Auditing meaning advantages nd disadvantages

• Meaning of Auditing:

  • The word "audit" comes from the Latin word "Audire," meaning to hear
  • In the past, auditors were appointed to hear explanations given by accountants when fraud was suspected
  • The importance of auditors increased after the industrial revolution and the introduction of Joint Stock Companies
  • According to the Companies Act, 1956, every company, whether Public or Private, must have its accounts audited by a Practicing Chartered Accountant
  • Audit means the examination of accounts, and an auditor is the person examining the books of accounts
• Definition and Features of Auditing:

  • Auditing is a careful and critical examination of books of accounts by a properly qualified person based on proper evidence to express an opinion on the truth and fairness of Financial Statements
  • Features of Auditing:

  1. Examination of books of accounts
  2. Done by a properly qualified person, usually a Practicing Chartered Accountant for Joint Stock Companies
  3. Based on proper evidence like vouchers, bills, invoices, etc.
  4. Purpose is to report by expressing an opinion on the true and fairness of books of accounts and financial statements
• Advantages of Auditing:

  1. Helps in detection and prevention of errors and frauds
  2. Keeps books of accounts up-to-date for timely decision-making
  3. Assists in determining insurance claims in case of loss by fire
  4. Audited accounts are reliable for obtaining loans and credit facilities
  5. Tax authorities consider audited accounts more reliable for determining tax dues
  6. Builds confidence in shareholders of Joint Stock Companies
  7. Eases processes like admission, retirement, dissolution in partnership firms based on Audited Accounts
  8. Provides expert advice on accounts for business improvement
  9. Facilitates systematic comparison of accounts from year to year

  10) Builds the reputation of the business

  11) Helps in correct valuation of assets and liabilities for business transactions

  12) Audited accounts can be used as evidence in legal disputes
• Disadvantages of Auditing:

  1. Post-mortem Examination: Auditing is like a post-mortem examination, more useful for the future than the past
  2. Dependence on Officers: Auditors rely on information provided by company officers, which may not always be accurate
  3. Dependence on experts: Auditors may lack expertise in certain areas, leading to reliance on external experts for information
  4. No Guarantee: Auditors express opinions, not guarantees, on the correctness of accounts
  5. Costly: Auditing can be expensive, making it a luxury for small businesses
  6. Staff becomes lazy: Client staff may become careless knowing the auditor will detect errors
  7. Skill and Intelligence: Auditing requires skill and intelligence; an auditor lacking these qualities may not fulfill the purpose effectively
• External auditors - Independent professionals hired by organizations to conduct external audits on their financial statements and operations.