Wednesday 26 September 2012

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Thursday 6 September 2012

What is Auditing ?

The word  "Audit"  is originated from the Latin word 'audire' which means 'to listen or hear'.  In the those days, whenever there is suspected fraud in a business organization, the owner of the business would appoint a person to check the accounts and hear the explanations given by the person responsible for keeping the account and funds.  In those days, the audit is done to find out whether the payments and receipt are properly accounted or not.
The objective of modern day accounting is not only for the verification of cash but to report the financial position of the undertaking as disclosed by its Balance sheet and Profit and Loss account.

So what Auditing is in real?

A precise definition of the term 'Auditing' is difficult to give. Some of the definitions given by different authors are as follows:

According to Montgomery, a well known author, "auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the financial operation and the result thereof. "

Spicer and Pegler expanded the above definition as follows:

"An audit may be said to be such an examination of the books, accounts and vouchers of a business as well enable the auditor to satisfy that the Balance Sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and whether the Profit or Loss for the financial period according to the best of his information and the explanations given to him and as shown by the books, and if not, in what respect he is not satisfied."

According to Lawrence R. Dicksee, "an audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some instances, it may be necessary to ascertain whether the transactions themselves are supported by authority."

R. K. Mautz defines auditing as being "concerned with the verification of accounting data, with determining the accuracy and reliability accounting statement and reports."

It is clear from the above definitions that auditing is the systematic and scientific examination of the books of a accounts and records of a business so as to enable the auditor to satisfy himself that the Balance Sheet and the Profit and Loss Account are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of the business and profit or loss for the financial period. The Auditor will have to go through various books and accounts and related evidence to satisfy himself about the accuracy and authenticity to report the financial health of the business.


Auditing vs Accounting
  1. The role of accountancy is to record the transaction in the book of accounts, extraction of trial balance, preparation of Trading and profit and loss account and balance sheet etc.  On the other hand auditing is the examination of books of account and checking the financial statement for the purpose of finding out the true and fair position and results of operation of a concern.  Audit is concerned with detailed examination of the complete accounting records but it does not involve the preparation of accounts.
  2. If the auditor is asked to write the books of accounts, extract an agreed trial balance and profit and loss account and Balance sheet, he would be doing the work of an accountant and not the work of an auditor.  Preparation of account is not the part of auditing.  An auditor, using his appointing authority, needs to check throughly, whether the Profit and Loss account  and the Balance Sheet have been properly drawn up and revel the 'true and fair view' of the state of affairs and results of operation of the concern and report it to the parties interested.
  3. Auditing without the prior existence of accounts is not possible.  When the accountant finishes his work, the auditor starts his work. PH3UQ56ACQNY