Auditing Features and Objectives – Primary and Secondary

This post explains Auditing features. The audit is a systematic and scientific examination of the books of accounts of the business. The Audit is done by an independent person or group of people qualified to do Audits.

Auditing Features – Attributes of Auditing

An audit is the verification of the results shown by profit and loss accounts and the state of affairs confirmed by the balance sheet.

The audit is a critical review of the system of accounting and internal control.

The audit is done with the help of the vouchers, documents, information, and explanations received from the authorities.

The critical responsibility of Auditor is to ensure that the financial statements and reports are authentic and show a fair view of the state of affairs.

An auditor investigates, analyzes, reviews examines the documents supporting the transactions.

He examines the minute books of Directors, shareholders, memorandum of associations to ascertain the correctness of the books of accounts.

Various methods and procedures are used for performing the audit.

The audit is not only limited to an examination of financial records, but it also includes other areas like operational audit, process audit, tax audit, secretarial audit, efficiency audit, social audit and more.

It involved reporting by the auditor on the accounts examined by him and prepared as per GAAP (Generally Accepted Accounting Principles) principle and present accurate and fair view.

Objectives of Auditing

There are two main objectives of Auditing. Primary and Secondary objective, let us understand both the objectives one by one.

Primary Objective

The main objective of an auditor is to report to owners that the financial accounts give an accurate view of the situation of the company’s activities.

Secondary Objective

The secondary objective is also known as incidental objective as it is related to the fulfillment of the primary purpose.

The incidental objectives of auditing are as follows:

  1. Detection and prevention of scams
  2. Discovery and prevention of mistakes

Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the primary aim of determining whether or not the financial statements give an accurate and fair view.

Frauds can take place due to the manipulation of accounts, and it is essential for the auditor to find the fraud so it can be prevented in the future.

Errors refer to an accidental mistake in the commercial data arising due to ignorance of accounting procedures.

Auditing Origin and Evolution – History of Auditing

In the early stages of civilization, the methods of maintaining accounts were very unrefined. The person used to listen to the accounts read over by an accountant to check them, he was known as the auditor.

History of Auditing

Auditing is as old as accounting, and there are signs of its existence in all ancient cultures such as Mesopotamia, Greece, Egypt, Rome, UK, and India.

Arthashastra by Kautilya detailed rules for accounting and auditing of public finances.

In olden days the key purpose of audits was to gain information about the financial system and records of the business.

However, recently auditing has begun to include non-financial subject areas such as safety, security, information system performance and environmental concerns.

With the non-profit organization and government agencies, there has been an increasing need for performing an audit, examining their success in satisfying mission objectives of the business.

Auditing Origin and Evolution

The auditing origin can be traced back to the 18th century, when the practice of large scale production developed as a result of the Industrial Revolution.

Systems of checks and counter checks were implemented to maintain public accounts as early as the days of ancient Egyptians, Greeks and Romans.

The last decade of the 15th century was a crucial period during which a great impetus was given to trade and commerce by Renaissance in Italy, and the principles of double entry bookkeeping were evolved and published in 1494 at Venice in Italy by Luca Paciolo.

This system of accounts was quite capable of recording all types of mercantile transactions.

The Industrial Revolution of England was another landmark in the history of trade and commerce.

The industrial revolution led to a significant expansion in the volume of trading transactions which compelled the use of more money, and the ordinary trader was enforced to combine with the partnership with others.

Consequently, a big enterprise was framed in the form of partnership firms and joint-stock companies.

This growth of business enterprises before and after the revolution accompanied an improved accounting system.

Besides British Companies made stockholders realize that an independent and impartial audit could well protect their interest.

Such developments had a direct effect on the evolution of the practice of auditing, but the audit of business accounts could not be standard until the 19th century.

A Royal Charter incorporated the Institute of Chartered Accountants in England and Wales on May 11, 1880. The key purpose of this incorporation was to prepare Auditors.

In January 1923, the British Association of Accountants and Auditors got established, and a person could be fully competent to work as a professional auditor after clearing this exam.

What is Auditing – Auditing Definition, Introduction and Meaning

The primary purpose of the audit is to confirm the authenticity of books of accounts prepared by an accountant. In this post, we will cover Auditing introduction, definitions, and functions.

It is well known saying that “where the function of accountant ends, audit begins to determine the true and fair picture of such accounts.”

Auditing Introduction

The audit is an intelligent and critical examination of the books of accounts of the business.

Auditing is done by the independent person or body of persons qualified for the job with the help of statements, papers, information and comments received from the authorities so that the examiner can confirm the authenticity of financial accounts prepared for a fixed term and report that:

  • The balance sheet exhibits an accurate and fair view of the state of affairs of concern;
  • The profit and loss accounts reveal the right and balanced view of the profit and loss for the financial period;
  • The accounts have been prepared in conformity with the law.

Thus, it will be seen that the duty of an auditor is much more than a mere comparison of the balance sheet and accounts with the books.

But, apart from doing this, he has to satisfy himself according to his information and the explanations given to him.

Meaning of Auditing

The term audit is derived from a Latin word “audire” which means to hear authenticity of accounts is assured with the help of the independent review.

Audit is performed to ascertain the validity and reliability of information. Examination of books and accounts with supporting vouchers and documents to detect and prevent error, fraud is the primary function of auditing.

Auditor has to check the effectiveness of internal control systems for determining the extent of checking out the audit.

Initially its meaning and use were confined merely to cash audit, and the auditor has to ascertain whether the persons are responsible for the maintenance of accounts had adequately accounted for all the cash receipts and the payment on behalf of this principle.

But the word audit has an extensive usage, and it now means a thorough scrutiny of the books of accounts and its ultimate aim is to verify the financial position disclosed by the balance sheet and profit and loss accounts of a company.

In short, an audit implies an investigation and a report. The process of checking and vouching continues until the study is completed and the auditor enables himself to report under the terms of his appointment.

Definition of Auditing

“An audit is an examination of accounting records undertaken with a view of establishing whether they correctly and completely reflect the transactions to which the purport to relate.”  –Lawrence R. Dickey

“Audit is defined as an investigation of some statements of figures involving examination of certain evidence, so as to enable an auditor to make a report on the statement.” Taylor and Perry

“An audit denotes the examination of balance sheet and profit and loss accounts prepared by others together with the books of accounts and vouchers relating thereto such in such a manner that the auditor may be able to satisfy himself and honestly report that in his opinion such balance sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of a particular concern according to the information and explanations given to him and as shown by the books.” -F.R.M De Paula

“Auditing is a systematic examination of the books of records of business or other organization in order to ascertain or to verify and to report upon the facts regarding its financial operations and the result thereof.” Prof. Montgomery

“Audit such an examination of the books of accounts and vouchers of a business as will enable the auditor to satisfy himself that the balance sheet is properly drawn up so as to give a fair and true view of the state of affairs of the business and the whether the profit and loss of accounts gives a true and fair view of profit and loss for the financial period according to the best of his information and explanations given to him and as shown by the books and if not in what respect he is not satisfied.” Spicer & Pegler

“Audit may be said to be verification of the accuracy and correctness of the books of accounts by an independent person qualified for the job and not in any way connected with the preparation of such accounts.” -J.B. Bose

“Audit is not an inquisition and its mission is not one of fault finding. Its purpose is to bring to the notice of the administration lacunae in his rules, regulations and lapses, and to suggest possible ways and means for the execution of plans and projects with greater expedition, efficiency and economy.” A.K. Chandra