Auditing for Managers Need of auditing Advantages and limitations, type of audit, scope of audit Advantages 1.

Judges the correctness of financial statements 2. Detect Errors and Mistakes 3. Prevent Errors and Frauds 4. Benefits through specified audits Manager can get the service of auditor in doing what beyond his capacity and abi lity Judges the correctness of the financial statements Independent opinion on accounts (true and fair view) Reliability on financial statements and supporting documents Defalcations Assessment of the degree of adequacy and efficiency of the internal control Evaluation of the accounting system in use Detect and prevent errors and mistakes i. Clerical errors Errors of omission Errors of commission Compensatory errors Errors of duplication Trial Balance errors ii. Errors of principle Incorrect allocation (capital and income expenditures) Omission of outstanding assets and liabilities Incorrect valuation of assets Inadequate provision for depreciation Wrong provision for bad and doubtful debts Overvaluation or undervaluation of closing stock iii. rrors) Trial Balance checking Short cut method Extensive checking Note; Check casts of TB lists of debtors and cre ditors Establish the amount of difference Personal and impersonal ledger Closing balances Try to locate the error by getting half of the difference of tri al balance columns. If the difference is divisible by nine it may mean an error of transposition of figures If the difference is round figure look for total difference or carry forward bal ances 3. Detect and Prevent frauds and i. Misappropriation and defalcation Misappropriation of cash Omission of receipts from books False entries for receipts and payments Misappropriation of Goods Locate errors (Only if the agreement says that auditor has to locate e

Especially when Goods are not bulky but of alues ii.

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Misrepresentation of accounts Fraudulent Manipulation or falsification of accounts Window dressing and Secret Reserves Objectives; To achieve certain specific objectives False entries Conceal the true picture Top management Closing stock valuation, valuation of liabilities, provision for depreci ation, capital expenditure as revenue expenditure and vice versa, provision of d oubtful debts, provision for bad debts Limitations of Auditing Collusion may conceal frauds and errors Cunningly and purposely prepared documents may not be Uncovered Sample audit Has to depend on some other professionals opinion Inadequate information Incorrect information Rely on certificates of management Manager Attitude towards Auditor Auditor is not a blood hound but a watch dog Detection of errors and prevention errors are important Auditor has to exercise reasonable care and skill to detect errors But not bound to be a detective Watch dog but not a blood hound Doubtful facts should be fully investigated Auditor has to exercise reasonable care and adopt required skill in examining ac counting records Kingston Cotton Mills Co. (1896) Judge Lopes described the duties and liabilities of the auditor