What Is The Importance Of Audit, And Its Advantages & Disadvantages?

Auditing is the analysis of the financial accounts/records, by a qualified accountant, and procedures of a firm or organisation. This is essential in order to gain a fair perspective on the company's financial statements. With auditing, potential investors and creditors can look at the financial statements to decide whether to invest in a business or not. Auditing is important as it also protects the public from scams and corrupt business procedures.

The advantages for a business audit are:
1. Gain a strong sense of internal control.
2. Identify key areas for improvement in your company.
3. Test out the performance of new technology.
4. Evaluate threats, economy, efficacy and quality.
5. Realise fraudulent occurrences in the business.
6. Analyse and understand your firms' financial data.
7. The public are protected from corruption.

The disadvantages of a business audit are:
1. It does not take into account the productivity and the skills of the employees of the business.
2. The financial data is never current and does not reveal much about the present financial position of a company.
3. Different accountants use different techniques, therefore it would be hard to compare audits between companies who have used different accountants.
4. For smaller companies, hiring an accountant/firm to carry out an audit can be costly.
5. A bad audit can discourage investment.
6. Can be time consuming to answer the auditor's questions and the business may not work to maximum capacity.

Was this community answer helpful? Blurtit is community driven Q&A, together we’re striving to continually improve this collective answer. So please help by rating this answer or adding your own answer.

Anonymous 62% helpful

Auditing fails to check planned frauds. The management can play tricks to manipulate the accounts in order to conceal their inefficiencies. The frauds committed in such circumstances are not disclosed. The audited accounts can not show true and fair view. Auditing is based on many certificates taken from management and other persons. These certificates may not disclose true information. Auditing may fail to provide desired result.

When certificates provide wrong information, the financial statements can not show correct position. Auditing fails to disclose correct information. The background of entries may not be clear to the audit staff. The management may not provide correct clarifications. The auditor is bound to present his report even if the clarification is not true. The auditing fails to help many persons who rely on audit report. The auditing does not show cent per cent true picture.

The auditor is concerned with the facts and figures shown in the books of accounts. When figures have been manipulated, the auditing fails to disclose true picture. The purpose of audit fails when it is unable to depict real scene of business affairs. The auditing fails to present correct view. There are limitations of accounting. So accounting figures are not facts. These are based on opinion. Moreover the auditor has to make judgement on various matters.

