Features and Objectives of Auditing

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Introduction

Auditing is an important process that involves examining the books of accounts and records of a business. The core function of auditing is to ensure that a company's profit and loss account, as well as its balance sheet accurately represent the economic state of the enterprise during a given period. When it comes to fraud, prevention studies have shown that four conditions increase the likelihood of employee misconduct, namely:

·        Pressing financial need

·        Opportunity

·        Reasonable justification

·        Lack of moral principles

FEATURES OF AUDITING

To explore the topic in greater detail, let’s examine some common features associated with auditing:

1. Auditing is a systematic and scientific procedure for reviewing financial information.

2. An auditor must be an independent individual or organization that is qualified to undertake this type of task.  

3. An audit involves verifying the accuracy of both profit and loss statements as well as balance sheets created by a business.  

4. During an audit, reviewers engage in critical analysis to assess a company's accounting practices and internal controls.

5. The audit process involves analyzing vouchers, documents, data points, and explanations provided by relevant parties.  

6. In conducting an audit review, auditors must ensure that financial statements are authentic and provide an accurate view of economic affairs.

7. Finally auditors must scrutinize documents such as minute books of shareholders, directors, Memorandum, and Articles of Association to validate accounting entries published on balance sheets.

OBJECTIVES OF AUDITING

Auditing serves many objectives but primarily helps companies verify whether their accounts exhibit an accurate representation of their operations' state of affairs accurately.

Primary Objectives:

The primary objective for performing audits involves reporting back to owners about whether their business operations' profitability metrics (balance sheet) provide accurate results or not during any given financial year. When auditors work for a company it is important to remember that they are accountable to the shareholders, not the directors. A key part of their job is verifying that the accounting system accurately records transactions following recognized policies and statutory requirements.

Secondary Objectives:

In addition to these primary objectives. Auditors also have secondary objectives related to detecting and preventing errors and fraud. Errors can occur when transactions are not properly recorded in the books of account. Types include errors of omission which happen when transactions are not entered at all while errors of commission involve incorrect entries or calculations.

Compensating errors occur when multiple mistakes negate each other. While errors of principle happen when accounting principles are not followed correctly.

Clerical errors arise from carelessness or negligence. Detecting and preventing these types of errors is a secondary objective for auditors.

Another secondary objective is detecting and preventing fraud. Fraud occurs when someone intentionally misleads or conceals information for personal gain or other reasons.

Identifying fraudulent activity requires careful attention to detail and a rigorous investigation. There are three types of fraudulent activities that organizations frequently encounter:

Misappropriation of cash holds the first spot since these crimes can easily occur within cash departments in an organization. It happens mainly when reports are doctored for expenses while revenue received remains omitted from records. Some personnel falsifies expense payments made while others might take cash paid by customers instead - often even transacting funds from one customer's account into another's before eliminating all transactional details (a process called "teeming and lading") - meaning auditors need meticulous bookkeeping practices and document recording systems. 

Another form involves sketchy dealings with goods where some personnel manipulate stockroom records producing items that were never purchased or not intended for use by a department.

These pilfered supplies may in turn be used by employees for personal reasons. Combatting this type of roguery requires auditors to perform stringent check-ups on physical goods inventory.

SO HOW IS AN ACCOUNT MANIPULATED?

Window dressing or manipulation of an account is executed in a couple of ways namely: inflation of sales, inflating gross profit, reduction in the purchase, excessive valuation of company’s assets and liabilities, mistaking capital expenditure for revenue expenditure or vice versa, by the directors of finance undervaluing the companies assets and not providing enough for depreciation and doubtful debts, writing a better state of finances on the balance sheet than the actual figures reflected by the accountant and providing non or less depreciation to reflect large capital, high profit, and more tax.

The embezzlement formula is simply motive + opportunity + rationalization and the reasons why auditors fail to detect fraud include:

·        Too much reliance on client representations

·        Having no experience

·        Some auditors may have personal relationships with their clients

·        Failure to know whether an observed condition may indicate material fraud or not

Finally, there's the manipulation of accounts commonly called "window dressing." This occurs when high-ranking officials connected to an organization's day-to-day operations run interference allowing wrong-headed account reports to surface to keep outsiders (tax authorities, moneylenders, and investors) unaware of an organization's real standing in the business world. The motivation behind these shenanigans could range from tax evasion schemes to enhancing stock prices. Auditors must stay vigilant when investigating organizations where window dressing is suspected.