SCOPE OF AUDIT
The scope and dimensions of auditing have greatly increased in the seventies and the evolution of new concepts such as Tax Audit, Management Audit and Operations Audit has further laid emphasis on its adoption on a wider scale. Actually, the primary audit objective of detection of fraud in the beginning has now shifted to the determination of the fairness and authenticity of reported financial position together with the detection and prevention of errors and fraud. This has vastly enhanced the scope of auditing and to meet with, exhaustive rules and regulations are being framed in all the countries of the world for conduct of independent and professional audit.
An auditor has to certify the correctness of the books of accounts and to detect errors committed by the clerks and accountants in the preparation of financial records. It is, of course, true that if this verification is not conducted in a proper and satisfactory manner, the results thus obtained would be wholly unreliable. There may be various ways and reasons due to which the financial books may be incorrect and inaccurate of an auditor to bring them to light and to report them to the owners of the business.
In a well-known English case, viz., London and General Bank (1895) case, it was indicated that the auditor should not only check the accuracy of the accounts but should also satisfy himself whether the books of accounts show a true position.
Hence, the duties of an auditor become :
(1) to check the arithmetical accuracy of the accounts;
(2) to check the books of accounts with the help of all the relevant vouchers, invoices, correspondence, minute books, etc.;
(3) to verify the assets and liabilities shown in the Balance Sheet; and
(4) to report to the client on the basis of his findings.
The following points should, however, be noted in this connection:
(1) The auditor of a limited company is expected to submit his report on annual accounts (i.e., Profit & Loss Account and Balance Sheet) which are placed before an Annual General Meeting. In other cases, however, such auditors submit some sort of certificate or report on the accounts. The work of audit should invariably justify such report or certificate. (Introduction to Auditing Notes Study Material)
(2) The work of audit usually depends upon the amount of discretion exercised by an auditor in his work. As such, it is not at all possible to lay down any hard and fast rules in this regard.(BCom 3rd Year Introduction to Auditing Notes Study Material)
(3) It is not possible for an auditor to check every item or conduct audit in detail in big business concerns and as such, he has to rely much on the system of internal check in vogue. Test checking, therefore, has to be exercised by him during the course of audit.
(4) An auditor should satisfy himself and ensure that the entries passed in the books are correct. For this, he has to exercise reasonable care and skill during the course of his work. (BCom 3rd Year Introduction to Auditing Notes Study Material)
(5) An auditor is not a technical man and, therefore, he has to rely upon the statements and explanations of responsible officials.
(6) He should investigate properly and thoroughly such matters which arouse suspicion and doubt.
Thus, it can be observed that the duties of an auditor provide a guideline towards the scope and subject matter of auditing. The scope of auditing is what an auditor does, or in other words, the scope of auditing depends mainly upon the extent of the work done by the auditor.
The scope and dimensions of duties of an auditor have been further extended due to the following factors:
1. Expansion of business and separation of management from ownership. With the advent of Industrial Resolution, the business has expanded from sole trader organisation to partnership and to company form of organisation in which there has been complete separation of ownership from management. The owners of company (shareholders) from within the country and outside are interested in the financial statements of the company which provide them the information about the affairs of the company. Hence, there has been growing importance of audit conducted by an impartial and competent person.
2. Statutory Control. The supervision and control exercised by the Government through the provisions of legislative measures such as Companies Act, 2013 have led to the need for exhaustive scrutiny of accounts under the norms and procedures laid down by such legislation. It has extended further the scope of audit. (BCom 3rd Year Introduction to Auditing Notes Study Material)
3. Legal Decisions. The courts have also given decisions from time to time and have laid down statutory obligations for presentation of financial statements and for reporting norms. This has greatly enlarged the scope of duties and liabilities of auditors.
4. Standards set by Professional Institutes. There are institutes of accountants in different countries which have laid down definite standards for preparation and audit of financial statements. The Institute of Chartered Accountants of India is an example in India which has issued statements on Standard Auditing Practices (S.A.P.) and Accounting Standards which the auditors are required to follow.
5. EDP Based Accounts. It is now a common practice for big business undertakings to use electronic computers for processing transactions, maintaining data files and preparing final accounts. Very often an auditor has to rely upon the EDP application of the client for determination of the extent of audit tests. This has given rise to new techniques to assess and prepare a proper audit plan.
BOOK-KEEPING, ACCOUNTANCY AND AUDITING
Some of the writers on the subject are of the opinion that Book-keeping, Accountancy and Auditing are the three aspects of the term ‘Accountancy’ itself in its widest sense, namely:
(i) the aspect of recording transactions, i.e., the practical part (known as ‘Book-keeping’):
(ii) the constructive aspect, i.e., the theoretical part (commonly known as ‘Accountancy Proper’): and
(iii) the critical aspect, ie, the analytical part (known as ‘Auditing’).
This is probably the briefest and the simplest distinction that can be made between these three terms. There was a time when no proper demarcation could be made between the duties of a book-keeper and an accountant. But in the present industrial age, Book-keeping and Accountancy have become separate functions. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Book-keeping. As is evident from the above table, book-keeping is the art on the daily transactions in a set of financial books. The elementary part of the whole process is performed by a book-keeper who is mainly concerned with our posting, totaling and balancing the various accounts in the ledger. The en book keeper is more or less mechanical for which it is not necessary to be familiar with the accounting principles. A person with the knowledge of rules of journalizing and posting can very easily do the job. In Western countries like England and America, this work is done by machines.
Accountancy. “Accountancy begins where Book-keeping ends.” It means that an accountant comes into the picture only when the book-keeper has done his job. He has to go behind the work of a book-keeper and to satisfy himself that the transactions have been properly recorded and posted in the books of accounts. His duty lies in making the Trial Balance agree and then to prepare the Profit & Loss Account and the Balance Sheet after making the necessary adjustments and the rectification of errors.
