Tuesday, January 31, 2012

Objectives Of Audit

Basic objective of auditing is to prove true and fairness of results presented by profit and loss account and financial position presented by balance sheet. Its objectives are classified into two groups which are given below:

A. Primary Objectives Of Audit
The main objectives of audit are known as primary objectives of audit. They are as follows:
i. Examining the system of internal check.
ii. Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing etc.
iii. Verifying the authenticity and validity of transactions.
iv. Checking the proper distinction of capital and revenue nature of transactions.
v. Confirming the existence and value of assets and liabilities.
vi. Verifying whether all the statutory requirements are fulfilled or not.
vii. Proving true and fairness of operating results presented by income statement and financial position presented by balance sheet.

B. Subsidiary Objectives Of Audit
These are such objectives which are set up to help in attaining primary objectives. They are as follows:
i. Detection and prevention of errors
Errors are those mistakes which are committed due to carelessness or negligence or lack of knowledge or without having vested interest. Errors may be committed without or with any vested interest. So, they are to be checked carefully. Errors are of various types. Some of them are:
* Errors of principle
* Errors of omission
* Errors of commission
* Compensating errors

ii. Detection and prevention of frauds
Frauds are those mistakes which are committed knowingly with some vested interest on the direction of top level management. Management commits frauds to deceive tax, to show the effectiveness of management, to get more commission, to sell share in the market or to maintain market price of share etc. Detection of fraud is the main job of an auditor. Such frauds are as follows:
* Misappropriation of cash
* Misappropriation of goods
* Manipulation of accounts or falsification of accounts without any misappropriation

iii. Under or over valuation of stock
Normally such frauds are committed by the top level executives of the business. So, the explanation given to the auditor also remains false. So, an auditor should detect such frauds using skill, knowledge and facts.

iv. Other objectives
* To provide information to income tax authority.
* To satisfy the provision of company Act.
* To have moral effect
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