.

Unit- I

Introduction to Auditing

Meaning and Definition of Auditing

The word Audit is derived from Latin word “Audire” which means ‘to hear’. Auditing is the
verification of financial position as disclosed by the financial statements. It is an examination of
accounts to ascertain whether the financial statements give a true and fair view financial position and
profit or loss of the business. Auditing is the intelligent and critical test of accuracy, adequacy and
dependability of accounting data and accounting statements. Different authors have defined auditing
differently, some of the definition are:

“Auditing is an examination of accounting records undertaken with a view to

establishment whether they correctly and completely reflect the transactions to which they purport to
relate.”-L.R.Dicksee

“Auditing is concerned with the verification of accounting data determining the

accuracy and reliability of accounting statements and reports.” - R.K. Mautz

“Auditing is the systematic examination of financial statements, records and related

operations to determine adherence to generally accepted accounting principles, management policies
and stated requirement.” -R.E.Schlosser

Objectives of Auditing
The objectives of auditing are changing with the advancement of business techniques. Earlier it
was only to check the correctness of receipts and payments. The objectives of the auditing have been
classified under two heads:

1) Main objective
2) Subsidiary objectives

Main Objective: The main objective of the auditing is to find reliability of financial position
and profit and loss statements. The objective is to ensure that the accounts reveal a true and fair view
of the business and its transactions. The objective is to verify and establish that at a given date balance
sheet presents true and fair view of financial position of the business and the profit and loss account
gives the true and fair view of profit or loss for the accounting period. It is to be established that
accounting statements satisfy certain degree of reliability. Thus the main objective of auditing is to
form an independent judgement and opinion about the reliability of accounts and truth and fairness of
financial state of affairs and working results.

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Subsidiary objectives: The subsidiary objectives of the auditing are:

1. Detection and prevention of fraud: the one of the important subsidiary objective of
auditing is the detection and prevention of fraud. Fraud refers to intentional
misrepresentation of financial information. Fraud may involve:
a. Manipulation, falsification or alteration of records or documents
b. Misappropriation of assets.
c. Suppression of effect of transactions from records or documents.
d. Recording of transactions without substance.
e. Misapplication of accounting policies
2. Detection and prevention of errors: is another important objective of auditing. Auditing
ensures that there is no mis-statement in the financial statements. Errors can be detected
through checking and vouching thoroughly books of accounts, ledger accounts, vouchers
and other relevant information.

Importance of Auditing
Importance of auditing can be judged from the fact that even those organizations which are
not covered by companies Act get their financial statements audited. It has become a necessity for
every commercial and even non- commercial organization. The importance of auditing can be summed
in following points:

a. Audited accounts help a sole trader in knowing the value of the business for the
purpose of sale.
b. Dispute over correctness of profits can be avoided.
c. Shareholders, who do not know about day-to-day administration of the company ,
can judge the performance of management from audited accounts.
d. It helps management in detecting and preventing errors and frauds.
e. Management gets advice on financial affairs from the auditors.
f. Long and short term creditors depend on audited financial statements while taking
decision to grant credit to business houses.
g. Taxation authorities depend on audited statements in assessing the income tax,
sales tax and wealth tax liability of the business.
h. Audited accounts are useful for the government while granting subsidies etc.
i. It can be used by insurance companies to settle the claims arising on account of loss
by fire.
j. Audited accounts serve as a basis for calculating purchase consideration in case of
amalgamation and absorption.
k. It safe guards the interests of the workers because audited accounts are useful for
settling trade disputes for higher wages or bonus.

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Types of audit
Based on ownership: On the basis of ownership audit can be:-

1. 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 of audit and the
specific instructions given by the proprietor.
2. 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.
3. 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.
4. 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.
5. 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 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.

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6. Government Audit: 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.

