WHAT IS AUDIT?

“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

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.

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.

Practical Auditing procedure to be Conduted:

Keeping a check on balances: The auditor has to make sure that the closing balances of the previous accounting period tally with the opening balance of the current accounting year. Discrepancy, if any, needs to be taken into account.
Supporting Documents: The auditor has to carry out a thorough check of transactions with relevant documentary evidences like vouchers.

Classification and Analysis: There should be an analysis of every transaction. For example, Purchase transactions, a company having a business of Television, makes purchases of televisions is considered as purchase of inventory (goods) whereas a company not dealing with television will treat the same purchase transaction as purchase of an asset. The auditor has to analyse and conduct the audit as per the nature of the client’s business.
TDS Application: Stands for “Tax Deducted at Source”. The auditor has to check various provisions as per the nature of the transaction and make sure that the exact amount is deducted.
GST: All the transactions and entries concerning the Goods and Services Tax must be accurately checked and reconciliation should be undertaken for differences, if any, by the company’s relevant concerned authority.
Assets: Assets of the business need to be verified. They should be correctly valued and present true and fair value.
Creditors: There must be a significant analysis relating to the creditors of the company. They must be classified as per time duration. The auditor has to find satisfactory reasons for the delay in the payments made to the creditors.
Provisions: The provision for depreciation is proper. The closing stock is physically verified and valued properly. Intangible assets like goodwill, copyright, trademark are written off properly. Expenses are not treated as revenue expenses and vice versa. Provision is made for all known losses and liabilities. Reserve is not shown as a provision.
Exchange Rates: The fluctuation in the rate of foreign exchange, if any, on the value of assets and liabilities is accurately recorded.
Rules and Regulations: If the circumstances indicate the possibility of existence of fraud and errors, the auditor should consider its potential consequences. If he or she is unable to obtain documentary evidences to confirm, he should consider the relevant rules and regulations before the expression of opinion.
Complete Disclosure: All the transactions are disclosed with atmost good faith. The assets are liabilities should neither be over valued nor undervalued.

Advantages of Audit:

Audited accounts are considered more reliable.
Errors and frauds are detected in time.
The management will write the accounts timely and take sufficient care to see that it’s accurate.
The guidance of the auditor helps the management.
Tax authorities, readily accept the audited accounts and the process of tax filing becomes less time consuming.
Claim of loss from the insurance company is easily settled if the accounts presented or audited.
There is quick sanctioning or approval of loans if the accounts are audited.

Disadvantages / Limitations of Audit:

Dependence on information and explanation given by the client’s staff which may not be always accurate.
The auditor has to rely on the opinions expressed by different professionals like lawyers, solicitors, engineers.
Audit is a post examination of the financial statements. Things have already happened, it is usually noted for future guidance.
The auditor cannot guarantee the future profitability and prospects of the company.
When the volume of transactions is huge the auditor cannot check each and every transaction, he or she may adopt test checking. In this system the financial transactions are examined at random which leads to the risk of undetected frauds and errors in the books of accounts, therefore, the auditors are somehow suspicious. Some errors in frauds may go and detected as all the transactions are not checked.

The test checking can be defined as “indepth checking of only a few selected items and to form an opinion about the quality of the accounts". If the items selected are accurate, the auditor can assume that the other entries are also accurate. For the success of test checking system, representative number of entries of each class is selected for checking. It is an accepted substitute of datailed checking which is applied where the volume of transactions is huge. Test checking is based on the theory of probability. If the selected sample is truly representative of the population it will yield reliable results.