Synopsis of Auditing
Auditing is defined as the on-site verification activity, such as inspection or examination, of a process or quality system, to ensure compliance to the requirements. An audit can apply to an entire organization or maybe specific to a function, process, or production step.
Auditing has become a standard practice in all the organizations, whether a business, social, industry or a trading company. The business owner and its management are separate, so auditing has become crucial to detect and prevent fraud.
Benefits of Auditing
To Maintain Accounts Regularly:
Audit adds moral pressure to maintain accounts regularly and correctly, thereby minimizing the questions raised by an auditor.
To Prepare a Plan:
The audited statements remain true and correct, and so, help with planning for the future.
To Detect and Prevent Errors and Fraud:
It is an auditor’s primary duty to prevent and detect errors and frauds, thereby avoiding scams. Therefore, even though audits are not mandatory, all organizations do conduct audits of their books of accounts.
To get Compensation:
The insurance company compensates business owners who have suffered losses in their property based on the auditor’s audited valuation report. Therefore, the information will help them to receive compensation.
To Get Business Loan Sanctioned:
Financial institutions provide loans based on audited financial statements. A business organization may obtain a loan based on its last five years of audited financial statements. Hence, an organization must make audit a condition of borrowing.
It Facilitates the Sale of Business:
Auditor values a company’s assets. Valuing assets and liabilities allows a business to be sold. It enables a business to determine its price.
To Assess Tax:
The tax authorities assess taxes based on profits calculated by the auditor; similarly, sales tax authorities determine taxes based on the sales in the audited statements.
It Facilitates Comparing Different Data:
An auditor instructs an accountant, in the same way, to help detect errors and frauds by comparing the accounts of the current year with those of the previous year. Again, comparing versions of the current year with those of the last year will help detect errors and frauds for the organization.
It Provides Information of Profit or Loss:
It is important for a businessman to know if his business has made money or lost money, time and again. On auditing the books of accounts, the business owner can determine the profit or loss that the company has made.
To Enhance Goodwill:
Auditing increases the goodwill of an organization by showing its financial position and profitability to the public, thus enhancing the public faith for the organization.
To Amalgamate the Company:
Sometimes, companies of the same type can merge. First, the auditor evaluates the company’s assets and liabilities that will be combined. Then, the company’s purchaser will accept the business organization based on its audit.
How does an auditor work?
Auditing is the process of reviewing and confirming your financial reports. Audits verify that you’ve created accurate and reliable financial reports and that no fraudulent activities are happening within the business. The three prime audits are: Internal, External, and Government or IRS audits.
What an Auditor Reports On?
Financial Statements:
An audit determines whether the information in financial statements is accurate and free from material misstatement. In this context, the term “material” refers to errors or omissions that are large enough to influence the reader’s opinion of the financial statements. An audit is designed to identify financial statement errors.
Regulatory Requirements:
Accounting rules must be followed when preparing financial statements. While for-profit businesses in the United States must follow Generally Accepted Accounting Principles (GAAP), governmental and not-for-profit organizations follow different accounting rules. An audit opinion states that the financial statements were prepared according to specific standards.
Internal Controls:
Additionally, auditors must assess the effectiveness of internal controls in most audits. These controls are enacted to ensure that the financial statements are accurate and that assets are not stolen. If there are weaknesses in any controls, the auditor must disclose them.
In a nutshell, your audit should be viewed as a quality control mechanism to improve the efficiency of your business. Audits are time-consuming and expensive, but they are usually worth it in the long run for your business. Further, directors of the company will be able to see the opportunities and risks that exist within the organization and in the broader marketplace.
