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Chapter 2 :Objectives of Auditing

S.Y. BBA

Academic Year : 2010-11

Trimester : VI

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The objectives of Auditing

Primary objectives :(to enable an auditor to express his opinion on….) 

• Truth and fairness of the financial position as

shown in balance sheet

• Truth and fairness of the trading results asdepicted in profit & loss account

• Adequacy of information required to be disclosed

• Compliance and statutory requirements

• Accuracy and reliability of books of accounts andunderlying records

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The objectives of Auditing

Secondary objectives :

a) To detect errors and frauds if any

b) To prevent errors and frauds by thedeterrent effect of audit

c) To provide allied services in the nature of consultancies on accounting treatment,

accounting systems, taxation, financialproblems etc.

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Definition of Fraud

Fraud can be defined as :

“ the successful practice of deception,

with the intention of cheating another person. It involves trickery and deceitful action.” 

Fraud maybe named in other words likeembezzlement, defalcation andmisappropriation or manipulation.

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Some methods of Manipulation of accounts

1. Overstatement of stock

2. Overstatement of sales

3. Understatement of purchases

4. Manipulation of expenses5. Overstatement of Assets

6. Understatement of Liabilities

7. Misappropriation of cash or goods

8. Omission to record cash receipts9. Teeming and Lading (Lapping)

10. Kiting

11. Intentional errors in balancing cash book

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Some methods of Manipulation of accounts

12. Payment by duplication of source documents

13. Cheque writing by leaving gap

14.Inclusion of dummies in the payroll

15. Payroll overcasting

16. Fraudulent adjustment entries

17. Forgery

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Types of Errors

1. Errors of omission-transaction has been omitted 

2. Errors of commission–

improper recording of transactions 

3. Errors of principles – transactions not recorded as per accounting principles 

4. Compensating Errors – Primarily wrong but offset by another wrong entry 

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Circumstances indicatingerrors or frauds

Quality of Management

a) Mgt is dominated by one person or a

small groupb) Internal control is absent or weak

c) There is high turnover of accountingstaff 

d) The accounts dept is overstaffede) Auditors and lawyers are changed

frequently

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Circumstances indicatingerrors or frauds

Problems in Audit :

a) There are inadequate records, incomplete files,untallied trial balances 

b) Vouchers are not available or not duly authorised or supporting documents are altered.

c) Third party confirmations are not available or are absent, differences in quantity reconciliations,or unexplainable changes in ratios 

d) there is lack of or inadequate explanations from management 

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Auditors responsibility forerrors and frauds

Basic responsibility of Management – for good accounting and internal control 

Incidental Objective of Audit – to ensure audit is free from major errors and frauds 

Possibility of Non detection–

not failure in duty as long as reasonable care has been taken 

When circumstances indicate error or fraud –

take additional steps to detect them and ensure proper closure or disclosure 

CARO 2003 – reporting requirements for fraud or error in the new format of CARO 2003.