What is an Audit?

What is audit?

What is an Audit?

Audit is an independent examination of financial statements of an entity that enables an auditor to expressan opinion whether the financial statements are prepared (in all material respects) in accordance with an identified and acceptable financial reporting framework (e.g. international or local accounting standards and national legislations)
This view of audit is presented by ISA 200 Objective and General Principles Governing an Audit of Financial Statements.

The phrases used; “to express the auditor’s opinion” means that the financial statements give a true and fair view or have been presented fairly in all material respects.
True and fair presentation means that the financial statement are prepared and presented in accordance with the requirements of the applicable International Financial Reporting Standards (IFRS) and local pronouncements/legislations.
What we can understand as the essential features of an audit from the above definition and explanation are as under:

• An auditor involves in examination of financial statements, the auditor is not responsible for the
preparation of the financial statements.

• The end result of an audit is an opinion to assist the user of the financial statements. Auditing
therefore relies heavily on professional judgment, not merely on the facts.

• The auditor’s opinion makes reference to “true and fair” or “fair presentations” but “true and fair”
is again a matter of judgment. It is not precisely defined for the auditor.

• In order to make the user of the auditor’s report able to feel confident in relying on such report, the
auditor should be independent of the entity. Independent essentially means that the auditor has no
significant personal interest in the entity. This allows an objective, professional view to be taken.
You will note that this is a wide concept of an audit which can be applied to any entity, not just to limited companies. However, in this course, we are concerned primarily with audits of limited companies (often known as statutory or external audits). Any other audit applications will be clearly indicated for you in the text.

Audits are of two types namely optional or private audits and statutory or compulsory audits. Basis for this classification is legal requirements with regard to conduction of audit.

Examples for private audits are audit of sole trading concerns, audit of partnership firm, etc., company audit can be taken as example for compulsory audits.

Differences between Private and Statutory Audit

Legal Requirements: Legal requirement is seen in case of statutory audits but not in case of optional audits.

Qualification: In case of statutory, auditor should have the qualification specified by the act concerned. For example: Company auditor`s qualification is specified by companies act. But in case of optional audits the question of qualification does not arise because the act with regard to optional audit is silent.

Rights, Duties, etc., of Auditor: In case of optional audit rights, duties, liabilities, etc., of auditor will be of Contractual nature. The contract which gets formed between auditor and client refers to all those things. There is no involvement of act. In case of statutory audits all such things will be of statutory nature concerned act determines all these things.

Conduction of Audit work: In case of optional audits, audit work takes place as per the agreement but in case of statutory audits, audit work will be conducted as per provisions of act concerned.

Alteration in Rights and Duties: In case of optional audits rights, duties etc of auditor can be altered by mutual understanding between auditor and client.

Report: In case of Optional audit report can be given at the choice of auditor. But in case of statutory audit report must be given as per requirements of concerned act.