Introduction to Auditing: Meaning, Objectives, Advantages, Limitations and Types of Audit Questions

Question 1

Define auditing.

Accepted Answer

**Auditing** is the independent and systematic examination of accounts and evidence to express an opinion on **true and fair view**.

Question 2

State the primary objective of audit.

Accepted Answer

The **primary objective** is to express opinion whether financial statements show a **true and fair view**.

Question 3

What is statutory audit?

Accepted Answer

**Statutory audit** is an audit that is **compulsory under law**.

Question 4

What is internal audit?

Accepted Answer

**Internal audit** is an audit conducted by or on behalf of management to evaluate internal controls and operations.

Question 5

What is reasonable assurance?

Accepted Answer

**Reasonable assurance** means a high but not absolute level of assurance that statements are free from **material misstatement**.

Question 6

What is professional skepticism?

Accepted Answer

**Professional skepticism** is a **questioning mind** and critical assessment of audit evidence.

Question 7

Differentiate between accounting and auditing.

Accepted Answer

**Accounting** records and summarises transactions to prepare financial statements, while **auditing** verifies those records and expresses an opinion.

| Basis | **Accounting** | **Auditing** |
|---|---|---|
| Nature | recording & summarising | checking & verification |
| Performed by | accountant/management | independent auditor |
| Output | financial statements | audit report/opinion |

Thus, accounting prepares, auditing examines.

Question 8

Explain the objectives of auditing.

Accepted Answer

**Objectives of audit** are:
- **Primary objective**: express opinion on **true and fair view** of financial statements.
- **Secondary objectives**: detection and prevention of **errors** and **frauds**, and checking compliance with laws/standards.

Audit mainly provides assurance on statements; fraud detection is a supportive outcome.

Question 9

Explain advantages of auditing (any three).

Accepted Answer

Advantages (any three):
- increases **reliability** and credibility of accounts for stakeholders.
- improves **internal control** and efficiency through recommendations.
- helps in obtaining **loans** and ensures **legal compliance**.

It also reduces chances of fraud due to fear of detection.

Question 10

Explain limitations of auditing (any three).

Accepted Answer

Limitations (any three):
- audit is based on **test checking**, not 100% verification.
- depends on **estimates and judgment** (depreciation, provisions).
- **collusion/management override** can hide frauds.

Hence audit gives **reasonable assurance**, not absolute guarantee.

Question 11

Differentiate between internal audit and external audit.

Accepted Answer

**Internal audit** is done for management to improve controls and operations; it is continuous and internal in nature.

**External audit** is done by an independent auditor to express opinion on financial statements, often to meet statutory requirements.

Thus internal audit is managerial tool; external audit provides assurance to outsiders.

Question 12

Explain continuous audit and periodical audit.

Accepted Answer

**Continuous audit** is conducted throughout the year at regular intervals, useful for large organisations with continuous transactions.

**Periodical (final) audit** is conducted at the end of the accounting period, common in smaller entities.

Continuous audit gives timely checking but may be costlier.

Question 13

Define auditing and explain the objectives of audit. Add a small table/flowchart.

Accepted Answer

**Auditing** is a systematic examination of books of accounts and supporting evidence by an **independent auditor** to express an opinion on whether financial statements show a **true and fair view**.

### **Objectives of audit**
| Type | **Objective** | What it covers |
|---|---|---|
| **Primary** | **True & fair opinion** | reliability of financial statements |
| **Secondary** | **Errors & frauds** | detection/prevention through procedures |

### **Importance** (exam points)
- increases **credibility** of accounts
- protects **shareholders** and stakeholders
- improves **internal control** and efficiency
- helps in **loans** and compliance

```text
Audit evidence → evaluation → audit opinion (report)
```

Thus, the main purpose is opinion on financial statements; detection of fraud is a secondary benefit.

Question 14

Explain advantages and limitations of auditing. Add a comparison table.

Accepted Answer

### **Advantages of auditing**
- **Reliability**: increases confidence in accounts.
- **Control**: strengthens internal control through recommendations.
- **Fraud deterrence**: fear of detection reduces fraud tendency.
- **Facilitates loans**: banks rely on audited statements.
- **Compliance**: helps meet legal and tax requirements.

### **Limitations of auditing**
| Limitation | Meaning |
|---|---|
| **Test check** | not 100% checking |
| **Judgment/estimates** | relies on management estimates |
| **Collusion/override** | fraud can be hidden by collusion |
| **Reasonable assurance** | not absolute guarantee |
| **Cost/time limits** | audit is within budget and time |

So, audit improves reliability but cannot guarantee that accounts are perfectly error-free.

Question 15

Explain the types of audit. Classify them on different bases with a table.

Accepted Answer

### **Types of audit (classification)**
Audits can be classified on different bases:

| Basis | Types | Meaning |
|---|---|---|
| **Legal requirement** | **Statutory**, **Voluntary** | required by law vs optional |
| **Auditor** | **Internal**, **External** | by employees vs independent auditor |
| **Time** | **Continuous**, **Periodical** | throughout year vs year-end |
| **Purpose** | **Financial**, **Cost**, **Management**, **Tax** | objective-based |

```text
Select audit type → plan audit → collect evidence → report opinion
```

Understanding types helps managers choose the appropriate audit and helps in exam answers with proper classification.

Basis	Accounting	Auditing
Nature	recording & summarising	checking & verification
Performed by	accountant/management	independent auditor
Output	financial statements	audit report/opinion

Introduction to Auditing: Meaning, Objectives, Advantages, Limitations and Types of Audit

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