To ensure the records and accounts are correct, a firm needs to conduct audits regularly. Many small firms don’t like the idea and process of auditing. Yet if the firms conduct audit regularly, it benefits them. In this article we will learn about the basic concepts of auditing, its advantages and disadvantages. But before that lets have look on audit and its different types:
What is an Audit?
Audit: In simple words audit is the systematic and documented process to derive the audit records. And compare it with the audit criteria. It examines a firm’s financial records and accounts, as a result they are correct. Audit helps in running a firm smoothly.
There are many different types of audit, but mainly it is divided in three parts: Internal audit, external audit and IRS tax audit.
- Internal audit: As the name suggests, it takes place within a firm to measure its challenges and achievements. A firm allows internal auditing to verify that its processes are correct and effective. Internal audits help in correcting a firm’s production step. It is also called a First-party audit, because a firm’s employed auditors conduct this audit. They conduct audit without having an interest in any auditing area. Internal audits keep updated the investors about a firm’s financial condition.
- External audit: Investors and shareholders are interested in External audits. Usually they conduct external audit to ensure a firm’s financial records are correct. It is often called a second-party audit, because an independent party audits a firm. External audits are conducted on behalf of a project contract. External audit is more effective and it can influence a contract.
- IRS tax audit: Internal revenue service (IRS), tax audit takes place to ensure a firm’s reported account record is correct. IRS also ensures a firm’s account record does not violate the laws of income tax. It checks errors in a firm’s filed tax returns.
After having a good vision on audit, we will know all the concepts of auditing. Auditing can be defined as the process of verifying a firm’s financial and account statement. A firm should conduct auditing regularly to check its profitability. Investors and shareholders depend too much on auditing, before making their final decision. Sometimes auditing is conducted on a certain production step to check it’s credibility.
Processes of Auditing
- Planning: This phase includes planning and preparation for auditing. Firm management conducts a formal meeting to decide the criteria and objectives of auditing. They decide to sort out all the ways, which can influence auditing. They always want the result to be clean.
- Implementation: ‘Fieldwork’, that is another name for this phase of auditing . In this phase, Auditors collect data and information of a firm. It also consists of steps like: meeting with the firm management, understanding a firm’s accounting system and ensuring it is correct. The auditor keeps communicating with his team members and the firm’s management team. They do so much hard work to make the audit results better.
- Result: Audit report is called the result of auditing. It should contain all the financial records and accountant statements fair and correct. It should also contain firm’s challenges and issues. The management team go through the issues.
- Closure: When all the planned audit examinations are conducted, it is said to be a complete audit. Later it comes to the closure phase. It contains subsequent steps like: taking the right decision to settle the firm’s issues and challenges.
Advantages of auditing
- Guarantees to the investors: One of the major benefits of auditing is, it ensures the investors and shareholders. Auditing ensures them that a firm’s financial record is fair and accurate. Auditing satisfies the investors about production efficiency. It also satisfies them showing profitability of a firm.
- Catch mistakes and frauds: Auditing can catch a simple mistake, and an intentional fraud also. Auditing never guarantees to detect every hidden fraud inside a firm. But it helps in reducing the amount of mistakes and frauds. It discovers the mistakes and wrong decisions on time. So that, the management team can take appropriate action quickly.
- Gives second viewpoint: During external audit, firms get a second opinion about their financial condition. External auditors audit a firm without having any agenda or specific interests. They examine the account records honestly. They derive unbiased results of a firm’s financial report. This is why these results are effective and influenceable.
- Boost morality: Auditing is good at finding mistakes and frauds. It boosts the morality of employees not to defraud the firm. Auditors examine the accounts very closely, so the employees remain under constant pressure to be honest and responsible.
- High credibility: If the financial report remains fair after auditing, it increases the credibility of a firm. After a clean auditing, Investors and shareholders can trust on the accounts. Banks sanction loans more easily to highly credible firms.
- Helps in staying organised: A firm remains in a organised way after proper auditing. It helps the management team in making better future decisions for the firm. It tries to eliminate all the mistakes. Hence, it helps in boosting a firm’s performance.
Disadvantages of auditing
- Extra costing: A firm has to spend some extra cost for auditing, as it is a deep and detailed process. Sometimes auditors limit the audit processes to reduce its cost, but its result is not so effective.
- Time limitation: Auditors audit a firm’s whole year account statement within a few weeks. Time limitation is a major barrier for auditing. Auditing contains different rules and regulations. It is conducted on a very specific timeline.
- Credential report: Auditing results are very credential. So, the chances get higher for a firm to do frauds. The report influences a firm to make major changes in its accounting system. Auditing does not consider a firm’s Smaller issues. This is also a limitation of auditing.
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Besides all of these disadvantages, auditing has some limitations also:
- auditing does not guarantee to detect every frauds happening inside a firm.
- auditor can not value and estimate a firm’s assets and liabilities, lawyers do this estimation.
- due to time limitation, auditor can not check all the transactions of a bigger firm. He has to depend on sample works.
- because of auditing, firms face extra cost and time during auditing.
Examining a firm’s set of transactions and obtaining it’s result, is the most basic concepts of auditing. Auditors obtain fairness and accuracy of a firm’s account from the audit result. Auditors also keep in mind that the audit result should not mislead the investors. Auditing must show the real face of a firm’s account and its financial conditions. Above mentioned in this article gives a good idea about all the basic concepts of auditing.