Concept of Auditing The term audit is derived from a Latin word “audire” which means to hear authenticity of accounts is assured with the help of the independent review. Audit is performed to ascertain the validity and reliability of information. Examination of books and accounts with supporting vouchers and documents to detect and prevent error, fraud is the primary function of auditing. Auditor has to check the effectiveness of internal control systems for determining the extent of checking out the audit.Initially its meaning and use were confined merely to cash audit, and the auditor has to ascertain whether the persons are responsible for the maintenance of accounts had adequately accounted for all the cash receipts and the payment on behalf of this principle. But the word audit has an extensive usage, and it now means a thorough scrutiny of the books of accounts and its ultimate aim is to verify the financial position disclosed by the balance sheet and profit and loss accounts of a company. In short, an audit implies an investigation and a report. The process of checking and vouching continues until the study is completed and the auditor enables himself to report under the terms of his appointment Definition of Auditing “An audit is an examination of accounting records undertaken with a view of establishing whether they correctly and completely reflect the transactions to which the purport to relate.” –Lawrence R. Dickey “Audit is defined as an investigation of some statements of figures involving examination of certain evidence, so as to enable an auditor to make a report on the statement.” –Taylor and Perry Classification of Auditors Auditors of financial statements & non-financial information (including compliance audit) can be classified into three categories: 1) External auditor/Statutory auditor is an independent firm engaged by the client subject to the audit to express an opinion on whether the company's financial statements are free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion on the effectiveness of internal controls over financial reporting. External auditors may also be engaged to perform other agreed-upon procedures, related or unrelated to financial statements. Most importantly, external auditors, though engaged and paid by the company being audited, should be regarded as independent and remain third party. 2) Cost auditor/Statutory cost auditor is an independent firm engaged by the client subject to the cost audit to express an opinion on whether the company's cost statements and cost sheet are free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion on the effectiveness of internal controls over cost reporting.

1. Contemporary Audit B.Com (Hons) Semester 6th
1 | Page Prepared by UMA KANT (Research Scholar “LU”, JRF(Commerce), UGC NET(Management), M.Com, MBA
Concept of Auditing
The term audit is derived from a Latin word “audire” which means to hear
authenticity of accounts is assured with the help of the independent review. Audit
is performed to ascertain the validity and reliability of information. Examination of
books and accounts with supporting vouchers and documents to detect and prevent
error, fraud is the primary function of auditing. Auditor has to check the
effectiveness of internal control systems for determining the extent of checking out
the audit.Initially its meaning and use were confined merely to cash audit, and the
auditor has to ascertain whether the persons are responsible for the maintenance of
accounts had adequately accounted for all the cash receipts and the payment on
behalf of this principle.
But the word audit has an extensive usage, and it now means a thorough scrutiny
of the books of accounts and its ultimate aim is to verify the financial position
disclosed by the balance sheet and profit and loss accounts of a company. In short,
an audit implies an investigation and a report. The process of checking and
vouchingcontinues until the study is completed and the auditor enables himself to
report under the terms of hisappointment
Definition of Auditing
“An audit is an examination of accounting records undertaken with a view of
establishing whether theycorrectly and completely reflect the transactions to which
the purport to relate.” –Lawrence R. Dickey
“Audit is defined as an investigation of some statements of figures involving
examination of certain evidence, so as to enable an auditor to make a report on the
statement.” –Taylor and Perry
Classification of Auditors
Auditors of financial statements & non-financial information (including
compliance audit) can be classified into three categories:

