Objectives of Auditing
The objective of an audit is to express an opinion
on financial statements. The auditor has to verify the financial statements and
books of accounts to certify the truth and fairness of the financial position
and operating results of the business. Therefore, the objectives of audit are
categorized as primary or main objectives and secondary objectives.
The primary or main objective of audit is as follows:
An auditor has to examine the accuracy of the books
of accounts, vouchers and other records to certify that Profit and Loss Account
discloses a true and fair view of profit or loss for the financial period and
the Balance Sheet on a given date is properly drawn up to exhibit a true and
fair view of the state of affairs of the business. Therefore the auditor should
undertake the following steps:
Verify the arithmetical accuracy of the books of
Verify the existence and value of assets and
liabilities of the companies.
Verify whether all the statutory requirements on
maintaining the book of accounts has been complied with.
Books of Accounts mean the financial records maintained
by a business concern for a period of one year. The period of one year can be
either calendar year i.e., from 1st January to 31st December or financial year
i.e., from 1st April to 31st March. Usually, business concerns adopt financial
year for accounting all business transactions.
Books of accounts include the following: ledgers,
subsidary books, cash and other account books either in the written form or
through print outs or through electronic storage devices.
After verifying the accuracy of the books of
accounts, the auditor should express his expert opinion on the truthness and
fairness of the financial statements. Finally, the auditor should certify that
the Profit and Loss Account and Balance Sheet represent a true and fair view of
the state of affairs of the company for a particular period.
Financial Statement means the statements prepared
at the end of the year taking into account the business activities that took
place for a year, for example, transactions that takes place in a business
concern from 1st April to 31st March.
Financial Statement includes the following:
Trading and Profit and Loss Account, and
include cash and bank balance, value of closing stock, debtors, bills receivable, investments, fixed
assets, prepaid expenses and accrued income.
include capital, profit and loss balance, creditors, bills payable, outstanding expenses and income received in advance.
includes sales, collection from debtors, rent received, dividend, interest received and other incomes received.
includes purchases, payment to creditors,
manufacturing and trade expenses, office expenses, selling and distribution
expenses, interest and dividend paid.
The secondary objectives of audit are: (1) Detection
and Prevention of Errors, and (2) Detection and Prevention of Frauds.
The Institute of Chartered Accountants of India
defines an error as, “an unintentional mistake in the books of accounts.”
Errors are the carelessness on the part of the person preparing the books of
accounts or committing mistakes in the process of keeping accounting records.
Errors which take place in the books of accounts and the duty of an auditor to
locate such errors are discussed below:
Errors that are committed in posting, totalling and
balancing of accounts are called as Clerical Errors. These errors may or may
not affect the agreement of the Trial Balance.
When a transaction is not recorded or partially
recorded in the books of account is known as Errors of Omission. Usually, it
arises due to the mistake of clerks. Error of omission can occur due to
complete omission or partial omission.
(1) Error of Complete Omission: When a transaction is totally or completely
omitted to be recorded in the books it is called as “Error of Complete
Omission”. It will not affect the agreement of the Trial Balance and hence it
is difficult to detect such errors.
Example – 1: Goods purchased on credit from Mr. X on 10.5.2016 for Rs. 20,500, not recorded in Purchases Book.
Example – 2: Goods sold for cash to Ram for Rs. 10,000 on 1.7.2016, not
recorded in Cash Book.
(2) Errors of Partial Omission: When a transaction is partly recorded, it is
called as “Error of Partial Omission”. Such kind of errors can be detected
easily as it will affect the agreement of the Trial Balance.
Example – 1: Credit purchase from Mr.C for Rs. 45,000 on 10.12.2016, is entered in the Purchases Book but not posted
in Mr.C’s account.
Example – 2: Cash book total of Rs. 1,10,100 in Page 5 is not carried forward to next page.
Errors which are not supposed to be committed or
done by carelessness is called as Error of Commission. Such errors arise in the
(1) Error of
(2) Error of
(3) Error of
casting, or Error of Carry-forward.
(1) Error of Recording: The
error arises when any transaction is
incorrectly recorded in the books of original entry. This error does not affect
the Trial Balance.
Example – 1: Goods purchased from Shyam for Rs. 1000 wrongly recorded in Purchases Day Book as Rs. 100.
Example – 2: Goods purchased from Ram for Rs. 1,000, instead of entering in Purchase Day Book wrongly entered
in Sales Day Book.
(2) Error of Posting : The
error arises when a transaction is
correctly journalised but wrongly posted in ledger account.
Example – 1: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted
to debit side of Repairs account instead of debit side of Rent account.
Example – 2: Rent paid to landlord for Rs. 10,000 on 1.5.2016 is wrongly posted
to credit side of Rent account instead of debit side of Rent account.
(3) Error of casting, or Error of Carry-forward: The
error arises when a mistake is
committed in carrying forward a total of one page on the next page. This error
affects the Trial Balace.
Example – 1: Purchases Book is totalled as Rs. 10,000 instead of 1,000.
Example – 2: Total of Purchases Book is carried forward as Rs. 1,000 instead of Rs. 100.
