What is the Audit? Explain the objects and advantages of its.

Ans.

Montgomery, a leading American accountant, defines : “Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and to report upon the facts regarding its financial operations and the results thereof”.

On a reading of this definition, one can appreciate the following points:

(a) Auditing is to express an opinion on the quality of financial statements. Financial statements generally mean the balance sheet and profit and loss account. The financial statements of any entity may be subject to audit so that credence is added to them. The entity may be business organizations with profit motive or organizations with non-profit motive. They may be of any forms of organization-companies or co-operatives where audit is compulsory or sole proprietorship or partnership where auditing is sought after by the entities voluntarily.

(b) The opinion of financial information is expressed after careful examination of books of account, documents, records and vouchers. That is before an opinion is pronounced evidence is gathered and tested to form the basis for framing an opinion.

SUBJECT-MATTER OF AUDIT

On the basis of subject-matter of the audit, the audit may be classified into financial audit, cost audit, operational audit and management audit.

Financial audit is an examination of financial statements to express opinion on the truth and fairness of financial condition and operating results of the entity. The statutory or external audit is generally financial audit.

Cost audit is audit of cost records of the company. It is checking of cost accounts and costing techniques, methods, system followed by the entity. The cost audit seeks to verify the truth and fairness of cost of production of goods or rendering of service by an entity. The Companies Act contains reference to cost audit in section 233B. It lays down that the Central Government may, by order, direct that the cost records, maintained by the company be subject to cost audit. The cost audit is generally carried out by cost accountants within the meaning of Cost and Works Accountants Act 1959. In case of companies the cost auditors are appointed by Board of Directors. The cost audit report is submitted to the management and to the Central Government, in case of cost audit of companies.

Operational audit is the review of operations of entity. It is generally carried out by internal auditors. It involves intelligent examination of various operations of functional areas of the business viz production marketing, stores etc, observing weakness, lapses, inefficiency in the operations and suggesting ways to strengthen the system, for aversing lapses and for improving efficiency and profitability of the operations.

Management audit is critical review of policy and practices of management. It involves review of various processes of management. For example, the audit involves checking of objectives for their relevance, clarity and dissemination downward the structure in understandable terms; the examination of organizational hierarchy-authority-responsibility relationship, departmentation, the quality of control techniques, the style of direction practiced by management etc.

OBJECTS OF AN AUDIT

“The Statement on Standard Auditing Practices: Objective and Scope of Audit of Financial statements” (SAP2) of the Institute of Chartered Accountants of India specifies that the objective of an audit is to express an opinion on financial statements. To give the opinion about the financial statements, the auditor examines the financial statements to satisfy himself about the truth and fairness of financial position and operating results of the enterprise. There are certain inherent limitations of audit examination. It would not be possible for auditor to discover all errors and frauds, in the financial statements due to the limitations of his checking. The SAP2 of the Institute of Chartered Accountants of India, states that “such discovery is not the main objective of audit.” In this light, the objectives of audit can be categorised into (i) Main objectives (ii) secondary objectives (iii) specific objectives.

The main objective of audit is to express expert opinion on financial statements. The secondary objectives are (i) detection and prevention of errors and (ii) detection and prevention of frauds.

ADVANTAGES OF AN AUDIT

On account of the following advantages people get their accounts audited especially in case where audit is not compulsory:

(1) Errors and frauds are located at an early date and in future no attempt is made to commit such frauds or one is rather careful not to commit an error or a fraud as the accounts are subject to regular audit.

(2) The auditing of accounts keeps the accounts clerks regular and vigilant as they know that the auditors would complain against them if the accounts are not prepared up-to-date or if there is any irregularity.

(3) In case of fire, the insurance company may settle the claim on the basis of the audited accounts of the previous years.

(4) Money can be borrowed easily on the basis of previous audited balance sheet.

(5) If the business is to be sold as a going concern, there will not be much difficulty regarding the valuation of assets and goodwill as the accounts have already been subject to audit by an independent person.

(6) Income-tax authorities generally accept the profit and loss account which has been prepared by a qualified auditor and they do not go into details of the accounts.

(7) The management may consult the auditor and seek his advice on certain technical points although it is not the duty of an auditor to give advice.

(8) If the accounts have been prepared on a uniform basis, accounts of one year can be compared with other years and if there is any discrepancy, the cause may be enquired into.

(9) Audited accounts are considered more or less correct by the sales tax authorities.

(10) It would facilitate the settlement of the accounts of a deceased partner.

Sole traders or partnerships are under no legal obligation to get their accounts audited but because of the advantages derived, they generally have their accounts audited.