Meaning of Auditing
Auditing simply refers to the evaluation of business book of accounts and vouchers. It is done to make sure whether all financial transactions are recorded accurately. Auditing is defined as the process of a detailed examination of financial records of the business to checks their accuracy and whether they follow the prescribed rules and regulations.
It reveals errors from books of accounts of organizations. It aims at checking fairness of financial records and prevention of frauds. This examination is totally unbiased and conducted by independent person. The person doing auditing should be qualified for job to perform it with accuracy.
This can be performed either by internal employees of business or the person who are external to business. Auditing is conducted continuously at regular intervals by auditor. However, auditing is not mandatory for all businesses. Auditing is of 2 types: Voluntary audit and the one required by law.
Characteristics of Auditing
Auditing is a systematic process of examining the authenticity of the book of accounts. It follows a logical and scientific series of steps for examining financial accounts.
It is an independent evaluation done by the body of individuals who are external to the business. These persons have the required qualifications for conducting auditing and give their views or opinions without any biases.
The auditor does not only examine the accounts but also give his opinions regarding them. He expresses whether accounts present a true and fair picture of the organization and also comply with required laws.
Auditing process requires collecting various financial and non-financial documents for verifying accounts. The auditor evaluates various documents such as certificates, vouchers, questionnaires etc. for examining purpose.
In auditing, the whole examination of evidence collected is done in accordance with the established criteria or principles. These consist of International financial reporting standards, international accounting standards, industry practices, generally accepted accounting principles etc.
Importance of Auditing
Detects Errors or Frauds
Auditing helps in identifying all errors or frauds in the financial books of business by examining them. Auditors examine every financial record to verify their accuracy and discover all mistakes or frauds committed within the organization.
Assurance to Owners and Investors
It provides assurance to owners and investors by checking all internal workings of the organization. Business owners will be satisfied by auditing reports that the books of accounts are properly maintained and all departments are working efficiently. Investors to gain confidence once the accuracy of financial records is verified.
Ensures Validation of Accounts
Auditing ensures the authenticity of all accounts by performing a detailed examination and presenting a trusted opinion regarding them. It checks the regularity of accounts and finds out whether they follow all prescribed rules and regulations.
Helps in Decision Making
It supports management in decision making by providing them with crucial information regarding the organization. Auditing is an examination process which is done by a highly qualified professional having good knowledge of subjects like finance and accounts. They discover issues in organization workings and books of accounts and give their opinions for resolving them.
Independent View Point
Auditing is an independent examination of accounts which is done by auditors which are external to the organization. Auditors properly inspect books of accounts and present their fair view without any biases or hidden agenda.
It helps in gaining the confidence of all stakeholders in the organization. Auditing reports provide a transparent view of organization operations and financial records. Financial accounts after getting audited gain more creditability and provide satisfaction to all creditors.
Provide Easy Access to Loans
Audit reports serve as an efficient tool for raising the required funds from banks or other financial institutions. These reports contain accurate information regarding the business organization and depict a fair financial position. Financial instructions easily decide the credibility of the business and take decisions regarding allocating funds to them.
Establishes Morale Check
Auditing enables in keeping a check over the performance and efficiency of organizations. Workers and staff work honestly and do not try to cheat or commit fraud due to the fear of being identified under the auditing process. It helps in avoiding all irregularities and makes all employees attentive.