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Principles & Practices of Auditing, , , , PRINCIPLES AND PRACTICES OF AUDITING, UNIT -1 INTRODUCTION, MEANING OF AUDITING, , “Auditing is concerned with verification of accounting & financial records with view to, determine their accuracy & reliability”., , “ Detailed examination of books of accounts of an organization for a given period by an, , independent & qualified person, who with the help of vouchers, documents & information, given, whether the profit & loss a/c position & balance sheet exhibits a true & fair state of, affairs of the business or not”. i, , DEFINITION OF AUDITING |, , According to R.B. Bose “ Auditing may be said to be the verification of the accuracy &, correctness of the books of accounts by an independent person qualified for the job & not in, any way connected with the preparation of such accounts™, , According to Mautz “ Auditing is concerned with the verification of accounting data, with, determing the accuracy & reliability of accounting statement & reports”., , According to Montgomery “ Auditing is a systematic examination of the books & records of, a business or other organization in order to ascertain or verify & to report upon the facts, regarding the financial operation & the results thereof”, , According A.W Hanson” An Audit is an examination of such records to establish their, reliability & the reliability of statements drawn from them”., , , , CHARACTERISTICS OF AUDITING, , 1. Audit is a crucial review of the system of accounting & internal control, It is an organized & scientific examination of the books of accounts of a business, , 3. Audit is undertaken by an independent person or body of persons who are duly, qualified for the job, , 4. Audit is a verification of the results shown by the profit & loss account & the state of, affairs as shown by the balancesheet, , 5. Audit is done with the help of vouchers, documents, information & explanation, received from the authorities., , i, :, , , , , , , , SANGEETHA.N, Asst. Professor., SSCASC, Tumkur. Page 1

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Principles & Practices of Auditing, , , , , , OBJECTIVES OF AUDITING, , Objectives of Auditing, , Primary or main objective spbsidiary or Ancillary objective, , , , , , Detection & Prevention of Errors, Detection & prevention of Frauds, 1. Primary or Main objective:, The main objective of audit is to report ot the owners of the business whether the, balancesheet exhibits a true & fair view of the state of affairs of the company as at the end of, the financial period & the P/L a/c exhibits a true & fair view of the Profit & loss for the, financial period., , 2. Subsidiary or Ancillary objective:i. Detection & Prevention of Errors, ii. Detection & Prevention of frauds, , T Detection & Prevention or Errors, , Errors refers to unintentional misstatements or dis-description made in the books of accounts, by the account assistants., , Errors are reportedly committed innocently, an auditor should be very careful about it,, because sometimes, errors which might appear as innocent are the results of fraudulent, manipulation., , Types of Errors, , a) Technical Errors or Clerical errors, a) Errors of Principle, , a) Technical Errors or clerical errors:Errors which committed —, , ¢ Inthe course of récording transaction in the books of original entry such as the cash, book, purchase, sales book etc.,, , ¢ Incasting carry forward & balancing the subsidiary books, , ¢ In posting the entries from the books of original entry to the concerned accounts in the, ledger, , ¢ In the totalling or balancing ledger accounts., , SANGEETHA. N, Asst. Professor., SSCASC, Tumkur. Page 2, , , , , , , , , , RET, , , , , , boc, , , , i:, t

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Principles & Practices of Auditing, , Technical or clerical errors may be sub divided into three types, , i Errors of Omission, ii) Errors of Commission, iii) Compensating Errors, , i} Errors of Omission :- Errors which are arise on account of transaction not being, recorded in the books of accounts either wholly or partially are called errors of, omission., , Ifa transaction is completely omitted to be recorded in a subsidiary book , it is an, error complete omission. An error of complete omission doesn’t affect the, agreement of trail balance as both the aspects of the transaction are omitted from, the trail balance. Therefore such errors cannot be detected easily, an intensive, checking of the subsidiary books & the posting from subsidiary books to the, ledger is required., , ii) Errors of Commission:- when incorrect entries are made in the books of, accounts either wholly or partially, the errors are known as errors of commission., Eg:- the amount 535 might be entered as 355 in the books of original entry such, errors can be located while vouching the purchases with original invoices., , ili) Compensating Errors:- When the effect of one error is counter-balanced, set off, or compensated by another errors are known as compensating errors., Eg:- if salaried account is under cast by Rs. 150 & wages account is over cast by, Rs 150 the errors in salaries account is set off by the error in wages account. Such, errors detected only by through checking of different subsidiary books & ledger, accounts,, , b) Errors of Principle, Ifa transaction is recorded in the books of accounts against the generally accepted, principles of accountancy, the errors are known as errors of principle. As such errors, not disclosed by the disagreement of trail balance , they cannot detected by mere, routine checking., , II Detection & prevention of Frauds, , Fraud refers to intentional misstatements or mis-description made in the books of accounts by, the account assistants, with a view to cheat some body., , Types of Frauds, , a. Misappropriation, b. Fraudulent manipulation of accounts, , a. Misappropriation:it refers to dishonest use of another’s funds or property for one’s own use., Misappropriation may be sub divided into two types, , SANGEETHA. N, Asst. Professor., SSCASC, Tumkur. Page 3

