Introduction: Origin of Audit

Origin of Audit:

The origin of audit may be traced to middle ages, but the audit in the present sense can be traced after the introduction of large-scale production, in consequence of Industrial Revolution, during the 18^th century. Before this era, goods were produced bt individuals, of\n small scale. There was not much capital. The individual, who invested the capital, usually himself maintained the accounts and, therefore, there was no necessity of checking them.

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 fin 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 of, 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 accountant 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.

MOTIVATION & REWARD SYSTEM

DEFINITION OF MOTIVATION: 

        Motivation is the willingness to exert high levels of effort forward organizational goals conditioned by the effort’s ability to satisfy some individual need. Motivation is not a simple concept instead motivation pertains to various drivers, desires, needs, wishes and other forces. Managers motivate by providing an environment that includes organization members to contribute. Motivation can be defined as the processes that account for an individual’s intensity, direction and persistence of effort toward attaining a goal.

In God we trust, all others we audit

According to: "A statement of Basic Auditing Concepts" (American Accounting Association 1973), there are four conditions that create the need for the independent performance of the audit or attest function:

• Conflict of interest (between the user and the preparer of financial information)
• Consequence (significance to the decisions of the user of financial information)
• Complexity (of the subject matter and the process of conversion into information)
• Reformation (of the user of financial information from the subject matter and the preparer).

The economic role of the audit has been discussed by numerous authors, including Wallace (1980), who offers three alternative hypotheses:

• The Stewardship (or Monitoring) hypothesis: the audit provides assurance that nimbers reported by stewards to enable monitoring by principals are carefully prepared and free of material fraud.
• The Information hypothesis: The audit improves the quality of financial information used for investment decision making.
• The Insurance hypothesis: The auditor id jointly and severally liable for losses attributable to defective financial statements, so that based on courts' inclinations auditors can provide protection from an otherwise uninsurable business risk of investment.

Definition of Auditing

Auditing has been defined by the American Accounting Association as:

•  A systematic process of objectively obtained and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. 

A very similar definition is given by Arens and Loebbecke: 

• Auditing is the accumulation and evaluation of evidence about quantifiable information of an economic entity to determine and report on the degree of correspondence between the information and established criteria.Auditing should be done by a competent independent person.
• It is interesting to note, however, that although standards set by professional bodies such as the American Institute of Certified Public Accountants (AICPA) or the international Audit Practice Committee(IAPC) provide extensive duidance on how audits are to be performed, they contain no explicit definition of what an audit is. Both sets of standards state the objective of an audit as the expression of an opinion.
• The objective of the ordinary examination of financial statements by the independent auditor is the expression of an opinion on the fairness with which they represent financial position, results of operations, and changes in financial position in conformity with generally accepted accounting principles.(American Institute of Certified Public Accounting 1972).
• The objective of an audit of financial statements prepared within a framework of recognized accounting policies, is to enable an auditor to express an opinion on such financial statements. The auditor's opinion helps establish the credibility of the financial statements.(International Audit Practices Committee 1980).
• The process of auditing is essentially concerned with the aggregation of evidence in support of the auditor's opinion. Indeed, Arens and Loebbecke (1994) emphasize the central role of evidence gathering:We believe that the most fundamental concepts in auditing relate to determining the nature and amount of evidence the auditor should accumulate after considering the unique circumstances of each engagement. 
• Audit evidence is expected to be persuasive rather than conclusive. 

The extent of appropriate audit evidence accumulation is set out in the third standard of field work (American Institute of Certified Public Accountants 1972):

• Sufficient competent evidence matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination.

The value of such evidence is clearly variable:

• Evidence matter varies substantially in its influence on the auditor as he develops his opinion with respect to financial statements under examination. The pertinence of the evidence, its objectivity, its timeliness, and the existence of other evidential matter corroborating the conclusions to which it leads all bear on its competence.(American Institute of Certified Public Accountants 1980)