In short, it can be said that he has to prepare summary in the form of Trial Balance and make analysis after preparing the Balance Sheet and Profit & Loss Account. An accountant is expected to be an expert in the accounting procedures as he has to examine analytically the final accounts.
Despite all this, it is not necessary for him to pass the Chartered, Accountant’s examination. He is not required to submit his report after the completion of his work. (BCom 3rd Year Introduction to Auditing Notes Study Material)
Auditing. “Where accountancy ends, auditing begins.” An auditor has to verify the entries passed by the accountant and the final accounts prepared by him. Auditing is, therefore, the scrutiny of the accounts of a business with the help of vouchers, documents and the information given to him and also the explanations submitted to him. Unlike an accountant, an auditor has to satisfy himself after due verification and thorough scrutiny of accounts as to whether the transactions entered into the books are bona fide.
It is to be noted that an auditor is required to submit his report to the effect whether or not the Balance Sheet is a true and fair representation of the existing state of affairs of a business concern.
Hence, an auditor must be well-versed in the accounting principles. This is why he should be a Chartered Accountant. He has to express his impartial opinion in his report which he cannot give unless he satisfies himself completely with the proper recording of transactions. No auditor can dream of certifying a Balance Sheet as true and fair by simply acting as an accountant. As such, auditing is based on accountancy and not accountancy on auditing. An auditor must be well familiar with the principles and practical aspects of accountancy but it is not necessary for an accountant to be an expert in the audit work.
Sometimes an auditor is requested to write up the books of accounts of his client from the records and documents as are produced to him. If he acts that way, he is not an auditor but an accountant as he plays the role of an accountant. In two cases viz., Apfell vs. Annan Dexter & Co. (1926) and Leach vs. Stocks (1937) and others, the learned judge did not hold a firm of accountants liable for negligence in tracing out the fraud on the ground that the firm has appointed an accountant whose duty was to prepare final accounts for purposes of Income-tax.
It was not part of his duty to audit the Balance Sheet. An auditor has, therefore, nothing to do with the preparation of accounts whatsoever but his work is totally different. An accountant is to put his signature as a token of his having drafted the Balance Sheet and Profit & Loss Account while an auditor has no duty to prepare such accounts but to certify that they are correct, properly drawn up and that they reveal true and fair view of the state of affairs of the concern.
Some people agree that auditing is a luxury as:
(a) The remuneration paid to the auditor is a charge on the profits of a concern and it is a sheer wastage of funds:
(b) An average businessman finds it difficult to observe formalities necessary for the purpose of auditing:
(c) The work of audit involves a lot of obstructions in the daily routine of work of the office staff and as such, it is an unnecessary waste of time; and
(d) An auditor cannot detect and prevent all the errors and fraud and hence, it is of no use.
The above arguments are not sound and are based on illusory grounds.
To sum up, if accounting is a necessity, auditing is still more important. It might be the case in small business-houses where only small amounts of capitals are invested and pay accounts are maintained in a very crude form that auditing may not be a necessity and legally compulsory. But, for every business, auditing has a great practical utility.
An individual by nature, wants to attain the maximum utility of his money and to earn maximum profits and if so, he must maintain proper accounts and get them audited by some independent and qualified auditor. Hence, the notion that “some businessmen are his of the opinion that auditing is a luxury, while accounting is a necessity,” no longer holds good.
Accountancy and Audit
As shown earlier, a line of demarcation has to be drawn between accountancy and auditing. The following points can be helpful in doing so:
1. Accountancy is mainly concerned with the preparation of summary and analysis of the records prepared by the book-keeper. Auditing is the examination of the completed records. (BCom 3rd Year Introduction to Auditing Notes Study Material)
2. The main object of accounting is to ascertain the trading results. of a business during a financial year while the object of audit is to certify as correct the financial statements prepared by the accountant.
3. An accountant is an employee of the business while an auditor is an independent outsider.
4. As an employee of the business, he draws his monthly salary regularly from the business itself while an auditor is paid a remuneration agreed upon between him and his client. (BCom 3rd Year Introduction to Auditing Notes Study Material)
5. An accountant is not expected to have a knowledge of auditing but for an auditor, it is very essential to possess a thorough knowledge of accountancy.
6. An auditor can be changed from year to year but an accountant is not, as he is usually a permanent employee of the business.
7. An accountant does not submit his report on the financial statements prepared by him while an auditor has to submit his report to his client.
Audit and Investigation
Auditing and investigation are not the same thing, but there is a lot of difference between the two. The accounts of a firm may be investigated for some special purpose. It is a sort of thorough enquiry into the financial position of a business to measure the profit-earning capacity.
1. As already pointed out, investigation is done with some special purpose in view while audit is carried out to find out whether the balance sheet of a concern is properly drawn up and it exhibits a true and fair view of the state of affairs.
2. Audit is generally conducted at the end of a financial year and as such, it relates to the accounts of one year only, while investigation covers several years, say 3, 5 or 7 years, to find out average earning capacity or to measure the financial position of a concern.
3. Investigation may be normally carried out on behalf of those who are outsiders who either want to purchase the business, to become partners, to advance loans or to purchase the shares of a firm. Audit is always conducted for proprietors only.
4. Audited accounts are further investigated for some special purpose in view while investigated accounts are audited in the ordinary course.
5. As the purposes behind investigation are different from those of audit, one cannot take the place of the other. As such, they have a separate function to perform. (BCom 3rd Year Introduction to Auditing Notes Study Material)
6. Audit is legally compulsory, especially in the case of companies, but investigation is voluntary and depends upon the necessity of some purpose in view. (BCom Introduction to Auditing Notes Study Material)