Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to determine the degree of correspondence between those assertions and established criteria.
The auditing process is designed to give reasonable assurance that financial statements represent the true and fair view of an organization’s financial position or performance. This process enables companies to access capital markets.
Evaluation of Fairness & Accuracy of Books of Accounts
The objective of auditing is to ensure that books of accounts are presented in a fair and accurate manner. This is done by examining the accounting records and disclosing the financial status of the company. The audit report is issued to users of the financial information, stating that the book of accounts has been produced in compliance with generally accepted accounting principles (GAAP).
The concept of fairness has grown in recent years as many definitions have appeared in the literature. Some are purely observational, based on statistical computation on observed data, while others try to uncover causal relationships between variables in order to assess fairness.
Another important distinction in fairness criteria is between group (or statistical) and individual (or similarity) based criteria. The former are mainly focused on enforcing equal metrics for different groups identified by protected attributes, while the latter try to prevent different treatment for individuals considered to be similar with respect to a specific task.
There is a growing debate about the optimum combination of these two factors. In particular, some studies claim that the combination of individual and group fairness is the best way to guarantee equality of treatment for all, while others suggest that focusing on equality of treatment for groups could be a bad idea, leading to biases among the members of those groups.
For example, a recent study by a media watchdog group called Fairness and Accuracy in Reporting found that, between January 2009 and February 2010, the New York Times Book Review had an exceedingly narrow view of who’s a worthy candidate for a review. The group compared every politically themed book critiqued by The Times and found that 95 percent of authors reviewed were white and 87 percent of reviewers were male.
In a similar vein, a number of studies have cited the use of statistical computation to measure fairness, while some have suggested that the use of counterfactual based criteria is the better way to go. However, both approaches have their pros and cons: whereas observational criteria focus on enforcing equal metrics for groups, counterfactual-based ones make assumptions on the mechanism that generates those metrics.
Evaluation of Accounting Policies
A company can choose to adhere to a set of accounting policies in preparing and reporting its financial statements. These policies can include the measurement of assets and liabilities, the accounting methods to be followed for various items, disclosures, presentation etc. These can be based on either the GAAP or the IFRS depending upon the country of operation.
The primary objective of auditing is to provide a true and fair view of a company’s Financial Statements by evaluating them against their accuracy, completeness, validity and reliability. To achieve this, the auditors test the accounting records for any material misstatements and verify the integrity of the books of accounts.
Moreover, the auditors also conduct examinations of a company’s internal controls to determine whether they are effective and efficient in controlling and reducing risk. These internal control tests can be conducted to verify the effectiveness of a company’s processes for determining capitalization thresholds, recording revenue, and monitoring cash receipts and disbursements.
In addition, the auditors should evaluate whether a company’s financial statements are consistent with earlier periods by evaluating changes to previously issued financial statements and the effect of those changes on the current period’s financial statements. The evaluation of consistency should encompass changes in accounting principles as well as material adjustments to previously issued financial statements.
For example, if a company has chosen to use the accrual basis of accounting, the company should follow the same in its accounting policies and its books of accounts.
As a result, the company will be able to present its financial statements in a uniform manner and it will be easier for investors to compare these statements with other companies’. Hence, the government has placed a lot of emphasis on the evaluation of accounting policies to ensure that companies are complying with them when preparing and reporting their financial statements.
The primary objective of auditing is to provide the shareholders with a true and fair view of a firm’s financial position by evaluating the accuracy, completeness, and reliability of a company’s books of accounts. The main objectives of auditing are to detect and prevent errors, frauds and omissions in the books of accounts, maintain accurate valuation of stocks or inventory, check that capital expenditures are properly classified, and verify that revenue expenditures are properly recorded as assets and expenses.
Detection of Errors & Frauds
Audits are an objective examination of a company’s books and records. They provide stakeholders such as creditors, investors, and lenders with a third-party, objective opinion about the accuracy of a company’s financial statements. The results of an audit can help a business entity improve its financial reporting practices and its ability to secure funding from lenders and investors.
Generally accepted auditing standards include specific procedures to detect frauds that must be carried out during each audit. These include brainstorming sessions, review of client-provided data, and a risk assessment.
In addition, auditors must consider the internal controls that the client has in place. These should be designed to prevent or detect errors and frauds that might lead to material misstatements in the financial statements.
The risk assessment process is a continuous and ongoing part of the audit and should be designed to address all potential risks. The risk assessment should be carried out in accordance with generally accepted auditing standards and the relevant accounting principles.
A key component of the risk assessment is a review of the control objectives of internal controls that the company has in place. These controls should be tested to ensure that they are effective in preventing or detecting errors and frauds that could result in material misstatements in the financial statements.
Another way to detect errors and frauds is by performing a forensic audit on the books of accounts. This can be done through the use of a specialized computer software system. This software system can be used to identify discrepancies in the book of accounts and to examine any fraudulent activities that may have occurred.
Fraud is a major concern in auditing because it can result in material misstatements of the financial statements that are not reported on. It can also be difficult to detect. Some frauds are so well hidden that the auditor cannot uncover them.
Nevertheless, the detection of errors and frauds is one of the auditing objectives because it is important to ensure that the information in the financial statements is accurate. This is crucial for the credibility of the financial statements and their subsequent usage.
Maintenance of Regularity in Book of Accounts
The main objective of auditing is to form and express a true and fair view of an entity’s financial statement. This objective is achieved through a systematic examination of the books of accounts and other documents that provide evidence to support the statements of financial position, earnings, and cash flows. The auditing process also aims to ensure that the entities are maintaining records in compliance with accounting standards and regulatory requirements.
The books of accounts should be maintained in a proper manner, showing the details of money expended and received, purchases, and sales. These records are also required to show all assets and liabilities. In addition, the books of accounts should be in a format that makes it easy to compare financial data over time.
Keeping books of accounts can place a significant burden on small and independent companies, but the tax authorities have settled on this method as the most effective way to verify income and expenses. For example, if you run a medical clinic, you’re required to keep daily totals for fees paid and costs incurred. It’s also important to make photocopies of any bills sent in excess of Rs 25 and the originals of any receipts over Rs 50.
A company that fails to maintain the book of accounts can face a fine or imprisonment. The penalty can be imposed for failure to maintain the books of accounts in accordance with Section 128 of the Companies Act, 2013.
According to the provisions of this section, companies are required to maintain their books of accounts for a period not less than eight years immediately preceding the financial year. If a company fails to comply with this requirement, it can attract a fine of up to five lakh rupees or an imprisonment of one year. However, the penalties may vary depending on the type of business the company is engaged in and its location.
