Introduction to Auditing Report

Department of Commerce JinnahUniversityforWomen
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JINNAH UNIVERSITY FOR WOMEN
DEPARTMENT OF COMMERCE
ASSIGNMENT
NAME
WAJIHA MUHAMMAD ISMAIL
DEGREE PROGRAM
BS-COMMERCE (SECOND YEAR)
SUBJECT
INTRODUCTION TO AUDITING
SUBMISSION DATE:
JUNE 30, 2020
SUBMITTED TO:
MISS MEHWISH ZIA

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Table of Contents
Auditing .....................................................................................................................................3
Audit Scope................................................................................................................................3
Audit Scope Meaning.................................................................................................................3
If an Audit Reveals Fraud ..........................................................................................................3
Types of Auditing ......................................................................................................................4
Objectives of An Audit ..............................................................................................................4
Merits or Advantages of Financial Audit...................................................................................5
Demerits or Disadvantages of Auditing.....................................................................................8
Difference Between Accounting and Auditing..........................................................................9
Fraud ........................................................................................................................................11
Error .........................................................................................................................................12
Conclusion ...............................................................................................................................14
References................................................................................................................................15

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Auditing
Auditing is the process of examining an organization's (or individual's) financial
records to determine if they are accurate and in accordance with any applicable rules (including
accepted accounting standards), regulations, and laws.
Audit Scope
Audit scope, defined as the amount of time and documents which are involved in
an audit, is an important factor in all auditing. The audit scope, ultimately, establishes how
deeply an audit is performed. It can range from simple to complete, including all
company documents. Audit scope limitations can result from the different purposes listed
below.
Audit Scope Meaning
Audit scope means the depth of an audit performed. Audits are performed for several
purposes: regular “check-ups” of company records, to check for internal errors, for the purpose
of finding fraud inside a company, for the purpose of finding fraud in another company, or
even for the purpose of finding tax income and other offenses against IRS law. Due to this
fact, audit scope and objectives have a different meaning depending on the person performing
the audit as well as the reason behind the audit.
If the audit is being performed for regular internal processing, then the audit will
generally only have a scope which includes the latest period which has passed. This occurs
because the company has probably already audited the previous period.
If an Audit Reveals Fraud
If the audit is being performed to find fraud, however, it will generally have a
deeper audit scope. It may include records from years or even decades ago. This is due to the
fact that, at the very least, a violation of company policy occurred. Dedicated auditors,
either company employees or hired auditors, spend their entire career in this. They often spend
much more time and look far deeper in this process.
IRS auditors may even look at documents which were created during the birth of
a company. This is because they are trying to find errors which result in increased income for
the government as well as civil or criminal charges. A company will want to keep

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pristine records to assure that the auditor does not look deeper than the audit scope
documents which a company can support.
Types of Auditing
In simple terms, auditing is nothing but an analysis of the current system, reports, and
process of the organization.
Here are some of the types of auditing that are enlisted below:
 Construction audit
 Tax audit
 Investigative audit
 Financial audit
 Information system audit
 Compliance audit
 Operational audit
Objectives of An Audit
The main objective of the auditing is to provide a suggestion on financial reports and
statements.
For this, the auditor needs to analyse all the financial statements to check the financial
position of the entity.
Though the auditing will not cover all the errors and frauds that happened with the help
of financial reports provided.
Here the main objectives of the auditing categorized into two types. They are:
i. Primary objectives
ii. Subsidiary objectives
1. Primary Objectives of Auditing
The main objectives of auditing are also known as the primary objectives of auditing. Some
of them mentioned are below
 Analysing the internal system.
 Checking the authenticity and validity of transactions.
 Examining arithmetical accuracy of books of accounts, casting, balancing, etc.

