Auditing – Purpose, Importance and Types

What is Auditing?

Auditing is a critical process of examination of books of accounts, statutory records, documents, and vouchers of an organisation to ensure the true and fair presentation of financial as well as non-financial disclosures. Auditing aims to provide assurance about the accuracy and reliability of financial as well as other data of an organisation. However, auditing focuses more on fair and true data representation rather than arithmetical accuracy. Auditing also ensures that accounts and other statements have been prepared in accordance with the relevant laws and accounting standards.

Auditing is considered important to maintain transparency, accountability, and reliability in an organisation’s financial reporting to withhold the trust of the stakeholders. Auditing is conducted by an independent professional known as ‘Auditor’, on the basis of documents and vouchers as a piece of evidence. Auditors have to follow and comply with the set of standards and regulations established by the International Auditing and Assurance Standards Board (IAASB) and the Public Company Accounting Oversight Board (PCAOB).

Purpose of Auditing

Auditing is performed to serve a variety of crucial purposes of an organisation that helps them to grow. The basic purpose of Auditing includes:

• Testing accuracy of the books of accounts and detecting financial errors.
• Guiding organisations to overcome such errors.
• Providing a fair and clear picture of the financial position of an organization that helps in future planning and decision-making.
• Complying with the legal aspect and fulfilling the legal requirements.
• Promoting transparency and accountability in data presentation and functioning of an organization.
• Enhancing internal control and effective risk management.
• Preventing financial irregularities and fraudulent activities.

Importance of Auditing

‘The auditing is crucial for proper functioning of organisation’. This statement is enough to present the importance of Auditing. Following points presents the importance of Auditing in detail:

1. Financial Accuracy: Auditing is conducted with an objective to ensure the accuracy and reliability of accounts, financial statements and non-financial disclosure. Auditing detect that the information and data presented are true and fair.

2. Detecting Fraudulent Act: Auditing is a systematic process that detect the errors in the data presentations and also identity the frauds by carefully examining the books, transactions with vouchers and internal control.

3. Standards and Rules Compliance: Auditing ensures that organisation complies with relevant Laws, Rules, Regulations and Accounting Standards to avoid any penalties and legal actions against organisation.

4. Stakeholder’s Securities: Auditing enhance transparency in the data presentation and hence, present reliable and accurate view of the organisation’s financial health to stakeholders like investors, shareholders, creditors, and the public. This safeguards their investment interest and also boosts up their confidence on the organisation.

5. Ease the Availibility of Funds: Organisation that complies with all the auditing standards and regulations finds it easy to attract investors. Auditing and Approved Audit Report builds up confidence among investors and creditors and helps organisation to attract more funds.

6. Improves Internal Control: Auditing helps identifying error and weakness in internal control management and also recommend effective improvements and corrections to avoid risk and losses.

7. Promotes Operational Efficiency: Auditing highlights the weakness of the organisation along with the solution to strengthen the efficiency. Auditor’s reports help management to make prominent decisions and strategic planning that improves overall efficiency of an organisation.

8. Legal Protection: Auditing represents compliance to the relevant laws and standards that protects organisation and it’s management from legal disputes. Moreover, audited financial statements serves as an evidence in case of any legal disputes.

Types of Audit

Based on purpose and specific organisational aspect several types of audits are conducted. Some of the most popular type of audits are:

1. Internal Audit: Internal Audit is examination of organisational books and statements by internal auditors, who are employee of that organisation. The aim is to maintain fair, timely and accuarte financial reports that helps in improving internal control and facilitates decision-making.

2. External Audit: External Audit refers to the auditing of accounts performed by external auditor who is independent of any type of employor-employee relationship in an organisation. External auditor gives more unbiased opinion in comparison to internal auditor. External Auditor’s report builds confidence inside various stakeholders regarding their investment decision.

3. Government Audit: Government audit is performed to check the accuracy of the statement showing total taxable income of the tax payer. It is done to ensure there is no misrepresentation of data that falls under a category of tax fraud. It aims to detect accuracy of tax return and tax paid by an organisation.

4. Financial Audit: Financial Audit is a process of examining the accounts and financial statement of an organisation that aims to determine the accuracy of the accounts. It determine how fairly the statements has been prepared in compliance to the relevant laws and accounting standards.

5. Operational Audit: Operational Audit examine the efficiency and effectiveness of internal operations, performance, and functioning of the organisation. The aim is to identify the area of improvements and to take effective measures of control to reduce the cost and manage risk factors.

6. Compliance Audit: Compliance Audit examines whether organisation fulfills all the legal requirements or not .i.e., whether organisation comply with all the relevant laws, rules and, policies and internal standards or not. Such audit helps to avoid penalties and any legal actions against the organisation.

7. Corporate Social Responsibility Audit: Corporate Social Responsibility Audit determine the impact of organisation’s activities on environment and society. The growing need of environment protection and sustainability, requires organisations to submit CSR report along with annual report, that shows impact of their economic activities on environment and society and initatives taken by them towards the protection and sustainability.

8. Forensic Audit: Forensic Audit is conducted to investigate and indentiy financial fraud and misconduct in presentation of data. The Auditor or Forensic Accountant uses specific forensic accounting techniques to determine financial misappropriation and looks for evidence to be presented at court.

Frequently Asked Questions (FAQs)

1. What is purpose of Audit?

Answer: Audit serves various purposes like examining accuracy of the books of accounts and detecting financial errors, providing fair and clear picture of financial position, complying with the legal aspect and fulfilling the legal requirements, and Promoting transparency and accountability in functioning of an organization.

2. Who performs an audit?

Answer: Audit is performed by professionals auditors who are either employee of the organisation (internal auditor) or are independent professionals or audit firms hired for auditing purpose.

3. Do auditors need to be a certified public accountant (CPA)?

Answer: Auditors are required to take certified public accountant (CPA) to being expertise in field of audit and to grab promotions and growth opportunity.

4. What are the different types of audits?

Answer: There are various types of audits, including financial audits, operational audits, compliance audits, information technology audits, internal audits, external audit and forensic audits, each serving specific purposes.

5. Are audits only about financial matters?

Answer: No, financial audit is just one type of audit. There are variety of audits performed based on the type and scale of opertions, different aspect of an organization, legal requirements and many more.

6. What is the purpose of an audit report?

Answer: Audit report presents findings and conclusion of audit process along with auditor’s opinion on accuracy and fairness of data and statements. It provides clarity to stakeholder about financial position of organization and its’ legal compliance.

7. Are audit findings made public?

Answer: Audit reports are shared with stakeholders like shareholders, investors, creditors and internal mangement. Some parts of the report is issued publicly while the other parts are kept confidential depending upon the legal requirements and compliance.

8. What happens if an audit uncovers fraud or irregularities?

Answer: In case audit detects fraud or irregularities, auditors may report such misconduct to management and, in some cases, to law enforcement authorities. They may also provide recommendations to strengthen internal controls and prevent re-occurrences of such errors.