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.
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.
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.
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.
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.
An audit is important for ensuring the optimal performance of a quality management system. These audits can assist the management for effective monitoring of the system.
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.
During the process of auditing, both frauds and errors, if any, can be detected. So it helps to prevent such frauds and errors.
If the auditor is an external auditor, the business can get a second opinion on their financial statements and also on their financial standing.
It is not cost-effective, as a detailed audit would be a costly affair.
Auditors always have a specific timeline i.e. they have to audit the whole year’s accounts within a specified period.
The evidence that the auditors collect is persuasive and not conclusive.
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.
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.
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1. What are the advantages and disadvantages of an Audit?
Ans. The advantages and disadvantages of Auditing are explained below. The objective of conducting an audit is to obtain reasonable assurance about whether the financial statement as a whole is free from mismanagement and to express an opinion on the same.
The main risk in audit is towards assurance services that derive the wrong conclusion. Testing involves an extra cost to a company, which is considered a burden. Besides, evidence that is identified is more pervasive than conclusive.
Advantages of Auditing are as follows:
Public Limited Companies can access the Capital Market as they satisfy audit requirements under the Securities and Exchange Commission.
Creditors may offer lower interest rates and investors may be willing to accept a lower return on their investment due to the reduced risk associated with audited financial statements. This, in turn, the company may have a lower cost of capital.
The employees take care of making fewer errors in performing accounting functions. So it is a deterrent to inefficiency and fraud.
It makes suggestions to improve control and to achieve greater operating efficiencies within the company.
Disadvantages of Auditing are as follows:
Due to certain limitations, the auditors do not oversee the process of building financial statements from the start to finish.
Most evidence that the auditor collects is persuasive and not conclusive.
A very detailed and thorough audit would be a costly affair. So it is not cost-effective.
Insufficient time is another limitation, as they generally work on a specific timeline.
2. Explain the inherent limitations of the Audit.
Ans. Auditors can offer only reasonable assurance over the truth and fairness of the financial statements rather than absolute assurance. Though the limitations of auditing cannot be completely eliminated, the effects of such limitations can be reduced to an appropriate level by taking appropriate steps.
An auditor cannot give an absolute opinion as it is not practical to test all the transactions. So, he has to apply the sampling method in selecting transactions to test. There is a possibility that there can be an error item in an unselected item.