Principle Aspects Covered by Auditing

It is very important to accurately determine the financial position of an organization. This is why auditing is done to double check the accounts system, and gain assurance of the accuracy of the financial statements of an organization. Now, let us take an in-depth look o what is auditing and the principle aspects covered by it.

What is Auditing?

Auditing, specifically financial auditing is the examination of a business’s financial records to determine their accuracy and their adherence to the accounting standards and other applicable rules.

In India, the ICAI (Institute of Chartered Accountants of India) has a list of Standards of Auditing that lay out the rules, procedures, methods etc about auditing, both internal and external. In all, there are 35 of these Auditing and Assurance Standards (AAS) as of now.

Browse more Topics under Concept Of Auditing

• Meaning and Definitions of Auditing
• Basic Principles Governing an Audit
• Advantages and Limitations of Audit
• Investigation vs Auditing

Principle Aspects Covered by Auditing

1] Review of all Systems

The primary objective of any audit is the review of all systems and procedures that relate to the accounting and financial processes. The auditor must first understand the system and its functionality before he started with the audit of the final statements of accounts. It will be the base of the entire auditing exercise.

2] Review of the Internal Controls

The effectiveness of the organizations internal control system will dictate the scope of the audit. If the internal controls of the company are in place and very effective, then the auditor can rely on the system. Then he need no go through the accounts very minutely.

However, if on the other hand the internal controls are not effective, the auditor has to go through the accounts with a fine tooth comb. And as per CARO 2003, it is compulsory for the auditor to review the internal control system.

3] Arithmetical Accuracy

The auditor must also routinely check the accuracy of the books of accounts. This includes checking the arithmetical accuracy of the books, by ensuring the posting of the entries is perfect.

4] Accounting Principles

The auditor must ensure that proper distinction is made between the capital and revenue transactions. All financial transactions must be properly categorized as either revenue or capital transactions. The auditor must also check the items of both income and expenditure for their accuracy.

5] Verification of Assets

The auditor must physically verify all the assets of the company. So he must check all the legal documents, certificates, official statements etc. to analyse the ownership of all assets. The auditor will also have to ensure no assets have been left out of the balance sheet either.

6] Verification of Liabilities

The auditor must also verify all the liabilities of the organization. Again he will inspect all documents, letters, certificates etc. If necessary he can ask third parties for confirmation as well.

7] Vouching

Ever financial transacting leaves a paper trail. The auditor has to examine these supporting documents to check the existence and accuracy of these transactions. This is known as vouching. For example the organization has shown an electricity expense of 12,000/-. Then the auditor must inspect the electricity bill to cross check this transaction.

8] Statutory Compliance

It is the duty of the auditor to check that the financial records of the company are in compliance with all the laws, rules and regulations in effect at any given time. So he must make sure that the accounts are in compliance with the Companies Act 2003, Income Tax Act 1961 etc.

Solved Question for You

Q: If the company has a very strong internal control system, then ____ checking is necessary.

1. less
2. more
3. both
4. none of the above

Ans: The correct answer is A. If there is already a strong internal controls system, then the auditor may rely on it and stringent checking of accounts is unnecessary.