The word ‘Audit’ is originated from the Latin word 'Audire' which means 'to hear'. In the earlier days, whenever there is suspected fraud in a business organization, the owner of the business would appoint a person to check the accounts and hear the explanations given by the person responsible for keeping the account and funds. In those days, the audit is done to find out whether the payments and receipt are properly accounted or not.
The objective of modern day accounting is not only for the verification of cash but to report the financial position of the undertaking as disclosed by its Balance sheet and Profit and Loss account. Definition of Auditing
According to Montgomery, a well known author, "auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the financial operation and the result thereof. " Prof. L.R.Dicksee. "auditing is an examination of accounting records undertaken with a view to establish whether they correctly and completely reflect the transactions to which they relate. Difference between Auditing and accounting.
1. The role of accountancy is to record the transaction in the book of accounts, extraction of trial balance, preparation of Trading and profit and loss account and balance sheet etc. On the other hand auditing is the examination of books of account and checking the financial statement for the purpose of finding out the true and fair position and results of operation of a concern. Audit is concerned with detailed examination of the complete accounting records but it does not involve the preparation of accounts. 2. If the auditor is asked to write the books of accounts, extract an agreed trial balance and profit and loss account and Balance sheet, he would be doing the work of an accountant and not the work of an auditor. Preparation of account is not the part of auditing. An auditor, using his appointing authority, needs to check thoroughly, whether the Profit and Loss account and the Balance Sheet have been properly drawn up and revel the 'true and fair view' of the state of affairs and results of operation of the concern and report it to the parties interested. 3. Auditing without the prior existence of accounts is not possible. When the accountant finishes his work, the auditor starts his work. Advantages of Auditing
It is compulsory for all the organizations registered under the companies act must be audited. There are advantages in auditing the accounts even when there is no legal obligation for doing so. Some of the advantages are listed below:
1. Accepted by Government authorities: Audited accounts are readily accepted in Government authorities like income Tax Dept., Sales Tax dept., land revenue departments, banks etc.
2. Errors and frauds: By auditing the accounts Errors and frauds can be detected and rectified in time.
3. Value: Audited accounts carry greater authority than the accounts which have not been audited.
4. Obtaining loan: For obtaining loan from financial institutions like Banks, LIC, HUDCO, HDFC, IFCI etc., previous years audited accounts evaluated for determining the capability of returning the loan.
5. Moral check: Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and errors.
6. Settlement of claims: Audited accounts facilitate settlement of claims on the retirement/death of a partner. In the event of loss of property by fire or on happening of the event insured against, Audited accounts help in the early settlement of claims from the insurance company.
7. Share-holders interest: In case of joint Stock Company where ownership is separated from management, audit of accounts ensure the shareholders that accounts have been properly maintained, funds are...