2. Contemporary Audit B.Com (Hons) Semester 6th
2 | Page Prepared by UMA KANT (Research Scholar “LU”, JRF(Commerce), UGC NET(Management), M.Com, MBA
1) External auditor/Statutory auditor is an independent firm engaged by the
client subject to the audit to express an opinion on whether the company's
financial statements are free of material misstatements, whether due to fraud or
error. For publicly traded companies, external auditors may also be required to
express an opinion on the effectiveness of internal controls over financial
reporting. External auditors may also be engaged to perform other agreed-upon
procedures, related or unrelated to financial statements. Most importantly,
external auditors, though engaged and paid by the company being audited,
should be regardedas independent and remain third party.
2) Cost auditor/Statutory cost auditor is an independent firm engaged by the
client subject tothe cost audit to express an opinion on whether the company's
cost statements and cost sheet are free of material misstatements, whether due to
fraud or error. For publicly traded companies, external auditors may also be
required to express an opinion on the effectiveness of internal controls over cost
reporting. These are Specialised Persons called Cost Accountants in India &
CMA globally either Cost & Management Accountants or Certified Management
Accountants.
3) Government Auditors review the finances and practices of federal agencies.
These auditors report their finds to congress, which uses them to create and
manage policies and budgets. Government auditors work for the U.S.
Government Accountability Office, and most state governments have similar
departments to audit state and municipal agencies.
4) Secretarial auditor/Statutory secretarial auditor is an independent firm engaged
by the client subject to the audit of secretarial and applicable laws/compliances
of other applicable laws to express an opinion on whether the company's
secretarial records and compliance of applicable laws are free of material
misstatements, whether due to fraud or error and inviting heavy fines or
penalties. For bigger public companies, external secretarial auditors may also be

3. Contemporary Audit B.Com (Hons) Semester 6th
3 | Page Prepared by UMA KANT (Research Scholar “LU”, JRF(Commerce), UGC NET(Management), M.Com, MBA
required to express an opinion on the effectiveness of internal controls over
compliances system management of the company. These are Specialized Persons
called Company Secretaries in India who are the members of Institute of
Company Secretaries of India and holding Certificateof Practice.
5) Internal auditors are employed by the organisations they audit. They work for
government agencies (federal, state and local); for publicly traded companies;
and for non-profit companiesacross all industries. The internationally recognised
standard setting body for the profession isthe Institute of Internal Auditors - IIA
(www.theiia.org). The IIA has defined internal auditing as follows: "Internal
auditing is an independent, objective assurance and consulting activity designed
to add value and improve an organisation's operations. It helps an organisation
accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control, and
governance processes".
6) Consultant auditors are external personnel contracted by the firm to perform
an audit following the firm's auditing standards. This differs from the external
auditor, who follows theirown auditing standards. The level of independence is
therefore somewhere between the internal auditor and the external auditor. The
consultant auditor may work independently, or as part of the audit team that
includes internal auditors.
Classification of Audit
According to the Organization of Business
1. Statutory Audit: A statutory audit is a legally required review of the accuracy of a
company's or government's financial statements and records. The purpose of a
statutory audit is to determine whether an organization provides a fair and accurate
representation of its financial position by examining information such as bank balances,
bookkeeping records, and financial transactions.
2. Private Audit: Private companies, ranging from family businesses to global, publicly-

4. Contemporary Audit B.Com (Hons) Semester 6th
4 | Page Prepared by UMA KANT (Research Scholar “LU”, JRF(Commerce), UGC NET(Management), M.Com, MBA
trading corporations, are not part of the government. Their profits are designated at the
operators’ prerogative, often for good old capitalist gain, and companies’ objectives can
differ vastly.
According to the Ownership of Business
1. Audit of Companies: Under companies Act, audit of accounts of companies in India is
compulsory. Chartered accountant who is professionally qualified is required for the
audit of accounts of companies. Companies Act 1913 for the first time made it
compulsory for joint stock companies to get their accounts audited from a qualified
accountant. A number of amendments have been made in companies Act, 1956 and
2013 regarding appointment, duties, qualification, power and liabilities of a qualified
auditor.
2. Audit of Trusts: The beneficiaries of the trusts may not have access and knowledge of
accounts of the trust. The trustees are appointed to manage and look after the property
and business of the trust. Accounts of the trust are maintained as per the conditions and
terms of the trust deed. The income of the trust is distributed to the beneficiaries. There
are more chances of frauds and mis-appropriation of incomes. In the trust deed as well
as in the Public Trust Act which provide for compulsory audit of the accounts of the
trust by a qualified auditor. The audited accounts of the trust ensure true and fair view
of accounts of the trust.
3. Audit of Accounts of Co-operative Societies: Co-Operative societies are established
under the Co-Operative Societies Act, 1912. It contains various provisions for the
regulations and the working of these societies. Some of the states have adopted it
without any change, while others have brought certain changes to it. The auditor of the
Co-operative Society should have an expert knowledge of the particular act under
which Co-operative society under audit is functioning. He should also study by-laws of
the society and make sure that the amendments made from time to time in the by-laws

