Auditing is the process of checking the financial statements along with other accounting information of a business entity. It is a systematic procedure where the economic condition of the entity is analyzed. The person taking up the responsibility of the process is called an “Auditor”.
In this process, it is checked if the business is running profitably or not. Auditing is an important process for the company, the investors, the government, creditors, shareholders, etc. They very much rely on the audit reports to make important business decisions.
This is the concept of auditing in a nutshell.
The basic principles of auditing are planning, honesty, secrecy, audit evidence, internal control system, skill and competence, work done by others, working papers, and legal frameworks.
Now we know what is meant by auditing. As discussed above, it is the inspection of financial statements of a business entity followed by checking of inventory. Based on this investigation and assessment of the financial records, the auditor gives his opinion regarding the financial position of the organization in the form of a report.
It is ensured that the statements are prepared following the accounting standards, they comply with all statutory requirements and proper presentation of the records is done with all matters duly disclosed.
The major advantage of auditing is that It gives assurance to the owners, investors, etc. about the accuracy of their financial statements.
During the auditing process, the errors and frauds in the account books are discovered. In a way, it also prevents such errors for the fear of being detected.
In the case of external audits, the books are very closely inspected, and the management gets a second opinion of their financial standing.
Since the books are closely examined, it helps the employees to be honest and responsible while preparing the reports.
The financial statements get more credibility while they are audited.
Auditing involves a deep examination of records, it ends up in extra cost to the company.
The reports of the audit act as evidence to make major changes in the accounts of the distribution of profits.
The changes are calibrated and it makes the employees feel harassed
Since the rules and regulations of business vary from time to time, it affects the result of the audit.
Since the audit report is credential, there are chances for the companies to commit fraud and ultimately it will force the auditors to commit crimes after the audit.
Smaller concerns do not consider auditing that important and proceed with regular transactions.
The auditing report is prepared based on the information agreed by the clients and so it is not guaranteed.
This Auditing and Assurance Standard was the standard on auditing that was first issued by the Institute. It explains the basics of auditing that govern the professional responsibilities of an auditor.
The basic principles of auditing are confidentiality, integrity, objectivity, and independence, skills and competence, work performed by others, documentation, planning, audit evidence, accounting system and internal control, and audit reporting.
The images tell about the essential features of an audit.
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It is a systematic procedure of examining the financial records of an organization
Its main objective is to find out any frauds or errors in the financial records.
It is conducted either by the auditors who have in-depth knowledge of accounting procedures and legal formalities.
It ensures the truth and fairness of the financial statements if it reflects the exact status of the state of affairs of the business.
It also ensures that the statements follow the accounting standards.
1. What do you mean by Auditing? Write in brief about the different types of Auditing.
Ans. Financial Audit Meaning- It is an investigation to evaluate the financial statements of a company. The auditing is done periodically to ensure that all the accounting records are true and fair and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate depiction of the transactions. There are three main types of audits as detailed below:
External Audits: Audits performed by other parties outside the business are called external audits. It is very much helpful in removing any bias while reviewing a company's financial statements.
Internal Audits: Audits performed by the employees of the company are called an internal audit. The internal audit report is directly submitted to the board of directors.
Internal Revenue Service (IRS) Audits: This internal revenue audit is a routine audit to check the accuracy of the tax returns and certain specific transactions.
2. Explain the limitations of Auditing?
Ans. Though there are benefits of auditing, there are certain limitations too. Those limitations of auditing are listed below.
An auditor has to rely on valuers and lawyers for estimation and valuation of fixed assets and estimation of contingent liabilities.
An auditor can comment neither on the efficiency of management of the client organization nor on their future performance through their audited statements.
An auditor cannot examine all transactions especially in bigger organizations where the number of transactions is too high.
An organization has to pay an additional cost on account of any fees and other such expenses for conducting an audit, which will be a burden to the company.
An auditor cannot detect frauds like forgery, and non-recording of transactions.