CHAPTER ONE

1. An overview of auditing
1.1. Origin and Meaning of audits
Auditing is from the latin word audire meaning “to hear” or listen The first country
exercise auditing is
 Mesopotamia.
 Ancient Egypt
 Greece,
 UK
 Rome

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Demands for audits:- The essence of demands for audit is
 Control mechanism
 Resolve conflict b/n managers and owners
 Reduce damaging consequences
 Simplify complexity
 Regulatory requirements

Advantages of Auditing.
 Auditing helps to assure the shareholders that the business enterprises is being run or
managed in their best interest.
 Audit accounts could be more easily acceptable the Inland Revenue for tax purposes.
 Audited accounts can be very useful for investigating bank loan or overdraft.
 Auditing helps to prevent or detect fraud or errors within an enterprise.
 Auditing helps to highlight those weakness or strength in the internal control system of
a company.
 Auditing serve as a psychological check and moral deterrent against fraudulent practice
by the employees of an enterprise
 Audited account s promotes the confidence of investors and investment analyst.

1.4. DISTINCTION B/N ACCOUNTING

 Need not be chartered accountant Whereas an auditor must be Chartered

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accountant

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An Accountant is an employee of the But an auditor is not an employee but
concern work directly under mgmt.  an independent person

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 Accountant is a permanent worker  Changes from year to year
/employee . An auditor is not
and he may Of the concern

 An Accountant not need have but an auditor must have thorough knowledge
Thorough knowledge of auditing and of accountancy
its techniques

 Accounting begins where the Begins where the accountancy work Ends.
accountancy record.

 Accounting is under taken through the . Where a auditing is generally

1.5. Objective of auditing

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A.The main objective of auditing is not to detect errors and frauds but to find out whether the
accounts of particular concern exhibit a true and fair view of the earnings and financial state of
affairs.
B.Subsidiary object of audits, which is incidental to the main object is
1. Detection of errors
2. Detection of frauds.

1. Detection of errors

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This errors arise Clerical or technical errors

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A. 2. Detection of frauds: - detection of frauds by the auditor is also considerable importance
and is more difficult than the detection errors.

While doing so, he should always avoid any hospitality and mistrust toward the staff of the
organ. And should always be polite
FRAUD is intentional and is knowingly committed to defraud the proprietors of the concern.
 This done deliberately which means that there is intent to deceive, to mislead or conceal
the truth or material facts.
 They are more difficult to detect then innocent errors
 tactful take place by two methods
 misappropriation of cash and goods
 by false faction of accounts

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Audit Scope Meaning
Audit scope means the depth of an audit performed. Audits are performed for several purposes:
regular “checkups” of company records, to check for internal errors, for the purpose of finding
fraud inside a company, for the purpose of finding fraud in another company, or even for the
purpose of finding tax income and other offenses against IRS law. Due to this fact, audit scope

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and objectives have a different meaning depending on the person performing the audit as well as
the reason behind the audit.
Types of Audits and Auditors
Accourding to our country There are three major types of audits. These are discussed below.
Financial Statement Audit: is conducted to determine whether or not financial statements are
presented in accordance with GAAP. The most common financial statements that should be
audited by the auditors are Balance sheet, Profit and loss statement, and cash flow statement
including the accompanying foot notes. Financial statement audits are normally performed by
firms of certified public accountants and users of auditor‘s report include management, investors,
bankers, creditors, financial analysts, and government agencies.
Operational Audit: is a review of any part of an organization‘s operation procedures and
method for the purpose of evaluating effectiveness and efficiency. This type of audit examines:
The economy of administrative activities in accordance with sound administrative principles and
practices, as well as management policies;
The efficiency of utilization of human, financial, and other resources including examination of
information systems, performance measures and monitoring arrangements, and procedures
followed by audited entities for remedying identified deficiencies; and
The effectiveness of performance in relation to achievement of the objectives of the audited
entity and audit of the actual impact of activities compared with the intended impact.
Here, some of the areas that should be audited are evaluation of organizational structure,
computer operations, production methods, marketing, and any other areas in which the auditor is
qualified.
Compliance Audit: the purpose of compliance audit is to determine whether the client is
following rules, procedures, regulations, and policies set down by the management. Such type of
audit includes the process prescribed by a company controller, reviewing wage, bonus, and
dividend rates, and examining contractual agreements. Like that of audits there are also three
types of auditors.

Independent (External) auditors: these are the auditors‘ of private audit firm. The audit firm
will sign audit contract in order to examine evidence and provide audit report to the concerned

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party. Thus, the independent auditors received a fee from the audited organization and they are
primarily responsible to third parties (shareholders).

Internal auditors: are permanent employees of the client and get a monthly salary. They are
primarily responsible to the management or the board of directors. Internal auditors lack
independent in appearance (are not free from financial and family relationship) from the client
since they are the employees of the audited organization, but they should satisfy independence in
(Objective). To be objective:
They should not be a member of any committee in the organization
They should provide their report not to the department heads rather to the manager.
Government auditors: are the employees of the government not the audited organization. They
are the auditors‘ of Federal government and/or Regional government and primarily responsible
the legislative or executive body. Such type auditors will assign to audit selective government
organization.

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