Auditing
Auditing asks what an auditor does, why, and on what evidence: meaning and objectives of audit, its types, audit evidence and procedures, internal control, errors and fraud, and the auditor's report.
Objectives and types
The primary objective is to express an opinion on whether the financial statements give a true and fair view; detection and reporting of material error and fraud is a related responsibility. Statutory audit is required by law (Companies Act, 2013), internal audit is a management tool, government audit is conducted by the CAG, while cost, tax, forensic and management audits serve narrower purposes.
Evidence and technique
Vouching tests the authenticity of recorded transactions; verification confirms the existence and ownership of assets; valuation checks the amount at which they are stated. Evidence is gathered by inspection, observation, inquiry, external confirmation, recalculation and analytical procedures, and must be sufficient and appropriate. Materiality and risk decide how much testing is enough.
Internal control chain
Internal check divides work so that one person's error is caught by another; internal control is the wider system of controls; internal audit independently appraises both.
Worked example
A cashier receives cash for a sale, issues a counterfoil receipt to the customer but records nothing in the books, and pockets the money. No debit and no credit exist, so the trial balance still agrees; this is fraud by misappropriation of cash, detected by comparing counterfoils and stock records with recorded cash sales, not by balancing the ledger. A compensating error, by contrast, is a pair of errors that cancel out.
Traps
Confusing errors of principle (capital treated as revenue) with errors of commission; confusing vouching with verification; and mixing a qualified opinion (material but not pervasive) with an adverse opinion (material and pervasive misstatement).