CLASSIFICATION OF AUDIT

The Audit may be classified different classes on the basis of following:

(A)   Legislative Control:

On the basis of legislative control the audit may be classified into three types. These are:

i)        Statutory Audit:

Where the appointment of auditors, manner of audit, contents of audit report etc. are specifically mentioned in any enactment, the audit conducted with reference to them is called statutory audit. Statutory audit is compulsory audit and is to be carried out each year by an auditor called statutory auditor.

ii)       Govt. Audit:

The audit of account of states, Government departments, undertakings, local bodies are done by Government auditors. The appointment of auditor is as per the articles of the constitution of the country. Under this act the President shall appoint the Comptroller and Auditor General, who is the prime authority in the audit hierarchy of Government accounts.

iii)     Private Audit:

In this case there is no statutory or constitutional compulsion to get the accounts audited. For example, the sole proprietors, partnership firms get their accounts audited without compulsion in view of advantages of having audit.

Continued...

OBJECT OF AN AUDIT

“The Auditing and Assurance Standard: Objectives and scope of Audit of Financial Statement-AAS 2” of the Institute of Chartered Accountants of India specifies that the objective of an audit is to express an opinion of financial statement. To give the opinion about the financial statements, the auditor examines the financial statement to satisfy himself about the truth and fairness of financial position and operating results of the enterprise.

The objectives of audit can be categorized into:

 

I.      Main objectives:

The main objective of audit is to express opinion on financial statement. Suppose an entity prepares balance sheet to portray its financial position as well as prepares P& L account to disclose the operating results of the period covered in the statement. These financial statements are submitted to the auditor for his checking and comment. The auditor checks them in a careful manner with utmost diligence and professional competence.

 

II.      Secondary objectives:

The secondary objectives are as follows:

1.      Detection and prevention of errors:

Errors are generally innocent but sometimes errors which might appear, at first sight, as innocent are ultimately found to be due to fraudulent manipulation and therefore an auditor must pay particular attention to every error, however, innocent it may appear to be at first sight. The following are the various types of errors:

i.  Clerical Errors: These errors are committed in posting, totaling and balancing. Such errors may again be subdividedinto: 

(a)  Errors of Omission: 

The error of omission is one where a transaction has not been recorded in the books of account either wholly or partially. It will not be easy to detect these types of error and it will not affect the trial balance. 

(b)  Errors of Commission: 

When a transaction has been recorded but has been wrongly entered in the books of original entry or posted in eh ledger, error of commission is said to have been made. 

Example: A purchase invoice for $ 1250 was entered in the purchase book as $ 1520. Other errors of commission are wrong castings calculations, postings, extentions etc. 

ii.Errors of Principle:  

Such errors arise when the entrys are not recorded accordin to fundamental principles of accountancy, e.g., wrong allocation of expenditure between capital and revenue. Such errors may be committed either intentionally, or unintentionally. If they are committed intentionally, the object is to falsify and manipulate the accounts either to show more profits or les profits than they actually are.

iii. Compensating Errors or Off-setting Errors: 

A Compensating error or Off-setting error is one which is counter-balanced by any other error or errors, e.g., If A’s account was to be debited for $ 100 but was debited for $10 while B’s account which was to be debited for a total sum of $ 10 was debited for $100. Thus both the account have been debited for a total sum of $ 110 which amount ought to have been debited or a sale of $ 10 to A is posted to the debit of B as $ 5, abd the purchases book is over-cast by $ 5. Again,  an over-casting of an account may be counter-balanced by the under-casting of another account to the same extent. Thes errors are most dangerous and are difficult to guard against. This type of error will not be detected by the trial balance. Such an error will not affect the trial balance and will not be detected by the trial balance. Such an error will not affect the trial balance and will not be detected easily. This error may or may not effect the profit and loss account. 

iv.Errors of Duplication: 

Such errors arise when an entry in a book of original entry has been made twice and has also been posted twice.

Continue...

OBJECT OF AN AUDIT(2)

2.      Detection and prevention of frauds:
Fraud means false representation or entry made intentionally or without belief in its truth with a view to somebody.

Detection of fraud is considered to be one of the important duties of an auditor. As a matter of fact, originally audit was conducted mainly with a vies to detect fraud whenever it was suspected. The system of internal check aims at the prevention of fraud. If the auditor finds that the internal check system is defective and will no prevent the commission of frauds, he should suggest a better system.

The followings are the chief ways in which fraud may be perpetrated:

(a)    Embezzlement of Cash:

There is a greater possibility of defalcation of money in a big business house than in the case of a small proprietary business where the proprietor has a direct control over the receipts and payments of cash. Cash may be misappropriated by:

• Omitting to enter any cash which has been received; or
• Entering fictitious entries on the payment side of the cash book; or
• Entering less amount than what has been actually received; or
• Entering more amount on the payment side of the cash book than what has been actually paid.

In order to discover fraud under (a) and (b) above, the auditor should check the debit side of the cash book with rough cash book, salesmen's reports, counterfoils of the receipt books, agent’s returns and other original records while the fraud under (c) and (d) can be discovered by reference to the vouchers, wage sheets, salary book, invoice, etc.

(b)   Misappropriation of Goods:

Fraud may be in respect of good, i.e., misappropriation of goods. This type of fraud is very difficult to detect especially when the goods are less bulky and are of higher value.

(c)    Fraudulent manipulation of Accounts:

This type of fraud is more difficult to discover as it is usually committed by directors or managers or other responsible officials with the object of:

(1)  Showing more profits than what actually they are:

=> So that if they get commission on profits, they may get more commission; or

=>Their service may be retained by showing to the shareholders of the shareholders; or

=> If they hold shares, they may sell them at high price by declaring higher dividends; or

=>To obtain further credit by showing the financial position of the business better that what actually it is; or

=>To attract more subscribers for the sale of the shares of the company, etc.

(2) Showing less profit than what actually they are:

=>In order to purchase shares in the market at a lower price; or

=>To reduce or avoid the payment of income tax; or

=>To give a wrong impression about the success of the business to the competitors, etc.

Falsification of account may be resorted to:

(a)  By not providing any depreciation or providing less depreciation or providing more depreciation; or

(b)   By under-valuation or over-valuation of assets and liabilities; or

(c)    By showing fictitious sales or purchases or returns in order to show more profits or less profits whatever the case may be; or

(d)   By the utilization of secret reserves during a period when the concern has made less or no profit, without disclosing that fact to the shareholders; or

(e)    By sharing revenue expenditure to capital account, or vice versa; or

(f)     By crediting the revenue account with the income which will be received next year or not crediting the profit and loss account with the income which has accrued but which has not been received.

III.    Specific objectives:

The audit may encompass such other areas like review of operations, performance management policy, cost records and so on. Accordingly, there sill be specific objective in respect of each type of such specific audits.

For Example:

In operational audit, the aim of audit is to evaluate the existing operations of the entity in order to give expert advice to improve their efficiency.

The cost audit is to check the cost records of the entity in order to make a report on the proper ascertainment of cost of production of goods or services.

Depending upon the nature of specific audit engagement and terms of engagement, there may be different objective in respect of each specific audit.