Nature, Objective and Scope of Audit

MEANING AND DEFINITION OF AUDITING

"An audit is independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon".

Analysis of the Definition

1. Audit is Independent examination of financial information.
2. Of any entity –that entity may be profit oriented or not and irrespective of its size or legal form. For example-Profit oriented-Audit of Listed Company engaged in business. On the other hand, Audit of NGO nonprofit oriented.
3. The objective of the audit is to express an opinion on the financial statements.
4. The basic objective of audit does not change with reference to nature, size or form of an entity.
5. As per SA 200 "Overall Objective of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing", the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

As per SA 200, the overall objectives of the auditor are:

a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements; and’

b) To report on the financial statements, and communicate as required by SAs, in accordance with the auditor’s findings.

The person conducting this task should take care to ensure that financial statements would not mislead anybody. This he can do honestly by satisfying himself that:

a) The accounts have been drawn up with reference to entries in the books of account; b) The entries in the books of account are adequately supported by sufficient and appropriate evidence;

c) None of the entries in the books of account has been omitted in the process of compilation and nothing which is not in the books of account has found place in the statements;

d) The information conveyed by the statements is clear and unambiguous;

e) The financial statement amounts are properly classified, described and disclosed in conformity with accounting standards;

f) The statement of accounts present true and fair picture of the operational results and of the assets and liabilities.

Past Attempt Questions

Question 1

Correct or incorrect

The basic objective of audit does not change with reference to nature, size or form of an entity. [May 2015- 2 Marks]

Answer

Correct

An audit is an independent examination of financial information of any entity, whether profit oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to express an opinion thereon. It is clear that the basic objective of auditing, i.e. expression of opinion on financial statements does not change with the reference to size, or form of an entity.

Question 2

Correct or incorrect

An auditor has nothing to do with the prudence or profitability of a company. [May 2016- 2 Marks]

Answer

Correct

The overall object of the audit is to express an opinion on true and fair view of the financial statement of an entity. It is nothing to him whether the business of company is being conducted prudently or imprudently, profitably or unprofitably. Hence above statement is correct.

Question 3

Correct or incorrect

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.

Answer

Correct

As per SA 200 "Overall Objective of the Independent Auditor and the Conduct of an Audit in accordance with Standards on Auditing", the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

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