What is Auditing? 

The word ‘Audit’ means inspecting various books of accounts to analyze the validity and reliability of the data and information that books contain with their supporting documents and receipts so that no error takes place while auditing and it also helps in preventing fraud during the process of auditing. 

Features of Financial Auditing 

• A financial audit is a systematic analysis of the various books of accounts of the company. 
• Financial Audit is done by an independent person, or body of persons, who is qualified for this job. 
• In a financial audit, the results of the financial statement are properly examined by the auditor. 
• Financial Audit is done with the help of the supporting documents, vouchers, receipts related to the books of account to do the verification. 
• The auditor must satisfy himself that the results of the financial statement show the true and fair value of the company’s affairs. 

Benefits of Auditing 

The following are the various benefits of Auditing – 

• Owner’s Satisfaction – Audit helps the owner to be satisfied with the operations of business and working of the various departments. 
• Help in detection in the prevention of frauds and errors – Audit helps in detection of errors whether it happens innocently or deliberately, and also helps in avoiding its occurrence in future. 
• Moral check –The employees of the firm know that they don’t have to commit any mistakes or frauds in the account of the business because it will be examined shortly by the auditor. 
• Help in protecting the interest of the shareholder – The process of an audit gives assurance to the shareholder that the company’s book of account is maintained properly by the company and their interest is not going to suffer in any situation or any circumstances. 
• Reliable by outsiders – If the audit is done by an independent authority in a proper way that shows the true and fair value of the company’s affairs then outsiders like creditors, banks, investors can rely on the book of account of the company. 

Limitation of Auditing 

Besides having various benefits, there are many limitations of Auditing – 

• High-cost burden – As audit is an expensive process, that’s why the auditor limits their scope of examining to selective areas because of which depth checking of books of accounts is not possible. 
• Insufficient time – Mainly, the auditor has to release the report within a specified time limit. But, sometimes because of this time limit, it made it difficult for the auditor to do the work of Audit effectively. 
• Based on test checks – Mainly, auditing is done based on test checking. So, the results drawn based on test checking need not be always true. 
• Based on the information provided by the management – The opinion of the audit is based on the information that the auditor gets from the management. Hence, it’s not necessary that outsiders can fully rely on the report prepared by the auditor. 

The objective of Auditing is Classified into Two Parts 

1. Primary Objective – The primary objective of the auditor is that to report to the owners at the end of its accounting year that the company’s financial statement shows the true and fair value of the company’s affairs after a proper examination. 
2. Secondary objective – The secondary objective of the auditor is to 

• Detect and prevent the fraud 
• Detect and prevent errors. 

Types of Audits 

There are mainly three types of Audits; 

1. Internal Audits – under Internal Audit, the audit is generally done by the people of the company. Mainly, the internal Audit is done by the company to improve decision-making within the company and also to ensure that true and fair financial reporting should be done. Internal audit is also used by the companies to find out any inefficiency or flaws that exist in the company before allowing the external auditor to do the review of the financial statement. 

2. External Audit – It means the audit is done by any external organization or any external auditor. External one gives an unbiased opinion about the financial statement of the company which the internal auditor may not give. 

3. Government Audit – generally, the government audit is done to analyze the financial statement whether it is accurate or not so that the companies cannot misrepresent the amount of taxable income of the company. 

Audit Procedure of Some of the Items of the Balance Sheet 

1. Share Capital – Share Capital is the money that the company raises through the issue of the share of a company. 

Audit Procedure 

• Audited Financial Statement of the previous year must tally with the period end balances of share capital i.e., authorized, issued, and paid-up share capital. 
• In case, there is no change in the year, then take a written confirmation from the company that there no change is going to be placed in the capital structure of the company during that year. 
• In case of any changes take place, then verify that whether the amount of paid-up capital at the end of the period is within the limits of authorized capital or not. 
• In case the company increases the share capital, then the auditor must verify whether the amount payable to MCA is calculated accurately or not. 

2.  Reserve and Surplus – Reserve is the appropriated amount out of profits that are not used to meet any liability or any contingencies. 

Audit procedure 

• Firstly, the Auditor checks the opening balances of reserve and surplus to the closing balances of the reserve and surplus of the previous year. 
• The auditor must verify whether the surplus or deficit of the statement of profit and loss account has been adjusted properly or not. 
• Verification of the reserve is done to see whether it is sub-classified according to nature and purpose while disclosing the same like capital reserve, general reserve, revaluation reserve, etc. 

3.    Borrowings – Borrowings are a financial obligation of the company other than the owner’s fund. 

Audit procedure 

• Verify that significant debt commitment were approved by Boards of Directors. 
• Check details of recorded loans like interest rate, terms, and conditions of repayment. Agree to the loan agreement. 
• Agree with details of leases and hire purchase creditors recorded to underlying creditors. 
• Auditors must obtain the balances of all the borrowings from the lender to make confirmation. 

Context and Applications 

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for: 

• B. Com 
• M.Com