Principles of Auditing: UGC NET Commerce Notes & Study Material

Auditing is an imperative process that enables stakeholders to be confident about the reliability, reliability, and truthfulness of financial information. The auditing principles are imperative guidelines for auditors in order to run examinations efficiently and ethically. The principles guide auditors in planning, conducting, and reporting on examinations in such a manner that examinations are professionally conducted, in an honest way, and professionally skeptically. Such reliability and credibility of financial reports are ensured by auditors following these principles, which in turn ensure transparency and accountability of organizations. Fundamental principles and auditing techniques have been outlined.

Principles of auditing is one of the vital topics to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, the readers will be able to know about the following:

• What is Auditing
• Principles of Auditing
• Advantages and Disadvantages of Auditing

What is Auditing?

Auditing is a scientific method of verifying the accounts and financial statements of an entity or a firm. It is a process of careful scrutiny where the financial well-being of a company is thoroughly analyzed. The individual who carries out this process is referred to as an 'Auditor'.

The audit process gives a clear image of whether or not an enterprise is working efficiently.

Major Takeaways for UGC NET Aspirants What is Auditing- Auditing is the procedure of verifying a company's books of accounts in order to ensure that they are accurate and true. It ensures that all is in order and according to the laws. Principles of Auditing: The principles of auditing are honesty, fairness, and accuracy. The auditors should check the records twice as carefully and even point out the discrepancies or any issues that they find. Strengths and Weaknesses of Auditing: Auditing is certain that the company's accounts are accurate and assists in giving confidence to customers.

Principles of Auditing

The nine guiding principles that control the auditing process are described in SA-200. It gives a detailed view of the duties and obligations of the auditor as well as the standards of behavior. Below mentioned are the fundamentals of auditing which are to be implemented.

Integrity with Independence and Objectivity

The auditor should be honest during the auditing process, without being biased towards the organization. He/She should be objective during the whole process, and his/her integrity should not permit any misconduct.

Another essential principle is independence, whereby the auditor should have no vested interest in the company he/she is auditing. This enables the auditor to remain impartial and objective at all times.

Skill and Competence

In order to stay up to date with the latest accounting and auditing techniques, the auditor may need to undergo training and development. For instance, auditors must refresh their knowledge after a new tax system is implemented. Additionally, the auditor needs to be trained in auditing procedures and have the requisite skills. Along with being knowledgeable about announcements, new rules, and other developments, the auditor must also hold an auditing certification.

Work Performed by Others

The auditor must possess the necessary skills and training in auditing procedures. He/She must be qualified as an auditor and should constantly stay updated on recent changes, announcements, rules, etc.

If required, the auditor can undergo training and development to keep up with the latest accounting and auditing methods. For instance, after the introduction of a new tax system, auditors are required to update their knowledge.

Work Performed by Others

In some cases, the scope of an audit can be extensive. Therefore, an auditor can delegate some tasks to his/her employees or representatives. However, the auditor will still be fully responsible for the work done by these individuals. Thus, the auditor should carefully supervise and review such work to ensure its accuracy.

Documentation

The auditor often maintains an audit notebook, an audit plan, and an audit file. It is crucial for the auditor to keep track of essential documents for his/her audit work as they serve as evidence of the work carried out. Also, the client has a right to access these documents and records if they wish to review the work.

Planning

An audit plan allows the auditor to organize his/her work, enabling him/her to be more efficient and timely. Each audit plan is unique as it must be customized according to the nature of the organization, the kind of business they conduct, the scope of the audit, the effectiveness of the internal controls, etc.

Audit Evidence

The auditor must gather sufficient evidence to support his/her final evaluation. This collection of evidence is carried out through substantive and compliance procedures. There are two sources of this evidence – internal and external. Moreover, evidence from external sources is always more reliable.

Accounting Systems and Internal Controls

The auditor must ensure that the records of the organization accurately reflect the financial status of the organization. Also, the auditor must ensure that all material information has been recorded in the accounting records. Testing the internal controls system is also crucial as it determines the same.

Examining and confirming a company's books of accounts to determine their accuracy is known as auditing. It helps businesses find mistakes and ensure that they are in compliance with rules.

Advantages of Auditing

An audit is the process by which a company checks its financial accounts to make sure they are accurate. It detects mistakes, stops fraud, and maintains company integrity.

Ensures Accuracy

The accuracy and veracity of the company's financial statements are guaranteed by auditing. By doing this, mistakes that could cause problems later are avoided. It gives the business confidence that its numbers are correct.

Builds Trust

Auditing enables the company to establish trust with its customers or investors. When the finances are verified and accurate, individuals feel secure conducting business. This trust enables the company to thrive and achieve success.

Enhances Business Management 

Auditing has the ability to indicate where the company can cut costs or improve. It enables managers to identify areas of weakness and correct them. This improves the business to operate more efficiently.

Disadvantages of Auditing

Although auditing is useful, it also has some drawbacks. It may take time and be expensive, and at times it may reveal issues that are difficult to resolve.

Expensive

Auditing may be costly since it involves paying professionals to verify the records. The company will have to incur expenses on this exercise, which could otherwise be utilized for other purposes. This can prove difficult for small companies with little money.

Time-Consuming

Auditing is time-consuming since it involves thoroughly verifying numerous records. This can delay the company's usual operations. It may take days or weeks to finish the audit.

May Find Problems

Auditing can reveal errors or dishonesty in the company's accounts. This can cause trouble or even harm the company's reputation. Though it identifies problems, it can be hard to correct them.

Conclusion

Auditing principles assist in keeping books of account well examined and honestly. Auditors have to be precise and honest while working. Based on these auditing principles, the auditors are able to detect any error or issue within books of accounts within a company. This makes it possible for firms to be sincere and acquire people's and investors' confidence.

Principles of auditing is a vital topic as per several competitive exams. It is advisable for the learners to go through other similar topics with the Testbook App.

Principles of Auditing Previous Year Question

1. If company Z sold a machine costing of Rs. 50,000 for Rs. 60,000. The amount of Rs. 60,000 would be treated as________.

Options. A. Capital Income

1. Revenue Income
2. Capital Receipt
3. Capital Expenditure

Ans. C. Capital Receipt