“Accounting is a necessity while auditing is a luxury”. This view is sometimes taken by small firms and traders. They feel that while accounting is a prerequisite for recording their day-to-day transactions and maintaining business records, auditing is not required for them. But is this view correct?
In this blog, we are discussing some of the reasons behind this view.
Why do small businesses see auditing as a luxury?
We know that accounting is needed to keep a systematic record of financial transactions. It helps in the preparation of financial statements to ascertain the operating results and state of affairs at the end of a period.
Without efficient accounting, the whole exercise of a business may fail because it won’t be able to determine whether the business is making a profit or incurring a loss and what is the state of its assets and liabilities.
Considering this, sole trading concerns and small businesses may think that while accounting is no doubt a necessity, auditing is a luxury. Because for them, an audit is not compulsory. They may feel that it is a waste of their time and money. Conducting an annual audit is not mandatory in these organizations as the audit of accounts of sole proprietorship businesses is not governed by any specific statute. The audit of partnership firms is also not provided under the Partnership Act, 1932. Proprietorship and Partnership firms, though, are required to get a tax audit done under the Income Tax Act on satisfying the prescribed criterion.
Generally speaking, the following are some of the reasons why small businesses consider that auditing is a luxury for them:
- A significant amount of time and resources are needed for the intensive process of auditing.
- The process of auditing puts a financial burden on small organizations since it costs a lot to examine all of the books and financial accounts. Businesses are required to pay huge fees to auditing professionals in order to use their services.
- Small organizations may feel that auditing is ineffective for them as they have limited transactions. Their accounts can be reviewed without the use of an audit program.
- Examining and confirming each business transaction is extremely difficult and not always feasible. It does not guarantee that accounts are 100% correct.
- The exercise of audit increases formalities and compliance requirements for small firms.
- It is not compulsory for small businesses.
- The work of auditors can interfere with the routine work of accountants causing disturbance and reduction in operational efficiency.
- Auditing firms are vulnerable to bribes, and in some instances, they have been threatened to falsify their findings in the past.
Is auditing compulsory for large companies?
As per the Companies Act, 2013, every company, irrespective of its sales turnover or nature of business or capital must have its books of accounts audited by an independent auditor each financial year.
It is to be carried out in many organizations such as:
- Joint-stock Companies, governed by the Companies Act of 2013
- Banking companies, governed by the Banking Regulation Act of 1949
- Insurance companies, governed by the Insurance Act of 1938
- Electricity supply companies, governed by the Electricity (Supply) Act of 1948
- Co-operative societies registered under the Co-operative Societies Act
- Public and charitable trusts registered under the Religious and Endowment Acts
Should small firms consider auditing seriously (or as a luxury)?
In my view, auditing should not at all be viewed as a luxury. Every business, whether small or big, should get its books evaluated by an independent auditor.
Auditing provides many benefits. It is an intelligent and critical examination of the books of accounts of a business. It also helps the management of an enterprise in the prevention and detection of fraud and errors, whether committed innocently or deliberately. When books are audited, the owner will be satisfied with the genuineness of business operations and the working of its various departments.
Moreover, an audit can help to find any weaknesses in the internal control system.
Needless to say, the process of auditing will also establish a moral check on the employees because they will have a fear of being discovered if they commit any irregularity.
As stated in the earlier paragraphs, in India, the Companies Act 2013 made the audit of company accounts compulsory.
Even if an audit is not mandated for small firms, yet such concerns often want to get their books audited voluntarily since it helps them manage their books properly. Moreover, audited results are looked upon more reliably by external parties like banks, creditors, lenders, etc.
If they can’t conduct an annual audit, they should at least consider a partial audit as an alternative. With partial audits, they can get a specific area of their operations examined rather than the entire accounting records. A cash audit, for example, can help determine the accuracy of cash receipts and payments and can act as a deterrent to fraud & misappropriation.
Both accounting and auditing are extremely important for a business. Even though small businesses may view auditing as a luxury, nevertheless it helps to ascertain the validity and reliability of financial information and plays a vital role in confirming the authenticity of accounting books. Hence, it should be given importance in every organization, as far as possible.
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