AUDITING Auditing is a systematic and independent examination of data statements records operations and performances of an entity whether profit oriented or not and irrespective of its size or legal form and this examination is conducted with a view to expressing an opinion.
The scope of auditing is not restricted to financial information only , today it extends to variety of non-financial areas like marketing audit, personnel audit efficiency audit , production audit etc.
Audit is conducted by a Chartered Accountant.
Basic Principles Governing Audit
The basic principles of audit are:-
- Integrity, objectivity and independence.
- Skills and competence.
- Works performed by others.
- Audit evidence.
- Accounting system and internal control.
- Audit conclusion and reporting.
Fundamentals of Auditing
The principal aspects to be covered in an audit concerning final statements of account are the following:-
- Reviewing the systems and procedures
- Checking of the arithmetical accuracy of the books of accounts
- Verification of the authenticity and validity of transactions in the books of accounts
- Ascertaining that a proper distinction has been made between the items of capital and revenue nature
- Comparison of Profit and Loss, Balance Sheet and other documents with the underlying record.
Purpose of Auditing:-
The purpose of auditing is to enhance the degree of confidence of intended users in the financial statements. It ensures maintenance of adequate books of account and records, statutory register.
It is an independent management function which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements and add value to and strengthen the overall governance mechanism of the entity , including the entity risk management and internal control system.
Internal audit helps in:-
- Understanding and assessing the risks and evaluate the adequacies of the prevalent internal controls,
- Identifying areas for systems improvement and strengthening controls,
- Ensuring optimum utilisation of the resources of the entity,
- Ensuring proper and timely identification of liabilities
- Safeguarding of the assets
- Reviewing and ensuring adequacy of information systems and control
- Ensuring the compliance with internal and external guidelines and policies of the entity as well as the statutory and regulatory requirements
An external audit is a statutory audit of the organisation in which examination of the financial statements are done independently which are prepared by management. It is usually conducted for statutory purposes and reasons.
Scope of External Audit:-
- It safeguards the financial interest of persons who are not associated with the management of the entity whether they are partner or shareholders.
- It acts as amoral check on the employees from committing deflections' or embezzlement.
- Audited financial statements are helpful in setting liability for taxes, negotiating loans and for determining the purchase consideration for a business.
EXTERNAL VS INTERNAL AUDIT
BASIS OF DISTINCTION
External audit check whether the financial statement give a true and fair view with legal requirements.
Internal audit check whether business practices are managing its risks and meeting the strategic objectives of the entity.
External auditors are appointed by the shareholders of a company.
Internal auditors are usually the employees of the organisation.
The objective for an external auditor is usually defined by statute.
The objective for an internal auditor is set by management.
External auditors are responsible to the owners of the company, government or general public.
Internal auditors are responsible solely to the company's senior management.
Professional ethics consist of personal organisational and corporate standards of behaviour expected for professionals. Every professional has some enforced code of ethics which need to be followed to preserve the integrity of the profession.
Chartered Accountants as professionals are engaged in building trust to vast variety of users, whether shareholder, government, banks, investors, employees or others which impose a public interest responsibility on their profession. Like other professionals, Chartered accountant also has some set of code of ethics. A Chartered Accountant either in practice or in service has to abide by these ethical behaviours. They are expected to follow the fundamental principles of professional ethics while performing their job.
The sole purpose of professional ethics is to ensure and uphold this credibility, the whole foundation is its credibility, and the main ingredient of an auditor profession is independence .The code of ethics is a shield that enables us to command respectability.
No business or institution can effectively carry on their business without the help of proper records and acoounts ,since transaction takes place at different point of time with numerous person entities. It is more essential for those who have invested their money in the business but cannot take part in its management for example shareholders in a company ,such persons certainly need an assurance that the annual statements of accounts sent to them are fully reliable .It is auditing which ensures that the accounting statements are authentic . Audit is a powerful tool which works as a check for the entity performance over a period of time as to whether its financial statement is free from material misstatement or not.
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