Auditing – It’s Purpose, Meaning and Importance
Definition and Meaning of Auditing
The term ‘audit’ has been derived from the Latin term ‘audire’ which means ‘to hear.’ In early days a person had to listen to the accounts read over by an accountant to check them. He was known as the auditor.
There is no precise definition of the word ‘audit.’ Originally, its meaning and use were confined merely to cash audit and the auditor had to ascertain whether the person responsible for the maintenance of accounts had properly accounted for all the cash receipts and payment on behalf of this principle. Audit means performance to ascertain the reliability and validity of the information. Examining books of accounts along with vouchers and documents to detect and prevent future errors/frauds is the main function of auditing. It safeguards the financial interests of the company/firm.
A few writers have defined the term ‘auditing’ is their own way –
Lawrence R. Dicksee – “An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate.”
Taylor and Perry – “Audit is defined as an investigation of some statements of figures involving examination of certain evidence, so as to enable an auditor to make a report on the statement.”
F.R.M De Paula – “An audit denotes the examination of Balance Sheet and Profit and Loss Account prepared by others together with books of accounts and vouchers relating thereto in such a manner that the auditor may be able to satisfy himself and honestly report that, in his opinion, such Balance Sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of the particular concern according to the information and explanations are given to him and as shown by the books.”
Basically, auditing has the following elements –
- a critical examination of the books of accounts of the business.
- carried out by an independent practitioner who is qualified, known as the auditor.
- carried out with the help of vouchers, documents, information and explanations.
- the auditor satisfies himself by the examination of financial accounts and it’s authenticity.
Purpose of Audit
The purpose of auditing can be classified into two categories –
a) Primary objective :
As per Section 143 of the Companies Act, 2013, the primary duty of the auditor is to report to the owners that the accounts, financial statements give a true and fair view of the state of the company’s affairs as at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.
b) Secondary objective or incidental objective :
It is also known as incidental objective. The incidental objectives are:-
- Detection and prevention of frauds
- Detection and prevention of errors
Importance of Audit
- Audit satisfies the owner about the working of the business operations and the functioning of its various departments.
- The audit helps in the detection and prevention of errors and frauds.
- The audit helps in maintaining the records and verification of books of the books of accounts.
- The independent opinion of the auditor is extracted through auditing which is extremely essential for the management of the company.
- The audit establishes a moral check on the staff of the business so that they became aware of not committing any irregularity. This makes the staff more active and responsible.
- Audit protects the interests of the shareholders in the case of a joint-stock company by assuring them that their accounts are being managed properly and their interests will not suffer under any circumstances.
- Audit creates confidence among stakeholders such as creditors, debenture holders, and banks, etc.
- Audited statements ensure compliance with legal requirements such as listing requirements of stock exchange etc.
- Auditing reinforces and strengthens Internal control and provides suggestions necessary in the internal control system.
- Audited financial statements enable easy access to loans because it provides a crystal clear image to the banks.
The basic function of auditing is to ascertain the authenticity of books of accounts prepared by the accountant. It is a well-known saying that “where the function of Accountant ends, the audit begins to determine the true and fair picture of such accounts.”
In India, the Companies Act, 2013 has made the audit of company accounts mandatory. With a sharp increase in the size of the companies and the volume of transactions day in and day out, the objective of auditing has changed. Now, auditing relies on fair representation of the financial efforts. The Companies Act, 2013 also prescribes for a qualification of the auditor. W.E.F from April 1, 2014, due to the amendment in the Companies Act, 2013 detailed provisions on cost audit, internal audit and secretarial audit can be found in the Act.