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 Finalizing the current value of assets and liabilities.
 Inspecting the variance between capital and revenue type of transactions.
2. Secondary Objectives of Auditing
The secondary objectives of auditing also known as subsidiary objectives of auditing.
Moreover, these are the type of objectives which help you in completing primary objectives.
Some of them are
 Finding and preventing errors
 Finding and preventing of frauds
 Unusual stock valuation
Merits or Advantages of Financial Audit
Auditing is a best practice that ensures the growth of public companies. Many of the
stakeholders of the business are financial statements of the audit.
Auditing considers the place of substantive testing and the need to verify it. It considers
following the set of rules. It mentions the maximum of the costs so that people can have prior
intimation about the auditing. Here are some of the advantages of an audit program or the
benefits of auditing.
 Operational Improvements
An independent auditor can control and achieved operating efficiency within the client’s
organization. It has an influence on the staffs along with the members of the client’s
organization.
 Ownership
If a public company deals with the audition, they can try to reassure the stakeholders about
the accounts that maintained properly.
 Value of Business
The event of purchase must identify within the management and by the sales team. It
interrelates with the settlement of claims, retirement funds, etc. In case of loss of property, one
must enhance the activities with moral values.

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 Gathering Information About Profit or Loss
This gathering will help in discussing the profit and loss of the company. Here employees
can disclose their ideas upon which they are lacking and how can they overcome those
obstacles.
 Proof Can Present
During the audit, one may collect the details from the person to ensure that every property
has a legal proof. It helps in the evaluation of further discussions. It helps in increasing the
goodwill that might keep track of the collected data.
 The Event of a Loss
In the event of loss of lives or property, an individual can get help from the insured. It
determines the values for business in the matter taking better decisions on their own. It enables
one to collect details about the accounts and properties that maintained.
 Settlement of Claims
The settlement of claims demands the enhancement and better atmosphere that sequenced
within the organization. For accessing and influencing moral values one has to restrain
themselves from performing fraudulent activities.
 Reports
It produces the report of the truth and fairness of the reported audit. It involves financial
statements that are more compatible when a person goes through the documents and reports of
the audit.
 High-Quality Perfection
Every organization will strive indefinitely for their success. These decisions will take in-
case to undertake the concept that an organization provides. These financial representations of
data can be gathered once the complete process of auditing gets over. It deals with the same
accounting and interpreting of high-quality perfection.
 Ethical Behaviour
Auditing can repeat to gain the business and its overall strategies. It devotes to the dealings
in the world. This analysis and exceptions are the most ethical behaviour of a company. This
information about accounting and records are qualified under the procedures of the firm.

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 Maximizing Profit Level
An audit termed as an appraisal activity that related to the sequence of challenging
circumstances that also involves the conflict that pursued in the maximum profit level that is
to reach.
 Analytical Procedures
It can neither help in prioritizing the changes and allocating them with the resources that
record in the work papers of audits. It also involves the control environment and appointment
of analytical procedures of the system.
 Reconciliations of Items
These findings will identify if the reconciliations of the processed items and the respective
operations are carried. This recommendation has to be finished at least once a month. The
process of reviewing the reports can be estimated twice in a year.
 Accounting on Auditing
Auditing is the process that includes testing and weighting of the accounts. It is the
correctness of the reviews of the logic. It is critical, analytical and the investigation that is done
leads to heavy work on ideas and adaptable methods. Audited accounts carry greater
knowledge than the accounts that are under the process of auditing.
 Regular Audit
Regular audit deals with the accounts that are facilitated to involve the happening of the
insured claims. It can create fear among the employees, to gain confidence in the related
auditing sections.
 Settlement of Claims
Some of the audited accounts that are explained are defined and must fit into the claims to
ensure the recent files. It determines the value of the business to claim for the other networks.
 Money on Contract Basis
Here the money involved is on a contract basis that compromises certain related functions.
It has the sense of hiring a permanent internal employee which makes more sense financially.

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Demerits or Disadvantages ofAuditing
The main risk in the audit program is towards the assurance services that derive wrong
conclusions. Assurances are to be provided within the related certification. Here are some of
the limitations of an audit.
 Extra Cost
Testing involves the extra cost to the organization which is considered a burden. It involves
the disruptions of multiple cases. The auditor must concentrate more even though there are
disruptions. Before the audit begins the auditor must get the attention of all the staff members
of the organization.
 Evidence
Evidence that is identified is more pervasive than conclusive. The strength of the
submission of audited accounts makes major changes in the accounts of the distribution of
profits.
 Unsuitable Changes
The rules and regulations of business may vary from time to time. It remains unstable when
the program begins. The company’s policies may not change periodically whereas the rules
and regulations may.
 Chances of Fraud
Since the information delivered after the audit procedure is credential then there becomes
more chance of getting the situations where an individual will be forced to commit the crime.
It harasses the auditors to commit crimes after the audit gets over.
 Small Concerns
Small-scale industries may usually proceed with transactions that are usually completed
within a shorter period. Thus, auditing is not too important.
 Problems in Remedial Measures
Here the problem is created in remedial measures that are enhanced by the detailed interface
of the data of remedial measures. These remedial measures are not included in the audit
program.