Based on Time: On the basis of time the audit can be of following types:

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 say weekly, fortnightly or monthly, during the whole
period of trading.” - T.R. Batliboi
“A continuous audit is one where the auditor or his staff is constantly engaged in
checking the accounts during the whole period or where the auditor or hiss staff attends at
regular or irregular intervals during the period.” -R.C Williams

Advantages of continuous Audit:

a. Complete checking of all the records: Since the audit is carried out
throughout the year, sufficient time is available for detailed checking. Any enquiry
and doubt arising in the course of audit can be tackled in a better way.
b. Proper planning: Auditor can plan his audit work in a systematic manner. He
can evenly spread his work throughout the year. It will improve efficiency of auditor.
c. Early detection of frauds and errors: The work of auditor becomes easier
for detecting frauds and errors, otherwise it will involve more time.
d. Up-to-date accounts: The efficiency of account staff will increase and their
work will be up-to-date and accurate.
e. Valuable suggestions: Continuous audit will help the auditor to understand
the technicalities of business. This will help the auditor to make suggestions for the
improvement of business.

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f. Preparation of interim accounts: Interim accounts can be prepared
without much delay. It will help the Board of Directors to declare interim
dividend.

Disadvantages of Continuous Audit:

a. Expensive: It is an expensive system as it may not suit the budget of small

organizations.
b. Dislocation of routine work: Frequent visits by auditor may dislocate
the smooth flow of office work.
c. Alteration of Figures: after the accounts have been audited, the figures may
be fraudulently altered by the staff.
d. Losing link in the audit work: As the work is not completed
continuously, the auditor may lose continuity and certain questions and inquires
may be left unanswered.
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 sheet 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.

Based on Objectives: On the basis of objectives the audit can be of following types:

1. Internal Audit: It implies the audit of accounts by the staff of the business. Internal
audit is an appraisal activity within an organization for the review of the accounting,
financial and other operations as basis for protective and constructive service to the
management. It is a type of control which functions by measuring and evaluating the
effectiveness of other types of control. It deals primarily with accounting and financial
matters but it may also properly deal with matters of operating nature.
2. Cost Audit: Cost Audit is the verification of the correctness of cost accounts and
adherence to the cost accounting plans. Cost Audit is the detailed checking of costing
system, techniques and accounts to verifying correctness and to ensure adherence to the
objectives of cost accounting.
3. Secretarial Audit: Secretarial Audit is concerned with verification compliance by the
company of various provisions o Companies Act and other relevant laws. Secretarial audit
report includes
a. Whether the books are maintained as per companies act, 2013.

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b. Whether necessary approvals as required from central Government, Company law
board or other authorities were obtained.
4. Independent Audit: Is conducted by the independent qualified auditor. The purpose
of independent audit is to see whether financial statements give true and fair view of
financial position and profits. Mainly it is for safeguarding the interest of owners,
shareholders and other parties who do not have knowledge of day-to-day operations of
organization.
5. Tax Audit: Now-a-days tax audit has become very important to ascertain the accuracy
of tax related documents. Tax audit mostly covers income returns, invoices, debit and
credit notes and various current and fixed assets. Tax audit is an innovation of 21 st century.
It has added one more chapter to the practice of auditing. Tax audit ensures the validity
and credibility of tax related documents.

Qualities of an Auditor:
The Auditor must possess the following qualifications and qualities:

1. Only the qualified chartered accountant can be appointed as auditor of a limited company.
2. The auditor must have thorough knowledge of principles and practice of all aspects of
accountancy. He must be familiar with all systems of accountancy in use.
3. He should have adequate knowledge of financial management, industrial administration
and business organization.
4. He must have thorough knowledge of audit case laws as per the various cases decide by the
courts in and outside India.
5. He should be able to understand the technical details of business whose accounts he is
going to audit.
6. An auditor must be honest i.e. He must certify that he does not believe to be true and he
must take reasonable care and skill before he believes what he certifies is true.
7. He must act impartially and not influenced by others, directly or indirectly while discharging
his duties.
8. He should be hard working, systematic and methodical.
9. He must have capacity to hear arguments of others.
10. He should have adequate skills and courage to write audit report correctly clearly and
concisely.
11. He should not disclose the secrets of his client.

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Internal Control

Meaning and Definition

Internal control is a broad term with a wide coverage. It covers the control of whole
management system. Internal control involves a number of checks and controls exercised in a business
to ensure its efficient and economic working.

