June 28, 2022

What is Auditing

What is Auditing

is an objective examination and evaluation of the financial statements of an organization to make sure that the records are faith and accurate representation of the transactions they claim to represent it can be done internally by employees of the organization or externally by an outside firm

Types of Audits

Financial – This is an analysis of the fairness of the information contained within an entity’s financial statements. It is conducted by a CPA firm, which is independent of the entity under review. This is the most commonly conducted type of audit.

Operational – This is a detailed analysis of the goals, planning processes, procedures, and results of the operations of a business. The audit may be conducted internally or by an external entity. The intended result is an evaluation of operations, likely with recommendations for improvement.

Complaints – This is an examination of the policies and procedures of an entity or department, to see if it is in compliance with internal or regulatory standards. This audit is most commonly used in regulated industries or educational institutions.

Information systems – This involves a review of the controls over software development, data processing, and access to computer systems. The intent is to spot any issues that could impair the ability of IT systems to provide accurate information to users, as well as to ensure that unauthorized parties do not have access to the data.

Objectives of Auditing

The basic objectives of audit are to express an opinion on financial statements. To give the supposition about the budget reports, the inspector analyzes the fiscal reports to fulfill himself about reality and reasonableness of budgetary position and working aftereffects of the endeavor. 

Detection of errors are frauds

Errors are those mistakes that are committed due to carelessness or negligence or lack of knowledge or without having vested interest.

Errors may be committed without or with any vested interest.

So, they are to be checked carefully. Errors are of various types. Some of them are:

Errors of principle.

Errors of omission.

Errors of commission.

Compensating errors.

prevention of error or frauds

Fraud is the intentional or willful 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 classified as:


This is a very common method of misappropriation of cash by 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.


The 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 the issue of material more than the actual issue made.

·           By showing good materials as an obsolete or poor line of goods.

·           By showing fictitious entries in the books of accounts


There is a very common practice almost in every organization, some dishonest employees have the 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 the manipulation of accounts.

Advantages of auditing

auditing detects errors and frauds with suggestions for their prevention

to avoid such mistakes being committed the accounts are kept up to date

the parties feel confident of the audit report because it was done by an independent person or body

accounts are as audited stand

the auditors are competent persons in the fields of accounts and financial laws so can render advice to management

in case of joint-stock companies, the director has no chance of taking undue advantage

Auditing accounts facilitates settlement among partners

Classification of Auditing

The Audit may be classified by different classes on the basis of following:

(A)   Legislative Control:

On the basis of legislative control, the audit may be classified into three types. These are:

i)        Statutory Audit:

Where the appointment of auditors, manner of audit, contents of audit report, etc. are specifically mentioned in any enactment, the audit conducted with reference to them is called a statutory audit. Statutory audit is a compulsory audit and is to be carried out each year by an auditor called a statutory auditor.

ii)       Govt. Audit:

The audit of accounts of states, Government departments, undertakings, local bodies are done by Government auditors. The appointment of an auditor is as per the articles of the constitution of the country. Under this act, the President shall appoint the Comptroller and Auditor General, who is the prime authority in the audit hierarchy of Government accounts.

iii)     Private Audit:

In this case, there is no statutory or constitutional compulsion to get the accounts audited. For example, the sole proprietors, partnership firms get their accounts audited without compulsion in view of the advantages of having an audit.

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