Here is a compilation of essays on ‘Auditing’ for class 11 and 12. Find paragraphs, long and short essays on ‘Auditing’ especially written for commerce students.
Essay on Auditing
Essay Contents:
- Essay on the Definition of Auditing
- Essay on the Scope of Auditing
- Essay on the Growth of Auditing
- Essay on the Techniques of Auditing
- Essay on the Principal Procedures of Auditing
- Essay on the Advantages of Auditing
Essay # 1. Definition of Auditing:
The regulatory, critical and analytical aspect of accounting handled independently by any outside agency is known as Auditing.
Two illustrative definitions of auditing are:
(i) “Independent examination of financial information of any entity, whether profit-oriented or not, and, irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon.” (The International Auditing Practices Committee).
(ii) “A systematic and independent examination of data, statements, records, operations and performance (financial or otherwise) of an enterprise for a stated purpose ………… the auditor………..collects evidence, evaluates the same and on this basis, formulates his judgement, which is communicated through his audit report.”
Thus, auditing may be defined as a process through which transactions and financial or other data and statements prepared by somebody and evidence or documents in support thereof are independently and systematically examined, checked or verified, analyzed, evaluated and reported upon about the reliability and authenticity of such data or statements by an expert having no connection with the preparation thereof, on behalf of a third party who has neither the capacity nor the opportunity of scrutinising such data, statements or accounts for himself. Auditing may also be defined as “accounting control” i.e., control exercised on the constructive and recording aspects of accounting through independent checking.
Essay # 2. Scope of Auditing:
Although an auditor’s report is usually appended to a balance sheet, audit work covers wider grounds and includes the checking of the profit and loss account or income and expenditure account and ledger accounts; and also scrutiny of entries with original documentary evidence so as to establish without doubt that not only accounts art arithmetically correct but also transactions are duly authorised and are consistent with the general nature of activities.
Audit enables an auditor to express opinion on financial statements and establishes credibility thereof. Sometimes audit may be restricted to a special financial or statistical statements relating to prospectus or statutory report of a company, net circulation of a newspaper, production account, cost accounts, etc.
The sphere of auditing has been extended beyond financial records and statements and now covers cost records, operations, performance, propriety, social and environmental implications, etc.
Essay # 3. Growth of Auditing:
The development of auditing as a useful and distinct branch of accounting has passed through the following stages:
(a) Ancient origin:
Etymologically, the word ‘audit’ has been derived from the Latin word ‘audire’ which means ‘to listen’. In ancient times persons preparing accounts used to read out entries and statements to the verifier or auditor who would pass them, if found correct, simply by listening to the reader. Since then any independent verification of financial statements or accounting records has come to be known as ‘auditing’.
(b) Influence of the joint stock form of organisation:
The joint stock form of business enterprise has been mainly responsible for the phenomenal growth of auditing. The separation of capital from management and the dependence of shareholders on a limited number of persons like directors, managing directors and officers of a company called for some machinery for independent verification of accounts on behalf of shareholders.
Audit which was considered essential for this purpose has been made compulsory in respect of all companies under the Company, Banking and Insurance Laws and for some assesses under the Income Tax Act. Similar considerations also apply to big partnership businesses and sole trading concerns, management of which must be entrusted to paid employees or agents.
(c) Other factors:
Audited accounts are found useful for submission to various taxation authorities, avoidance of disputes among partners, negotiation of loans or credit and sale or purchase of business and also with regard to insurance claims. Besides, statements certified by auditors are required for obtaining Government patronage e.g., import and export licenses etc.
Besides, “The increasing size and sophistication of to-day’s enterprises have resulted in decentralisation of their activities and functions. This has led to increasing the remoteness of top management of enterprises from day to day activities”.
Thus, audit is now accepted almost universally as a reliable machinery to inspire confidence in regard to financial matters in the minds of those who invest their funds as capital of a business and also those who may have dealings with or interest in a particular organisation.
Essay # 4. Techniques of Auditing :
There are ten basic auditing techniques (as listed by Prof. Mautz):
(1) Physical examination and count:
All physical items actually on hand, in transit, or on consignment that are represented in the books of account can be actually examined by personal inspection to ensure that they actually exist at a given date.
(2) Confirmation:
The existence and ownership of items held on consignment or in public warehouses are capable of being confirmed by having communication with the consignors or warehouse owners. Similarly authenticity, validity and accuracy of any transaction can be established through confirmations received from banks and other creditors and minutes of the board of directors.
(3) Examination of authoritative documents and comparison with records:
The documents duly signed by persons in authority, such as sales invoices, inventory lists, etc. can be examined with approved price lists and purchase invoices for value extensions and compared with accounting records to obtain authenticity of transactions in respect of entries, postings and balancing. This is known as ‘vouching’.
