Page 11 - DCOM204_AUDITING_THEORY

Unit 1: Introduction to Auditing

7. In the event of loss of property by fire or on happening of the event insured against, Notes
Audited accounts help in the early settlement of claims from the insurance company.
8. In case of Joint Stock Company where ownership is separated from management, audit of
accounts ensure the shareholders that accounts have been properly maintained, funds are
utilized for the right purpose and the management have not taken any undue advantage
of their position.
9. To determine the value of the business in the event of purchase or sales of the business,
audited account will be the treated as the base for the evaluation.

10. The audit of accounts by a qualified auditor also help the management to understand the
financial position of the business and also it will help the management to take decision on
various matters like report in internal control system of the organization or setting up of
an internal audit department etc.

11. If the accounts have been audited by an independent person, disputes between the
management and labor unions on payment of bonus and higher wages can be
settled amicably.

12. In the event of admission of a new partner, audited accounts will facilitate the formation
of terms and conditions for joining the new partner. Last 3 years audited accounts and
balance sheet will give a general idea about the growth and financial position of the
business to the new partner.

Notes It is compulsory for all the organizations registered under the Companies Act must
be audited.

Self Assessment

Fill in the blanks:
6. Audit is concerned with detailed examination of the complete accounting records but it
does not involve the ........................
7. Auditing without the ........................ is not possible. When the accountant finishes his work,
the auditor starts his work.

8. To determine and judge the reliability of the ........................ and the supporting accounting
records of a particular financial period is the main purpose of the audit.
9. Detection of fraud or errors is a ........................ objective of the audit.

10. Overvaluation of closing stock or incorrect allocation of expenditure or receipt between
capital and revenue are some of the examples of ........................ .

1.6 Different Types of Audit

There are three different classes of audit that can be performed:

1. First Party Audit: An audit performed within an organization by that organization’s own
auditing resource. It is also referred to as an Internal Audit.
2. Second Party Audit: An audit of contractors/suppliers undertaken by or on behalf of a
purchasing organization. This may include the audit of organizations or divisions supplying
goods or services to others within the same group. It is also referred to as a Supplier Audit.

LOVELY PROFESSIONAL UNIVERSITY 5