Discuss the Main and Subsidiary Objects of Audit.
The objects of audit can be classified as Main Objects and Subsidiary Objects.
The main object of audit is to verify the accounts and to report whether the Balance Sheet and the Profit and Loss Accounts have been drawn properly according to the Companies Act and whether they exhibit a true and fair view of the state of affairs of the business. The verification of accounts is done to see if they are correct, complete and in conformity with the law.
The subsidiary objects of the auditor are:
- Detection and prevention of errors.
- Detection and prevention of frauds.
Detection and Prevention of Errors:
Such an error arises due to the mistake of the clerk. Clerical errors are of three types:
Error of Commission: These errors may be regarding the wrong totaling of subsidiary books or writing wrong amount in the subsidiary books or posting wrong amount in the ledger or incorrect balancing of ledger accounts.
Error of Omission: 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. “Under error of complete omission, transactions are not recorded at all. The accountant forget to record these transactions in the subsidiary books or in the Journal proper. In case of partial omission, the transaction is recorded at the debit side of the account but corresponding credit is omitted to be recorded.
Compensating Error: It arises where an effect of wrong error may be neutralized by any other error. Compensating errors will not affect the trial balance and as such will not be detected easily. Hence, their detection requires complete and exhaustive preparation on the part of the auditor.
Errors of Principle.
Sometimes, errors are committed due to incomplete knowledge of accounting. The accountant fails to discriminate between the capital and revenue expenditure, posting of revenue items to the wrong class of revenue account (wages posted to general expense), posting of an item of revenue expenditure to the personal account, valuation of assets against fundamental principles of accountancy.
Detection and Prevention of Frauds.
Fraud means a false representation or entry, which is made intentionally or without belief in its truth to defraud somebody.
Misappropriation of Cash: Misappropriation or embezzlement of cash means misapplying the cash. It virtually takes the form of actual theft. It may be made in any of the following manners:
- Non-recording of Cash Sales.
- Omitting to record the cash received.
- Recording less amount than actually received.
- Recording fictitious payment of cash etc
Misappropriation of Goods: Goods can be misappropriated by:
- The stealing the goods from godown.
- Not recording the purchase of goods anywhere.
- Use of stationary for domestic use purchased for the organization etc.
The chances of misappropriation of goods is more where goods are less bulky, highly priced and easy to carry without detection.
Manipulation of accounts: The fraud of cash and goods is also done through manipulating the accounts. This type of fraud is committed by persons holding high position in the organization with the object of showing more than the actual profit (to get more commission, to create goodwill among the shareholders, to sell the business at higher price, to win the confidence of the government etc), or showing less than the actual profit (to purchase the shares at low price, to pay low tax to the government, to create secret reserves etc).