Errors of duplication arise when an entry in a book
of original entry has been made twice and has also been posted twice. These
errors do not affect the agreement of trial balance, hence it can’t located
Example: Amount paid to Anbu, a creditor on 1.10.2016 for Rs. 75,000 wrongly accounted twice to Anbu’s account.
When one error on debit side is compensated by
another entry on credit side to the same extent is called as Compensating
Error. They are also called as Off-setting Errors. These errors do not affect
the agreement of trial balance and hence it cannot be located.
Example: A’s account which was to be debited for Rs. 5,000 was credited as Rs. 5,000 and similarly B’s account which
was to be credited for Rs.
5,000 was debited for Rs. 5,000.
An error of principle occurs when the generally
accepted principles of accounting are not followed while recording the
transactions in the books of account. These errors may be due to lack of
knowledge on accounting principles and concepts. Errors of principle do not
affect the trial balance and hence it is very difficult for an auditor to
locate such type of errors.
Example – 1: Repairs to Office Building for Rs. 32,000, instead of debiting to repairs account is wrongly
debited to building account.
Example – 2: Freight charges of Rs. 3,000 paid for a new machinery, instead of debiting to Machinery account wrongly debited to
Fraud is the intentional or wilful
misrepresentation of transactions in the books of accounts by the dishonest
employees to deceive somebody. Thus detection and prevention of fraud is of
great importance and constituents an important duty of an auditor. Fraud can be
This is a very common method of misappropriation of
cash by the dishonest employees by giving false representation in the books of
accounts intentionally. In order to detect and prevent misappropriation, the
auditor should verify the system of internal check in operation and by making a
detailed examination of records and documents. Cash may be misappropriated in
the following ways:
(1) By omitting to enter cash which has been
Example: Cash received on account of cash sales for Rs. 35,000 is not accounted in the debit side of the cash book.
(2) By accounting less amount on the receipt side
of cash book than the actual amount received.
Example: Cash received on account of cash sales for Rs. 35,000 is accounted in the debit side of the cash book as Rs. 25,000. The difference of Rs. 10,000 may be defrauded by the cashier.
(3) By recording fictitious entries on the payment
side of cash book.
Example: Cash book is credited for Rs. 44,000 as amount paid to Mr.X for goods purchased on credit but actually no amount is paid.
Hence, cashier misappropriates Rs. 44,000 of cash as paid to Mr.X.
(4) By accounting more amount on payments side of
cash book than the actual amount paid.
Example: Amount paid to Gopal for Rs. 5,000 is accounted on the credit side of cash book as Rs. 15,000. The difference of Rs. 10,000 may be defrauded by the cashier.
(5) Teeming and Lading of Fraud which means cash
received from one customer is misappropriated and remittance received from
another debtor is posted to the first debtors account.
Fraud which takes places in respect of goods is
Misappropriation of Goods. Such a type of fraud is difficult to detect and
usually takes place where the goods are less bulky and are of high value.
By showing less amount of purchase than actual
purchase in the books of accounts.
By showing issue of material more than actual issue
By showing good materials as obsolete or poor line
By showing fictitious entries in the books of accounts.
Example – 1: Goods purchased amounting to Rs. 58,000 is wrongly accounted in Purchases Book as Rs. 50,000. Hence, showing less amount of purchases than the actual
and misappropriating goods worth Rs. 8,000.
Example – 2: Goods issued from stores for 1000 units is wrongly
accounted in the Ledger accounts as 3000 units issued. The difference of 2000
units may be misappropriated by the storeskeeper.
Example – 3: Entries in the Purchases Book may
be suppressed or inflated to show more or less profit.
Detection of Misappropriation of goods is a
difficult task for an Auditor. Only through efficient system of inventory
control, periodical stock verification, internal check system and adequate
security arrangement the scope for such frauds can be eliminated or minimized.
Auditor has to thoroughly scrutinize the inward and
outward registers, invoices, sales memos, audit notes, etc., to detect the
There is a very common practice almost in every
organization, some dishonest employees have intention to commit this type of
fraud. Manipulation of accounts is the procedure to alter books of accounts in
such a way that there will be an increase or decrease in the amount of profit
to achieve some personal objectives of the high officials. It is very difficult
for the auditors to identify such frauds which may be due to manipulation of
There are different reasons for manipulation of
accounts. The reasons are:
· To get
more commission calculated on profit
evasion of income tax and sales tax
· To get
huge loan from financial institutions by showing more profit in the books of
declare more dividend to the shareholders.
showing more profit than actual to get confidence of the shareholders.
To make secret reserves by showing less income or
by showing more expenses in the books of accounts.
Manipulation of accounts may be made in the
By showing more or less amount on fixed assets,
By showing over valuation or under valuation of
Over or under valuation of liabilities,
Creation of over or under provision for
Charging capital expenditure as revenue expenditure
or vice versa,
By making more or less provision for bad debts and
for outstanding liabilities,
By showing advance income or expenditure in the
current year accounts.
The objectives of Manipulation may be window dressing or creation of secret reserves.
Dressing: In window dressing, accounts
are manipulated in such a manner to reveal a much better and sound financial
position of the business than what actually it is, in order to mislead the
outsiders by inflating the profit.
Reserves: Accounts are prepared in
such a manner that they disclose a worse financial position than the real. The
real picture of the business is concealed and a distorted one is revealed.