The Audit And Its Nature Accounting Essay

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Auditing was originally restricted to determine whether the accounting party had properly accounted for all receipts and payments on behalf of his principal. It is concern more on the evidence so it is logical that it should be resort to the study of the theory of knowledge, the ways of obtaining relief. With the evidence provided, it gives the user a rational basis for forming judgments. (Sharaf, 1961). Auditing also can defined as a formal, systematic process of objectively obtaining and evaluating evidence regarding assertions about actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users. (Messier, 1999)

Besides that, it also increases the credibility of financial statements or other information that is the subject of the audit. In other words, auditing helps to ensure the information is reliable, credible, relevant, and timely. Furthermore, auditing is regulated by professional standards, completed by individuals independent of the process being audited, and normally performed by individual who is acknowledge by certifications.

The main function of an auditor is to state an opinion on the truth and fairness of the accounts laid by him instead of detecting the fraud and errors. In order to achieve it, an auditor must consider and report on whether in an opinion of the auditor, proper account records must be kept by the business such as a record of purchases and sales that including the details of the goods so that it is able to track it back and also the sellers and buyers except in normal retail trade, day-to-day cash flow, details of assets and liabilities, statement of stock and supporting stocktaking schedule.

In a financial statement audit, all the audit evidence that the auditors gather and evaluates is comes from the examination of the accounting books and records and the supporting documents that are generated from the entity’s accounting system. The auditor will evaluate whether the management assertions is contain in the financial statements correspond with an identified financial reporting framework during the process. Thus, an auditor must be acquiring accounting knowledge as well as the expertise to accumulate and evaluate audit evidence while an accountant does not need to know auditing. It is consider as a additional knowledge relate to the accumulation and evaluation of evidence that distinguishes an auditor from an accountant.

Distinction between accounting and auditing

Hereby, we would like to explain about the differences between accounting and auditing. Accounting is information systems that consist of the process of identifying, measuring and communicating the economic information of a business so that the users such as manager are able to use the information for decision making purpose. A transaction is an exchange that each involved party in a business deal receives or sacrifices value such as purchases of raw materials, external or internal event is a happening of consequence of an entity which is the use of raw material for production and an entity is an economic unit that performs economic activities. As everyone knows, accounting is used to record the financial transaction of a business in book of accounts and also involve in the preparation of financial statement. Besides that, it also define as the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events according to the American Institute of Certified Public Accountants (AICPA).

AS for auditing, in consists of a process that which is concerned about about the verification of the accounting data to determine whether the credibility and accuracy of the accounting statement and reports. It is vital for them to ensure the information can be reliable with the established rules and regulations. It focuses more in the supporting proof for financial statements and data.

The objectives of accounting are different from business to business and it also depends on specific requirements. There are several general objectives that a business should achieved in the accounting such as to keep systematic record, this is the most basis of the objective that all organization should have done and the others are ascertain the results of the operation and the financial position of a business, show the liquidity position, protect business properties, facilitate rational decision making and satisfy the requirements of law. Besides that, the main 4 function of accounting are record keeping function, managerial function, legal requirement function and language of business.

Areas

Accounting

Auditing

Governance

Governed by the Generally Accepted Accounting Principles (GAAP)

Governed by the Generally Accepted Auditing Standards (GAAS)

Nature

It is concerned with the finalization of the accounts.

It is concerned with the establishment of the credibility of the financial statement.

Obligations

Measures the economic effects and communicates economic results to decision makers.

Makes sure that the economic events reported in the financial statements occurred.

Reporting

Balancing of books and preparation of financial statements.

Expression of opinion as to the truth and fairness of the financial statements.

Commencement

Accounting is begin when the book keeping is done.

Auditing started when accounting end.

Table 1.0 : Differences between Accounting and Auditing

Objective of auditing and why auditing is needed

There are two main objectives of auditing and the primary objective is that to report to the owners whether the balance sheet is provide the true and fair view of the organization’s state of affairs and the profit and loss account gives the correct figure of profit and loss for the financial year. On the other hand, the secondary objective is also known as the incidental objective because it is incidental to the satisfaction of the main objective. The objectives are the detection and prevention of frauds and errors.

Thus, as for the detection of the frauds and errors are the incidental objectives of independent financial auditing flows from the main objective of determining whether the financial statements is giving the true and fair view. As the statements of auditing practices are issued by the institute of charted accountants of India states, an auditor should consider that the possibility of the existences of frauds and errors in the accounts since the audit may misstated. The word fraud is mean by with the intention to deceive, the user intentionally misrepresent the financial information. It take place in the form of manipulation of accounts and also it is very important for an auditor to detects the fraud and prevent the repetition. On the other hand, an error is referring to unintended mistake that take place in the financial information arising on account of ignorance of accounting principles.

An audit requires extensive professional judgment at all stages of process, for example the auditor has to establishing the materiality, identifying audit objectives, evaluating effectiveness of controls, and reaching conclusions about the fairness of financial reporting. (Knechel, 2000) Auditors should use a systematic and accurate decision process that is designed to facilitate the consideration of all the relevant factors that could affect the outcome of audit.

The secondary objective, also known as the incidental objective as it is incidental to the satisfaction of the main objective. The incidental objective of auditing are detection and prevention of frauds and errors

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