According to The American Institute of Certified Public Accountants, “Internal control

comprises of the plan of organization and all the coordinate methods and measures adopted
within a business to safeguard its assets, check the accuracy and reliability of its accounting data
to promote operational efficiency and to encourage adherence to prescribed managerial
policies.”

The system of internal control can be defined as, “the plan of organization and all the methods
and procedures adopted by the management of an entity to assist in achieving the management’s
objectives of ensuring, as far as practicable, the orderly and efficient conduct of its business.”

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In brief it can be stated that internal control includes not only internal check and
internal audit but the whole system of controls, financial and otherwise, established by the
management in order to carry on the business of the company in an orderly manner, to safeguard its
assets and to secure as far as possible the accuracy and reliability of records.

Objectives/Need of the Internal Control:

1. Providing reliable data: Business decisions require accurate information o run the business
efficiently. Examples of significant areas where management requires reliable information
are fixation of selling prices production directives depending upon requirements etc. with
the efficient internal control in place the accurate, required and reliable information can be
provided for taking the important decisions and efficient performance of the activities.
2. To promote operational Efficiency: the controls within an organization are meant to prevent
unnecessary duplication of efforts, protect against waste in all aspects of business and
discourage other types of inefficient use of resources so as to promote the operational
efficiency.
3. To encourage adherence to the prescribed policies: the system of internal control is meant
to provide reasonable assurance that procedures and rules of various institutes are followed
by company personnel.
4. Safeguarding assets and records: the physical assets of the company can be stolen, misused
or accidently destroyed if not properly protected by adequate controls. The internal control
helps to safeguard the physical assets and to secure the accuracy and reliabilities of the
records of the company.

Internal Check
Meaning and Definition:
Internal check is the valuable part of the internal control. It is an arrangement of the duties of
members of staff in such a manner that the work performed one person is automatically and
independently checked by the other.

According to F.R. M.e paula, “internal check means practically a continuous internal
audit Carried on by the staff itself, by means of which the work of each individual is independently
checked by other members of the staff.”

According to D.R. Davar, “ Internal check is a system or method introduced with defined
instructions given to staff as to their sphere of work with a view to control and the verification of their
work and also the maintenance of accurate records as the ultimate aim.

According To Joseph Lancaster, “The internal check is a method of organizing the entire
operations, office, warehouse, factory and the duties to the respective staff so that frauds and
irregularities are impossible without collusion.”

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All the definitions of internal check give a common idea about system organized within the
concern itself, wherein the work of one employee is automatically checked up by the other and the
possibility of error or fraud is reduced to the minimum.

Objectives of internal check:

1. To exercise moral pressure over the staff.
2. To ensure that the accounting system produces reliable and adequate information.
3. To provide protection to the resources of the business against fraud, carelessness and
in efficiency.
4. To distribute work in such a manner that no business is left unrecorded.
5. To allocate duties and responsibilities of each clerk in such a way that he may held
responsible for particular fraud or error.
6. To increase the efficiency of clerks because the allocation of duties is based on the principle
of division of labour.
7. To detect errors and frauds easily if it is committed, because in an efficient internal check
system, there is a provision for independent checking.

Advantages of Internal Check:

1. Proper division of work: internal check entails a proper and rational distribution of work
among the members of staff of the enterprise keeping in view their individual qualifications,
experience and area of specialization.
2. Detection of errors and frauds: since no individual worker is allowed to handle a job
completely from the beginning to the end, and the work of each clerk is automatically
checked by the other, this helps in the early detection and discovery of errors and frauds.
3. Increased efficiency coupled with economy: A good system of internal check increases the
efficiency of work among the staff and leads to overall economy.
4. Convenience to auditor: where an organization is operating the system of internal check,
the statutory auditor may conveniently avoid detailed checking of the transactions. He may
apply a few tests here and there and can relieve himself from detailed checking.
5. Accuracy of the accounts can be relied upon: If there is a good system of internal check the
owner of the concern may rely upon the genuineness and accuracy of the accounts.
6. Increase in Profits: overall efficiency and economy in operations result in more profits- thus
ensuring larger dividends for the owners or shareholders.

