Auditing meaning, purpose and objectives
Auditing meaning: : Auditing is an independent examination of financial statements with an objective to give an opinion on such financial statements.
What is financial statements?
Financial statements comprises of:
|A||Balance sheet||:||It shows the financial position of the entity|
|B||Profit and loss account||:||It shows operating results of the entity|
|C||Cash Flow Statement||:||Cash flow statement shows inflow and outflow of cash in an organisation.|
|D||Receipts and payments account||:||It is generally prepared in case of government entities. It shows details of cash received and paid during the year.|
|E||Notes to accounts||:||It explains the accounting policies and procedures adopted in the organisation|
|F||Statement of changes in equity||:||It is generally prepared in case of listed entities. It represents the changes in owners’ equity over an accounting period.|
What is independent examination?
Independency is very important ethical requirement of an auditor. It is the duty of an auditor to maintain independency while conducting audit. Auditor should be independent, he should not be influenced by any other person.
What are the opinion, auditor can give?
They are two types of opinion. They are:
- Unmodified opinion
- Modified opinion.
1. Unmodified opinion: Unmodified opinion deals with unqualified opinion. When the financial statements give true and fair that is when the financial statements are free from material misstatements, auditor can give unmodified opinion.
2. Modified opinion: Modified opinion deals with qualified opinion, adverse opinion and disclaimer.
a. Qualified opinion: When the financial statements give true and fair view subject to certain reservations auditor shall give qualified opinion.
b. Adverse opinion: When financial statements does not give true and fair view, auditor shall give adverse opinion.
c. Disclaimer opinion: When auditor cannot give his opinion on financial statements due to lack of sufficient and appropriate audit evidence he shall give disclaimer opinion.
So we can conclude that auditing means an independent examination of Balance sheet, Profit and loss account, Cash flow statements, Receipts and payments accounts, Notes to accounts and Statement of changes in equity in order to give an opinion on such financial statements.
Purpose of auditing
- Purpose of auditing is to enhance the degree of confidence of intended users of financial statements by giving an opinion by the auditor that financial statements as whole are free from material misstatements arising due to fraud or error.
- This can be achieved by conducting the audit in accordance with standards of auditing.
- Standards of auditing requires auditor to obtain reasonable assurance.
- Reasonable level of assurance means high level of assurance this is achieved by obtaining sufficient and appropriate audit evidence to reduce audit risk to an relative low level.
What does standard of auditing mean?
Standards of auditing means principles of auditing. It is the duty of auditor to apply the standards of auditing on all independent audits. Standards of auditing requires auditor to obtain reasonable level of assurance that financial statements as a whole are free from material misstatements.
What does audit risk mean?
Audit risk means risk of giving wrong or inappropriate opinion on financial statements. Factors responsible for audit risk are:
- Inherent risk
- Control risk
- Detection risk.
1. Inherent risk: Inherent risk means those risk which is unavoidable in nature. There is no control to check the misstatement in account balance, class of transactions or disclosure. For example: In petrol pumps some quantity of petrol gets evaporated every year, this is unavoidable in nature.
2. Control risk: When the internal controls fail, or when the internal controls are unable to prevent, detect or control the misstatement arising due to account balance, class of transactions or disclosure it is called as control risk. For example: When there is lack of segregation of duties among employees, this type of risk may arise.
3. Detection risk: When the auditor is applying audit procedures, or making wrong judgement it rises to detection risk.
Objective of audit is to:
- Give an opinion on financial statements.
- To check whether the financial statements are prepared as per financial reporting framework.(Financial reporting framework means format of balance sheet, profit and loss along with compliance of accounting standards and accounting policies).
- To see whether the financial statements are free from material misstatements arising due to fraud or error.(Fraud means intentional misstatements of information in order to take illegal advantage of the situation and deceive. Error means unintentional misstatements of information. Person committing error does not have any intention to deceive).
Inherent limitations of audit:
- Complex Internal Control systems (Internal control means plans, policies and procedures of an organisation).
- Undetected frauds and error
- Audit evidence is persuasive in nature
- Audit is based on test check basis.
Auditing meaning, purpose and objectives
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