An Introduction
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 audit reports to make important business decisions.
This is the concept of auditing in a nutshell.
Definition of Auditing:
An audit is when an auditor examines or inspects various books of accounts, followed by a physical inventory check, to ensure that all departments are using a defined system of recording transactions. It is done to ensure that the financial statements presented by the organisation are accurate.
Internal auditing can be done by employees or department heads, and external auditing can be done by a firm or an independent auditor. The goal is for an independent body to audit and verify the accounts to ensure that the books of accounts are completed fairly and that no misrepresentation or fraud is taking place.
Before they can announce their quarterly results, all publicly traded companies must have their accounts examined by an independent auditor.
What qualifications do you need to perform an audit? Any institution in India will have an independent audit conducted by chartered accountants from the Institute of Chartered Accountants of India or ICAI. Principles are set out by CPAs in the United States (Certified Public Accountants).
There seem to be four steps to the auditing process. The very first stage is to establish the auditor's position and terms of engagement, which is typically done through with a letter signed by the client.
The second phase is to prepare the audit, which gave information like timelines and organizations that will be scrutinized by the auditor.
Is the auditor in charge of a particular division or the rest of the company? The audit could last a day or even a week, due to the nature of the audit.
When an auditor examines a company's accounts or inspects its major financial statements, the results are usually published in a report or prepared methodically.
Analyzing the findings is the final and most important element of an audit. The conclusions of the auditor are detailed in the report.
Principles of Auditing
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.
Audit Report
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 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.
Advantages and Disadvantages of Auditing
Advantages of Auditing
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, 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.
Disadvantages of Auditing
Auditing involves a deep examination of records, which 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 credentialed, 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.
Basic Principles Governing an Audit
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, independence, skills and competence, work performed by others, documentation, planning, audit evidence, accounting system and internal control, and audit reporting.
1) A thorough examination of all systems
The assessment of all systems and procedures related to accounting and financial operations is the primary goal of any audit. Before beginning the audit of the final statements of accounts, the auditor must first comprehend the system and its functionality. It will serve as the foundation for the entire auditing process.
2) Internal Controls Assessment
The extent of the audit will be determined by the efficacy of the organization's internal control system. The auditor can rely on the system if the company's internal controls are in place and very effective. Then he won't have to go over the accounting in great detail.
If the internal controls, on the other hand, are ineffective, the auditor must go over the accounts with a fine-tooth comb. The auditor must also assess the internal control system, according to CARO 2003.
3)Arithmetic Precision
The auditor must also check the accuracy of the books of accounts regularly. This includes double-checking the books' arithmetical accuracy and verifying that the entries are properly posted.
4) Principles of Accounting
The auditor must check that the capital and income transactions are properly distinguished. All financial transactions must fall into one of two categories: revenue or capital. The auditor must also verify the accuracy of both income and expenditure items.
5) Assets Verification
All of the company's assets must be physically verified by the auditor. As a result, he must examine all legal documents, certifications, official statements, and other documents to determine the ownership of all assets. The auditor must also make certain that no assets are missing from the balance sheet.
6) Liabilities Verification
The auditor must also verify the organization's liabilities. He'll go over all of the documents, letters, and certificates once again. He can also seek confirmation from outside parties if necessary.
7) Attestation
A paper trail is left behind by every financial transaction. These supporting documentation must be examined by the auditor to ensure that the transactions are valid and accurate. Vouching is the term for this. The organisation, for example, has a 12,000/- electrical expense. The auditor must then examine the electrical bill to double-check the transaction.
8) Statutory Obligations
The auditor's job is to ensure that the company's financial records conform with all laws, rules, and regulations in effect at the moment. As a result, he must ensure that the accounts are compliant with the Companies Act 2003, the Income Tax Act 1961, and other relevant laws.
Features of Auditing
The images tell about the essential features of an audit.
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Characteristics of Auditing
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.
FAQs on Concept Of Auditing
1. List the Advantages of Auditing.
Ans: Owners/Investors can rest assured.
One of the most significant benefits of auditing is that it provides reassurance to owners, investors, and shareholders. The accuracy of the books of accounts will be guaranteed to the business owners.
They will be pleased with the efficiency and profitability of their business operations, as well as the functioning of their numerous departments. The same is true for investors, who will find assurance in the books of accounts after they have been audited.
Errors and Deceptions
An error is a mistake made without the goal of defrauding the firm; it is an unintentional blunder. Fraud, on the other hand, is an intentional act. Both errors and frauds are detected during the auditing process. Auditing also aids in the prevention of such mistakes and frauds. It instils a fear of being discovered.
As a result, auditing assists us in reducing the danger of errors and fraud in our books of accounts, but it does not eliminate the risk. There's always the possibility that the mistake may go unnoticed, and that the scam will be undiscovered due to its cunning concealment.
2. List some limitations of performing an Audit.
Factor of Cost
A complete and detailed audit would be prohibitively expensive. It is not economically viable. As a result, the auditor must limit the scope of his audit and employ sample and test checking techniques.
Factor of Time
Auditors usually work on a very strict schedule. This is sometimes due to legal obligations. This implies he'll have to audit a full year's worth of accounts in a matter of weeks. As a result, one of the most significant restrictions of auditing is a lack of time.
Evidence that isn't conclusive
In general, the audit evidence gathered by the auditor is compelling rather than conclusive. In most auditing situations, there is never 100 per cent conclusive evidence.
This is one of auditing's primary drawbacks. Estimates are also frequently used in accounting. The auditor is unable to assess or comment on the precision of these estimations. He has no choice but to rely on his knowledge.
3. What do you mean by Auditing? Write in brief about the different types of Auditing.
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 internal audits. 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.
4. Explain the limitations of Auditing?
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.