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ii), , Principles & Practices of Auditing, , , , Misappropriation or embezzlement of cash, Misappropriation of goods, , Misappropriation of embezzlement of cash:, Refers to the fraudulent appropriations of belonging to another person by one, , to whom it has been entrusted or by one who handles it., , Different ways to misappropriating the cash, , (a) Non-disclosure of cash receipts:- recording the cash sales proceeds at a, figure lower than the actual cash sales proceeds. Omitting to record the, credit sales., , (b) Showing false cash Payments:- recording false cash purchase & pocketing, the amount, inflating the cash purchase i.e. at a figure higher than the, actual & pocketing the difference etc,., , Misappropriation of Goods:, It means the wrongful or fraudulent conversion or fraudulent application of, , goods by those who handle them., , Different ways of misappropriation of goods, , (a) Recording sales of larger quantities than actually supplied &, misappropriating the balance quantity., , (b) Recording purchase of large quantities, getting delivery of lesser quantities, & receiving the balance quantity privately., , b. Fraudulent manipulation of accounts:It is said to be committed when a person makes a false entry in the business records or, alters, erases, removes or destroys a true entry in the business records., Different ways of manipulations of accounts:, , POMS, , Cre:, , w, , Non-payment of depreciation on fixed assets, Provision of less depreciation on fixed assets, Provision of more depreciation on fixed assets, Over-valuation & under valuation of assets, , ation of secret reserves., , DIFFERENCE BETWEEN ACCOUNTING & AUDITING, , , , , , , , , , , , , , , , BASIS BOOK KEEPING & AUDITING, , ACCOUNTANCY, , 1.Period The book keeping & Auditing work is, accounting work is done generally undertaken at, continuously throughout the the end of the financial, year year, , 2.Nature of work The book keeping & Auditing is concerned, accounting work is constructive | with examination of past, in approach transactions., , , , , , SANGEETHA. N, Asst. Professor., , , SSCASC, Tumkur. Page 4

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Principles & Practices of Auditing, , , , 3.Recording of, business, transactions, , The book keeping &, accountancy is concerned with, current recording of business, transactions, , Auditing is concerned, with examination of past, transactions, , , , 4.detection of, , The book keepers &, , Auditors are required to, , , , accountants are the employees, of the concern., , frauds accountants are not expected to | detect frauds, detect frauds, 5.Status The book keepers & Auditors are the, , outsiders. The qualified, Chartered accountants., , , , 6.Remuneration, , The book keepers &, accountants are paid regular, salaries., , Auditors are given fee for, the specific work done., , , , 7.Qualification, , The book keepers &, accountants need not be, chartered accountants, , Auditors should be, Chartered accountants, , , , &. knowledge, , The book keepers &, accountants may or may not, have the knowledge of audit, techniques & procedures., , Auditors must have the, knowledge audit, techniques & procedures., , , , 9.Accountaney &, audit work, , The book keepers or, accountants cannot take up, both accountancy & audit work, , Auditors can take up both, accountancy & audit, work,, , , , 10.code of conduct, , , , , , The book keeping &, accounting work is not, governed by any code of, conduct prescribed by any, profession body., , , , Auditing work is, governed by code of, conduct prescribed by the, institute of chartered, accountants ., , , , CLASSIFICATION OR TYPES OF AUDIT, , 1 ON THE BASIS OF THE CONDUCT OF AUDIT, , a) Continuous Audit, b) Interim Audit, , c) Balancesheet audit, d) Final audit, , e) Partial Audit, , f) Occasional audit, , Il ON THE BASIS OF OBJECTIVE OF AUDIT, , a) Cash audit, , b) Cost audit, , c) Management audit, d) Special audit, , e) Operational audit, , SANGEETHA. N, , Asst. Professor., SSCASC, Tumkur., , Page 5