2. "Objects Of An Audit" from Auditing Subject - Important Topic

Summary

In this comprehensive lecture on auditing, the professor introduces the core objectives of auditing, emphasizing both main and subsidiary objectives. Main objectives focus on verifying the accuracy of financial transactions and statements. The subsidiary objectives delve into detecting and preventing fraud and errors, with key distinctions made between different types of fraud (misappropriation of cash, goods, and manipulation of accounts) and errors (e.g., omission, commission, duplication). The lecturer also highlights the importance of auditor knowledge, practical application, and careful analysis to identify issues, ensuring accurate financial records for businesses.

Takeaways

• 😀 Auditing is crucial for ensuring that financial transactions are accurately recorded and fairly represented in financial statements.
• 😀 The main objective of auditing is to verify that all transactions are true, fair, and correctly recorded in the accounts.
• 😀 Auditors check critical financial documents such as the trading account, profit and loss account, and balance sheet for accuracy.
• 😀 Auditors verify journal entries, ledger accounts, and trial balances to ensure proper recording of transactions.
• 😀 Subsidiary objectives of auditing include detecting and preventing fraud and errors in financial records.
• 😀 Fraud involves intentional deception, such as misappropriation of cash or goods and manipulation of accounts.
• 😀 Misappropriation of cash occurs when cash is misused or not deposited correctly, such as inflating receipts or failing to pay creditors.
• 😀 Manipulation of accounts involves altering financial records, such as overstating assets or liabilities to deceive others.
• 😀 Errors are unintentional mistakes in accounting, including omission, commission, duplication, and compensating errors.
• 😀 Compensating errors are challenging to detect, as one mistake offsets another, causing the trial balance to appear balanced despite inaccuracies.
• 😀 Auditors need strong knowledge of accounting principles and a keen eye to detect fraud and errors during the auditing process.

Q & A

What is the main objective of auditing as mentioned in the script?

The main objective of auditing is to verify the transactions to ensure that they are accurately and fairly written, ensuring that the accounts are true and correct.

What are the two types of objects in auditing?

The two types of objects in auditing are 'Main Objects' and 'Subsidiary Objects'.

What is included in the 'Main Object' of auditing?

The 'Main Object' includes verifying the transactions, trading accounts, profit and loss accounts, and balance sheets to check if they are prepared correctly and to ensure accuracy in accounting calculations.

What is the difference between fraud and error as discussed in the script?

Fraud is intentional and done with a deliberate attempt to deceive someone, whereas error is a mistake made unknowingly, without bad intent, often due to lack of knowledge.

What are the three types of fraud mentioned in the subsidiary objects section?

The three types of frauds are: misappropriation of cash, misappropriation of goods, and manipulation of accounts.

How does 'misappropriation of cash' occur?

Misappropriation of cash occurs when cash is either written incorrectly in the books (e.g., writing a lower amount than actually paid) or when cash received is not deposited into the account as recorded.

What is meant by 'misappropriation of goods'?

Misappropriation of goods refers to either underreporting the quantity or value of goods, or intentionally changing the quality of goods (e.g., swapping high-quality goods with low-quality ones).

What are the five types of errors that can occur in accounting as described in the script?

The five types of errors are: error of principle, error of omission, error of commission, error of duplication, and compensating error.

What is 'error of principle'?

Error of principle occurs when the basic accounting principles, such as the double-entry system or proper journal entries, are not followed correctly, leading to mistakes at the root level.

What is a 'compensating error' and why is it difficult to detect?

A compensating error occurs when one mistake is covered up by another mistake. This makes it difficult to detect because the trial balance may still tally, even though there are underlying errors in the accounting records.