Auditing and its Importance | Bank Exam Preparation

Auditing and its Importance

Introduction of Auditing

Auditing refers to a process of detailed examination of company’s account to assess their accuracy. Originally audit was related with examination of receipt and payment account i.e. purely cash audit. Nowadays it became wide. Today auditor has not only to do cash audit but also look into the facts behind the figures and clarify their accuracy.
An auditing is concerned with the verification of accounting data and with determining the accuracy and reliability of accounting statements and reports.
Auditing is the systematic and scientific examination of the books of a business concern. That is systematic and analytical examination of the accounting records. It is carried on periodically by the independent qualified person with the help of relevant records, documents, information and explanation etc.
In auditing, auditor should examine records on the basis of regularity, economical, efficiency, effectiveness and relevancy.
In auditing process auditor must satisfy himself that:

• The transaction entered in the books of original entry are correct and
• The generally accepted accounting principle(GAAP) have been followed in recording of transaction
• Accountings are on under accepted accounting standards.

In order to satisfy himself the auditor examine the following

• Internal documentary evidence i.e. records, vouchers, books of accounts and quality of internal evidence
• External evidence e.g. confirmation of balance from debtors and creditors, conducting physical count and survey, seeking independent expert opinion regarding technical matter etc.

In brief auditing involves testing the reliability, competency and adequacy of evidence in support of monetary transaction.
So, systematic examination of accounting records prepared by others, of business enterprises or other economic unit ascertaining that they correctly reflect the related transactions to the satisfaction of qualified auditor who has to report giving his opinion as to the proprietary of financial statements and accounts.

Nature of Auditing

• Examination and checking of accounting records
• Detection of errors and frauds
• Auditors must be qualified, CA or RA
• Auditors must have knowledge of accountancy
• Auditing work is generally carried on at the end of the financial year or periodically.

Principle of Audit

Base for the auditing of financial activities are its principle. As per constitutional provision of Nepal following points should be consider as base for auditing purpose.

• Principle of regularity: Follow of rules for the accounting of financial activities
• Principle of economy: Mobilization of resource with quality as well as low cost
• Principle of efficiency: Inspection of production and productivity of financial resources
• Principle of effectiveness: Objectivity while performing financial activities
• Principle of relevancy: Inspection of books of account in order to evaluate, are the financial activities are relevant?

Types of Audit

There are two types of audit
Internal audit: Continuous examination from organization itself
External audit: Compulsory by law

Internal Audit

Inspection of books of accounts, its documents and accounting methods by independent internal authority is internal audit. It is the process of examining financial and administrative transaction of organization within one year transaction not based on sample basis but by using concept of population test. For the rectification of internal error and weakness & to maintain effective internal control system internal audit is necessary. It is perform before final or external audit. RBB has own its internal audit department. On organization chart internal audit committee lies over CEO and under BOD as independent division. Report of internal auditor should submit to BOD.

External Audit

Examination of only financial transaction on sample basis by external expert after completion of fiscal or accounting year is external audit. It is known as final audit or mandatory audit. Chartered accountant or registered auditor is the expert to perform final audit. In order to make transaction understandable, comparable & valid, final audit is necessary. Report of external auditor should submit to AGM.

Importance of Auditing

The audit of the accounts of a concern has many advantages and in case of a joint stock company it has been compulsory by law. In other words, irrespective of the fact whether audit is compulsory, statutory or voluntary. It has advantage for every type of organization. Chief importance of auditing is as follows:

• It ensures the corrective ness of accounts to a great extend. As such reliability increase.
• It enables the detection and prevention of frauds, errors and put check upon dishonest employee.
• Regular audit makes the account clerk alert and help to keep book of account and other records up to date.
• Prevent the application of wrong principles.
• It helps in valuation of property.
• Reliable documents for banking loan and tax
• Audited accounts are more reliable as evidence in the court.
• Minimize different risk (to mitigate immediately).
• To provide financial information to the stakeholder.

Financial Statement of Commercial Bank

Financial statements are the finished product of accounting cycle. Financial statement is the complete set of accounting output that should be prepared by an organization to provide economic information to the stakeholders. Company Act and other regulator force the organization to make financial statement. As per unified directive no 4 which is issued by central bank to the licensed bank and financial statements, Followings are the financial statement component that should be prepare for auditing purpose.

1. Income statement
2. Balance sheet
3. Statement of change in equity
4. Cash flow statement
5. Notes to accounts and accounting policy

• Income statement is the combination of Trading account and Profit & loss account. It is performance indicator. Statement showing income and expenses of an accounting period is income statement. It is prepared on accrual basis.
• Balance sheet is the indicator of financial position. It shows the status of assets and Capital as well as liabilities at any point of time. It is not account but a statement of owe and owes.
• Cash flow statement is the statement of change in financial position. It is the description of cash inflow and outflow under different activities.
• Movement on promoter share, ordinary share as well as reserve and surplus figure of the firm on given period of time is statement of change in equity. Is is the change figure of net worth which is prepare with the help of two period balance sheet. It describes the turnover of shareholder as well.
• Notes to account is the space to disclose accounting policies and clarification of controversy matters. It is qualitative financial statements by which all accounting practice becomes understandable.