use of sampling rather than testing 100% of transactions.
- The possibility of collusion and sophisticated concealment of fraud.
- The fact that audit procedures are designed to detect material misstatements, so minor frauds may go undetected.
- Management's ability to override internal controls.
Therefore, while an audit significantly increases the likelihood of detecting major fraud, it does not eliminate the risk entirely.