Helpful Not helpful

Anonymous 65% helpful

ADVANTAGES TO BUSINESS
Advantages of audit for the business are:
1. Satisfaction of Owner
It is because of audit that the owner will be satisfied about the business operations and working of its various departments.
2. Detection and Prevention of Errors
The errors whether committed innocently or deliberately are discovered by the process of audit and its presence prevents their occurrence in the future. No one will try to commit an error or fraud as the accounts are subject to audit and hence they will have a fear of being detected.
3. Verification of Books
Another advantage of audit is the verification. Of the books of accounts, which helps in maintaining the records up to date at all times.
4. Independent Opinion
Auditing is very useful in obtaining the independent opinion of the auditor about business condition. If the accounts are audited by an independent auditor, the report of the auditor will be true and fair in all respects and it will be of extreme importance for the management of the company.
5. Detection and Prevention of Frauds
Just like errors, frauds are discovered by audit and its presence minimizes future possibility if not eliminated totally.
6. Moral Check
The process of audit will establish a check on the minds of the staff working in the business and they will not be able to commit any irregularity, as they will have a fear and will also be aware that the accounts will be examined in the near future and that action would be taken against them if any irregularity is discovered. Thus the audit prevents the happening of any irregularity before it starts and the staff hence becomes more active and responsible. The fear of their getting caught act as a moral check on the staff of the company.
7. Protection of the Rights and Interests of Shareholders
Audit helps in protecting the interests of shareholders in case of joint stock company. Audit gives assurance to the shareholders that the accounts of the company are being maintained properly and their interest will not suffer under any circumstances.
8. Reliance by Outsiders
Outsiders like creditors, debenture holders and banks etc. Will rely on the business accounts if they are audited by an independent authority (external auditor).
9. Loan Facility
Money can be borrowed easily on the basis of audited balance sheet from financial institutions. If accounts are audited the true picture will be visible to banks and it will be easy for them to issue loans as early as possible.
10. Easy Valuation
It becomes easier to evaluate property etc. If the accounts are audited when the business is disposed off and as a result no dispute whatsoever will arise.
11. Upto Date Record
Due to the fear of audit the work of accounting always remains upto date and correct in all respects.
12. Reliance by Partners
If a new partner is to be inducted in the business, the audited balance sheet will be a good base to estimate the value of good will. Moreover, the audited accounts of a company by an independent person will minimize the chances of misunderstanding among the partners.
13. Reliance by Shareholders
In case of joint stock company, the shareholders have no hand in the actual running of the business because the management was in the hands of the directors. So the shareholders are assured in the presence of the process of audit that the directors have not taken any undue advantage of their status and position.
ADVANTAGES TO THE PUBLIC
Advantages of audit for the public are given below:
1. Safety from Exploitation
The interest of the public and shareholders is safe and guaranteed in the presence of audit. Otherwise they may have been exploited by the management. This is the main reason for which the audit has been made mandatory for public limited companies.
2. Facility for Prospective Investor
The prospective investor can easily analyze the position of the company gaining through the audited financial statements of the company and can make the decision to invest or not in the company.
3. Satisfaction about Business Operations
In the presence of audit, the public in general and the owner of the business in particular receive the reliable statement of accounts, indicating the true financial position of the concern and they can collect result from it and feel satisfaction about it in every respect.
ADVANTAGES TO THE STATE
Advantages of audit to the state are as under:
1. Privatization of Industries
If the nationalized industries are running in losses, the government may denationalize them after going through the audited accounts of such industries.
2. Easy Assessment of Tax
In the presence of audited accounts the assessment of tax becomes very easy because the tax is imposed on the basis of audited accounts.
3. Quick Recovery of Taxes
As the assessment orders can easily be made it will lead to early recovery of taxes.
4. Leading to Economic Progress
The joint stock companies play a vital role in giving a boost to the economic progress of a country. The successful operation of the companies would have not been possible without the presence of audit. So we can easily say that presence of audit leads to economic progress of the country.

Helpful Not helpful

Anonymous 54% helpful

Carrying out an audit is essential because for public listed companies it is important that an audit is carried out to ensure that the companies are using fair policies prescribed by law and the public’s money is in safe hands. The basic advantage of an audit is that it makes it easier to compare different companies as the auditors express their opinions about the fairness of procedures. Of a company is given a good opinion then it means that it is following the law. It also helps in following certain standards. An audit will keep the managers from trying to indulge in fraudulent practices as it is a means of accountability. It testifies to reliability and integrity of the results. The only disadvantage of an audit can be the costs involved because you have to pay the auditors and also ensure that you maintain detailed records of all the transactions which involve a lot of costs.

Helpful Not helpful

Anonymous 63% helpful

Nationalize them after going through the audited accounts of such industries.
2. Easy Assessment of Tax
In the presence of audited accounts the assessment of tax becomes very easy because the tax is imposed on the basis of audited accounts.
3. Quick Recovery of Taxes
As the assessment orders can easily be made it will lead to early recovery of taxes.
4. Leading to Economic Progress
The joint stock companies play a vital role in giving a boost to the economic progress of a country. The successful operation of the companies would have not been possible without the presence of audit. S

Helpful Not helpful

Anonymous 50% helpful

The auditor is in possession of full facts relating to the accounts for the year under review and he can check the books and accounts for year under review and he can check the books and accounts duly completed in respect of that particular year. There is less danger that figures may be altered, either inadvertently or fraudulently, after the checking has been done by the auditor. As there is not intervals in this types of audit and is carried on until its completion, the audit staff do not lose the threads of work already performed.

Audit fee of this audit is comparatively less than the continuous audit because the auditors because the auditor has less time in conducting this types of audit as compare to the continuous audit. This type of audit, the auditor does not make frequent visits and the work of the client is not dislocated. So it is not inconvenient to client staff.

As the auditor is pressed by time to complete the audit so checking cannot be performed in greater detail and test checking is applied. Mistakes cannot be discovered and rectified at an early date by the auditor before the close of the financial period.

Helpful Not helpful