INTRODUCTION

Definition and Meaning of Auditing

Definition: Audit is the examination or inspection of various books of accounts by an auditor

Description: Audit can be done internally by employees or heads of a particular department and
externally by an outside firm or an independent auditor. The idea is to check and verify the
accounts by an independent authority to ensure that all books of accounts are done in a fair
manner and there is no misrepresentation or fraud that is being conducted.
All the public listed firms have to get their accounts audited by an independent auditor before
they declare their results for any quarter.
Who can perform an audit? In India, chartered accountants from ICAI or The Institute of
Chartered Accountants of India can do independent audits of any organisation. CPA or Certified
Public Accountant conducts audits in USA.
There are four main steps in the auditing process. The first one is to define the auditor’s role and
the terms of engagement which is usually in the form of a letter which is duly signed by the
client.
The second step is to plan the audit which would include details of deadlines and the departments
the auditor would cover. Is it a single department or whole organisation which the auditor would
be covering. The audit could last a day or even a week depending upon the nature of the audit.
The next important step is compiling the information from the audit. When an auditor audits the
accounts or inspects key financial statements of a company, the findings are usually put out in a
report or compiled in a systematic manner.
The last and most important element of an audit is reporting the result. The results are
documented in the auditor’s report.

Purpose of Audit
The purpose of auditing can be classified into two categories

a) Primary objective: As per Section 143 of the Companies Act, 2013, the primary duty of the
auditor is to report to the owners that the accounts, financial statements give a true and fair view
of the state of the company’s affairs as at the end of its financial year and profit or loss and cash
flow for the year and such other matters as may be prescribed.
b) Secondary objective or incidental objective:

It is also known as incidental objective. The incidental objectives are: -

 Detection and prevention of frauds

Importance of Audit

 Audit satisfies the owner about the working of the business operations and the
functioning of its various departments.
 The audit helps in the detection and prevention of errors and frauds.
 The audit helps in maintaining the records and verification of books of the books of
accounts.
 The independent opinion of the auditor is extracted through auditing which is extremely
essential for the management of the company.
 The audit establishes a moral check on the staff of the business so that they became aware
of not committing any irregularity. This makes the staff more active and responsible.
 Audit protects the interests of the shareholders in the case of a joint-stock company by
assuring them that their accounts are being managed properly and their interests will not
suffer under any circumstances.
 Audit creates confidence among stakeholders such as creditors, debenture holders, and
banks, etc.
 Audited statements ensure compliance with legal requirements such as listing
requirements of stock exchange etc.
 Auditing reinforces and strengthens Internal control and provides suggestions necessary
in the internal control system.
 Audited financial statements enable easy access to loans because it provides a crystal-
clear image to the banks.

Types of Audits

There are three main types of audits:

1. Internal audits

Internal audits are performed by the employees of a company or organization. These audits are
not distributed outside the company. Instead, they are prepared for the use of management and
other internal stakeholders.

Internal audits are used to improve decision-making within a company by providing managers
with actionable items to improve internal controls. They also ensure compliance with laws and
regulations and maintain timely, fair, and accurate financial reporting.
2. External audits

Performed by external organizations and third parties, external audits provide an unbiased
opinion that internal auditors might not be able to give. External financial audits are utilized to
determine any material misstatements or errors in a company’s financial statements. External
audits are important for allowing various stakeholders to confidently make decisions surrounding
the company being audited.

The key difference between an external auditor and an internal auditor is that an external auditor
is independent. It means that they are able to provide a more unbiased opinion rather than an
internal auditor, whose independence may be compromised due to the employer-employee
relationship.

3. Government audits

Government audits are performed to ensure that financial statements have been prepared
accurately to not misrepresent the amount of taxable income of a company.

Audit selections are made to ensure that companies are not misrepresenting their taxable income.
Misstating taxable income, whether intentional or not, is considered tax fraud. The IRS and CRA
now use statistical formulas and machine learning to find taxpayers at high risk of committing
tax fraud.