Audit is an
independent examination of financial statements of an entity that enable an
auditor to express openly and whether the financial statements are prepared (in
all material respects) in accordance with an identified an acceptable financial
reporting framework (exam for international or local accounting standards and
national legislation).
Advantage of audit
1. detection and prevention of error and fraud.
2. Protection of the rights and interests of shareholders.
3. To obtain loan.
4. To keep the account regularly
5. satisfaction of owner: because of audit the owner will be satisfied
about the business operations and working of its various departments.
6. Verification of books.
7. Helpful in obtaining the independent of opinion of the auditor about
business condition.
8. Reliance by outsiders like creditors, debenture holder and bank etc
9. Reliance by partner.
10. Reliance by shareholders.
11. To present as of proof.
12. Two Assess taxes
what is fraud? Write three examples/types
fraud may be defined as the use of the
deception with the view to fulfil individual interest, manipulate the
transaction or account. This is done deliberately, which means that there is an
intent to deceive to mislead or to conceal the truth or the material facts .
Frauds are more than on intentional errors because of the implications of offer
dishonesty which accompanies them. They are more difficult to detect they an
innocent error. Thus detection and prevention of fraud is off great, important,
and constitute an important duty of and a auditor. Fraud maybe of three types
A. Misappropriation of cash.
1. Misappropriating cash by entering dummy of workers in distributing
wage.
2. Cancelling the purchase returns.
3. Misappropriation by inflating bill received from supplier.
4. Misappropriation by not showing received the cash.
B. Misappropriation of
goods
1. Pilferage
2. misappropriation by not checking goods.
3. Not providing security by the proper authority.
C. Manipulation/fraudulent
of account
1. showing loss to avoid taxes
ended to deceive shareholders.
2. Falsification of account to deceive creditors, bankers, so as to
obtain further loan.
3. Showing high profit to inflate the rate of dividend.
4. Increasing sales by showing fictitious entries to earn profit.
Method of detecting
errors.
·
Checking cashbooks and reports
·
Checking receipt, invoice,
Bill, evidence, salarysheet and wagesheet
·
find out the difference of dr
and cr in trial balance.
·
Compare amount written in trial balance, and other
books
·
check the amount of last year
cld and this year bld
·
examine all the primary books.
Difference between audit and accounting.
Audit.
Meaning: audit is to check the record kept by account,
to provide evidence, that p&L account and the balance sheet are true
beginning of work: book of audit begins when an account
is end
scope: auditors see whether the company has followed
fact or law or not
appointment: auditor is a point for a short period
preparation of report: auditor prepare or report and
present to the concerned authorities after completion of the job
Account:
account is to collect information of an financial year,
to keep a record, properly analyse and give all necessary information
Work of account begin when the business transaction
begin
Account prepare different account, joural, ledger,
manufacturing, trading, profit and loss account and its balance sheet.
Accountant is a permanent staff
Accountant does not prepare any report of the completion
of job
Objectives of audit
for better understanding. We could classify the
objectives of audit as:
1 . Primary objectives. Cancelling
2. Secondary objectives
3. Specific objectives
Primary objectives: to
deter mined and drugs. The reliability of the financial statement and the
supporting accounting records of particular financial period is the main
purpose of the audit. Auditor discloses his opinion that whether the audited
book of account profit and loss account and balance sheet are showing the true
and fair view is of the state of affair of the company's business.to get a true
and fair view of the company affair and express his opinion, He has, to
thoroughly check the transaction and relevant documents of the company made
during the audited period, which will help the auditor to report the financial
condition and working result of the organisation.
Secondary objectives: in
order to report the financial condition of the business, auditor has to examine
the books of accounts in the relieving documents. In that process he may come
across some errors and fraud. We make classified this error and fraud is below
1 detection and prevention of errors.
2 detection and prevention of frauds.
