Basic Principles of Auditing: All you need to know about!

We know that audits are crucial to any organization. They help to examine the records of a business and to ensure that such accounting records are reliable and free of errors and fraud. But to be able to perform audits in an effective and fruitful manner, the auditors must abide by certain basic principles of auditing. Auditors need to adopt high standards of professionalism, independence, and care while carrying out their duties. It is only when an auditor exercises reasonable care and skill, that the conclusions drawn by him shall be considered to be fair. Auditing and Assurance Standards (SAs) and guidance notes issued by the Institute of Chartered Accountants of India (ICAI) dictate the principles & guidelines to be adopted by audit firms to ensure the accuracy and verifiability of auditors’ actions and reports.

One such auditing standard namely, SA 200 on “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing” issued by ICAI specifies the basic principles governing an audit. These are the fundamental principles that govern the professional responsibilities of an auditor and which must be followed whenever an audit is conducted.

Further, adherence to the basic principles of auditing is also required to ensure that auditors who are working independently from one another follow the same set of guidelines and hence, arrive at similar conclusions in similar circumstances.

Basic Principles of Auditing

The basic principles governing an audit are described below:

1) Integrity, objectivity, and independence:

An auditor must be truthful, sincere, independent, and free of any bias. He should be a person of high integrity and objectivity. He should maintain impartiality at all times and should not come under any influence while performing audit work.

In the case of London & General Bank (1895), Lord Justice Lindley said that “an auditor must be honest, that is, he must not certify what he does not believe to be true and must take reasonable care and skill before he believes that what he certifies is true”.

2) Confidentiality:

The auditor must maintain the confidentiality of information obtained during the course of his work and must not disclose it without the client’s prior permission unless there is a legal obligation to do so.

3) Skill and competence:

Adequate training and experience are necessary for the auditor to carry out his work. He should be knowledgeable, skilled, and up to date with the latest developments on accounting and auditing issues, including the pronouncements of ICAI.

In addition, an auditor should be well-versed in a variety of related disciplines such as accounting, economics, mathematics, and so on. The auditor must also be familiar with the general principles of the law that governs the auditee’s enterprise. For example, while auditing a company, the knowledge of the Companies Act, 2013 is required. Similarly, if an enterprise is governed by a specific statute, as in the case of banking companies, knowledge of that special statute (Banking Regulation Act, 1949 in the case of banking companies) is also required.

4) Work performed by others:

Even though the auditor delegates some work to others and relies upon the work performed by others, including that of an expert, he continues to remain accountable for forming and expressing his opinion on the financial information of the client. Therefore, he should carefully supervise the work performed by his subordinates, other auditors, experts, etc.

5) Documentation:

The auditor should document all the important points concerning an audit in order to provide evidence that the audit was conducted in conformity with the basic principles. Audit working papers are extremely crucial to showcase the audit work and to demonstrate that the audit was done in compliance with auditing standards. They also act as evidence in a Court of law to defend the auditor against any charge of negligence.

6) Planning:

The auditor should plan or organize his work so that he can conduct the audit effectively, efficiently, and on time. He should gain knowledge about the client’s accounting system and the degree to which internal controls can be relied on, and should decide how to coordinate the work to be undertaken. Based on the information gathered about the client’s business, the auditor should determine the nature, timing, and extent of audit procedures to be performed. Moreover, for every category of assets or liabilities to be checked, the auditor should then draft a detailed audit program. An audit program lists down the various steps and procedures required to be followed in an audit.

7) Audit evidence:

Through the aid of compliance and other substantive procedures, the auditor should acquire sufficient and appropriate audit evidence to enable him to draw reasonable conclusions and form an opinion on the financial information.

8) Accounting system and internal control:

The management of the client’s company is in charge of maintaining an adequate accounting system with various internal controls that are appropriate to the size and nature of the company. The auditor should ensure that the accounting system is adequate and that all data that has to be recorded have been recorded. Internal control systems and their level of adequacy help in ensuring this. If the internal controls are strong, the auditor can be assured about the accuracy of accounting information to a large extent.

9) Audit conclusions and reporting:

Based on the audit evidence, the auditor should study and evaluate the audit conclusions. He should check to see if accounting policies have been regularly followed by the company and if financial information complies with regulatory and statutory requirements. He should also ensure that all material matters relevant to the presentation and preparation of financial information are adequately disclosed as per legislative requirements.

The auditor’s report should include a clear written opinion on the financial information. A clean audit report reflects the auditor’s satisfaction in all aspects, and where a qualified, adverse, or disclaimer of opinion is to be issued or a reservation of opinion on any matter is to be made, the audit report should specify the grounds for doing so.

Takeaway

SA 200 dictates nine basic principles of auditing that help govern the professional roles and responsibilities of an auditor. These specify the general code of conduct that must be followed by auditors while conducting the audit of financial statements of any concern.

These principles are as follows: