SCOPE OF AUDIT

Definition of auditing:

According to Montgomery, a
prominent American accountant:

“Auditing is a systematic
examination of books and records of a businesses and other organization, in
order to ascertain or verify, and to report upon the facts regarding its
financial operation and the result thereof.“

                Scope of
audit

We
can see scope of auditing by following headings:

Legal Requirements:

The auditor can determine the
scope of an audit of financial statements in accordance with the requirements
of legislation, regulations or relevant professional bodies. The state can
frame rules for determining the scope of audit work. In the same way
professional bodies can make rules to conduct the audit. The auditors can
follow all the rules applicable on the audit work while checking the accounts
of a business concern

Audit of all aspects of entity:

The audit should be organized to
cover all aspects of the entity as far as they are relevant the financial
statements being audited. A business entity has many areas of working. A small
entity may have a few functions while large concern has many functions. The
auditor has duty to go cover all functions so that the reader may know about
all the working of a concern.

Reasonable assurance:

The auditor should obtain
reasonable assurance that information contained in underlying accounting
records is the basis of preparation of financial statements. The auditor can
use various techniques to test the validity of data. All auditors while doing
the audit work usually apply the compliance test and substantive test. The
auditor can show such information in the report.

Reliable financial information:

The auditor assesses that
information contained in the underlying accounting records and other source
data is reliable. He studies and evaluates accounting system and internal
controls. He determines the nature, extent and timing of other auditing
procedure.

Sufficient accounting record:

The auditor checks that
information contained in the underlying accounting records and other relevant
data is sufficient. He carries out other tests, enquiries and other
verification procedures of accounting transactions and account balances, as he
considers appropriate. There are compliance test and substantive test I order
to examine the data. The vouching, verification and valuation techniques are
also used.

Comparison of financial statements:

The auditor determines whether
the relevant information is properly communicated.  He compares the financial statements with the
underlying financial records and other source date. He checks whether they
properly summaries the transactions and events therein. The auditor can compare
the accounting record with financial statements in order to check that same
data has been processed for preparing the final accounts of a business concern.

Testing management judgments:

The auditor determines whether
the relevant information is communicated properly. He considers the judgments
that management has made in preparing the financial statements. The auditor
assesses the selection and consistent application of accounting policies. He
checks the manner in which the information has been classified and the adequacy
of disclosure. The auditor must have the quality of judgment when accounting
books do not provide the true data.

Judgments increase work:

Judgments increase the work of
auditor. He determines the extent of audit procedures. He assesses
reasonableness of judgments. He checks estimates make by management in
preparing financial statements. The accounting data is based on personal
judgment of accountant and managers in preparing final accounts. Such judgments
also increase work of an auditor. He is also bond to make guess work on the
basis of available data.

Evidence is persuasive:

The audit evidence available to
auditor is persuasive rather than conclusive in nature. Due to judgments and
persuasive evidence absolute certainty in auditing is rarely attainable. That
is why the auditor can express an opinion as true and fair instead of exact and
cent percent correct. The personal judgments affect the value of many items.
The value of such items becomes and opinion so cent percent accuracy is not
there.

Chance of misstatements:

The auditor carries out
procedures designed to obtain reasonable assurance that financial statements
are properly stated in all material respect. Because of test nature and other
inherent limitations of an audit, together with limitations of any system of
internal control, there is an unavoidable risk that even some material
misstatements may remain undiscovered. The statements show true and fair view
instead of exact view of operations.

Indication of errors:

The auditor may get an indication
that some fraud or error have occurred which could result in material
misstatement. The auditor should extend procedures to confirm or dispel his
suspicion. It is the duty of auditor to check cent percent items he must try to
discover the errors in accounting books and other records when he smells any
doubt he should clear the doubt or confirm it while going through the record.

Expressing opinion:

The auditor can express
unqualified opinion if he is satisfied about financial information of business.
When he finds weaknesses in accounting record then he should express qualified
opinion or disclaimer of opinion.