Preparation for Audit: Meaning of Audit, Preparation, Ultimate Stepts To Conduct An Audit.

What is a Financial Audit?

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Audit is an independent examination of the books of accounts undertaken by independent external auditors to check the accuracy, credibility,reliability of the financial statements.

A financial audit is undertaken to examine the true and fair position of the organization. it is undertaken with the view that whether the stated financial reports depict a true and fair position of the organisation.

“Audit is an examination of accounting records, undertaken with a view to establishing whether the correctly and completely reflect the transactions to which they purport to relate.” Prof. Dickers
“Auditing is concerned with the verification of accounting data, determining the accuracy and reliability of accounting statements and reports.” R.R. Mautz 
“Long range objectives of an Audit should be to serve as a guide to management's future decisions in all financial matter such as controlling, forecasting, analysing and reporting. These objectives help the business unit to improve its performance.” Arthur W. Holme
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  • Auditing is nothing but the systematic and critical examination and verification of the books of accounts. It can be undertaken throughout the year or periodically.
  • The primary aim is to find out whether the financial statements exhibit a true and fair view of the business.
  • Origin of the term audit is said to be in the Latin term audire which means to listen.
  • Audit of accounts by a duty qualified chartered accountant is mandatory for the registered joint stock companies, public trusts, bigger co-operative societies and for income tax and VAT tax payers above a particular limit.
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Objectives of Audit:

  • To find the reliability of the financial position and profit and loss statement.
  • To check whether the financial statements of the company present a true and fair view.
  • To check whether the financial statements are kept as per the provisions of the relevant Act.
  • Verification of the entries with the relevant documentary evidences.
  • To check whether all the money received is accounted for or not and all the payments made have proper supporting documents.
  • To conduct an independent review of financial statements.
  • Auditor has to examine the prevailing internal control and internal check systems prevalent in the organisation and must check the arithmetical accuracy of the books of accounts.
  • The auditor has to check the physical existence of various assets shown in the balance sheet and check whether they present a true and fair value.
  • After checking the accounts the auditor has to express his or her personal judgement on the maintenance of the books of accounts.
  • The company who audits its financial statements on a timely basis builds a good reputation and goodwill.
  • Helps the stakeholders with decision making as audited accounts are considered more reliable.
  • To detect and prevent frauds and errors.
The main difference between the two is that errors are generally committed due to lack of knowledge and are considered to be innocent, whereas, frauds are committed intentionally.

PREPARATION FOR AN AUDIT?

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  • Planning is thinking well before commencing any activity. We all think before doing any important work. Audit of accounts being an important job the auditor things in advance before starting any audit and prepares a detailed plan of action.

Necessary Steps:

Before the commensement of any new audit ,the auditor must take the following steps:

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1. Ascertain the scope of duties: To start with, the auditor should assertain the exact nature and scope of his or her duties. This question does not arise in case of a statutory audit as his or her duties are enumerated in the concerned law only.For example; when an auditor is appointed to audit the accounts of a joint stock company, there are provisions in the Companies Act, about the duties, rights of an auditor. However, if a concern in which audit is not legally mandatory, auditor must communicate or discuss the scope of his or her duties with the management of the concern.

2. Acquisition of Appointment letter: Before the commencement of the audit work, the auditor must obtain his or her appointment letter from the client. Such letter should consist of his or her duties, remuneration, duration allowed to complete the job. Engagement letter leads to an audit contract.

3. Nature of the client’s business: Each and every business has its own special and unique features. Hence, business follows and accounting system that suits its needs. There is no one uniform accounting system that can be followed by every business organisation. So the auditor before commenting his auditing work should study the special problems of the business unit and the system of accounts prevalent in the organisation.

4. Obtain a list of accountable officers: The auditor should obtain a list of responsible and accountable officers, so that, while going through the audit procedure, if the auditor needs any information or clarification on any specific point, he can directly contact the concerned officer. Auditor should also obtaine information about the extent and scope of authority of each of them.

5. Knowledge of technical details: The auditor should also acquire some knowledge about the technical details of business. This will help him or her to understand and analyse the nature of the transactions while auditing them.

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6. Inquiry into special circumstances, if any: Should enquire into special circumstances surrounding his appointment. In case he or she is appointed in place of another auditor it is his professional duty to communicate with him.

7. Instructions to the client:

  • Accounts should be finalized and kept ready for audit.‌
  • Necessary schedules be prepared and made available. For example: list of debtors and creditors, fixed assets, outstanding incomes, incomes received in advance, cost of acquisition and market price statement of deferred revenue expenditure etc.‌ The auditor should also ask to produce the final accounts of last two three years with auditor’s report.
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