Institute of Business Administration Jahangirnagar University (IBA-JU) BBA Programme 27thBatch Taxation and Auditing Lecture Handout - 1 (Covering Class 1 and 2) Course Teacher: Shish Haider Chowdhury shish.1965@gmail.com Mobile: +880 18 1922 5594 06 April 2020
1 1. Audit, Auditing The word ‘audit’ has been defined by many distinguished authors and every one of them has attempted to highlight one aspect or the other. Definitions of the word ‘audit’ given by authorities on the subject are as follows: “An audit is the independent examination of financial statements or related information of an entity, whether profit oriented or not, and irrespective of its size, or legal form, when such an examination is connected with a view to expressing an opinion thereon.” [International Standard of Auditing 1] “An audit is such an examination of the books, accounts and vouchers of business, as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up, so as to give a true and fair view of the state of the affairs of the business and whether the Profit and Loss Account gives a true and fair view of the profit or loss for financial period, according to the best of his information and explanations given to him and as shown by the books; and if not, in what respects he is not satisfied” [Spicer and Pegler] “An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate. In some instance it may be necessary to ascertain whether the transactions themselves are supported by proper authority. [L. R. Dicksee] “An audit is an examination of such records to establish their reliability and reliability of statements drawn from them. [A.W. Hanson] “Auditing is connected with the verification of accounting data with determining the accuracy and reliability of accounting statements and reports.” [R. K. Mautz] “Auditing is a systematic examination of the books and records of business or other organizations in order to ascertain or verify and to report upon, the facts regarding the financial operations and the results thereof.” [Montgomery] It can be concluded that, the audit means critical and intelligent examination of facts- financial or otherwise to give in the form of certificate or report an attestation, an expert opinion or expert advice. 2. Origin of Audit The word ‘audit’ is derived from the Latin word “audire” which means to hear. In the good old days whenever the proprietors of a concern suspected a fraud, certain people were appointed to hear verbal evidence of transactions of barter etc., and to judge the facts. They ‘heard’ the points of view of those who maintained the accounts. Lucas Pacilio who is commonly considered as the father of double entry book-keeping wrote his treatise on the double entry book-keeping and described the duties and responsibilities of an auditor in it. The roots of ‘modern audit’ lie deep in the birth of ‘Industrial Revolution’, which brought large-scale production in its wake. The rapid growth of banking, transport & insurance development, use of mechanical appliances and computers in business concerns and gigantic
2 growth of joint stock companies have resulted in the growing importance of audit. The need of audit became imminent when the management and ownership of business was divided among different groups of people. The investor would naturally like to see that his investment is safe. For this purpose, the accountants must be checked and audited, especially in case of joint stock companies. As it is not possible for shareholders to check the accounts of the company they appoint a person who would audit the accounts on their behalf. Formerly such a person used to be one of the shareholders who might not technical knowledge of accountancy. To have an effective check, the custom to appoint professional accountant began to develop. 3. Advantages of audit 1. Errors and frauds are located at an early date and in future no attempt is made to commit such frauds or one is rather careful not to commit an error or fraud as accounts are subject to regular audit. 2.The auditing of accounts keeps the accounts department regular and vigilant as they know that the auditors would complain against them if the account is not prepared up-to date or there is any irregularity. 3.Fund can be borrowed easily on the basis of previous audited Balance Sheet. 4.If the accounts have been prepared on a uniform basis, accounts of one year can be compared with other years and if there is any discrepancy, the cause may be enquired into. 5.In case of any accident/mishap/untoward event, the insurance company may settle the claim on the basis of audited accounts of the previous years. 4. What is accounting Accounting means the compilation of accounts in such a way that one is in a position to know the state of affairs of the business. It is a comprehensive information system begins with recognizing the event of transaction, ends with analysis and interpretation. The man who performs this work is called an accountant. His work is to interpret and review the accounts and draw conclusions with a view to guide the management in chalking out the future policy of business. 4.1 Necessity, importance & role of accounting 1.To determine profit or loss: the most principle aim of a business organization is to achieve profit. If the transactions of a business organization are written and maintained in the books of accounts properly, it can be easy to determine the amount profit achieved within a certain period. 2.To determine the financial condition: The financial condition of a business organization can be known by preparing the balance sheet at the end of the year only through preserving the accounts. 3.Comparative analysis: If the accounts are preserved in right way, the improvement or other condition of business can be recognized by doing comparative analysis of one year’s income- expense with that of another year. 4.To take care of the assets and repayment of debt: To know the amount of debt and to repay it in time etc., it is necessary to keep any kinds of accounts of related to debt. 5.To determine the income tax: The income tax of a business organization is determined on the basis of its income. So it is important to prepare a reliable Income statement after preserving the accounts in a scientific way.
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