Introduction to Auditing and Window Dressing

Topics: Financial audit, Audit, Income statement Pages: 8 (2064 words) Published: September 14, 2012
To AuditING and
Window Dressing

INDEX| Topic|
1.| Introduction|
2.| Origin , Definition|
3.| Objectives|
4.| Principles|
5.| Errors and Frauds|
6.| Window Dressing|
7.| Case Study|
8.| Conclusion|

The main object of the audit is to find out whether the accounts of a particular concern show a true and fair view of the earnings and financial state of affairs.This is possible only when all the accounts are properly verified. Auditor has to discover errors and frauds while performing his duty. The objects of auditing include:

1) Primary objects
2) Secondary objects
Primary objects is to report to the shareholders of a company: i) Whether the profit and loss account and the balance sheet are properly drawn up according to the Companies Act ,1956. ii) Whether the company shows true and fair views of the state of affairs of the concern as on that date. iii) Whether the profit and loss account show a true and fair view of the profit earned or loss suffered by the company during the year.

A) Detection and prevention of errors :
An error maybe defined as any unintentional mis-statement in the books of account of records. Errors are generally innocent and unintentional and are due to either carelessness or ignorance on the part of the clerks. An auditor should be very careful in finding out the cause of any error.Following are the various types of errors: 1)Clerical errors, which includes:

a)Errors of omission
b)Errors of commission
c)Compensating errors
d)Errors of duplication
2)Error of Principal
It arises when a transaction is not recorded in the books of account either wholly or partially. It includes the following 2 types:
Total Omission :
* It takes place when a transaction is not at all recorded in the books of accounts. * Both debit and credit aspects are omitted, for any transaction. * Hence, the trail balance will tally.

* Eg. Credit purchases is not recorded in the sales day book. Partial Omission:
* It takes place when a transaction is partially recorded in te books of accounts i.e. only one aspect of the transaction is recorded. * Here the trial balance will not tally.
* Eg. Rent paid not posted in the rent account.

* It arises when transactions are entered in the books of account with the wrong amount. * Eg. A credit sale of Rs.320 recorded as Rs. 230 in the sales day book. * This also includes incorrect totallingand balancing and incorrect carry forward to the trial balance.

* When an error is counter balanced or compensated by the effect of another error ,its said to be a compensatory error . * Eg. Cash received from ‘A’ Rs.100 is posted as Rs. 1000 and cash received from ‘B’ Rs. 1000 is posted as Rs. 100. * These errors donot affect the trial balance.

* This error arises when the same transaction is recorded twice in the books and hence posted twice in the ledger accounts. * Such errors are also difficult to detect through trial balance as the same will be effected at all.

* It arises when the transactions are not recorded according to the fundamental principle of accountancy. * They donot affect the agreement of the trial balance.
* Eg. A) When revenue expenditure is shown as capital expenditure and vice-versa. B)Ignoing outstanding assets and liabilities.
C)Improper valuation of the closing stock.
Fraud means the false representation or untrue entry made in the books of account intentionally or without believing it to be true, with an intention to cheat another. Detection of fraud is considered to be one of the most important duties of the auditor.

Frauds are of the...
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