In this tutorial, we will learn about the advantages or merits of auditing, which offers assurances to the owners, investors, shareholders, etc.
It is no more controversial that accounting is a necessity while auditing is a luxury. People now get their accounts audited by a qualified auditor so that they may be sure of the smooth running of their business and the validity of the investment that they have made therein.
It is of the utmost importance to get accounts audited in a proprietary concern to see that the business is running efficiently in a partnership firm to ensure healthy relations among partners and especially to decide question like valuation of goodwill at the time of entry retirement and death of a partner and in a joint-stock company in which shareholders invest their money and presume their capital intact if some qualified auditor audits the accounts of such company. The shareholders of a company have virtually no direct stake in its day-to-day administration. Various advantages of audit can be grouped into the following three categories:
- For business itself
- For the owners of the business
- For others
For Business Itself:
- An independent and qualified auditor can examine the accounts of a business and its financial position.
- Errors and fraud are located very quickly at an early date, and chances of their further occurrence are reduced to the minimum.
- The auditing of accounts makes the clerks who maintain them alert, careful and vigilant, and more so they prepare reports very carefully in the future and keep them up to date.
- An audit is useful in case the business is managed by some agent or representative of its owner.
- The auditor, if he audits a business regularly, can come into close touch with the irking of that business and hence can give concrete suggestions to improve it if he asked to do so.
- Money can be easily borrowed from banks and other money lenders based on adequately audited accounts.
- The business itself enjoys a better reputation if an independent auditor audits its accounts.
For The Owners Of The Business:
- If a sole trader owns the business, he can rely thoroughly on the audited accounts and his accounts clerks responsible for the maintenance of accounts.
- If the business is organized as a partnership firm, its partners can utilize audited accounts to settle their disputes regarding the adjustment of capital and valuation of goodwill at the time of admission, retirement, or death of a partner.
- If the business is constituted as a joint-stock company, its shareholders who reside at places distant from the head office of the company can rely on audited accounts. They can be sure of their investment being safe with the company.
- If it is a trust, its trustees can easily make their position clear before others by getting the accounts audited by outside and impartial auditor.
- The audited accounts of the previous year are helpful in the settlement of claims by the insurance company in case of fire.
- The taxation authorities can rely on the audited accounts to impose sales, income, wealth and expenditure tax, etc.
- The audited accounts of a business can be produced in support of a legal case before the court. It forms a basis to determine action in bankruptcy and insolvency cases.
- The purchaser of a business can easily calculate the amount of purchase consideration based on its audited accounts.