Internal Check With Regard To Sales:

The system of internal check regarding sales should take care of following0:

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1. On receipt of the order, it should numbered and preserved in Orders Received Book with full
particulars.
2. The Despatch Department should be given a copy of the order with necessary particulars.
3. The Despatch Department should take steps to pack the goods as per order.
4. The statement of goods as prepared by the Despatch Department should be checked with
the customer’s order and then invoice will be prepared in triplicate by means of carbon
papers.
5. A responsible official should check the invoice particularly the rates charged and calculations
made.
6. With the help of the copy of invoices entries should be made in Sales Day Book.
7. On dispatch of the goods records should be made in the Goods Outward Book.
8. Two copies of the invoice may be sent to customer who will return one of them after signing
it. It will serve the purpose of delivery note. Third copy will be retained for further
reference.
9. Entries should be made in Goods inward Book for all the goods returned by the customers.
Credit notes should be prepared and should be duly checked and initialed by the responsible
official.
10. With the help of credit notes, records should be made in the Sales Return Book.

Internal Check With Regard To Purchases:

1. Requisition: the procedure for issuing purchase requisitions should be specified. The
head of the department, who is need of goods, should fill a requisition slip duly signed
and then should send to the purchase department. The details about the quality,
quantity and the time by which the goods must be supplied be clearly mentioned in the
requisition slip.
2. Enquiry: Purchases department makes an enquiry about terms and conditions of the
purchases from different suppliers for these purposes tenders are generally invited. But,
who shall open and accept the tenders, should be clearly specified. As rule lowest tender
should be accepted and decision be taken.
3. Purchase Order: the purchase department places orders which should be recorded in the
purchase order book. Four copies of purchase order should be prepared. One copy will
be sent to vendor, the second to the store department, third to the accounting
department and fourth will be retained by the purchase department itself. A responsible
officer should review the purchase order, before signing by the authorized person or
director.
4. Receipt of goods: on receipt of goods, the purchase department should properly inspect
them, and after an entry in the goods inward (receipt) book, the same should be sent to
the stores. Concerned department should be informed about the receipt of goods.
5. Making the payments: the purchase department should thoroughly check the invoices
and send the same to accounting department for payment. The accounting department
should compare the invoice with the purchase order and incoming inspection report and

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should verify the calculations. The accounts department should enter the invoice in
purchase book. Only responsible official should draw cheque for the payment of invoice.
At the time of signing, a signing authority must verify that correct payment is made.

Internal check with regard to fixed assets:

1. A proper authority should be designated for the sanction of capital expenditure. The
authority may be given to managing director, a factory manager or a committee may
be set up for this purpose.
2. A proper authority should be designated even for sale of fixed assets, transfer or even
for discarding of an asset.
3. Proper accounting records in respect of fixed assets should be maintained and it should
be ensured that the proper accounting distinction is observed between capital and
review expenditure.
4. There should be a periodic inspection of assets.
5. A fixed asset register must be maintained giving details of all the fixed assets. In this
register description of the assets, their cost and location should be mentioned.
Management should also ensure that all the fixed assets are verified physically from
time to time.
6. Perfect arrangements should be made to ensure that fixed assets are properly
maintained and applied in the service of the company.
7. Where the fixed assets are transferred between branches or members of the sale
group, proper arrangements in respect of their pricing, depreciation and accounting
should be made.
8. Depreciation rates are to be authorized and evidenced and which persons are to be
responsible for carrying out and checking the necessary calculations.
9. Lastly it should be seen that these fixed assets should be adequately insured.

Internal check with regard to cash transactions

CASH RECEIPTS:

1. There should be a separate clerk known as cashier to deal with the receipts of cash.
Immediately upon receipts of cash a rough record of the amount should be made. The
cashier should not be authorized to keep cash with him. He should not be allowed to
make expenditure out of it and to make entries in the ledger an d other books of prime
entry.
2. All receipts should be banked daily. From time to time the bank reconciliation
statements should be prepared to reconcile bank and cash balances.
3. Bank pay- in-slips should not be prepared by the same person who is incharge of making
actual deposits in the bank.

