What Are The Basic Principles Of Auditing?

Prabhat Nigam

21 May, 2022

According to Accounting Standards 200 (SA 200), basic principles of auditing or the basic principles governing an audit describe the basic principles which govern the auditor’s professional responsibilities which must be duly followed by an auditor while carrying out an audit. This piece of information is an overview of the basic principles which govern the auditing responsibilities undertaken by an auditor. According to SA 200 the basic principles which govern an audit are:

• Integrity, Objectivity and independence
• Confidentiality
• Skills and competence
• Work performed by others
• Documentation
• Planning
• Audit evidence
• Accounting Systems and Internal Controls
• Audit Conclusions and Reporting

What Are The Basic Principles Of Auditing? 

According to SA 200, following are the basic principles of auditing:

1. Integrity, Objectivity and Independence: The auditor should be a person of high integrity and display objectivity while conducting an audit. The auditor should not allow any malpractice being undertaken under his supervision. The auditor should be honest, sincere, impartial and free from biasness. He should be honest while conducting the audit. An auditor is not supposed to be biased towards the organisation being audited.

Another important principle to be kept in mind is the independence of the auditor. An auditor should not have any interest in the organisation being audited as it will hamper in the auditor being independent and impartial during the audit cycle. There should not be any existence of conflict of interests.

• Confidentiality: During the process of Audit, the auditor comes across a lot of sensitive information related to the finances, operations etc. of the organisation. Therefore, it has been made mandatory on the part of the auditor to maintain confidentiality of the information and related documents acquired during the course of his work. The auditor must be very careful with the documents and other important information being entrusted to the auditor by the client. The auditor should not disclose or share the acquired information without the prior consent of the client unless a legal duty bounds the auditor to do so.

• Skill and Competence: An auditor should acquire adequate training and experience to carry out audit in a skilful and seamless manner i.e. the person auditing should be a qualified auditor. The auditor must be competent, skilful and should keep himself updated with the latest developments and pronouncements made by the ICAI related to accounting and auditing matters. The auditor should attend workshops and trainings to be updated with the new developments. For example, with the advent of GST, the auditors need to update themselves of the amendments made in the laws relating to it.    

• Work performed by others: many a times, it happens that the scope of audit is extensive and the auditors require assistance from his employees and associates that work for him and even in few cases, assistance from experts. This results in auditor delegating the duty of auditing to its employees. Though the work is being done with the assistance of associates and employees, the auditor continues to be held fully responsible for the work done by his employees. Therefore, it is encumbent upon the auditor to carefully supervise and review the task of auditing and be reasonably sure of the accuracy of the work done by his employees as the auditor continues to be ultimately responsible for forming and expressing his opinion on the financial information.

• Documentation: While carrying audit, usually the auditors maintain an audit notebook, audit plan and an auditing file where the auditor maintains a record of important documents with respect to his audit work. This record then serves as evidence for the work done by the auditor. The client refers to the documentation prepared by the auditor if he wishes to inspect the work done by the auditor. Another major reason for the documentation is to ensure that the audit was carried out in accordance with the basic principles of auditing.

• Planning: The audit plan^[1] prepared by the auditor helps the auditor to plan out his task in a more timely and efficient manner. An important part of planning involves acquiring knowledge of the client’s accounting system, the extent of reliance placed on the internal controls and the coordination of the work to be performed. This is the reason why every audit plan is different as it has to be customised according to the type of organisation, business carried on by the organisation, scope of audit, efficiency of the internal control etc.

• Audit Evidence: It is the duty of the auditor to collect enough evidence to support his final opinion in the audit report. The auditor collects such evidence based upon the compliance and substantive procedures. There are two sources of audit evidence- internal and external where the external sources are found to be more reliable.

• Accounting system and internal control: The management is responsible for maintaining an adequate accounting system having various internal controls based on the size and nature of business of the organisation. The auditor has to ensure that the accounting system is adequate to record all the information which must be recorded. The internal control systems are also checked by the auditor.

• Audit Conclusions and reporting: Once the evidence has been collected, the auditor then needs to form his opinion for the audit report. The opinion is formed on the following criteria:
• All the applicable and relevant standards were applied at all times
• Financial statements comply with all the necessary regulations and statutory requirements
• The company disclosed all the material information

Conclusion 

After completing the audit, the auditor gives his opinion through an audit report.  A clean audit indicates that the auditor does not find financial irregularities in the accounts. The auditor believes that the books represent a true and fair reflection of financial status of an organisation. However, the auditor may provide an adverse or qualified report with a disclaimer if he finds financial irregularities and frauds in the financial accounts.

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