Detection and prevention of errors:
to detect the errors and mistakes and to rectify this
are the secondary objectives. Under this, the error of omission, and are of
commission, compensating error,error of duplication, trial balance in error,
error of principle, are found and rectified .finding and rectifying such errors
are former on the other secondary objectives
Detection and prevention of frauds: fraud is intentional
and is knowingly committed to defraud the appropriator of the concern. This is
done deliberately. It is mentioned that there is an intent to deceive to
mislead or to conceal the truth or the material facts. Fraud maybe of three
types
1. Misappropriation of cash
2. Misappropriation of goods.
3. Manipulation or fraudulent of account.
Detection and prevention of fraud is of great importance
and constitute an important duty of an auditor.
Specific objectives:
testing and finding the validity of errors, frauds and rectifying those in the
area of the cost expenses and management, tax and depreciation etc are the
specifics objectives.
Detection and prevention of error
·
errors are generally committed
innocently but an auditor should be very careful about it because sometimes
error which might appear as innocent are the result of fraudulent manipulation.
For example, a debtor sends rs 500 by bank draft and the accountant forget to
make an entry in the books. It is an error. On the other hand, if the
accountant intentionally keeps the money with him and does not make an entry in
the book is to become fraud.
Errors are of various types, some of which are listed
below
1. Clerical errors: a clerical error is one which arises on account of
wrong posting clerical error are of three types
A. Errors of omission: errors which arise on account of
transaction not being recorded in the books of accounts either wholly or
partially are called errors of omission .in case where a transaction has been
totally omitted. It will not effect the trial balance, and hence it is more
difficult to detect. For example, omission to enter purchases in purchase book.
It means both the debit and credit aspects of the transactions are equally
omitted and the arithmetically accuracy of the trial balance is not affected.
On the other hand, partial omission can be easily discovered as the trial
balance will not agree. For instance, if entry for purchase is made in the
purchase books, but is omitted from the accounts of the concerned customer.
Similarly, the rent account must show 12 entries for the rent, paid in a year
whereas , if only nine entries are Sony, it means that rent for three months
has not been paid. In these cases, the trial balance will disagree and the
auditor can find out these errors by conducting a thorough checking of the
records.
B. Errors of comission: when incorrect entries are made
in the books of accounts (books of original entry or, ledger accounts) either
wholly or partially the errors are known in errors of commission. Examples of
such errors are wrong entries in the book of original entry, wrong
calculations, postings, additions, castings and carry forward. For instance,
the amount in the books of original entry is wrongly recorded. The amount of rs
232 might be entered as rs 322 in the books of original entry. Such errors can
be located while vouching the purchases with the original invoices and
rectified. Some of such errors will be detected by the non-agreement of the
trial balance while some errors of omission do not effect the trial balance.
C compensating errors: when there are two or more errors
which exactly counterbalance each other, they are referred as compensating
errors
they are also non as off setting errors because the
effects are offset. Such errors are difficult to detect as the trial balance
will still agree. For example x account was credited by RS 20 instead of rs 80.
There was a short credit of rs
60 , while z
account is debited by rs 20 instead of rs 80. Thus , there is a short debit of
rs 60. It means that there is only a short credit and a short debit of rs 60
each. Both the sites of the trial balance are equally affected.at the same
times it may or may not effect the poor fit and loss account
Errors of principles: errors of principles may arise quite
unintentionally due to lack of correct knowledge of the principles governing
the preparation of the accounts of business. Examples of such errors are
incorrect location of expenditure between capital and revenue, ignoring out
extending assets and liabilities, wrong valuation of assets and provision for
liabilities, and bad debts etc. this is the most important class of error
because error of this kind. It does not affect the agreement of the trial
balance, but the profit and loss account may be very much affected. For
example, if revenue expenditure is shown its capital expenditure are well
closing stock is overvalued, the profit is inflated, . The profit is shown more
than what actually it is should be. Such errors will never be discovered by
mere routine checking, therefore, and auditors should exercise the utmost carer
in discovering such error. He should make an intelligent enquiry and
investigation of every transaction. Sometimes such errors are committed
intentionally to manipulate the accounts in order to show more poor fit or less
profits than they actually are for the year. For instance, if more depreciation
is provided. The perfidy is reduced. This may affect the profit and loss
account and the balance sheet. Therefore, an independent checking and detailed
enquiry shall be made by an auditor to locate such errors, otherwise he will
not be able to give the correct financier position of the organisation for the
year for instance, if more depreciation is provided. The profit is reduced.
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