Explain the meaning of auditing and write the scope and importance.
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Definition of 'Audit'
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Definition: Audit is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organisation.
Description: Audit can be done internally by employees or heads of a particular department and externally by an outside firm or an independent auditor. The idea is to check and verify the accounts by an independent authority to ensure that all books of accounts are done in a fair manner and there is no misrepresentation or fraud that is being conducted.
All the public listed firms have to get their accounts audited by an independent auditor before they declare their results for any quarter.
Who can perform an audit? In India, chartered accountants from ICAI or The Institute of Chartered Accountants of India can do independent audits of any organisation. CPA or Certified Public Accountant conducts audits in USA.
There are four main steps in the auditing process. The first one is to define the auditor’s role and the terms of engagement which is usually in the form of a letter which is duly signed by the client.
The second step is to plan the audit which would include details of deadlines and the departments the auditor would cover. Is it a single department or whole organisation which the auditor would be covering. The audit could last a day or even a week depending upon the nature of the audit.
The next important step is compiling the information from the audit. When an auditor audits the accounts or inspects key financial statements of a company, the findings are usually put out in a report or compiled in a systematic manner.
The last and most important element of an audit is reporting the result. The results are documented in the auditor’s report.
Answer:
Explanation:
Auditing:
To ensure that all departments are using a documented method of documenting transactions, an auditor must examine or inspect multiple books of accounts in addition to physically examining inventories. It is done to check the correctness of the financial statements that the organization provides.
The scope and importance of Auditing:
• The audit assists in the identification and prevention of mistakes and frauds
• The audit satisfies the owner about how the business operates and the functioning of its various departments.
• The audit assists in maintaining records and checking the books of accounts.
• Through auditing, the independent opinion of the auditor is obtained, which is crucial for the management of an organization.
• The audit creates a morale check on the company's employees so that they are conscious of not engaging in any irregular activities. The staff becomes more accountable and engaged as a result.
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