Advantages of Auditing | Why is it important?
Auditing and its advantages:
Every auditor should carry out his work impartially and effectively based on actual facts and figures. Because an audit and the work done by an auditor hold great significance for everyone concerned with a company.
In this article, we have tried to list all the important advantages/benefits that auditing can provide to a business.
Why is auditing important?
The credibility of the report has always been a problem when a manager reports to the owners. The report may (a) contain errors, (b) fail to disclose frauds, (c) be unintentionally misleading, (d) be intentionally misleading, (e) fail to disclose key information, and (f) fail to conform to rules.
The solution to the problem of credibility in reports and accounts is to employ an independent individual known as an auditor who can investigate the report and submit his findings. Auditing kind of certifies the reports and accounts prepared in a company.
Another aspect to consider is that modern corporations can be very huge, with multi-national operations. The preparation of accounts of such corporations is a very difficult task that involves bringing together and summarising accounts of subsidiaries having diverse conventions, legal systems, accounting and control systems, and so on. The verification of such accounts by an independent and qualified professional is, thus, helpful to both owners and outsiders in confirming their accuracy.
Also, many financial statements must be prepared in accordance with statutory and other regulations. The most important point is that all company accounts must comply with the provisions of the Companies Act of 2013. Further, the accounts should be in adherence to Indian Accounting Standards (Ind AS) and GAAP as well. Thus, it is essential that an audit should be carried out to ensure that the financial statements comply with these regulations.
What are the advantages of auditing?
The primary benefit of audit lies in the generation of credible financial statements, which allow the position of a business to be easily understood. Apart from this obvious benefit, auditing has several other advantages too. Some or all of these benefits are valuable even to those businesses and organizations where auditing is not compulsory; these advantages are listed below:
1. Satisfaction of the owner
Once an independent examination of books is done by an auditor, the owner of the business will be satisfied with the business operations and the functioning of its various departments.
2. Detection and prevention of fraud and errors
The process of audit helps to locate errors, whether committed unintentionally or on purpose. Continuous appraisal of books also prevents them from recurring in the future. Similarly, frauds, like errors, are also identified by auditing. Even though the future possibility of their occurrence might not be eliminated completely, they can be minimized to a large extent by having a periodic audit examination.
3. Independent opinion
Auditing is highly important in obtaining an unbiased and independent opinion of the auditor regarding the state of affairs of the business. If the accounts are audited by an independent auditor, the auditor’s report will be crucial for both internal and external stakeholders as it will give an objective opinion on the true and fair view of the company’s financial position.
4. Safeguarding financial interests
Auditing protects the financial interests of those who are not directly involved in the management of the enterprise, such as clients or shareholders, bankers, creditors, debenture holders, financial institutions, the general public, and so on. It gives an assurance to them that the accounts of the enterprise are being maintained properly and that their interests will not suffer under any circumstances.
5. Moral check on employees
Auditing acts as a moral check on the employees and prevents them from committing fraud or embezzlement. When employees know that the accounts are subject to audit, they tend to be more careful and responsible in their work. No one will attempt to commit errors or fraud as they will have the fear of being caught.
6. Negotiating loans as well as determining purchase consideration
Audited financial statements are useful for settling tax liabilities, negotiating loans with banks & financial institutions, and determining the purchase consideration of a business in matters of amalgamation & merger.
If an independent authority (i.e., an external auditor) verifies the books, their reliability increases in the eyes of outsiders like banks and financial institutions. It will be easy for them to issue loans as early as possible since the true picture of the business will be visible to them.
In addition, audited accounts are useful during corporate restructuring exercises, valuations, etc.
7. Settlement of trade disputes and insurance claims
Audited financial statements are also important for resolving trade disputes over higher wages or bonus pay, as well as claims over damage suffered by property due to fire or other natural calamities. Insurance companies may settle the claim for loss or damages on the basis of audited accounts of current and previous years.
8. Proper verification and maintenance of books
Another advantage of audit is the verification of the books of account. An audit determines whether or not appropriate books of account and related documents have been kept properly by the client. It assists the client in fixing any faults or inadequacies in this regard and in keeping its records up to date.
9. Compliance with legal requirements
Audited financial statements help to ensure that the company has complied with applicable accounting standards and disclosure requirements. Moreover, compliance with legal requirements of MCA, SEBI, RBI, etc. is also ensured, especially with secretarial audits.
10. Assessment of controls
Audit, as an evaluation function, examines the existence and functioning of various internal controls operating in an entity. It then reports weaknesses or inadequacies therein. Such a review of the internal control system is an important element of auditing and it helps to strengthen the internal controls if any weaknesses are found.
With the review of such controls, the company will also be able to find wastages and losses in the utilization of resources such as inventory, materials, etc. Particularly those wastages will be found that arise as a result of the lack or insufficiency of internal checks or internal control mechanisms.
11. Settlement of accounts in partnership
Audited accounts prove to be very helpful in the settlement of accounts (goodwill valuation, etc.) at the time of admission or death of a partner and to avoid any disputes between partners.
12. Government assistance
Before providing assistance or issuing a license for a certain trade, the Government may need audited and approved financial statements. Audited accounts are considered more reliable by the Government. For example, the tax audit report filed with taxation authorities.
Most importantly, audited financial statements of a company aid in protecting the financial interests of shareholders of the company. Because shareholders are not actively involved in the company’s management, audited financial statements are very beneficial to them in understanding the real financial position of the business. Shareholders give regard to audited accounts because an audit is an independent evaluation of financial statements done by a qualified professional.
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