In this tutorial, we will learn about the benefits of auditing. The main reason for setting up a business is to maximize profit for the shareholders, but problems often arise.
- An audit helps to identify weaknesses in the accounting systems and enables us to suggest improvements. The process keeps our partners informed of areas/situations where advice is useful.
- An audit assures directors not involved in the accounting functions on a day-to-day basis that the business is running following the information they are receiving, and helps reduce the scope for fraud and poor accounting.
- An audit facilitates the provision of advice that can have real financial benefits for a business, including how the business is running, what margins can be expected, and how these can be achieved. The advice can cover anything from the tightening of internal controls to reducing the risk of fraud or tax planning.
- An audit will enhance the credibility and reliability of the figures being submitted to prospective purchasers. If an owner-manager is planning on selling in the next 3 years, it may be beneficial to carry out regular audits.
- An audit may be advantageous if a company is growing and likely to exceed the turnover threshold shortly, to avoid having to revisit the previous years’ figures, once the threshold has been reached.
- An audit adds credibility to published information for employees, customers, suppliers, investors, and tax authorities:
- Credit ratings may be affected by not having an audit. Suppliers may not be prepared to give appropriate credit limits. Banks and trade suppliers rely in part on credit rating agencies’ assessment of the company and will look more favorably on companies that have an audit.
- The HMRC may consider the figures to be less reliable.
- In the event of insurance claims, loss adjusters often have more faith in audited accounts.
- An audit assures shareholders (if they are not directors closely involved in the business) that the figures in the accounts show a true and fair view.
The various benefits of auditing are as follows:
The satisfaction of the owner:
Because of an audit, the owner will be satisfied with its various departments’ business operations and work.
The process of an audit will establish a check on the minds of staff working in the business, and they will not be able to commit any irregularity as they will have fear and will also be aware that the accounts will examine soon and that action will be taken against them if any defect will be discovered. Thus the audit prevents the happening of any irregularity before it starts, and the staff hence becomes more active and responsible.
Money can borrow quickly based on the audited balance sheet from financial institutions. If accounts are audit, the real picture will be visible to banks, and it will be easy for them to issue loans as early as possible.
Ensures Compliance With Legal Requirements:
Audited statements are necessary to fulfill individual legal requirements, e.g., listing requirements of a stock exchange, etc.
Reliance By Outsiders:
Outsiders like creditors, debenture holders, and banks, etc., will rely on the books of accounts and financial statements of the business if they are audit by an independent authority (external auditor).
Auditing is very useful in obtaining the independent opinion of the auditor about business conditions. If an independent auditor audits the accounts, the auditor’s report will be fair and correct in all respects. It will be of extreme importance for the management of the company.
Protection of rights and interest of the shareholders:
An audit helps protect the interests of shareholders in the case of a Joint Stock Company. The inspection gives the shareholders that the company’s accounts are appropriately maintained and that their investment will not suffer under any circumstances.
Detection and prevention of errors and frauds:
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 subject to inspection, and hence they will have a fear of being detected.
Reinforce and strengthen internal controls:
Since the auditing exercise involves the review of the internal control system, an auditor will identify the internal control system gaps and suggest the necessary changes in the internal control system.