Chapter 2 : Chapter 2 : Objectives of AuditingObjectives of Auditing

T.Y. B com (Honours)

Academic Year : 2009-10

Trimester : V

The objectives of AuditingThe objectives of AuditingPrimary 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 as depicted in profit & loss account

• Adequacy of information required to be disclosed

• Compliance and statutory requirements

• Accuracy and reliability of books of accounts and underlying records

The objectives of AuditingThe objectives of AuditingSecondary objectives :a) To detect errors and frauds if any

b) To prevent errors and frauds by the deterrent effect of audit

c) To provide allied services in the nature of consultancies on accounting treatment, accounting systems, taxation, financial problems etc.

Definition of FraudDefinition of FraudFraud 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 like embezzlement, defalcation and misappropriation or manipulation.

Some methods of Some methods of Manipulation of accountsManipulation of accounts

1. Overstatement of stock

2. Overstatement of sales

3. Understatement of purchases

4. Manipulation of expenses

5. Overstatement of Assets

6. Understatement of Liabilities

7. Misappropriation of cash or goods

8. Omission to record cash receipts

9. Teeming and Lading (Lapping)

10. Kiting

11. Intentional errors in balancing cash book

Some methods of Some methods of Manipulation of accountsManipulation 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

Types of ErrorsTypes of Errors

9. Errors of omission-transaction has been omitted

10. Errors of commission – improper recording of transactions

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

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

Circumstances indicating Circumstances indicating errors or fraudserrors or frauds

Quality of Management

a) Mgt is dominated by one person or a small groupb) Internal control is absent or weakc) There is high turnover of accounting staffd) The accounts dept is overstaffede) Auditors and lawyers are changed frequently

Circumstances indicating Circumstances indicating errors or fraudserrors or frauds

Unusual pressures on the concern

a) The working capital is inadequateb) High credit sales to show income ignoring risk of bad debtsc) There is need to show a better position to succeed shares issued) there is heavy investment in a product which is subject to rapid obsolescencee) There is heavy dependence on few products or customers

Circumstances indicating Circumstances indicating errors or fraudserrors or frauds

Unusual transactions :

a) Many transactions near the year end that affect the profit

b) Many transactions with related parties, group concerns

c) There are excessive payments for services

Circumstances indicating Circumstances indicating errors or fraudserrors 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

Auditors responsibility for Auditors responsibility for errors and fraudserrors 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.