Audit is the procedure of checking and determining the accuracy, correctness, and completeness of financial record and their compliance with financial statements. In other words, we may say that auditing is art examination of the books of accounts and vouchers of a business.
origin of auditing
The work of audit originated, when the necessity was felt to set up some system of check upon the persons who recorded receipt, and disbursement of money on behalf of others. In the early stages of civilization. The methods of account were so crude and number of transactions to be recorded so small that each individual was able to check all the transactions himself.
From an early date, it was customary to perform an audit of the accounts of manors and estates, and the persons who performed this duty came to be known as auditors. The word auditor was originally derived from a Latin word "audire" which means hears as the accounting parties were required to attend before the auditor; who heard their accounts. Business men used to appoint auditors to hear accounts matters relating to their business. The auditors have %10 rely on die statements of the accounting staff regarding the receipt and payments: When Principles of double entry were introduced and published. in year 1494 at Venice by Luca Pacioli, the duties of the auditor correspondingly increased. With the passage of time,. there have been developments in the field Of accounting which resultantly made improvements in the field of audit. The increase in volume of trading Operations necessitated the use of more capital than was at the disposal of average trader; this induced them to Combine in partnership with Others for the purpose of obtaining the .requisite funds. This tendency was an important factor in the evaluator of a more Perfect system of accounts.In 19th Century, an enormous increase in trade occurred which led to the formation of joint stock companies involving the use of large sums of capital under the management of a few individuals. Under these conditions, the professional management started to be hired for running business, which resulted in the separation of ownership from business administration. These revolutions made the audit a profession.
The main purpose of audit is to express opinion about the correctness and reliability of accounts and the financial position of the business concerned. The auditor is an expert in the field of auditing. It is due to his expertise and independence of his professional opinion that audited accounts are treated as reliable not only by owners but also by the government, business community and general public. His attitude, training, principles and the procedures that he employs have enabled him to attain the-present high status that he occupies.
definition of auditing
Auditing is an examination of the books of accounts and vouchers of a business, which enables an auditor to satisfy himself that:-
Whether the balance sheet is properly drawn up so as to give a true and comet view of the state of the affairs of the business. and
Whether the profit and loss account gives true and correct views of the profit or loss for the financial period.
To satisfy himself in respect of the above-mentioned points, an auditor has to verify that the books of accounts contain a proper record of the transactions entered into by the organization. For this purpose, he has to exercise reasonable skill and diligence, and try to reach at a conclusion according to the best of the information and explanation provided to him.
Different experts defined auditing in different ways. One of the definitions given by"Montgomery", a leading American accountant, is described below:
"Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and to report upon the facts regarding its financial operations and the results thereof"
scope of auditing
Scope means the range of action. Hence the scope of audit means the actions taken by the auditor or procedures followed by the auditor to achieve the objectives of the audit.
The auditor determines the scope of an audit of financial statements, keeping in view the requirements. The scope of audit conducted in the private sector will differ from the public sector enterprise. For example, while caring out audit of the joint stock companies, auditor will take into account the requirements of legislation like Companies Ordinance 1984, other Government orders like ministerial directives etc. Hence the scope becomes the broader as compared to private entities as the latter has less legal requirements. However, the auditor should also obtain a statement in writing as to the nature and scope of the audit, he is to undertake.
The International Auditing Standard No.1 states determining the scope of the audit of a company: -
1. The procedures required to conduct an audit should be determined by auditors having regard to the legislation rules and regulations, framed by the statute of a country for safeguarding the interest of the shareholders.
2. International Auditing Standards issued by relevant professional bodies.
3. Regulatory of companies and terms of audit engagement and reporting requirements.
objects of an audit
The reliability of accounting data is very essential. Errors creep into data for various reasons. The users are not sure whether the data are correct and reliable or where and what errors are in the data. This shows the importance of verification of data by some independent person, who is not connected with their preparation. Therefore the primary object of an audit is to give an independent opinion on financial statements.
Detection of errors is the primary object of an audit. Chances of errors are always present in accounting. Sometimes the. errors are due to the negligence or carelessness of those responsible for maintaining records, sometimes due to the ignorance of such persons. Mistakes may occur in original documents, in copying from the. original records into the books or in the final statements prepared.form the books. Errors may be named as errors of omission, errors of commission, errors of principles, clerical errors, and compensating errors.
Detection of frauds is also a primary object of an audit. There are always chance of fraudulent manipulation of assets, deliberately omission of transactions, recording without evidence etc. Negligence on the part of an auditor may lead him to damages under the provisions of companies of ordinance 1984.
The objects of an audit may be described as:
i) Shareholders satisfaction. The aditors verify the accounts and financial statements prepared by the accounting department so that the shareholders feel satisfaction that these have been prepared in accordance with the recognized accounting principles.
ii) Discovery and prevention of frauds and errors.
iii) To satisfy the tax authorities.
iv) To satisfy the creditors.
In addition to the general routine objectives, there may be certain specific objectives.
i)To work out purchase or sale consideration.
ii)To determine defalcations
iii)To satisfy the new partner at his admission time and to satisfy new administration at the time of change of administration.
iv) To determine the performance and suggest best courses of action.
v)To satisfy loan giving agencies like banks etc.
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