Principle of

Auditing
RICARDO V.
VILLANUEVA
Discussant
01 Definition and Table of
Characteristics of Contents
Auditing
02 Objectives of Auditing

03 Basic Principles
Governing an Audit

04 Advantages and
Limitations of Auditing

05 Internal and External

Audit
 01
Definition and
Characteristics of
Auditing
 The word “audit” is a very
generic word, it essentially
means to examine something
thoroughly.
The International Federation of Accountants has given the following
definition of an audit, “audit is an independent inspection of the financial
information of any organization, whether profit-oriented or not profit-
oriented, irrespective of its legal form, status or size when such
examination is conducted with a view to express an opinion thereof”.
Auditing it is the process of examining evidence regarding a report,
statement, information, or other assertion to determine its agreement with
established criteria. Moreover, Auditing can be defined as a systematic
process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and
communicating the results to interested users” (American Accounting
Association, 1972).
Prof. L.R.Dicksee. "Auditing is an examination
of accounting records undertaken with a view to
establish whether they correctly and completely
reflect the transactions to which they relate.
Audit is a process whereby the accounts of business entities, including
limited companies, charities, trusts and professional firms are subjected to
scrutiny in such detail as will enable the auditors to form an opinion as to
their truth in fairness (Woolf, 1997).
The one important thing to remember is that an
audit is a close inspection of the books of
accounts, but it does not absolutely guarantee
error-free books.
Generally auditing can be termed as the systematic and
independent examination of data, statement (financial
statement), records, operations, and performances of an
enterprise for the stated purpose. The audits usually evaluate
system input, output; processing controls; backup and
recovery plans; system security; and computer facilities.
These audits may review existing, as well as, systems in the
development phase.
 Who can do the audit?
- The audit is always done by an independent authority or a
body of persons with the necessary qualifications. They have
to be independent so their views and opinions can be totally
unbiased, called AUDITORS.

- The auditor must completely satisfy himself with the

accuracy and authenticity of the financial statements. Only
then can he give the opinion that they are true and fair
statements.
 Who can do the audit?
Auditors have the following rights.
 Rights of Auditors to access books of accounts.
 Right to obtain information and explanations
 Right to visit branch offices and access to branch account
 Right to receive notice and attend general meeting
 Right to make representation
 Who can do the audit?
Remuneration of the Auditor
An auditor is entitled to receive remuneration as
follows
a) Where appointed by the Board of Director When an auditor is
appointed by the Board of Directors, remuneration is also fixed by
them.
b) Where appointed by shareholders: In this case the remuneration
is determined by the share holders at the AGM.
c) If appointed by the Central Government In this case the
remuneration is fixed by the Central Government
 02
Objectives of
Auditing
 Objectives of Auditing
There are two main objectives of auditing. These are as follows;

Primary objective.
The primary duty (objective) of the auditor is to
report to the owners whether the balance sheet gives
a true and fair view of the Company’s state of affairs
and the profit and loss A/c gives a correct figure of
profit of loss for the financial year.
 Objectives of Auditing
There are two main objectives of auditing. These are as follows;

Primary objective.
The primary duty (objective) of the auditor is to
report to the owners whether the balance sheet gives
a true and fair view of the Company’s state of affairs
and the profit and loss A/c gives a correct figure of
profit of loss for the financial year.
 Objectives of Auditing
There are two main objectives of auditing. These are as follows;
Secondary objective.
This is also called the incidental objective as it is incidental
to the satisfaction of the main objective. The incidental
objectives of auditing are:
 Detection and prevention of Frauds
 Detection and prevention of Errors.
 Objectives of Auditing
There are two main objectives of auditing. These are as follows;
Secondary objective.
This is also called the incidental objective as it is incidental
to the satisfaction of the main objective. The incidental
objectives of auditing are:
 Detection and prevention of Frauds
 Detection and prevention of Errors.
 Objectives of Auditing
Fraud refers to intentional misrepresentation of financial
information with the intention to deceive. Frauds can take
place in the form of manipulation of accounts,
misappropriation of cash and misappropriation of goods. It
is of great importance for the auditor to detect any frauds,
and prevent their recurrence. Errors refer to unintentional
mistake in the financial information arising on account of
ignorance of accounting principles.
 03
Basic Principles
Governing an
Audit
 Basic Principles Governing an Audit
SA- 200 describes the nine basic principles that govern the procedure of auditing. It
lists out the roles and responsibilities of the auditor and his general code of conduct
during an audit.
 Integrity, Independence and Objectivity
 Confidentiality
 Skill & Competence
 Work Performed by Others
 Documentation
 Planning
 Audit Evidence
 Accounting Systems and Internal Controls
 Audit Conclusions and Reporting
 Basic Principles Governing an Audit
SA- 200 describes the nine basic principles that govern the procedure of auditing. It
lists out the roles and responsibilities of the auditor and his general code of conduct
during an audit.
 Integrity, Independence and Objectivity
 Confidentiality
 Skill & Competence
 Work Performed by Others
 Documentation
 Planning
 Audit Evidence
 Accounting Systems and Internal Controls
 Audit Conclusions and Reporting
1] Integrity, Independence and Objectivity

The auditor has to be honest while auditing, he cannot be

favoring the organization. He must remain objective
throughout the whole process, his integrity must not allow
any malpractice.