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 Insufficient Considerate
The education curve will be contented about the business and insufficient relaxed networks
and offers systematic internal recruitment. These may gravely obstruct the expense of all the
employees.
 Not Guaranteed
Auditing cannot provide any data that are analysed and prepared. It has financial accounts
for the data that are provided. It is disclosed based on the information and explanations that are
agreed on by the clients.
Difference BetweenAccounting and Auditing
1. Definition
Accounting is keeping records of the financial transactions and preparing financial
statements; but auditing is critical examination of the financial statements to give an opinion
on their fairness.
2. Timing
Accounting is carried out on continuous basis with daily recording of financial transactions;
while auditing is basically a periodic process and carried out after the preparation of final
accounts and financial statements, usually on yearly basis.
3. Beginning
Accounting starts usually where book-keeping ends; while auditing always starts where
accounting ends.
4. Period
Accounting mainly concentrates on the current financial transactions and activities; while
auditing concentrates on the past financial statements.
5. Coverage
Accounting covers all transactions, records and statements having financial implications;
while auditing mainly covers final financial statements and records.
6. Type of Checking:
Accounting involves checking and verifying details related with all financial statements
and records; while auditing may be carried out through test checking or sample checking.

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7. Focus
The primary focus of accounting is to accurately record and present all financial
transactions and statements; while the primary focus of auditing is to verify the accuracy and
reliability of the financial statements, and to judge whether the financial statements provide a
true picture of the actual financial position of the entity.
8. Objective
Objective of accounting is to determine the financial position, profitability and
performance; while objective of auditing is to add credibility to the financial statements and
reports of the company.
9. Legal Status
Accounting is governed by Accounting Standards with some degree of discretion; but
auditing is governed by Standards on Auditing and does not provide much flexibility.
10. Performed By
Accounting is performed by accountants; while auditing is performed generally by
qualified auditors.
11. Status
Accounting is usually carried out by an internal employee of the company; but auditing is
carried out by an external person or independent agency.
12. Appointment
Accountant is appointed by the management of the company; while the auditor is appointed
by the shareholders of the company, or a regulator.
13. Qualification
Any specific qualification is not compulsory for an accountant; but some specific
qualification is compulsory for an auditor.
14. Remuneration Type
Accounting is carried out by a company employee who gets a salary; while a specific
auditing fee is paid to the auditor.
15. Remuneration Fixation
Accountant’s remuneration, i.e., salary is fixed by the management; while auditor’s fee is
fixed by the shareholders.

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16. Scope Determination
The scope of accounting is determined by the management of the company; while the scope
of auditing is determined by the relevant laws or regulations.
17. Necessity
Accounting is necessary for all organizations in the day-to-day or routine operations; while
auditing is not necessary in the day-to-day operations.
18. Deliverables
Accounting prepares financial statements e.g. Income Statement or P/L, Balance Sheet,
Cash Flow Statement, etc.; while auditing provides Audit Report.
19. Report Submission
Accounts are submitted to the management of the organization; while audit report is
submitted to the shareholders.
20. Guidance
Accountants may make suggestions for the improvement of accounting and related
activities to the management; whereas auditor usually does not make suggestions, except in
some cases with specific requirements, e.g. improvement in internal controls.
21. Liability
Accountant’s liability generally ends with the preparation of the accounts; while auditor
has liability after preparation and submission of the audit report.
22. Professional Misconduct
An Accountant is not usually prosecuted for professional misconduct; whereas an auditor
can be prosecuted for professional misconduct as per the applicable legal procedure.
23. Removal
Accountant can be removed by the management; while an auditor can be removed by the
shareholders.
Fraud
Fraud refers to an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of deception to obtain
an unjust or illegal advantage.
 Misappropriation of Manipulation of accounts

