Introduction: Auditing and Investigation

Auditing and Investigation:

            Sometimes students get an impression that auditing and investigation mean the same thing. There is a lot of difference between the two. Investigation means a searching inquiry into the profit-earning capacity or the financial position of a concern or to find out the extent of the fraud if there is any suspicion about it and so on.

1. Audit is conducted to find out whether the balance sheet is properly drawn up and exhibits a true and fair view of the state of affairs of a concern while investigation is carried out with a certain object in view, e.g., to find out the profit-earning capacity, or the financial position of a concern or a fraud and the extent thereof.           
2. investigation covers several years, say, 3, 5, or 7 years to find out the average earning capacity, financial position, etc., of a concern while audit usually relates to one year.
3. Investigation may be carried out on behalf of outsiders while audit is conducted on behalf of the proprietors only. However, investigation may also be carried out on behalf of proprietors in some cases where fraud or defalcation is suspected.

We shall, however, deal with this topic in detail, in the chapter on “investigation”.

Introduction: Difference between Book-keeping, Accountancy and Auditing

Difference between Book-keeping, Accountancy and Auditing:

            Before we proceed further, it is considered necessary that one should understand the difference between Book-keeping, Accountancy and Auditing:

1. Book-keeping is an art of recording the business transactions in the books of original entry and the ledgers.

On the other hand accountancy means the compilation of accounts in such a way that one is in a position to know the state of affairs of the business.

But auditing means the verification of book entries and accounts to find out their accuracy. It is neither book-keeping, nor accountancy.

2. The spade work is done by the book-keeper and the accountant while the finishing touch is given by the auditor or, as has been said, that where the work of an accountant ends, the work of an auditor begins.
3. Sometimes an auditor is asked to prepare from a set of books the trial balance, profit and loss account and balance sheet in which case he would be acting as an accountant and he would not be required to give his certificate at the foot of the balance sheet. He has simply to put his signature in token of his having prepared such a profit and loss account and balance sheet. On the other hand, an auditor has not to prepare the trial balance, profit and loss account and balance sheet. He is to report whether the profit and loss account and the balance sheet prepared by the accountant exhibit a true and fair view of the state of affairs of the concern and in the case of a company, they are drawn up according to the Companies Act.
4. A book-keeper and an accountant has to record the transactions in the books of accounts while an auditor has to check and verify such transactions and accounts and send a report to the persons who appointed him.

Introduction: Definition of Auditing

Definition of Auditing:

            The word “audit” is derived from the Latin word “audire” which means “to hear”. In olden times, whenever the owners of a business suspected fraud. They appointed certain persons to check the accounts.

            THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

                        In its publication of the Statement of Standard Auditing Practices: Basic Principles Governing an Audit (SAPI) describes audit as “the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such examination is conducted with a view to expressing an opinion thereon”

            MONTGOMERY, a leading American accountant, defines:

                        “Auditing is 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”.

            On a reading of these definitions, one can appreciate the following points as reflected in them:

(a)    Auditing is to express an opinion on the quality of financial statements. Financial statements generally mean the balance sheet and profit and loss account. The financial statements of any entity may be subject to audit so that credence is added to them. The entity may be business organizations with profit motive or organizations with non-profit motive. They may be of any forms of organizations or companies or co-operatives where audit is compulsory of sole proprietorship or partnership where auditing is sought after by the entities voluntarily.

(b)   The opinion on financial information is expressed after careful examination of books of account, documents, records and vouchers. That is, before an opinion is pronounced evidence is gathered and tested to form the basis for framing an opinion.

From the above discussion, it is clear that the term audit generally implies audit of financial statements. Hence it can be concluded that the audit means critical and intelligent examination of facts-financial or otherwise, to give in the form of certificate or report an attestation, an expert opinion or an expert advice.