The word audit is taken from Latin word gaudier” which means to hear. In the olden days, the business people living in Egypt, Greece, and Rome used to appoint auditors to hear accounts matters relating to their business.
The auditors used to rely on words of mouth. The accountant was allowed to read the receipts and payments before the auditors. It was period of 5600 years ago.
The matter was linked with an accounting system. The development of business leads to the changes in accounting, which, in turn, affected the work of auditing.
‘The division of labor and specialization became possible due industrial revolution: Industrial business companies were set up during the 19th century.
See Also: Continuous Audit Definition
There was need of large funds to finance business activities. The companies collected the capital from the general public. The professional management was hired to run the business.
The separation of ownership from management, use of a computer and legal requirements increased the importance of professional auditors. let’s discuss the various definition of auditing.
Definitions of Auditing
The various definition of auditing are as under:
- Montgomery says that auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and to report upon the other facts regarding its financial operations and the results thereof.
- Robert E. Schlosser says that auditing is a systematic examination of financial statements; records and related operations to determine the adherence to generally accepted accounting principles, management policies or stated requirements.
- According to International Auditing Practices Committee an audit is the independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size, or legal form, when such an examination is conducted with a view to expressing an opinion thereon.
It is clear from the above definition of auditing that auditing is an independent checking of statements, records, operations and performance of a concern with a view to expressing an opinion in the form of the written report.
See Also: Test Checking in Auditing
Characteristics of Auditing
The characteristics of auditing leads to the definition of auditing are as follow:
INDEPENDENT EXAMINATION
Audit is concerned with an independent examination. An auditor must be independent in fact and appearance. He is independent if he is not an employee.
FINANCIAL INFORMATION
Audit relates to financial information of a business concern the books of accounts and financial information provide data about the business. The auditor examines such information to test the validity of data.
ENTITY
Audit deals with an entity, enterprise, undertaking, concern, agency or company. All aspects of entity relevant to financial statements are covered by the audit.
BUSINESS FOR PROFIT
Audit is for the business set up for profit in private sector. In real life proprietorship, partnership and companies are working for profit. An audit is compulsory for companies and it is optional for other businesses.
NON-PROFIT BUSINESS
Audit is conducted by non-profit associations. Many companies are working, for the welfare of society. These companies promote art, religion, charity and other useful objects.
SIZE OF BUSINESS
The size of business may be small, medium or large. Proprietorship, partnership, and co-operative society are small in size.
See Also: Application of Continuous Audit
Private limited company may be medium and a public limited company is large in size. An audit is suitable for every size of business.
LEGAL FORM
Audit can protect business assets and rights of owners. The legal form may differ from business to business. But the audit is equally beneficial for all forms of business concerns.
EXPRESSING OPINION
Audit is conducted for expressing an opinion on financial information. The auditor can express an opinion whether financial statements give a true and fair view and comply with relevant laws.
See Also: Types of Ledger Used in Auditing
Nature Of Auditing
PLANNING
Auditing seeks to ensure that proper attention is given to important areas of audit. The problems are identified and work is completed in time. Audit program helps to regulated audit,
EVALUATION
Auditing is concerned with the evaluation of accounting system and internal control. The purpose is to examine information in accounting records.
EVIDENCE
Auditing requires evidence to form an opinion on financial statements. The compliance and substantive procedures are used to collect sufficient evidence about business matters,
TESTING
Auditing involves testing reliability, competency and -adequacy of evidence in support Of monetary transactions of. a business concern, It is a process of testing and weighing of evidence.
ANALYTICAL
Auditing is analytical in nature, The auditor into details of facts and figures stated in financial statements.
CRITICAL
Auditing is critical in nature, The auditor can be prescribed laws have been followed in the preparation of final accounts, He can examine that accounting policies remain the same.
INVESTIGATIVE
Auditing is investigative in nature. An auditor may an indication that fraud or error has been committed. He must investigate the matter thoroughly to clear doubt or confirm it.
COMPARING
Audit work requires comparing entries with vouchers. An audit clerk can call over the figures stated in vouchers, The senior auditor can compare amount appearing in journals.
TICKING
Audit work requires ticking by audit staff. The symbols and ticks are used for vouching, casting, posting, confirmation, circularization, and verification. These ticks may change from year to year and from auditor to auditor.
VERIFICATION
Auditing is concerned with verification. It is a technique to determine value and existence of assets and liabilities. The auditor can determine proper use, recording and valuation of assets.
See Also: How to Conduct an Audit of a Firm
GUESSWORK
Accounting work involves judgment in preparing final accounts, Such judgment affects the working of an auditor. He can make guesswork in various matters about financial information.
REVIEW
Auditing deals with the review of financial statements as a whole to check that such statements show a true and fair view of the company’s state of affairs, profit and cash flow statement for the period then ended.
MATERIAL MISSTATEMENT
Auditing is carried out to obtain reasonable assurance that financial statements are proper in all respects.
It is possible that material misstatement may remain undiscovered due to test nature and other limitations of an audit.
REPORTING
Auditing is concerned with reporting. The auditor can report on business matters to shareholders and owners.
The report may be clear or qualified under the circumstances. When a qualified, adverse or disclaimer of opinion is given, the report must state all reasons for such opinion.
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