Auditing: Advantages and Limitations

On completion of a financial year, there is a final report that is created of accounts. This report has to be accurate and the company needs to be certain that the accounting process was followed thoroughly. This is where Auditing comes into play. Before we understand the advantages and disadvantages of Auditing. Let us first understand what is Auditing, what are the basic principles and also the difference between auditing and investigation for an overall understanding of the concept. 

In general terms, the word audit means to examine. Students will learn the process of accounting from the point of view of financial accounts in a company. Hence, auditing is a complete inspection done thoroughly of the books of accounts. This involves verification of assets of the company as well as vouchers issued. The person who conducts this inspection is called Auditor. 

An Auditor does not guarantee an error-free book of accounts but rather expresses his opinions about the accuracy of the book. An Auditor does not give predictions or judgements on the performance of the book or predict the next financial year performance. 

If an Auditor is convinced and satisfied with the examination he would then state the books of accounts to be accurate and fair and this not an opinion of the financial status of the company.  

Principle Aspects 

The books of accounts need to be accurate as it allows them to determine the financial position of the company. In India, there is a list of rules, procedures and methods that are followed as per the ICAI (Institute of Chartered Accountants). There are about 35 AAS (Auditing and Assurance Standards). 

Let us Look at the Eight Principle Aspects Covered by Auditing: 

• The primary objective is to carefully review the procedures related to the accounting process. This works as the base of the auditing and hence the auditor has to first understand the system and its functionality. 

• It is compulsory as per CARO 2003 for auditors to review the internal control system. The auditor has to assure the internal control system is effective and can be relied upon before going through the accounts minutely. 

• The auditor has to check the posting of the entries in the books of accounts and ensure it is arithmetically accurate. 

• The Auditor has to ensure there is a proper bifurcation between the capital and revenue transactions. This is the basic accounting principle that has to be followed by the auditor. 

• The assets declared by the company have to be verified by the auditor and analyse the ownership of the declared assets. There should be no assets left out from the balance sheet. Inspection of documents is mandatory. 

• As assets are important to be evaluated, so are the liabilities of a company. The auditor has to ensure no liabilities are left from the balance sheet and also inspect all related documents and verify the same. 

• Every financial transaction of a company needs to have supporting documents. The auditor has to check the existence as well as the accuracy of this transaction. This process is also known as Vouching. 

• Lastly, the auditor has to check all financial records of the company to comply with the law, regulations and procedures declared by the Companies Act 2003, under the Income Tax Act 1961. 

Difference Between Auditing and Investigation

These two terms are very commonly confused with one another. These two terms have a very distinct meaning in Accounts. 

Auditing is an inspection of the books of accounts and there is a report written by the auditor stating the financial position of the company considering the law, regulations and procedures declared by the companies act. 

An investigation is a very critical inspection or examination of a specific fact to understand the whole matter with an in-depth scrutiny process. An investigation is not done annually as Auditing, it is performed only if the situation calls for it. 

Advantages of Auditing

Auditing is the process of inspecting and scrutinizing the books of accounts of an entity to authenticate its accuracy and reliability. Such a process is essential to the company, the investors, creditors, and shareholders. Auditing is very advantageous as it offers assurance to all the stakeholders. Auditing helps prevent fraud and errors and minimize the risks of fraud in the books of accounts.

Disadvantages of Auditing

Testing involves an extra cost to the company, which is considered a burden. Evidence that is identified is more pervasive than conclusive. The employees may feel harassed as they cannot express their own in terms of auditing. Another disadvantage is that the company’s policies may not change periodically whereas the rules and regulations may vary from time to time.

Limitations of Auditing

The company auditor uses techniques like test checking and sampling to limit the scope of the audit. The auditor also has to audit the whole year’s account within a limited time.  So, they have such a limitation of time, within which the audit has to be completed. One of the limitations of auditing is that the auditor cannot measure or comment on the accuracy of the estimates in accounting.

Benefits of Auditing

Auditing provides credibility to the financial statements of a company and gives confidence to the shareholders that the accounts are true and fair. It also helps to improve the company’s internal controls and systems and helps to identify the weaknesses in the systems giving scope for making improvements.

Objectives and Advantages of Auditing

The main objectives of auditing are (1) verification of accounts and statements, (2) detection of frauds and errors, and (3) prevention of frauds and errors. 

Auditing enables us to detect frauds and errors with suggestions for the prevention of the same. The accounts audited stand authenticated.  Auditors also render advice to the management of the company, as they are competent persons in the field of accounts and financial laws.

Advantages and Disadvantages of Quality Audits

An audit is important for ensuring the optimal performance of a quality management system. These audits can assist the management ineffective monitoring of the system.

Advantages

1. The process of examining the books of accounts of an organization in an audit is to authenticate their accuracy and reliability. It is an important process offering assurance to the company, the investors, creditors, shareholders, and also to the government.

2. During the process of auditing, both frauds and errors, if any, can be detected. So it helps to prevent such frauds and errors.

3. If the auditor is an external auditor, the business can get a second opinion on their financial statements and also on their financial standing.

Disadvantages

1. It is not cost-effective, as a detailed audit would be a costly affair. 

2. Auditors always have a specific timeline i.e. they have to audit the whole year’s accounts within a specified period.

3. The evidence that the auditors collect is persuasive and not conclusive.

Advantages of Statutory Audit

An audit, when made compulsory by law, is a statutory audit. In this statutory audit, the auditor gives his views independently without being influenced by anybody in any manner. The report submitted by a statutory auditor helps stakeholders to rely on the financial statements.  

Advantages of Management Audit

Management audit reviews managerial aspects like organizational objectives, policies, procedures, control and system to check the efficiency of the management over the activities of the organization. It will identify the weaknesses of management in different functional areas. It will also analyze the different ways to overcome these weaknesses and inefficiencies. It helps the management in decision-making areas also.