Auditing is the process of inspecting the books of accounts to authenticate their accuracy and reliability. It is an important process to the company itself, the government, the investors, creditors, shareholder etc. They all rely on audited accounts to make important decisions. Let us now take a look at the advantages of auditing and the disadvantages of auditing in some detail.
Advantages of Auditing
1] Assurance to the Owners/Investors
One of the biggest advantages of auditing is that it offers assurances to the owners, investors, shareholders etc. The owners of the business will be assured about the accuracy of their books of accounts.
They will be satisfied with the workings of their various departments and the overall efficiency and profitability of their business operations. It is the same case with investors, who will find assurance in the books of accounts after auditing.
Browse more Topics under Concept Of Auditing
- Meaning and Definitions of Auditing
- Basic Principles Governing an Audit
- Principle aspects covered by auditing
- Investigation vs Auditing
2] Errors and Frauds
An error is something that is done without the intention to fraud the company, it is an innocent mistake. Fraud, on the other hand, is deliberate. During the process of auditing, both errors and frauds are discovered. Auditing also helps prevent such errors and frauds. It creates a fear of being detected.
So auditing helps us minimize the risks of errors and frauds in our books of accounts but does not eliminate the risk entirely. There is always the chance that the error may go unnoticed, and the fraud is very cleverly hidden so may go undetected.
Learn the difference between auditing and investigation here.
3] Independent Viewpoint
If the auditor is an external auditor, the business can get a second opinion on their financial statements and their financial standing as well.
An external auditor will closely inspect the books and be completely true and fair in his opinion as he has no hidden agenda. If he says the accounts are true and fair, it has a lot of weightage with the company and the investors.
4] Moral Check
One of the other advantages of auditing is that the staff and the workers of the company do not try to steal or defraud the company. They are under constant scrutiny since they know that the accounts will be audited. Any irregularities can be identified during such an audit, and they will be caught eventually. This helps the staff in being honest and responsible at all times.
5] Stakeholders Confidence
After auditing stakeholders like creditors, investors, banks, debenture holders etc. can rely on the books of accounts with more confidence. And so after auditing by an independent authority, the financial statements have more credibility.
(source – Idaho legislature)
Understand the audit meaning and definition of an audit here.
Limitations of Auditing
1] Cost Factor
A very thorough and detailed audit would be a costly affair. It is not cost effective. So the auditor has to limit the scope of his audit and use techniques like sampling and test checking.
2] Time Factor
Auditors generally work on a very specific timeline. Sometimes this is due to statutory requirements. This means he has to audit a whole year’s accounts in a few weeks. Hence insufficient time is one of the main limitations of auditing.
3] Inconclusive Evidence
Generally, the audit evidence the auditor collects is persuasive in nature, not conclusive in nature. So there is never cent percent conclusive evidence in most cases while auditing.
This is one of the major limitations of auditing. There also a lot of use of estimates in accounting. The auditor cannot measure or comment on the exact accuracy of these estimates. He has to rely on his knowledge.
Understand the Principle aspects covered by Auditing here.
Solved Question for You
Q: Auditing helps in securing loans from banks. True or False?
Ans: This statement is in fact, true. Audited statements are a necessity when availing loan or credit facilities from banks. The banks are more assured about the financial position of the company and can sanction loans accordingly.