Page 10 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes of a concern. Audit is concerned with detailed examination of the complete accounting
records but it does not involve the preparation of accounts.
2. If the auditor is asked to write the books of accounts, extract an agreed trial balance and
profit and loss account and Balance sheet, he would be doing the work of an accountant
and not the work of an auditor. Preparation of account is not the part of auditing. An
auditor, using his appointing authority, needs to check thoroughly, whether the Profit
and Loss account and the Balance Sheet have been properly drawn up and revel the ‘true
and fair view’ of the state of affairs and results of operation of the concern and report it to
the parties interested.
3. Auditing without the prior existence of accounts is not possible. When the accountant
finishes his work, the auditor starts his work.

1.4 Objects of an Audit

There are two types of object of auditing.

Main Object

The main object of auditing is to help the auditor to form an opinion as to whether the books of
account and the financial statements show true and fair view of the business. Auditor has to
check the books of account and financial statements keeping the main object in mind. According
to de Paula: The main object of audit is to ascertain that the balance sheet and profit and loss
account of an undertaking do show true and fair view of its financial position and earnings. A
similar view was observed by the Institute of Chartered Accountants of India when it state that,
the objective of an undertaking do show true and fair view of its financial position and earnings.

Secondary or Subsidiary Objects

The subsidiary object of auditing is to detect and prevent errors and frauds in the books of
accounts.
1.5 Advantages of Auditing

It is compulsory for all the organizations registered under the Companies Act must be
audited. There are advantages in auditing the accounts even when there is no legal obligation
for doing so. Some of the advantages are listed below:
1. Audited accounts are readily accepted in Government authorities like Income tax Dept.,
Sales Tax dept., Land Revenue departments, banks etc.
2. By auditing the accounts errors and frauds can be detected and rectified in time.
3. Audited accounts carry greater authority than the accounts which have not been audited.
4. For obtaining loan from financial institutions like Banks, LIC, HUDCO, HDFC, IFCI etc.,
previous years audited accounts evaluated for determining the capability of returning the
loan.

5. Regular audit of account create fear among the employees in the accounts department and
exercise a great moral influence on clients staff thereby restraining them from commit
frauds and errors.
6. Audited accounts facilitate settlement of claims on the retirement/death of a partner.

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