1. Auditing Subject - Introduction Class

Summary

In this introduction to auditing, the instructor explains the essence of the subject, its history, and its relevance in today's business landscape. Auditing is defined as the verification of financial accounts to ensure their accuracy, relying on evidence such as bills and receipts. The video covers the distinction between bookkeeping, accountancy, and auditing, and outlines the steps involved in auditing. The instructor also discusses important legal cases and the growing importance of auditing for tax, loans, and government subsidies, emphasizing that auditing is not just a luxury but a necessity in modern business practices.

Takeaways

• 😀 Auditing is the process of verifying accounts after the completion of the accounting work, ensuring their accuracy and reliability.
• 😀 The term 'auditing' originates from the Latin word 'audire,' which means 'to hear,' as auditors used to listen to account summaries in ancient times.
• 😀 The primary duty of an auditor is to verify the accounts and give certification, ensuring the financial data is clear and accurate.
• 😀 Auditing can be done internally by company employees without any specific qualifications or externally by a certified chartered accountant.
• 😀 According to the Companies Act 1956, auditors must possess specific qualifications, such as being a chartered accountant, to conduct external audits.
• 😀 Auditing helps in certifying the accuracy of accounts, making them more reliable for external parties like tax officers or financial institutions.
• 😀 In some public and government organizations, auditing is mandatory to ensure the financial statements are accurate and trustworthy.
• 😀 Bookkeeping, accountancy, and auditing are different processes. Bookkeeping involves recording transactions, accountancy involves preparing and rectifying accounts, and auditing involves verifying and certifying them.
• 😀 Auditing involves steps like studying the organization’s structure, understanding internal controls, verifying arithmetic accuracy, and ensuring the accuracy of profit and loss accounts and balance sheets.
• 😀 Visualizing the auditing process through practical examples can help students better understand the concept and retain the information for the long term.

Q & A

What is the meaning of auditing, and where does the word originate from?

Auditing refers to the process of verifying accounts after they have been prepared. The word 'auditing' comes from the Latin word 'audire,' which means 'to hear.' Historically, auditors were appointed to 'hear' or review the accounts written by others.

What is the primary duty of an auditor?

The primary duty of an auditor is to verify the accuracy of financial accounts and provide certification. They ensure that the accounts are accurate, reliable, and comply with applicable standards or regulations.

When does auditing begin in relation to accounting?

Auditing begins after accounting work is completed. In other words, auditing starts where accounting ends, once all accounts, such as the profit and loss account and balance sheet, are finalized.

What is the difference between bookkeeping, accountancy, and auditing?

Bookkeeping involves recording journal entries, posting them to ledgers, and preparing basic accounting records. Accountancy builds on bookkeeping and involves tasks like rectifying errors and preparing trial balances, profit and loss accounts, and balance sheets. Auditing, on the other hand, involves verifying the accuracy of these records and ensuring they are reliable through evidence-based checks.

Why is auditing mandatory for some organizations?

Auditing is mandatory for public and government companies to ensure that their financial records are accurate and trustworthy. Audited accounts are essential for tax compliance and verifying the organization's financial integrity, which is why many entities are legally required to undergo auditing.

What are the steps involved in the auditing process?

The main steps in the auditing process include: 1) Study of the organization and its structure, 2) Understanding internal controls, 3) Checking arithmetic accuracy with supporting evidence, 4) Verifying the profit and loss account and balance sheet, and 5) Preparing a final audit report.

What role does internal control play in auditing?

Internal control refers to the systems and processes an organization has in place to manage its operations and ensure the accuracy of its accounts. The auditor must understand these controls to assess the reliability and validity of the financial records.

What is the significance of evidence in the auditing process?

Evidence is crucial in auditing because it supports the verification of financial records. Auditors check accounts against tangible documents like receipts, bills, and vouchers to confirm that transactions were accurately recorded.

What key cases were discussed in the lecture, and what do they illustrate about auditing?

Two key cases were discussed: 1) Fels Trustee and Anon Dexter and Company (1926), which concluded that accountants are not responsible for detecting fraud, as their duty is only to prepare accounts, and 2) Leech vs Stocks Bros and Pim (1937), which clarified that accountants are not responsible for auditing accounts, which is the duty of an auditor.

How has the perception of auditing changed from past to present?

Historically, auditing was considered a luxury, but in the present scenario, it has become an essential and mandatory function. Auditing ensures the accuracy of accounts, which is crucial for businesses, tax compliance, and obtaining loans or grants.