Definition: The term ‘audit’ means an unbiased examination of the financial statements, i.e. account books and other relevant documents such as vouchers, invoices, bills, receipts, etc., of a business entity, regardless of the size, nature, orientation and legal structure, carried out by an auditor so as to give an opinion on the financial statement. The auditor can satisfy himself, by ensuring that:
- The financial statements of the company are prepared in reference to the entries in the account books.
- Sufficient documents and vouchers back the entries made in the books of account.
- During the process of compilation, no entries are omitted or skipped in the books of accounts.
- The financial statement clearly communicates the information.
- There must have proper classification, description and disclosure of the amounts in the financial statement, adhering to the accounting standards.
- The financial statement shows a clear view of the operational results, i.e. profits and losses and assets and liabilities of the entity.
Auditing aims at confirming the authenticity of the financial statements of an entity, by checking whether it shows a true and fair picture of the accounts. It determines ‘to what extent the financial information is valid and reliable’.
Objectives of Audit
- To gain considerable assurance that the financial statement of the entity does not have any material misstatement, that may influence the decision of the stakeholders.
- To present a report on the financial statements so examined by the auditor, with respect to the findings of the auditor.
The audit is not a mandatory requirement for all categories of business entities or institution. So, based on this, there are two types of audit, i.e. audit required by law and voluntary audit.
Features covered under Audit
- Examining the Accounting and the internal control system and procedures of the organization.
- Confirming the validity, reliability and authenticity of transactions.
- Scrutinizing the vouchers and supporting documents.
- Checking arithmetic accuracy of the accounts.
- Determining whether distinction has been made between capital and revenue natured items.
- Making a comparison of the items covered in the financial statement with those of the account books.
- Verifying the assets and liabilities.
- Confirming the statutory requirements of the body corporate
- Reporting to the requisite authority
Auditing is a methodical examination of the financial statement of any enterprise whether financial or non-financial, by an independent person or body to verify that whether the results shown by the statement of accounts are accurate or not and communicate the opinion thereon.