Important Auditing Terms and Topics

Auditing 

Thorough & critical examination of all the books of account and records of a business by an independent person duly qualified for the job , with a view to find out arithmetical & theoretical accuracy of the books of account & report to the owners of business whether the statements are fair or not.

Primary Object of Audit

The primary or main object of audit is to examine the books of accounts and records with a view to find out whether the balance sheet, at a given date, is properly drawn up, so as to exhibit "a true & fair view of state of affairs of the business".

Management Audit 

A critical verification of the mgt plans, policies & objectives, appraisal of the performance of the mgt in various functional areas. evaluation of the decisions and managerial techniques adopted by the mgt in a business.  

Error of Comission

The error of comission takes place when a transaction is wrongly recorded either in the books of original entry or in the ledger.Ex-wrong calculation,wrong carry forwards,wrong balancing, wrong totaling ,wrong addition etc 

Errors of Omission

An error of omission occurs when a transaction is not recorded in the books of accounts either wholly or partially.It is very difficult to detect such errors since both the aspects of the transactions are omitted to be recorded.Error of omission may be intentional or unintentional or may be due to carelessness of the clerical staff.

Errors of Principle 

It arises when transactions are not recorded in the books of accounts according to the fundamental principles of accountancy.Such errors are very important as they affect the profit and loss account to a considerable extent.

External Audit

It refers to the audit of a business concern undertaken independently by a professional qualified auditor.Such an audit report is quite independent of the business concern by whom he is appointed to audit. 

Internal Audit

Internal audit is the audit of accounting, financial and other operations of a business concern which is carried out by its own staff, specially appointed for the purpose.In other words, internal audit is the continuous & systematic examination of books of accounts carried out by the specially appointed staff of the business concern. 

Statutory Audit

Statutory audit means legally compulsory audit.It is provided under the provisions of a statute or law.It applies to those undertakings which have been established by law.It is to be conducted by duly qualified independent auditor competent under the law applicable to the enterprise.

Interim Audit 

Interim audit is the audit which is conducted in between two annual or periodical audits.In other words, It is conducted in the middle of the year.The primary object of conducting interim audit is to enable the company to ascertain interim profit in order to declare interim dividend.

Ethical Conduct as a concept of audit

The concept of ethical conduct implies that an auditor is under obligation to conform to a code of conduct besides several legal requirements.He should remain within the ambit of professional code of conduct.

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 SAP- Standard Auditing Practices

 AS- Accounting Standards

ICAI- Institute of Chartered Accountants of India

LAN- Local Area Network 

Accounting Standard

An accounting standard is a selected set of accounting policies or broad guidelines regarding the principles and methods to be chosen out of several alternatives.Standards conform to applicable laws, customs, usage & business environment. 

Audit Risk 

Audit risk is the risk to be borne by the auditor when he fails to express a correct opinion in an auditing situation.It is the risk which a monetary error, greater than the tolerable error, exists in the accounts and the auditor fails to detect such error. 

Surprise Check

Surprise check means audit verification on non-routine and surprise basis.For carrying out surprise check,auditor visits the clients office without prior intimation & verifies certain specific matters the regularity of which is vital for audit.

Audit Evidence

Audit evidence is evidence obtained during a financial audit and recorded in the audit working papers.

Audit Planning 

An important part of the process for managing an audit function involves planning. Planning covers both administration of the audit office as well as administration of the audit assignment. For successful audits, we need to know what we want to achieve (audit objectives), determine what procedures we should follow (audit methodology), and assign qualified staff to the audit (resource allocation).

Permanent Audit File

Permanent audit files are are the working paper files which should be updated currently with information of continuing importance to succeeding audits.Some of the permanent audit files are- Memorandum of Association,Articles of Association, Copies of previous year audited statements,...etc 

Current Audit Files

• evidence of planning process of the audit & audit program

• analysis of transactions and balances

• evidence that the work of the assistants was supervised & reviewd

Materiality

An information is material if its omission or misstatement could influence the economic decision of the users taken on the basis of the financial statements.

Fraud

Fraud means false representation or false entry made intentionally or without belief in its truth with a view to defraud somebody.The primary objective of the audit is to detect frauds.Since frauds are made cleverly, auditor needs to examine suspected accounts carefully.

Computer Fraud

A computer fraud involves gaining or deriving an undue advantage such as embezzlement or defalcation through tampering with computer programs, data files, operations, equipment or media.Proper internal control procedures and their constant review will help in preventing computer frauds. 

Computer Virus

It is a program which affects the normal functioning of computer system by altering or destroying other programs.

Internal Control

Internal control refers to the overall control environment established by the management of the enterprise for efficient & effective monitoring and control of its operations.It aims at safeguarding assets and to secure to a maximum possible extent the accuracy & reliability of its accounting records.

Compliance Testing 

Compliance test is the second stage in evaluation of internal control.The aim of compliance procedure is to provide reasonable assurance that the internal control system is functioning properly and has been implemented throughout the period.

Analytical Procedure

Analytical procedure refers to systematic study and comparison of relationships among the elements of financial and non-financial information and the investigation of significant fluctuations and variances from the expected relationships.

Gross Profit Ratio 

This ratio indicates the relationship between gross profit & net sales.

Gross Profit Ratio = Gross Profit / Net Sales

Net Profit Ratio 

This ratio indicates net profit margin on sales after meeting all the costs except interest on long-term loans.

Net Profit Ratio = PBIT / Sales

Capital Turn-over Ratio 

It measures the effectiveness with which a business firm uses the resources at its disposal.

Capital Turn-over Ratio = Sales / Net Capital Employed

Intra-Firm Comparison

It includes comparison of the information between different periods of time in the past.It is thus the corresponding information for a prior period.In other words, comparison of the information ratios of the current year with those of the previous year.

EDP Auditing

EDP Auditing is the process of collecting and evaluating evidences to determine whether a computer system safeguards assets, maintains data integrity, achieves organizational goals effectively and consumes resources efficiently.

Batch Processing System

This is the traditional form of processing information. Under this system, transactions of similar nature such as purchases, sales,returns inward, wages etc. are accumulated and processed in batches or groups.For example, daily sales invoices are fed into the computer and the master file may be updated at the end of the day.

Clean OR Unqualified Audit Report

If the auditor is completely satisfied with the truth and fairness of the books of accounts and the balance sheet and Profit and Loss account, he gives a clean report.In other words, he gives his opinion without any reservations.

Qualified Audit Report 

When an auditor gives his opinions subject to certain reservations,he is said to have given a qualified report.In such case, the auditor may include his objections in his reports and state "subject to the above reservation, we report that the balance sheet exhibits true & fair view".

Negative Report

An adverse or negative report will be given by the auditor only when he has sufficient and strong ground to form such opinion.that the accounts & financial statements, taken as a whole, do not represent a true & fair view of the financial position of the company.

Window Dressing

A company can use window dressing when preparing financial statements to improve the appearance of its performance or liquidity. In this case, window dressing may consist of changing asset depreciation or valuation policies, making short-term borrowings, or engaging in sales and leaseback transactions at the end of a period. By doing so, management embellishes the company's results or liquidity and obtains some benefits.