Page 7 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes and by the Institute of Chartered Accountants of India. Unit tries to define audit, and explain
various aspects of auditing and duties and responsibilities of an auditor. Two objectives of
auditing are primary and secondary. 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 and the subsidiary object of auditing is to detect and prevent errors and
frauds in the books of accounts. Different classes of audit and locating different errors are
explained.

1.1 Origin of Audit

From the time of ancient Egyptians, Greeks and Romans, the practice of auditing the accounts of
public institutions existed. Checking clerks were appointed in those days to check the public
accounts. To locate frauds as well as to find out whether the receipts and payments are properly
recorded by the person responsible was the main objective of auditing of those days.
During the 18th century industrial revolution brought in large scale production, steam power,
improved facilities and better means of communication. This resulted in the origin of joint stock
form of organizations. Shareholders contribute capital of these companies but do not have
control over the day-to-day working of the organization. The shareholders who have invested
their money would naturally be interested in knowing the financial position of the company.
This originated the need of an independent person who would check the accounts and report the
shareholders on the accuracy of the accounts and the safety of their investment.

The Indian Companies Act, 1913 defined the qualification, power, duties and procedure of
appointment of the Auditor. The audit of Joint Stock Company made compulsory by this Act.
Educational qualification certificate were issued by the Central and State Governments to those
who undergone the prescribed course. In the year 1949, Chartered Accountants Act was passed.
Companies Act, 1956 further elaborated the provisions related to the auditing and accounts of
the companies. Now a person to do the auditing must be qualified as per the standards of the
Institute of Chartered Accountants of India.
The word ‘Audit’ is originated from the Latin word ‘audire’ which means ‘to hear’. In the earlier
days, whenever there is suspected fraud in a business organization, the owner of the business
would appoint a person to check the accounts and hear the explanations given by the person
responsible for keeping the account and funds. In those days, the audit is done to find out
whether the payments and receipt are properly accounted or not. The objective of modern day
accounting is not only for the verification of cash but to report the financial position of the
undertaking as disclosed by its Balance sheet and Profit and Loss Account.



Caselet Let us Root the GAO on

I like the heat CMS and its contractors are getting for their audit activities as of late. The
lead for this story in Bloomberg Business week, based on a recent report from the
Government Accountability Office (GAO), pretty much says it all:
“A program to fight fraud in the Medicaid health system for the poor has cost the U.S. at
least $102 million in auditing fees since 2008 while identifying less than $20 million in
overpayments, investigators found.”
In other words, the government spends about five times more money chasing fraud than
it gets back. The story continues:
Contd....

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