An audit is an independent examination of financial information of any organization or business, whether for profit or not, irrespective of size or legal form when such an examination is conducted with a view to express an opinion thereon. Auditing attempts to ensure that books of account are properly maintained by the business as required by law. We consider the propositions set before us, obtain evidence and evaluate them in the auditing report.
Auditing has the following elements:
- Critical examination of the books of accounts of a business
- It’s carried out by an independent/third-party practitioner (auditor): some organizations have their own internal audit team that evaluates such information to allow for compliance, maintain fair and accurate financial reporting.
- It’s carried out with the help of vouchers, documents, information and explanations
- The auditor satisfies himself by the examination of financial accounts and its authenticity
Purpose of Audit
The purpose of auditing can be classified into two categories –
a) The primary objective of auditor is to report to the owners that the accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.
b) Secondary objective or incidental objective which are: –
- Detection and prevention of frauds
- Detection and prevention of errors
Importance of Audit
- Audit satisfies the owner about the working of the business operations and the functioning of its various departments.
- The audit helps in the detection and prevention of errors and frauds.
- The audit helps in maintaining the records and verification of books of the books of accounts.
- The independent opinion of the auditor is extracted through auditing which is extremely essential for the management of the company.
- The audit establishes a moral check on the staff of the business so that they became aware of not committing any irregularity. This makes the staff more active and responsible.
- Audit protects the interests of the shareholders in the case of a joint-stock company by assuring them that their accounts are being managed properly and their interests will not suffer under any circumstances.
- Audit creates confidence among stakeholders such as creditors, debenture holders, and banks, etc.
- Audited statements ensure compliance with legal requirements such as listing requirements of stock exchange etc.
- Auditing reinforces and strengthens internal control and provides suggestions necessary in the internal control system.
- Audited financial statements enable easy access to loans because it provides a clear financial image of an organization to the banks