(4) Re-computation:
Arithmetically worked out balances of accounts are verified both as to their arithmetical accuracy by re-computation and with respect to the relevant factor chosen. For example, inventory values may be checked by re-computation under any one of several assumptions as to the flow of cost factors (such as, FIFO, LIFO, Average).
(5) Retracing book-keeping procedures:
The genuineness and consistency of various accounting entries or account balances can be subjected to the process of verification by tracing back to the source book-keeping records. For example, closing balances in the balance sheet are retraced into the ledger of the succeeding period.
(6) Scanning:
This involves a critical examination of any transaction, event, record or evidence. A sales ledger, for example, is scanned when all its posting details are noted and then critically appraised to observe characteristic features.
(7) Inquiry:
This is a technique of obtaining an answer to a pertinent question.
(8) Examination of subsidiary records:
The reliability obtained through the examination of records like: vendor invoices, material issue requisitions, shipping records and so on, can support the inventory account.
(9) Co-relation with related information:
This is similar to analytical review. The use of co-relation method assists the auditor to determine that a proper inventory cut-off has been made. Similarly an analytical review of the inventory balance in relation to sales, production, shipments and purchases for the current period and/or with prior periods provides good audit technique.
(10) Observation of pertinent activities and conditions:
Normally at year end, inventory quantities are counted by the client. The accuracy and validity of these quantities can be obtained by the auditor by observation of this pertinent activity.
Essay # 5. Principal Procedures of Auditing:
The following may be cited as the principal audit procedures:
(1) Reviewing, testing and evaluating the internal accounting controls relating to inventories, purchases, payroll, sales invoice preparation, stock valuation, depreciation accounting and analysis, routing of invoices, etc.
(2) Inspecting, counting and calculating the different assets relating to cash, stocks, investments, plant and equipment, furniture and determining that the inventory is calculated properly at the lower of cost or market price in accordance with generally accepted accounting principles consistently applied and obtaining confirmation in regard to the validity of debtors and creditors balances, etc.
(3) Obtaining the proof of accuracy:
A copy of final inventory listing can be obtained and its clerical accuracy checked and tested; obtaining the earnings records of employees and checking the same for accuracy with the original copies of appointment-cum-increment letters.
(4) Reconciling, comparing and confirming:
Sales invoices may be reconciled with the total charges to customers. The reconciliation between the cost accounts records and the books of financial accounts is an illustration. The Bank Reconciliation Statement provides a good measure of confirmation.
(5) Observation and inquiry about any excess, slow-moving, obsolete, or un-saleable inventory.
(6) Accounting of all pre-numbered inventory tags before and after the physical stock-taking.
(7) Verification as to the evidences relating to the ownership of assets and existence of assets and liabilities, as a part of auditing practices and procedures, is the principal duty of the auditor before he certifies that the assets and liabilities that appear in the balance sheet exhibit ‘true and fair view’ of the state of affairs of the business.
Essay # 6. Advantages of Auditing:
The chief advantages that may be derived from an audit have been indicated while discussing the circumstances leading to the growth of auditing and the objects of audit.
They are now summed up:
(1) Accounts and financial statements are confirmed by independent verification and thus correctness of results and financial condition of any business organisation or body is ensured to the satisfaction of everybody interested therein.
(2) Accounts are maintained up-to-date due to pressure of audit, particularly when a continuous process of audit is in operation.
(3) Audit helps in rectification of errors and frauds through their detection. It also reveals defects and weakness, if any, in the accounting methods as well as in general internal administration so that suitable precautionary and preventive measures may be adopted for the future.
(4) Audited accounts and statements are relied upon or are indispensable for various special purposes e.g., realisation of claims, tax assessment, raising of capital or borrowing, valuation of shares, adjustment of accounts or settlement of disputes among partners, purchase or sale of business, complying with import and export controls and other government regulations.
The foregoing considerations apply equally to business concerns as well as non- trading organisations. In other words, wherever financial transactions are involved and they take place through some operative processes, audit yields the aforesaid advantages. In a sense, however, audit is more useful and necessary in case of the second group of concerns.
Charitable, religious, educational, professional and other non-profit- earning and non-trading bodies raise their funds largely from public subscriptions, donations and grants, and utilise such funds for public benefit. Similar is the case with public and private trusts for various purposes.
In case public money and public interest are involved and trust funds are vested in the hands of a few executors and/or administrators, it is all the more advantageous to have the respective accounts audited with a view to detecting and checking misuse or misappropriation of funds, if any.