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4. All receipts should be acknowledged by means of printed receipts. Counter-foils of all
the receipts issued should be properly maintained. Unused receipt must be kept with
some responsible officer.
5. Spoiled receipts should be cancelled and not torn off. If some alterations is made in the
receipts already written, it should be properly initialed.
6. Copies of receipts previously issued must be marked duplicate.
7. Some responsible persons of the firm should verify the balance of cash by carrying out a
surprise physical check from time to time.

CASH PAYMENTS:

1. The person in charge of making payments should have no connection with the receipts of
cash.
2. All payments should, as far as possible be by chance cheques excluding petty cash
payments. The cheques drawn for payment should be order cheques and as far as
practicable they should be crossed.
3. Arrangements should be made to ensure that the vouchers supporting payments cannot
be presented for the payments twice, such vouchers should be stamped as paid before
the cheques are signed.
4. An official should check up the statements received from creditors and verify with the
invoices and ledger accounts only after proper verifications cheques should be drawn in
favour of the creditors.
5. For sanctioning the payments of special nature, only directors and senior officers should
be empowered.
6. Bank reconciliation statements should be prepared to reconcile bank and cash balances
from time to time by some authorities other than the cashier.
7. Bank cheques must be held under lock and key with a responsible officer.
8. Receipts duly signed and stamped should be obtained for each payment.
9. Receipts so obtained should be properly arranged and maintained through proper filing
system.
10. To ensure the availability of cash discounts, monthly or periodic payments should be
made on the fixed dates.

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Investigation
Meaning and Definition
Investigation involves inquiry into facts behind the books and accounts into the technical,
financial and economic position of the business. Investigation is a critical examination of the books and
accounts with a specific objective.

“The term investigation implies an examination of the accounts of a business for some
special purpose.” - Spicer and Pegler

“An investigation is an examination of accounting records undertaken for a special

purpose; in fact, it is an audit of which the scope the scope is limited or extended in accordance with
requirements of the particular purpose. Its object is usually to discover and display the facts in such a
manner as will enable the parties for whom it is undertaken to draw conclusions and make their
decisions accordingly.”

Features Of investigation
1. It is critical examination and is based on Suspicion on the state of affairs to be investigated.
2. It may even extend to the examining of individuals like Directors, Auditors and other officers
of the company
3. It does not confine itself only with the financial aspects but technical, political, economical
and managerial aspect are also accounted for.
4. The investigation is normally conducted with certain specific objectives.
5. With the predefined objectives, the scope and the nature of investigation may be limited or
extended.
6. The investigator submits his report of investigation only to his client, who appoints him.
7. In the investigation report, the factual information is given in an analytical and descriptive
manner.
8. No specific rules and provisions are framed for the investigation. Investigation is voluntary
and contractual in nature, except in companies.

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9. It suggests the outlines for the future course of action on a particular problem.

Difference between Investigation and Audit

1. An Audit is carried out to ensure that the balance Sheet and the profit and Loss A/C show a
true and fair picture. But, on the other hand, an investigation is carried out on for some
predefined purpose e.g. to know the financial position of the company or its earning
capacity.
2. An Audit is limited only for an examination of the accounts of the concern but the
investigation covers not only examination of accounts, it involves probing deep into the
matter and looking for required information far behind the books whenever necessary.
3. The Investigation is not legally compulsory but audit is statutorily compulsory in case of joint
stock companies.
4. Auditing can only be conducted by a chartered accountant but it is not necessary that an
investigator must be a Chartered accountant.
5. An audit is always carried out on behalf of the owner of the business, but the investigation
may be conducted on behalf of the proprietor of the business, in case he suspects any
fraud, or on behalf of the outside parties.
6. An audit always relates to a period of 1 year or 6 months but the investigation may cover
several years.
7. Investigation is done when the books of accounts are already subject to a regular audit i.e.
the investigation starts where the audit ends.
8. Unlike auditor, an investigator is not bound by accounting conventions, policies and
disclosure requirements.

