MEANING OF AUDITING, ADVANTAGES AND IT’S INHERENT LIMITATIONS

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MEANING OF AUDITING

“An Audit is an independent examination of financial information of any entity ,Whether profit oriented or not irrespective of size or legal firm, when such an examination is conducting with a view to express an opinion thereon”.

ADVANTAGES OF AUDIT

  • It Safeguards the Financial interest of persons who are not associated with the management of the entity like partners or shareholders.
  • It acts as a moral check on the employees from committing defalcations or embezzlement.
  • It is helpful in Settling liability for taxes, negotiating loans and for determining the purchase consideration for the business.
  • It is also helpful in Settling trade disputes for higher wages/bonus.
  • It helps in detecting and minimizing wastages and losses.

SCOPE OF AUDIT

  • To form an opinion, the auditor should be satisfied that the accounting information is reliable and sufficient as the basis for the preparation of the financial statements.
  • All aspects of the enterprise to be covered in audit.
  • In forming his opinion, the auditor should also decide Whether the relevant information is properly disclosed in the financial statements.
  • The auditor is not expected to perform duties which fall outside the scope of his competence.
  • Constraints on the scope of the audit should be set out in his report & a qualified or disclaimer of opinion should be expressed as appropriate.

TYPES OF AUDIT

Audit is not legally obligatory for all types of business organizations or institutions. On this basis audit may be of two broad categories i.e audit required under law and voluntary audits.

The organizations which require audit under law are following:-

  • Companies governed by the Companies Act, 2013;
  • Banking companies governed by Banking regulation Act,1949;
  • Co-operative societies registered under the Co- operative societies Act, 1912;
  • Corporations set up under an Act of parliament or state legislature such as the life insurance Corporation of India;
  • Electricity supply companies governed by the Electricity Supply Act, 1948;
  • Public and Charitable trusts registered under various Religious and Endowment Acts;
  • Specified entities under various sections of the Income tax Act,1961;
  • Audit required under sales tax and VAT by various state Government.

VOLUNTARY CATEGORY

In the voluntary category are the audits of the accounts of proprietary entities, partnership firms, Hindu undivided families, etc. In respect of such accounts, there is no basic legal requirement of audit.

INHERENT LIMITATIONS OF AUDIT

As per SA 200 “Overall Objectives of the Independent Auditor and the conduct of an Audit in Accordance with Standards on Auditing”,

  1. The Nature of Financial Reporting:- Judgement by Management & many financial statements also involve subjective decisions which differs from different management prospective.
  2. The nature of Audit Procedures:- Auditors Job is to do audit &not do official investigation into alleged wrong doing. Fraud if one will always be carefully organized to conceal it.
  3. Timeliness of Financial Reporting and the Balance between Benefit and cost:- We want more information early to get more benefit, but it may involve more cost which we are not ready to incur and there is fixed deadline of financial statements. So maintaining balance between benefit and cost is difficult and also completing audit in time.
  4. Other Matters that Affect the Limitations of an Audit:- In case of certain matters, limitations on the auditor’s ability to detect material misstatements are particularly significant. Such assertions or subject matters include:
    • Fraud, particularly fraud involving senior management or collusion.
    • The existence and completeness of related party relationships and transactions.
    • The occurrence of non-compliance with laws and regulations.
    • Future events or conditions that may cause an entity to cease to continue as a going concern.

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