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 Cash Goods
Misappropriation of Cash – Usually, Cash Is Misappropriated By:
i. The theft of cash receipts and petty cash.
ii. The theft of cheques and other negotiable instruments.
iii. Payments made to fictitious creditors or workmen.
Misappropriation or defalcation of cash is a very easy affair.
Anybody with a little skill on his part can misappropriate money, especially in a big
business-house where the contacts between the proprietor and the persons handling cash are
not as close as in the case of a small proprietary business.
A transaction relating to the receipt of cash may either go totally unrecorded or recorded
at a figure less than the actual one in the Cash Book and, thus, the total or a part of the cash
may be pocketed by the cashier.
Similarly, it is possible to record false payment of money and to enter cash payment at
more than the actual figure. In this way, there may be concealment of money by the cashier.
Thus, in a big business, strict control should be exercised over the receipt and payment of cash
so that there may be a system of checking the work of one clerk automatically by another.
Error
The term error refers to an unintentional mistake occurred in the financial statements, such
as math or accounting mistakes in the accounting records and data related; oversight or
misinterpretation of facts; misapplication of accounting policies.
1. Errors of Omission
Errors of omission generally arise due to the mistake of a clerk. If a transaction has been
omitted from being entered in the books of accounts, wholly or partially, it is an example of
error of omission.
There are items like purchases or sales which ought to have been recorded in the books of
accounts but due to oversight or carelessness, they have been wholly omitted from being
recorded.
Apart from these, there are cases where items remain partially recorded, e.g: (i) the rent or
interest may have been paid for 10 or 11 months and the remaining part of it which is unpaid
or outstanding has not been recorded in the journal.

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It is, of course, true that such a mistake can be detected by careful audit but this is after all
a case of clear omission, (ii) Secondly, if an item has been recorded in the journal but has not
been posted in the ledger; error of omission may also arise. Really, this is an example of
omission in ledger-posting in which a transaction has been recorded but not posted to the
relevant accounts in the ledger.
The errors which arise due to non-recording of certain items will not affect the Trial
Balance and, the omission can be detected by scrutiny. But if one aspect of an item, e.g.,
purchases or sales, has been entered in the books, such an omission will affect the Trial Balance
and, hence, will be easily detected. The errors which produce some effect on the agreement of
Trial Balance are easily detectable.
2. Errors of Commission
Errors of commission usually arise through negligence in the matter of recording some
business transactions in the books of accounts. They are the outcome of a sort of wrongdoing
on the part of clerks. If an item is incorrectly recorded in the journal or posted in the ledger, it
is an error of commission.
3. Compensating Errors
Compensating errors arise when an error is counterbalanced or compensated by any other
error or errors so that the adverse effect of one on debit or credit side is neutralised by that of
another on credit or debit side.
For example, A’s account, which was to be debited for Rs. 200, was credited for Rs. 200
and similarly, B’s account, which was to be credited for Rs. 200, was debited for Rs. 200. If
Rs. 120 is posted to the debit of the wages account in place of Rs. 100 and similarly to the
credit of rent account Rs. 120 is posted in place of Rs. 100, it is an example of compensating
error.
Such errors also creep up when an under casting of an account is counterbalanced by the
overcasting of another account to the same extent and on the same side. Compensating errors
will not affect the trial balance and, as such, will not be detected easily. Hence, their detection
requires a complete and exhaustive preparation on the part of an auditor.
4. Errors of Principle
Errors of principle generally arise out of a disregard for the principles of accountancy. Such
errors are sometimes committed intentionally to falsify and manipulate accounts with an
objective of showing profits than their actual figures.

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Conclusion
Accuracy in the audit process plays a vital role that is reflected in the statement of the
correct amount. Classification of the transaction is handled properly, and timings are recorded
on the exact dates.
Posting and summation of the master file amounts are properly classified. Therefore,
without the audit process, the progress of the company cannot be identified.

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References
https://strategiccfo.com/audit-
scope/#:~:text=Audit%20Scope%20Definition,complete%2C%20including%20all%20compa
ny%20documents.
http://www.differencebetween.net/business/difference-between-accounting-and-
auditing/#:~:text=There%20are%20many%20differences%20between,unbiased%20opinion
%20on%20their%20accuracy.
https://www.shareyouressays.com/essays/what-are-the-main-classes-of-errors-and-fraud-
found-while-auditing-a-firms-accounts/92912
https://content.wisestep.com/top-advantages-disadvantages-auditing/

Introduction to Auditing Report

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