Meaning of Auditing
Auditing simply refers to the evaluation of business books of accounts & vouchers. It is done to make sure whether all the financial transactions are accurately recorded. Auditing aims at finding out the errors from books of accounts of the business.
It aims at the prevention of frauds. This examination is totally unbiased & conducted by an independent person. The person doing auditing should be qualified for the job to perform it with accuracy. This can be performed either by internal employees of a business or the person who are external to business.
Auditing is conducted continuously at regular intervals by the auditor. However, auditing is not mandatory for all businesses. Auditing is of 2 types: Voluntary audit & the one required by law. purpose of auditing are below.
Aims and Objectives of Auditing
Accounts and statements verification
Evaluating the fairness & accuracy of books of accounts is the primary objective of Auditing. It checks each & every financial transaction thoroughly. It detects and prevents any frauds in the books of accounts. The auditor is provided with free hands to audit the books of accounts & is independent of business.
Checking Accounting Policies
Every business or organisation needs to follow some accounting policies. Books of accounts are prepared according to these accounting policies. If a business has an effective accounting system, its efficiency can be increased. It is the duty of the auditor to check the accounting policies of business & express his independent opinion.
Error and Fraud detection
Auditing helps in easy finding of errors & frauds from the books of accounts. It is the duty of management to avoid & check errors & frauds. However, sometimes it becomes difficult for management to find out the errors.
It is through auditing that helps managers to find out errors & frauds. After this managers take corrective steps against these errors or frauds.
Improves Quality of Business processes
Auditing helps management in finding out the errors & frauds. Management can take corrective measures against these errors. Steps are taken so that they are not repeated again. This way it improves the quality of business process & improves its efficiency. Also the employees of business work properly due to the threat of auditing.
Assurance to investors
Auditing assures that each & every figure represented in the financial statement is correct. It helps in evaluating every figure of business books of accounts. Financial statements after being audited are considered trustworthy by investors. Investors are fully assured by these financial statements.
Checking Assets and liabilities
Auditing thoroughly evaluates the financial statements of the business. It helps in confirming the true value of assets & liabilities of the organisation. This helps in determining true financial position of the business. After that accordingly, proper plans can be made to achieve targets & goals.
Advantages of Auditing
- Ensures account correctness: Auditing conducts a detailed examination of all accounting books of an organization. It finds out the accuracy of financial records and ensures whether they fulfil all statutory requirements or not.
- Detects and prevent errors: It plays an efficient role in finding out errors and prevention of frauds. Auditing evaluates each financial transaction of business for checking if there is any mistake or not. This way it reduces the chances of errors and overall risk occurring due to such errors or frauds.
- Helps in maintaining accounts regularly: Maintenance of all account on a regular basis is another major advantage provided by the auditing process. It keeps a check on the regularity of account and raises questions if they are not maintained in an adequate manner.
- Easy procurement of loans: Auditing reports serves as a tool for easily acquiring the required funds from various financial institutions. These reports depict the true financial position of organizations to investors which helps them in deciding the credibility of concerned business organization.
- Keeps morale check: Auditing monitors the overall financial dealing of organizations. This prevents the working staff from committing any error and fraud. All employees work efficiently towards their role with a fear that all irregularities will be identified by auditing.
- Assists in decision making: It provides valuable information to managers for efficient decision making. Auditing is done by various experts of account and finance who have detailed knowledge of subjects, so they provide advice and resolves all problems.
- Stakeholder’s confidence: Auditing statements enables in gaining the confidence of stakeholders. All stakeholders such as creditors, shareholders, banks, investors etc. have more confidence in audited financial accounts of the company.
Disadvantages of Auditing
Disadvantages of auditing are as follows:
- Costly: Auditing process puts a financial burden on organizations as it requires the huge cost to conduct an examination of all financial accounts. Business needs to pay large fees to auditing experts for their services.
- Rely on experts: Auditor is dependent on experts of various fields for conducting auditing process. For acquiring true information regarding the valuation of fixed assets and contingent liabilities, he needs to approach valuers, engineers and lawyers.
- Impossibility of checking all transactions: Another major drawback of auditing is that it is not always possible to check each financial transaction of organizations. Some organizations are too big and have a large number of transaction, where evaluating all of them become quite an impossible task.
- Unsuitable for small concern: Auditing may not be fruitful for small organizations where there are limited transactions. Their accounts can be evaluated without an audit program.
- Chances of fraud: Audit may lead to errors and frauds in a business. Audit staff may perform their task carelessly and present an inaccurate audit report. Also, there may be chances where staff auditing accounts may be harassed within the organization and may be forced to manipulate the figures.