Define auditing and explain its objectives and advantages
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Auditing is an examination of the accounting books and the relative documentary evidence so that an auditor may be able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial statements which have been prepared from there.
OBJECTIVES OF AUDITING :-
Auditing main purpose or object is to find the opinion of an auditor about correctness and reliability of accounts and the financial position of the business concern. For this purpose, auditor has to check the arithmetically accuracy of the books of account and find out that whether the transactions entered in the book of account are correct or incorrect. This is done by various methods like inspecting, comparing and checking. So all that work which is done by the auditor ensures him that "figures are facts".
ADVANTAGES or MERITS OF AUDITING :-
1. Verification Of Books And Statement :-
The main object of audit is the verification of the books and the financial statements of the company concerned.
2. Discover and Prevention Of Error :-
While examining the books, auditors detect some errors. These are various kinds of errors. So audit is very useful in preventing and detecting the errors.
3. Discovery and Prevention Of Fraud :-
Fraud means false representation made intentionally with a view to defraud somebody. It is the duty of the auditor that he should detect the fraud. So audit main object and advantage is that fraud may be detected and prevented. Auditor may also suggest various methods of internal check which will prevent fraud.
4. Moral Check :-
When each staff of the company knows that this financial transactions will be examined by the auditor then he fears to do that fraud. The fear of their detection acts as a moral check on the staff of the company.
5. Independent Opinion :-
Auditing is very useful to obtain the independent opinion of the auditor about the business condition.
If the accounts are audited by the independent auditor, the report, of the auditor will be a true picture and it will be very important for the management. Keeping in view the report, owner of the business will be able to prevent frauds and errors in future.
6. Protects The Interest Of Share Holder :-
Audit protect the interest of shareholders in the case of joint stock company. Through audit shareholders are assured that the accounts of the company are maintained properly and their interest will not suffer.
7. Check On Directors :-
Audit acts a check upon the directors and precaution against fraud on the part of the management.
8. Proper Supervision :-
Sometimes owner of the business can not look after the business personally. Audit acts as a check on employees and it saves the owner from losses.
9. Valuable Advice :-
The auditor has expert knowledge about the accounts and finance problems, so he may be consulted about these problems.
10. Disputes Settlement :-
In case of partnership, audit is very useful in settling the disputes among the partners. If any partner dies, or retires, the audited balance sheet will be very useful in estimating the value of goodwill.
11. Loan Facility :-
If accounts are audited, then true picture will be known to the financial institutions and they will never hesitate to lend the money.
12. Insurance Claim :-
In case of fire insurance and participation of fraud claims can be settled on the basis of audited accounts of the previous years.
13. Property Value Assessment :-
If the accounts have been audited, then it is easier to value property when the business is sold. In the eye's of law audited accounts are considered more reliable.
14. Correct Information About Business :-
Due to the fear of audit work accounting always remains upto date and correct information is given to the members in time.
15. Advantage For General Public :-
Audited financial statements present the real position of the company before the general public. Keeping in view the position of a company one can do the investment.
OBJECTIVES OF AUDITING :-
Auditing main purpose or object is to find the opinion of an auditor about correctness and reliability of accounts and the financial position of the business concern. For this purpose, auditor has to check the arithmetically accuracy of the books of account and find out that whether the transactions entered in the book of account are correct or incorrect. This is done by various methods like inspecting, comparing and checking. So all that work which is done by the auditor ensures him that "figures are facts".
ADVANTAGES or MERITS OF AUDITING :-
1. Verification Of Books And Statement :-
The main object of audit is the verification of the books and the financial statements of the company concerned.
2. Discover and Prevention Of Error :-
While examining the books, auditors detect some errors. These are various kinds of errors. So audit is very useful in preventing and detecting the errors.
3. Discovery and Prevention Of Fraud :-
Fraud means false representation made intentionally with a view to defraud somebody. It is the duty of the auditor that he should detect the fraud. So audit main object and advantage is that fraud may be detected and prevented. Auditor may also suggest various methods of internal check which will prevent fraud.
4. Moral Check :-
When each staff of the company knows that this financial transactions will be examined by the auditor then he fears to do that fraud. The fear of their detection acts as a moral check on the staff of the company.
5. Independent Opinion :-
Auditing is very useful to obtain the independent opinion of the auditor about the business condition.
If the accounts are audited by the independent auditor, the report, of the auditor will be a true picture and it will be very important for the management. Keeping in view the report, owner of the business will be able to prevent frauds and errors in future.
6. Protects The Interest Of Share Holder :-
Audit protect the interest of shareholders in the case of joint stock company. Through audit shareholders are assured that the accounts of the company are maintained properly and their interest will not suffer.
7. Check On Directors :-
Audit acts a check upon the directors and precaution against fraud on the part of the management.
8. Proper Supervision :-
Sometimes owner of the business can not look after the business personally. Audit acts as a check on employees and it saves the owner from losses.
9. Valuable Advice :-
The auditor has expert knowledge about the accounts and finance problems, so he may be consulted about these problems.
10. Disputes Settlement :-
In case of partnership, audit is very useful in settling the disputes among the partners. If any partner dies, or retires, the audited balance sheet will be very useful in estimating the value of goodwill.
11. Loan Facility :-
If accounts are audited, then true picture will be known to the financial institutions and they will never hesitate to lend the money.
12. Insurance Claim :-
In case of fire insurance and participation of fraud claims can be settled on the basis of audited accounts of the previous years.
13. Property Value Assessment :-
If the accounts have been audited, then it is easier to value property when the business is sold. In the eye's of law audited accounts are considered more reliable.
14. Correct Information About Business :-
Due to the fear of audit work accounting always remains upto date and correct information is given to the members in time.
15. Advantage For General Public :-
Audited financial statements present the real position of the company before the general public. Keeping in view the position of a company one can do the investment.
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Auditing is the procedure in which a qualified individual examines the books of accounts and assemble the evidence to form an assessment and convey their point of view to the responsible person or the management by submitting the audit report at the end of the financial year.
The term “Audit” is borrowed from the Latin word “Audire”, i.e. to hear. In ancient times when the person who has possession of business suspected fraud, they assign particular individuals to inspect the accounts, such individuals were appointed as an accountant and perceived what they had to say in respect of accounts. From the above statement, it is precise that auditing or audit consists of three elements. They are as follows:
Books of Accounts
Auditor
Approaches and measures of audit
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