What Are Generally Accepted Auditing Standards (GAAS)?

Auditing is a crucial process in any organisation. An auditor’s primary job is to perform an audit or track
changes that affect the integrity of a transaction. It could be changes made to date, ledger masters and
amounts in the voucher. While performing such checks, there are a set of rules/guidelines which an auditor is
supposed to mandatorily follow. These systematic guidelines are referred to as Generally Accepted Auditing
Standards aka GAAS.

GAAS came into being by the Auditing Standards Board (ASB) of the American Institute of Certified Public
Accountants (AICPA). It ensures that the auditor who performs these checks has accuracy, consistency, and
verifiability on the quality of companies' financial records. Once the auditors perform the necessary checks of
the financial records, they must ensure that the audit report is reviewed as per the GAAS. Following this
process helps auditors not only ensure correctness in the reports, but also determine if the
company’s financial statements are as per GAAP (Generally accepted accounting principles).

Requirements for Accounting Standards

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While we understood what GAAS is, let us take a look at what are the standards to which an auditor must
comply with, in order to ensure that the auditing process is as per GAAS. 2 The general, field work, and
reporting standards (the 10 standards) approved and adopted by the membership of the AICPA, as amended
by the AICPA Auditing Standards Board (ASB), are as follows:

General Standards
 The auditor must have adequate technical training and proficiency to perform the audit
 The auditor must maintain independence in mental attitude in all matters relating to the audit
 The auditor must exercise due professional care in the performance of the audit and the preparation of
the auditor's report.

Standards of Field Work

 The auditor must adequately plan the work and must properly supervise any assistants
 The auditor must obtain a sufficient understanding of the entity and its environment, including its
internal control, to assess the risk of material misstatement of the financial statements whether due to
error or fraud, and to design the nature, timing, and extent of further audit procedures
 The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford
a reasonable basis for an opinion regarding the financial statements under audit.

Standards of Reporting
 The auditor must state in the auditor's report whether the financial statements are presented in
accordance with generally accepted accounting principles
 The auditor must identify in the auditor's report those circumstances in which such principles have not
been consistently observed in the current period in relation to the preceding period
 If the auditor determines that informative disclosures in the financial statements are not reasonably
adequate, the auditor must so state in the auditor's report
 The auditor's report must either express an opinion regarding the financial statements, taken as a
whole, or state that an opinion cannot be expressed. When the auditor cannot express an overall
opinion, the auditor should state the reasons in the auditor's report. In all cases where an auditor's
name is associated with financial statements, the auditor should clearly indicate the character of the
auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.

Following are the differences between bookkeeping and accounting:

Bookkeeping Accounting

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Accounting uses the information provided by
Bookkeeping is a foundation/base of
bookkeeping to prepare financial reports and
accounting.
statements.

Accounting starts where the bookkeeping

Bookkeeping is one segment of the whole
ends and has a broader scope than
accounting system.
bookkeeping.

The result of accounting is preparing financial

The result of the bookkeeping process is
statements for making informed decisions
providing input for accounting.
and judgments.

The purpose of bookkeeping is to maintain a The purpose of accounting is to report the

systematic record of financial activities and financial strength and obtain the results of the
transactions chronologically. operating activity of a business.

The objective of bookkeeping is to summarise The objective of accounting is to interpret and

the effect of all financial transactions of a analyse financial information for informed
business for a given period. decisions.

The person responsible for bookkeeping is The person responsible for accounting is
called a bookkeeper. called an accountant.

Bookkeeping is clerical in nature. The Accounting requires the skills of an

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bookkeepers do not require any special accountant and knowledge of various
knowledge or skill. accounting practices and policies.

The financial statements are not a part of the The financial reports and statements are
bookkeeping process. prepared under the accounting process.

The bookkeeping process is in accordance Accounting procedures and methods for

with the accounting conventions and interpreting and analysing financial reports
concepts. can vary from one entity to another.

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