Auditing: meaning, objectives, advantages and limitations - Principles and Practice of Auditing

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1. Meaning and definitions
2. Accountancy and auditing distinguished
3. Objectives of auditing
4. Advantages of audit
5. Disadvantages and limitations
6. Qualities of an auditor
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

About this paper. KSLU has not published the B.Com LL.B. syllabus, and there is no BA or BBA paper on auditing; the topics in these notes are built from the nine past papers (December 2019 to January 2026) and standard auditing coverage, in the five-unit order the papers use. This first note covers the definition and objectives, which are set in almost every paper, and the “accountancy versus auditing” table, which came as a 16-mark question in January 2026.

1. Meaning and definitions

The word comes from the Latin audire, “to hear”. In early times the owner of an estate or the treasury appointed a person to hear the accounts read out by the steward, and to satisfy himself that they were correct. The modern audit is an examination of the books, vouchers and records of an organisation by an independent person, so that he can express an opinion on whether the financial statements show a true and fair view.

Spicer and Pegler: an audit is “such an examination of the books, accounts and vouchers of a business as will enable the auditor to satisfy himself that the balance sheet is properly drawn up so as to exhibit a true and fair view of the state of affairs of the business, and that the profit and loss account gives a true and fair view of the profit or loss for the financial period, according to the best of his information and the explanations given to him and as shown by the books.”
Montgomery: auditing is a systematic examination of the books and records of a business in order to ascertain or verify, and to report upon, the facts regarding its financial operations and their results.
ICAI: an audit is the independent examination of financial information of any entity, whether profit-oriented or not, and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion on it.

Three features follow from these definitions: the audit is an examination of records and evidence; it is done by an independent and qualified person; and it ends in an opinion in a report, not a guarantee. For companies the Companies Act 2013 makes it compulsory (sections 139 to 148) and requires the auditor to follow the Standards on Auditing issued by ICAI (section 143(9)). SA 200 states the overall objective: to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on them.

2. Accountancy and auditing distinguished

Accountancy is the recording, classifying and summarising of transactions and the preparation of final accounts. Auditing begins where accountancy ends: it is a critical examination of what the accountant has prepared.

Point	Accountancy	Auditing
Nature	Constructive: records and prepares accounts	Analytical: examines and reports on accounts
Starting point	Begins with original entries	Begins after the accounts are prepared
Done by	Accountant, an employee of the business	Auditor, an independent outsider
Qualification	No statutory qualification	For companies, a chartered accountant in practice (s.141)
Responsibility	Management is responsible for the accounts	Auditor is responsible only for his opinion
Report	Produces final accounts	Produces the audit report
Period	Continuous, day to day	Usually after the year ends (or at intervals)
Remuneration	Salary	Fee fixed by the appointing authority (s.142)

3. Objectives of auditing

Primary (main) objective. To examine the accounts and report whether the balance sheet and the profit and loss account give a true and fair view, and, for companies, whether they comply with the Act and the accounting standards. “True” means the accounts are not false and agree with the facts; “fair” means they are not misleading, are prepared on proper principles consistently applied, and disclose everything material.

Subsidiary objectives.

Detection of errors in the books.
Detection of frauds.
Prevention of errors and frauds: the knowledge that an independent person will check the records has a moral check on the staff.

Errors are unintentional mistakes:

errors of omission: a transaction is left out wholly or partly (a credit purchase not recorded at all; this does not affect the trial balance);
errors of commission: wrong posting, wrong totalling, posting to the wrong side or the wrong personal account;
errors of principle: capital expenditure treated as revenue or the reverse (purchase of machinery debited to purchases account);
compensating errors: one error cancels another, so the trial balance still agrees;
errors of duplication: the same entry recorded twice.

Frauds are intentional, and are harder to detect because they are concealed:

misappropriation of cash: teeming and lading (cash from one debtor is pocketed and the shortfall covered by later receipts from another), fictitious wages, dummy creditors, inflated expenses;
misappropriation of goods: stock taken away or used privately, concealed by false entries;
manipulation (falsification) of accounts: by management, to show more profit (to raise share prices, borrow, earn commission) or less profit (to evade tax, buy shares cheaply). Over-valuing stock, omitting liabilities and under-providing depreciation are common methods.

SA 240 places the primary responsibility for preventing and detecting fraud on management and those charged with governance; the auditor must plan and perform the audit with professional scepticism so as to obtain reasonable assurance that the statements are free from material misstatement caused by fraud.

Trap. Do not write that the main object of an audit is to detect fraud. That was the nineteenth-century view. The main object is to express an opinion on the truth and fairness of the accounts; detection and prevention of errors and frauds are subsidiary. As Lopes L.J. put it in Re Kingston Cotton Mill Co. (1896), the auditor is a watchdog, not a bloodhound (see the note on liabilities).

4. Advantages of audit

Reliable accounts: audited accounts are accepted by shareholders, banks, creditors and tax authorities with greater confidence.
Protection of owners who are not in day-to-day control: shareholders of a company, a sleeping partner, the beneficiaries of a trust.
Moral check on employees, reducing errors and frauds.
Easier loans and credit: banks rely on audited statements.
Tax and government: assessments are smoother; tax audit is compulsory above the turnover limits.
Settlement of disputes: on admission or retirement of a partner, or between partners on profit sharing, audited accounts are an agreed basis.
Valuation: on the sale of a business or amalgamation, audited accounts help fix the value of assets and goodwill.
Advice: the auditor points out weaknesses in the accounting system and internal control.
Insurance claims: claims for loss of stock or profit by fire are supported by audited accounts.

5. Disadvantages and limitations

Cost: an audit is expensive for a small business.
Test checking: the auditor does not check every transaction; he relies on samples (SA 530), so some errors will escape.
Dependence on management: he relies on information, explanations and representations (SA 580) given by the staff; collusion can defeat him.
Judgment in accounts: depreciation, provisions and stock valuation involve estimates, so the accounts cannot be “exact”.
Time: the report comes months after the year end.
No guarantee: the opinion gives reasonable, not absolute, assurance. A clean report does not certify that the business is well managed or that there is no fraud.
Independence may be weakened where the auditor depends on the client for fees or other work, which is why section 144 forbids an auditor to provide certain other services.

6. Qualities of an auditor

Set as a short note (June 2025): sound knowledge of accounting, auditing standards, the Companies Act, tax and the business of the client; honesty and integrity; independence and objectivity; tact and the ability to deal with staff; patience, alertness and a questioning mind (professional scepticism); confidentiality; and the courage to report adversely when the facts require.

How this is examined

“What is auditing? Explain the objectives of auditing” (November 2021, August 2024, and as 9(c) in January 2026) and “Explain the advantages and disadvantages of auditing” (April 2022, June 2025) are the commonest Unit I essays. “State the difference between Accountancy and Auditing” was set in April 2021, December 2019, October 2023 and for 16 marks in January 2026: give a table of eight points and a short paragraph on each side. In an objectives answer, define audit, separate the primary from the subsidiary objectives, and list the kinds of errors and frauds with one example each.