Module I
Overview of Auditing
Part I: Audit and Audit profession
• Meaning and concept of auditing
• Historical development of auditing
• International aspect of auditing
• Professional requirement
• Professional ethics and principles
Meaning and concept of Auditing
• It is quite difficult to give a single and precise definition
of the term “Audit”.
• Many notable authors and other bodies have defined the
word “audit”, and every one of them has attempted to
emphasize one aspect or the other, but the central idea
is more or less the same.
• Definition 1: Some authors define auditing as an
independent examination of an expression of opinion on,
the financial statements of a concern by an appointed
auditor in pursuance of that appointment and in
compliance with any relevant statutory obligations.
• Definition 2: Some scholars also define auditing as an
independent examination of the books of account and the
related documentary evidence by a qualified person in
order to ascertain the accuracy of figures.
• Definition 3: According to Montgomery, an American
Accountant & auditors defined, auditing is a systematic
examination of the books and records of a business of other
organizations in order to ascertain or verify and to report
upon the facts regarding the financial operations and the
results thereof.
• Definition-4: A special committee of the American Institute
of Accountants has defined the term ‘audit’ as follows:
• “An audit is an attest function where by a Certified Public
Accountant (CPA) independently examine financial information
of an entity and produce a report on the subject matter or an
assertion about the subject matter which is the responsibility of
another party ( e.g. Management).”
• To attest to information means to provide assurance as to its
reliability.
• More formally, the AICPA has defined an attest engagement as
one in which:
A practitioner is engaged to issue or does issue a written
communication that expresses a conclusion about the reliability
of a written assertion that is the responsibility of another party.
• Definition 5: "Auditing is such an examination of books
of accounts and vouchers of business, as will enable the
auditors to satisfy himself 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 that the profit
and loss account gives true and fair view of the
profit/loss for the financial period, according to the
best of information and explanation given to him and
as shown by the books; and if not, in what respect he is
not satisfied. Spicer and Pegler
Cont...d
• Definition 6: "Auditing is an examination of accounting
records undertaken with a view to establish whether
they correctly and completely reflect the transactions to
which they relate. Prof. L.R.Dicksee
• Generally Auditing is a systematic process of (1)
objectively obtaining and evaluating evidence
regarding assertions about economic actions and
events to ascertain the degree of correspondence
between those assertions and established criteria and
(2) communicating the results to interested users.
Features of an Audit
• Systematic Process: As a systematic process, auditing is
a logical, purposeful, structured approach to decision-
making; it is not an unplanned, haphazard process.
• Objectively Obtaining and Evaluating Evidence:
Auditing involves the collection of evidence.
Evidence represents the information collected by the
auditor that will affect the auditor’s decision
process.
Although evidence itself may be more or less
conclusive in nature, the process of collecting and
evaluating evidence should be objective.
• The audit is always done by an independent authority or a
body of persons with the necessary qualifications. They
have to be independent so their views and opinions can be
totally unbiased.
• An audit is the examination of all the books of accounts and
financial information of the company. So it is essentially a
verification of the final accounts of the organization, i.e. the
profit and loss statement and the balance sheet at the end
of the financial year.
• Auditing is not only the review of the books of accounts but
also the internal systems and internal control of the
organization.
• The auditor must completely satisfy himself with
the accuracy and authenticity of the financial
statements. Only then can he give the opinion that
they are true and fair statements.
Historical development of auditing
• The term audit is derived from the Latin term ‘audire,’
which means to hear.
• In early days an auditor used to listen to the accounts
read over by an accountant in order to check them
Auditing is as old as accounting.
• It was in use in all ancient countries such as
Mesopotamia, Greece, Egypt. Rome, U.K. and India.
• The original objective of auditing was to detect and
prevent errors and frauds.
• Auditing evolved and grew rapidly after the industrial
revolution in the 18th century with the growth of the
joint stock companies the ownership and management
became separate.
• The shareholders who were the owners needed a report
from an independent expert on the accounts of the
company managed by the board of directors who were
the employees.
• The objective of audit shifted and audit was expected to
ascertain whether the accounts were true and fair
rather than detection of errors and frauds.
• With the increase in the size of the companies and the
volume of transactions the main objective of audit
shifted to ascertaining whether the accounts were true
and fair rather than true and correct.
• Hence the emphasis was not on arithmetical accuracy
but on a fair representation of the financial efforts.
• The later developments in auditing pertain to the use
of computers in accounting and auditing.
• In conclusion it can be said that auditing has come a
long way from hearing of accounts to taking the help of
computers to examine computerized accounts
Origin and historical development of Auditing
• The original meaning of the term Audit is derived from the
Latin word ‘Audere’ which means ‘to hear’ and the term
Auditor is ‘one who hear’.
• In earlier periods, commercial and governmental records
were approved only after a public reading in which the
accounts were read allowed to peoples those hear.
• From medieval period up to the industrial revolution Audit
were performed to determine whether person in position
of official responsibility in government and commerce were
acting and reporting in an honest manner.
• During the industrial revolution, manufacturing
companies grew in size and their owners began to use
the service of hired managers.
• With this separation of the ownership and
management groups, the owners turned increasingly
to the need of auditors to protect themselves from the
danger of intentional error as well as fraud committed
by managers and employees.
• Before 1900, consistent with this primary objective of
detecting error and fraud, auditors often include a
study of all, or almost all recorded transactions.
• In the first half the 20th century, the direction of audit
works tends to move away from fraud detection
towards a new goal of determining whether financial
statements give a full and fair picture of financial
position, operating results, and change in financial
position.
• Although banks were the primary users of financial
reports, auditors become more responsible to
stockholders, government agencies and to other parties
who might rely up on financial information.
• In the middle of 20th century, the large scale corporate
entities growth rapidly, and auditory began to examine
selected transaction rather than study all transactions.
• Auditors and business managers gradually comes to
accept the careful examination of relatively few
transactions selected at random and they believe that it
would be a cost effective and reliable indication of the
accuracy of other similar transaction.
• In addition to sampling, auditors become aware of the
importance of effective internal control.
• A company internal control consists of the policies and
procedures established to provide reasonable assurance
that the objective of the company will be achieved.
• Auditor found that by studying the firm’s internal
control they could identify areas of strength and
weaknesses.
• Now a days, Auditors began to use sophisticated
computer soft ware to test the intensity of firm’s
internal control and the accuracy financial statement
balances.
• The major auditing developments in the 20th century are
sequentially listed as follows:
1. A shift in emphasis to the determination of fairness in financial
statements
2. Increased responsibility of the auditor to third parties, such as
governmental agencies, stock exchanges
3. A change in auditing method from detail examination of
individual transactions to use of sampling techniques.
4. Recognition of the need to consider the effectiveness of internal
control as a guide to the direction and amount of testing and
sampling to be performed
5. Development of new auditing procedures applicable to computer
systems and use of the computers as an auditing tool
Demands for Audit
• There is a need for auditing when ownership is separated from
control.
• At a practical level, it helps prevent or detect misstatements-
errors or fraud.
• It may prevent or detect misstatements on the part of 1) the
employees who actually handle the money, or 2) management.
• Auditing is needed to enhance the credibility of financial
information prepared by an entity.
• The independent audit requirement fulfills the need to ensure
that those financial statements are objective, free from bias
and manipulation and relevant to the needs of users.
• The major reasons for increase in demand of auditing are:
A. Control Mechanism
B. To resolve Conflict of Interest
C. To reduce damaging consequences
D. To simplify complexity
E. Regulatory Requirements
