Auditing Lecture Notes

Introduction

• Lecturer: Formerly taught at Pragati Mahavidyalaya Degree College in Hyderabad.
• Subject: Auditing
• Format: Direct recording and uploading without editing.

Definition of Auditing

• Auditing: Verification of accounts after the accounting work is completed.
• Origin: From the Latin word 'adair' meaning 'to hear'.
• Purpose: To verify and certify accounts.

History and Qualifications

• 1913: Introduction of auditing in India.
• Companies Act 1956: Specified minimum qualifications for auditors.
• Types of Auditing:
  • Internal Auditing: Verification by another accountant within the company.
  • External Auditing: Verification by a qualified external auditor (chartered accountant).

Responsibilities and Importance

• Duties of an Auditor:
  • Verify all accounts.
  • Provide certification of accuracy.
  • Prepare a report with findings.
• Compulsory for: Government organizations and public companies.
• Benefits: Ensures accuracy and reliability of accounts, facilitates tax assessments.

Key Concepts

• Bookkeeping: Involves journal entries, posting to ledger, totalling, and balancing.
• Accountancy: Includes error rectification, preparing trial balance, trading, profit and loss account, and balance sheet.
• Auditing: Begins where accounting ends, involves checking and verification of accounts with evidence.

Steps in Auditing

1. Study of Organization and Its Structure:
   • Understand the organization, its products, branches, and accounting system.
2. Internal Control:
   • Understand the internal control system of the company.
3. Arithmetic Accuracy with Support of Evidence:
   • Ensure calculations are correct and supported by evidence (vouchers, bills, receipts).
4. Verification of Profit and Loss Account and Balance Sheet:
   • Ensure these documents are accurate and complete.
5. Preparation of Reports:
   • Auditor prepares a final report summarizing findings.

Visualization for Better Understanding

• Visualize the process and role of an auditor for better retention and understanding.
• Apply this visualization technique to other subjects as well.

Important Cases

1. Fels Trustee and Anon Texter Dexter and Company (1926):
   • Accountants are not responsible for tracing out fraud; their duty is to prepare final accounts for income tax purposes.
2. Leech vs. Stocks Bros and Pim (1937):
   • Auditing of accounts is not the duty of accountants; it requires someone with proper knowledge.
   • Accounting is necessary, while auditing was considered a luxury (context has changed in modern times).

Modern Perspective

• Auditing Today: Considered necessary and compulsory for ensuring accuracy and reliability.
• Benefits: Facilitates loans, grants, subsidies, and government trust in audited accounts.

Conclusion

• Key Takeaway: Auditing is essential for verifying the accuracy of accounts.
• Next Steps: Deeper dive into auditing topics and cases in upcoming classes.

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