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Chapter 2 : Objectives of Auditing

S.Y. BBA Academic Year : 2010-11

Trimester : VI

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 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 Auditing


Secondary objectives :
a)

To detect errors and frauds if any

b)
c)

To prevent errors and frauds by the deterrent effect of audit


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

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 like embezzlement, defalcation and misappropriation or manipulation.

Some methods of Manipulation of accounts


1.
2. 3.

Overstatement of stock
Overstatement of sales Understatement of purchases

4.
5. 6.

Manipulation of expenses
Overstatement of Assets Understatement of Liabilities

7.
8. 9. 10. 11.

Misappropriation of cash or goods


Omission to record cash receipts Teeming and Lading (Lapping)

Kiting
Intentional errors in balancing cash book

Some methods of Manipulation of accounts


12. 13. 14. 15. 16.

Payment by duplication of source documents Cheque writing by leaving gap

Inclusion of dummies in the payroll


Payroll overcasting Fraudulent adjustment entries

17.

Forgery

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 but offset by another wrong entry

4.

Compensating Errors Primarily wrong

Circumstances indicating errors or frauds

Quality of Management
a) Mgt is dominated by one person or a small group b) Internal control is absent or weak c) There is high turnover of accounting staff d) The accounts dept is overstaffed e) Auditors and lawyers are changed frequently

Circumstances indicating errors 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 errors 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 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.

When circumstances indicate error or fraud