Another important principle is independence. So the auditor

cannot have any interest in the organization he is auditing,
which allows him to be independent and impartial at all
times.
2] Confidentiality

The auditor has access to a lot of sensitive financial

information of the organization. It is important that he
respect the confidential nature of such information and
documents.

He cannot disclose any sensitive information to any third

party unless it is a requirement by law. And he must also be
very careful with documents, certificates etc. that the
organization entrusts to him.
3] Skill & Competence

The auditor must be experienced and trained in the

procedures of auditing, i.e. must be qualified as an auditor.
And as a professional, he must be up to date on recent
changes, announcements, rules etc.

If necessary he can undergo training and workshops to stay

up to date with the recent auditing and accounting
procedures. For example, after GST was introduced,
auditors had to update their knowledge.
4] Work Performed by Others

The scope of audit at times can be very vast. So an auditor

has employees, delegates and other people who work under
him.

However, the auditor will continue to be fully responsible

for the work done by these people working for him. So the
auditor must carefully supervise and review such work and
be reasonably sure of the accuracy of such work.
5] Documentation

In most cases the auditor maintains an audit notebook, an

audit plan and auditing file. It is important the auditor keeps
a record of important documents with respect to his audit
work, as it is evidence of the work the auditor has done.
And the client is inclined to these documents and files if he
wishes to inspect the work.
6] Planning

An audit plan allows the auditor to plan out his work and
enables him to be more efficient and timely. Every audit
plan is different as it has to be customized according to the
type of organization, the kind of business they conduct, the
scope of the audit, the efficiency of the internal controls etc.
7] Audit Evidence

The auditor must collect enough evidence to support his

final opinion. This collection of such evidence is done by
compliance and substantive procedures. There are two
sources of this evidence – internal and external. Also,
external sources of evidence are always more reliable. to
the type of organization, the kind of business they conduct,
the scope of the audit, the efficiency of the internal controls
etc.
8] Accounting Systems and Internal Controls

The auditor has to assure that the accounts of the

organization are accurate and represent a true and fair
picture of the financial status of the company. Also, the
auditor must ensure that all material information has been
recorded in the accounts. Testing the internal controls
system is also important as it helps determine the same.
9] Audit Conclusions and Reporting

After the auditor collects all evidence he must now form his
opinion on the basis of the following criteria,

I. all relevant accounting standards were applied at all times

II. financial statements are in compliance with all
regulations and statutory requirements
III. all material information has been disclosed
- What is a clean audit report?

After the auditing procedure, the auditor must give his

opinion via an audit report. A clean audit report means the
auditor is fully happy with the accounts. He thinks they are
a true and fair representation of the financial status of the
organization. The opposite of a clean report is an adverse or
qualified report or a disclaimer.
 04
Advantages and
Limitations of
Auditing
The following are the ADVANTAGES of
Auditing

 Assurance to the Owners/Investors

 Errors and Frauds
 Independent Viewpoint
 Moral Check
 Stakeholders Confidence
The following are the LIMITATIONS of
Auditing

 Cost Factor
 Time Factor
 Inconclusive Evidence
 05
Internal Audit and
External Audit
Internal auditing is an independent appraisal function
established within an organization to examine and evaluate
its activities as a service to the organization (Brink and
Witt, 1982). The term internal audit has been defined as "a
independent appraisal of activity” within an organization
for review of operations as a basis of service to
management. It is a managerial control which functions by
measuring and evaluating the effectiveness of other
controls.
Internal Auditing is an independent objective assurance
and consulting activity designed to add value and improve
an organization’s operations. Internal auditors are employed
by individual companies to investigate and appraise the
effectiveness of company operations. These reviews
(audits) focus on the organizations major operating
activities For examples are salaries and benefits, policies
and procedures for cash handling, inventory and equipment,
physical security
External Auditing is an independent body which
resides outside of the organization which it is
auditing. This focuses on the financial accounts or
risks associated with finance and external auditors
are appointed by the company shareholders.
External auditing is the independent examinations
of the evidence from which the financial statements
are derived, in order to give the reader of those
statement confidence as to the truth and fairs of the
state of affairs which they disclose (Acc, 2008).
 Thanks!
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