5. Contemporary Audit B.Com (Hons) Semester 6th
5 | Page Prepared by UMA KANT (Research Scholar “LU”, JRF(Commerce), UGC NET(Management), M.Com, MBA
have been duly registered in the Registrar’s Office. Companies Act is not applicable to
the co-operative Societies. The Registrar of co-operative societies shall audit or cause
to be audited by some person authorized by him, the accounts of the society once in
every financial year.
4. Audit of Government Offices: Audit of government offices and departments is
covered under this heading. A separate department is maintained by government of
India known as Accounts and Audit Department. This department is headed by the
Comptroller and Auditor General of India. This department works only for the
government offices and departments. This department cannot undertake audit of non-
government concerns. Its working is strictly according to government rules and
regulations.
5. Audit of Proprietorship: In case of proprietary concerns, the owner himself takes the
decision to get the accounts audited. Sole trader will decide about the scope of audit
and appointment of auditor. The auditing work will depend upon the agreement with
auditor and the specific instructions given by the proprietor.
6. Audit of Partnership: To avoid any misunderstanding and doubt, partnership audits
their accounts. Partnership deed on mutual agreement between the partners may
provide for audit of financial statements. Auditor is appointed by the mutual consent of
all the partners. Rights, duties and liabilities of auditor are defined in the mutual
agreement and can be modified by the partners.
7. Audit of Individuals: An Individual such as estate managers, rent collectors, investors,
etc. who engaged in business/ or profession is required to maintain books of account
and to get them audited and obtain and furnish Tax Audit Report of the Income Tax Act
(1961) from a Chartered Accountant if the sale, gross receipts or turnover etc. exceeds
prescribed limit.

6. Contemporary Audit B.Com (Hons) Semester 6th
6 | Page Prepared by UMA KANT (Research Scholar “LU”, JRF(Commerce), UGC NET(Management), M.Com, MBA
According to the Time of Audit
1. Interim Audit: When an audit is conducted between two annual audits, such audit is
known as Interim audit. It may involve complete checking of accounts for a part of the
year. Sometimes it is conducted to enable the board of directors to declare an Interim
dividend. It may also be for the purpose of dealing with interim figures of sales.
2. Continuous Audit: The Continuous Audit is conducted throughout the year or at the
regular short intervals of time. A continuous audit involves a detailed examination of
all the transactions by the auditor attending at regular intervals for example weekly,
fortnightly or monthly, during the whole period of trading.
3. Final Audit: Final Audit means when the audit work is conducted after the close of
financial year. A final audit is commonly understood to be an audit which is not
commenced until after end of the financial period and is then carried on until
completed.
4. Balance Sheet Audit: Balance Sheet Audit relates to the verification of various items
of balance sheets such as assets, liabilities, reserves and surplus, provisions and profit
and loss balance. The procedure under this audit is to follow a backward process. First
the item is located in balance sheet, and then it is located in original record for the
purpose of verification.
Difference between Internal and External Audit
Basis for
comparison
Internal audit External audit
Meaning Internal Audit refers to an ongoing
audit function performed within an
External Audit is an audit
function performed by the

7. Contemporary Audit B.Com (Hons) Semester 6th
7 | Page Prepared by UMA KANT (Research Scholar “LU”, JRF(Commerce), UGC NET(Management), M.Com, MBA
organization by a separate internal
auditing department.
independent body which is not a
part of the organization.
Objective To review the routine activities
andprovide suggestion for the
improvement.
To analyze and verify the
financialstatement of the
company.
Conducted by Employees Third Party
Auditor
appointed
by
is Management Members
Users of Report Management Stakeholders
Opinion Opinion is provided on the
effectiveness of the operational
activities of the organization.
Opinion is provided on the
truthfulness and fairness of the
financial statement of the
company.
Scope Decide
d
entity.
by the managemen
t
of the Decided by the statute.
Obligation No, it is voluntary Yes, according to Indian
CompaniesAct, 1956.
Period Continuous Process Once in a year
Checks Operational Efficiency Accuracy
Statement
and Validiy of Financial