Objectives and Advantages of Auditing
Systematic examination of books and records to confirm whether prepared financial statements or giving true and fair view is called Auditing. It is optional in case of some undertakings like sole trading concerns, partnership firms etc and compulsory in case of some undertakings like joint stock companies, Banking companies etc. Objectives of auditing can be classified into two groups namely; Primary Objectives and Secondary Objectives.
Primary Objectives: The above definition itself indicates primary objective of auditing which is conforming whether financial statements are in accordance with books and records or not.
Secondary Objectives: The Secondary objectives of auditing includes; Detection and prevention of errors, Detection and prevention of frauds.
The blunders omitted unknowingly are called errors. These are un-willful blunders. There are four types of errors as shown below;
- Clerical Errors
- Errors of Principle
- Compensating Errors
- Duplicating Errors
Clerical Errors: The Errors committed by lower level staff members due to lack of knowledge, lack of concentration are called clerical errors. These are of two types again. Errors of Omission, Errors of Commission.
- Errors of omission: Not recording the transactions is called errors of omission. Again it is of two types, namely; Errors of obsolete omission, Errors of partial omission. If a transaction is completely omitted, it is called obsolete omission. It has no effect on trial balance. Trial balance agreed. Therefore these errors come out only during audit. If the transaction is partly recorded and partly omitted, it is called partial omission. It influence trial balance. Trial balance does not agree therefore these errors will be disclosed by trial balance.
- Errors of Commission: The blunder with regard to additions, subtractions, etc. are called errors of commission. These errors may or may not affect trial balance. If ledger totaling is wrong, trial balance will not agree. If wrong totaling is made in the voucher itself trial balance agrees.
Errors of principle: If treatment is given hostile (against) to accounting concepts and conventions, those are called errors of principal. Here trial balance undergoes no effect.
For example: Changing capital expenditure as revenues expenditure or in reversal, recording current assets at cost price or market price whichever is greater, etc. can be considered as errors of principle.
Compensating Errors: It includes a pair of errors where the effect of the one gets compensated by that of the other. Here also trail balance agrees.
For example: Purchase account is overcast by Rs. 1000/- and sales account also overcast by Rs. 1000/- i.e. the same amount. It does not show effect on the trial balance.
Duplicating Errors: If a transaction is recorded more than once it is called duplicating errors. They will have no impact on the trial balance.
Fraud means willful blunder. Frauds are of three types. They are;
- Mis-appropriation of cash.
- Mis-appropriation of Goods.
- Manipulation of Goods.
Mis-appropriation of Cash: It is visual type of fraud. It can be done in any of the following ways; Recording receipt at lower value, Not recording receipts completely, Recording payment at greater value, Showing un-real payments, etc.
If auditor gets failed in finding out misappropriation of cash, he is said to be negligent. He has to compensate his client.
Mis-appropriation of Goods: This type of fraud is not common when compared to mis-appropriation of cash. Mis-appropriation of goods is difficult to identify. There is chance for gate keeper to mis-appropriation of goods. He maintains two records namely goods inward book which includes Purchases and Sales returns and goods outwards books which includes sales and purchase returns without making entry in those records he can mis-appropriate goods.
Manipulation of Goods: This type of fraud will be committed by top level authorities like directors, etc.
Advantages of Auditing
- By means of conduction of audit, errors can be deducted and prevented.
- By means of audit, frauds can also be deducted and prevented.
- Taxation matters can be settled by means of audited accounts.
- On the basis of audited accounts only bankers grant loans. Basing on audited accounts only purchase consideration can be computed.
- On the basis of audited accounts partners disputes can be solved.
- In case where audit is regularly conducted, reputation of the undertaking gets enhanced.
- In presence of conduction of audit work, auditor advises can be obtained.
- Basing on audited accounts insurance claims can be settled.
- When audit is under operation honesty of staff will get increase.