Advantages and Limitations of Auditing | Qualities of an auditor
Definition of auditing
The International Auditing Practices Committee defines Auditing as “The independent examination of financial information of any entity, whether profit-oriented or not and irrespective of its size, or legal form when such an examination is conducted with a view to expressing an opinion thereon.”
Montgomery has defined Auditing as “A systematic examination of the books and records of a business or other organizations in order to ascertain or verify and to report upon the facts regarding the financial operations and the result thereof.”
Explanation of auditing
Auditing is a systematic and independent examination of data, statements, records, operations, and performance (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognizes the propositions before him for examination, collects evidence, evaluates the same, and on this basis, formulates his judgment which is communicated through his audit report.
The primary objective of Auditing is to examine the reliability and validity of the financial statements so as to render an opinion on the truthfulness and fairness of the presentations in those statements. The secondary objective of the audit is to detect and prevent errors and fraud.
Advantages of auditing
- Audit Helps To Detect and Prevent Errors and Frauds: An auditor’s main duty is to detect errors and frauds, preventing such errors and frauds and taking care to avoid such frauds.
- Audit Helps To Maintain Account Regularly: An auditor raises questions if accounts are not maintained properly. So, audit gives moral pressure on maintaining accounts regularly.
- Audit Helps To Get Compensation: If there is any loss in the property or business, the insurance company provides compensation on the basis of an audited statement of valuation made by the auditor. So, it helps to get compensation.
- Audit Helps To Obtain Loan: Especially financial institutions provide loans on the basis of audited statements. A business organization may obtain a loan considering the audited statement of the last five years.
- Audit Helps To Assess Tax: Tax authorities assess taxes on the basis of profit calculated by the auditor. In the same way, the sales tax authority calculates sales tax on the basis of sales shown in the audited statement.
- Audit Helps To Adjust Account Of Deceased Partner: Valuation of all the assets and liabilities of the business is made by the auditor while auditing books of account.
- Audit Helps To Present Proof: If any case is filed against the auditor regarding negligence, the auditor can present an audited report as a proof to settle such a case. So, it helps to present proof to settle such cases.
Limitations of auditing
1) Conflict with others:- Auditor may have differences of opinion with the accountants, management, engineers, etc. In such a case personal judgment plays an important role. It differs from person to person.
2) Effect of inflation:- Financial statements may not disclose the true picture even after audit due to inflationary trends.
3) Corrupt practices to influence the auditors:- The management may use corrupt practices to influence the auditors and get a favorable report about the state of affairs of the organization.
4) No assurance:- Auditor cannot give any assurance about future profitability and prospects of the company.
5) Inherent limitations of the financial statements:- Financial statements do not reflect current values of the assets and liabilities. Many items are based on the personal judgment of the owners. Certain non-monetary facts cannot be measured. Audited statements due to these limitations cannot exhibit true position.
6) Detailed checking is not possible:- Auditor cannot check each and every transaction. He may be required to do test checking.
Qualities of an auditor
- Common sense: According to Spicer and Pegler, “the auditor should have a full share of that most valuable commodity-commonsense.”
- Independence: Expression of opinion is a prime duty of an auditor. An influenced and biased person cannot form an independent opinion. Hence, independence in the true sense is an utmost quality of an auditor.
- Honesty and Integrity: Like any other professional viz. Doctors, Lawyers, etc. auditors should possess a high moral character. In a way, he is a public servant.
- Objectivity: The independence of an auditor depends on his ability to act with objectivity. For example, the auditor of XYZ Company believes that closing stock has not been properly valued but accepts a certificate from the management as to its valuation.
- Communication: He should be able to communicate effectively, both orally and in writing. Particularly in the matter of report writing, he should be able to convey his message clearly and unambiguously.
- Tactfulness: He should be firm, yet diplomatic with his client and staff. He should be tactful enough to obtain necessary written as well as oral evidence from his client so that he can form a reasonable opinion.
Role of internal auditor in the company’s management
- Review of Internal Control System: The internal auditor should review the internal control system of the organization. He should determine whether the existing control system is appropriate and adequate keeping in view the objectives of the organization.
- Review of Safeguards for Assets: The main concern of the management is to establish that all assets of companies are adequately protected against any damage or loss of any kind. Here an Internal Auditor can play a very important role by reviewing the means used for safeguarding assets against losses mainly fire, theft, damage due to improper use, etc.
- Review of Compliance with Policies, Plans, Procedures, and Regulations: Every company has its own policies, plans, procedures, and regulations for conducting various managerial and non-managerial functions.
- Review of Organization Structure: A well-designed organization structure is a basic requirement for the smooth functioning of any organization. An organizational structure defines the authorities and responsibilities of executives.
- Review of Utilization of Resources: Optimum utilization of resources is the prime task of the management. For this, management develops operating standards, budgets, and norms to measure and control the use of resources. The internal auditors should compare the standards with actual, and try to find out the deviations therein.
- Review of Reliability of Information: Accurate and reliable management information system is a must for effective managerial decisions. The internal auditor should regularly evaluate the reliability and accuracy of the financial and operating information of the organization.
- Review of Achievements of Goals and Objectives: Achievement of goals and objectives is the ultimate thing for which managers are paid. Budgets and targets are quantified objectives of managers of different departments.
Auditing is an essential process for organizations to understand their current performance and identify areas for improvement. It requires the auditor to possess several qualities such as objectivity, technical knowledge, communication skills, and the ability to identify risks.
While auditing can be a lengthy and complex process, it is often worth pursuing due to its potential benefits. With the right skillset and resources, organizations can strengthen their internal controls and ensure accurate financial reporting.