Chapter 2 :
Objectives of Auditing
T.Y. B com (Honours)
Academic Year : 2009-10
Trimester : V
The objectives of Auditing
Primary objectives :
(to enable an auditor to express his opinion on….)
•
Truth and fairness of the financial position as
shown in balance sheet
•
Truth and fairness of the trading results as
depicted in profit & loss account
•
Adequacy of information required to be disclosed
•
Compliance and statutory requirements
•
Accuracy and reliability of books of accounts and
underlying records
The objectives of Auditing
Secondary objectives :
a)
To detect errors and frauds if any
b)
To prevent errors and frauds by the
deterrent effect of audit
c)
To provide allied services in the nature of
consultancies on accounting treatment,
accounting systems, taxation, financial
problems etc.
Definition of Fraud
Fraud can be defined as :
“ the successful practice of deception,
with the intention of cheating another
person. It involves trickery and deceitful
action.”
Fraud maybe named in other words like
embezzlement, defalcation and
misappropriation or manipulation.
Some methods of
Manipulation of accounts
1.
Overstatement of stock
2.
Overstatement of sales
3.
Understatement of purchases
4.
Manipulation of expenses
5.
Overstatement of Assets
6.
Understatement of Liabilities
7.
Misappropriation of cash or goods
8.
Omission to record cash receipts
9.
Teeming and Lading (Lapping)
10.
Kiting
11.
Intentional errors in balancing cash book
Some methods of
Manipulation of accounts
12.
Payment by duplication of source documents
13.
Cheque writing by leaving gap
14.
Inclusion of dummies in the payroll
15.
Payroll overcasting
16.
Fraudulent adjustment entries
17.
Forgery
Types of Errors
1.
Errors of omission-transaction has been
2.
Errors of commission – improper
3.
Errors of principles – transactions not
4.
Compensating Errors – Primarily wrong
omitted
recording of transactions
recorded as per accounting principles
but offset by another wrong entry
Circumstances indicating
errors or frauds

Quality of Management
a) Mgt is dominated by one person or a
small group
b) Internal control is absent or weak
c) There is high turnover of
accounting
staff
d) The accounts dept is overstaffed
e) Auditors and lawyers are changed
frequently
Circumstances indicating
errors or frauds

Unusual pressures on the concern
a) The working capital is inadequate
b) High credit sales to show income
ignoring risk of bad debts
c) There is need to show a better
position to succeed shares issue
d) there is heavy investment in a
product which is subject to rapid
obsolescence
e) There is heavy dependence on few
products or customers
Circumstances indicating
errors or frauds

Unusual transactions :
a) Many transactions near the year end
that affect the profit
b) Many transactions with related
parties, group concerns
c) There are excessive payments for
services
Circumstances indicating
errors or frauds

Problems in Audit :
a) There are inadequate records, incomplete files,
untallied trial balances
b) Vouchers are not available or not duly
authorised or supporting documents are altered.
c) Third party confirmations are not available or
are absent, differences in quantity reconciliations,
or unexplainable changes in ratios
d) there is lack of or inadequate explanations from
management
Auditors responsibility for
errors and frauds





Basic responsibility of Management – for
good accounting and internal control
Incidental Objective of Audit – to ensure
audit is free from major errors and frauds
Possibility of Non detection – not failure in
duty as long as reasonable care has been
taken
When circumstances indicate error or fraud –
take additional steps to detect them and
ensure proper closure or disclosure
CARO 2003 – reporting requirements for
fraud or error in the new format of CARO
2003.