Definition of auditing
As per general auditing is issued by ICAI it is defined as the systematic and independent examination of data, statements, records and operations and performance of an enterprise. In this proper and correct process should be followed. Independent opinion is not dependent upon the wishes and directions of any other person. It can be a company, sole trading, bank, insurance company etc.
How auditing is done
It is a systematic and independent examination where we will perform auditing for a stated purpose to know the financial statement of a company and to form an opinion on a company. It is performed by an auditor. Auditor collects the evidence, evaluates the evidence and communicates the report.
In a company we will have a lot of transactions so all the transactions are entered into books of accounts. The summary of books of accounts will be done as trial balance. The financial statements include balance sheet, profit and loss account, cash flow and fund flow statements.
Balance sheet is a statement which tells about positions and assets of the liabilities on a particular date.
Profit and loss accounts
Profit and loss account shows that during the period how the operations were conducted, what were the incomes and expenses and what was the result of the operation whether it was profit or loss. The difference between balance sheet and profit and loss account is the balance sheet is done on a particular date and profit and loss is just for a period.
Cash flow and fund flow statements
It is not compulsory for all the companies to make cashless statements as part of the financial statements but however, all the list of companies have to note down first and attach to the financial statements. So financial statements include balance sheet, profit and loss account, cash flow and fund flow statements.
Books of accounts
Trial balance → Balance sheet
→ Profit and loss account
→ Cash flow and fund flow statements
Uses of financial statements
They give money to the company they will be willing to know that their money is utilized properly or not so they are interested in seeing the financial statements.
Management is also interested in knowing whether our ventre is profitable or not, if it is profitable then how will we make further investment in other sectors or if it is not profitable then how should we shutdown the premises these financial statements will make the management for decision making purposes.
These persons are giving credit to us so they may be interested in knowing the creditworthiness of the company like whether their money is safe or not.
If we want to open an account in a bank the bank will require the three years auditor financial statements.
The government wants to calculate tax or if we are applying for any subsidies the government also needs the auditor financial statements.
If we are employees of a company we might be interested in knowing whether the company is running in profits or loses.
Credit rate agency
If a company has to go for a loan to a bank they will give a rating what a crisal does is they will see the financial statement of a company they will evaluate it and calculate some ratio and analysis etc then they will give a rating for a company if the company has rated as A+ then they will get the best loan.
He is the person who will compare the performance of the company with other companies for comparing even if he needs the financial statements.
Who is an auditor
A person who is chartered accountant as per CA act 1949 can audit a company; it is the qualification of an auditor.
Qualities of an auditor
- Integrity: It means the auditor should be honest and also he should be very brave to ask questions for the clients.
- Objectivity: The objective of the client should be clear and he should work for the achievement of that objective.
- Independence: It means the auditor wishes should not subordinate with the wishes of direction of any other person and the auditor should work independently.
- Professional judgement: The judgement should be professional it means only a person with relevant experience and training can only give a judgement.
- Professional skepticism: Skepticism means an auditor should have a questioning mind and he should be alert to the conditions indicating doubts.
- Update his knowledge: The auditor should update his knowledge very soon.
- Adequate practical experience: It means after completing IPCC the person should work in the articles then he will get practical experience to perform.
This is information about a chartered accountant which is very important and useful in many of the competitive exams. From this we can gain a lot of knowledge. By learning this we can get a lot of information and knowledge.