Auditing is a system to keep check and make systematic examination of all the books of accounts, financial records and other relevant documents of an entity to project the extent to which the financial statements and other disclosures of non-financial nature project a clear view of the organization. This examination or audit is done by qualified accountants known as auditors. The auditors have the responsibility to ensure that the audit period for which they are hired has maintained proper compliance in maintaining proper book and other relevant papers and documents as per law and are correctly utilised (Mock et. al, 2013). Audit does not mean only financial department audit, it has now covered all departments of corporate sector which includes secretarial and compliance audit, internal as well as external audit and any other subject matter where an organisation feels that it should be periodically examined for proper compliance can be audited by that respective department qualified auditors.
An audit is conducted in a step to step process where the auditor first examines then obtains the evidence for audit and lastly makes the report giving his or her valuable judgment or advice based on the audit conducted by them. This systematic method or process wise method is important to follow because now not only doing audit is voluntary so that no noncompliance occurs but also made compulsory under various sections and laws, therefore, chances of providing false and non-reliable information’s by organisations due to remoteness of information, large volume of unmanageable data and complex and non-compliance way of transactions done (Blay et. al, 2011). So therefore in order to overcome the problem of these type of unreliable information, the qualified auditors must develop a channel of process to be followed while doing auditing to assure that the information gathered by the auditors can be churned and make into a reliable data and the assumptions finally made by the auditors is complete, accurate and not biased. Any unreliable and wrong audit report made can cause detriment, harm and mislead the path of the society, its clients and all the stakeholders and person associated with that particular organization (Church et. al, 2008). Therefore audit is primarily based on independent assessment and examination of the performance and management of a program against objective criteria and an examination of the best practices indulged in making an audit. Awareness of economic and industry trends is very important for developing a sense of economic context within which the auditor’s client firm operates and knowledge of the laws of the audit process in order to provide accurate audit report.
The word audit comes with different perception to different types of corporate sectors involved in it. All have different expectations and goals to be achieved by doing the audit process. Generally, we can also say that many companies just follow this auditing process for the sake of getting the audit compliance certificate or report because the law has made it compulsory and not having any goals to be achieved with this audit process. While most people does not trust the goals to be achieved by the audit as they believe that the information received through audit is not valuable and accurate and it’s just based on the tits and bits information provided by the companies (Church et. al, 2008). The majority practical corporate world does set goals from the audit process and does keep the expectations from auditors to fulfill it. The various stakeholders, the public investors, the business owners the overall management committee have various perspectives and goals for auditing to be done.
Providing an accurate financial statement to the concerned users is one of the primary goals to be achieved through an audit. The bankers, the insurance companies, vendors, and suppliers do want the correct company’s collateral and actual credit worthiness of the concerned department. The auditors can meet the goals of auditing which the company keeps is that when an accurate auditing is done the internal management knowing that their area of work will be reviewed and audited is more likely to be careful in recording and maintaining transactions and complying with other internal control policies and procedures and hence that goal of the companies though audit to enhance its internal employees with honest sense of responsibility and to convey a message to management that they are doing their job efficiently and effectively can be achieved. As per Wright & Charles (2012), auditors are the persons who can see the how actually various departments of the companies are actually managed and operated therefore they set a goal to provide accurate insight and real picture of the company to the society so that they can take their decisions without any misleading concept or believe. One of the major goals of the business owners is to protect their companies from doing any non-compliance or incurring that extra expense through paying penalty by not handling the proper way of maintaining various papers and documents and therefore when they involve auditors to audit any concerned compliance department they keep a goal to make an intact audit and make their company complaint of various rules, regulations, and law involved in that department.
Auditing is important for a company because it helps in maintaining an effective line of control in the management and to achieve company’s true and fair view for all the concerned internal and external users associated with the company. An audit makes it compulsory for the internal accounting and another compliance department to keep its papers, relevant document, and proper compliances to be always ready and intact. Auditing helps in facilitating in supervision and monitoring, preventing and detecting any inadequate policies or unreliable procedures followed in the various compliances involve in the company’s internal control management (Tepalagul & Lin, 2015). It prevents any material irregularities prevailing in the accounting part of the management. The assessment of risk of material misstatement is evaluated by the auditors. If a proper auditing is not made then it would not be possible for a company to provide reliable financial reports or other compliance or secretarial reports.
When it comes to prevention and detection of fraud, the internal audit plays a pivotal role. If a company have a diligent audit system it may keep the employee at bay from operating any scheme to cheat the company. Many households and common public invest in shares of public companies, therefore through accurate and reliable corporate disclosures and financial statements these common people could invest safely in the shares of any company according to their risk appetite which would not be possible without honest and competent auditors to audit under various departments (Holland & Lane, 2012). The public’s trust is a vital factor which builds in only through proper auditing. The cost of capital is very important are of concern for all company being a small company to a multinational company. As per Christensen (2011), the cost of capital is directly associated with the risk of various types of investments. When an investment carries more risk, an investor will simultaneously need a higher rate of return for the purpose of investment. A strong audit system can help in reducing various forms of risks associated with companies and firms. The insider trading fraud which now strictly abides by strict laws and penalties and also be prevented through active auditing channel. Auditing also saves the cost of bearing penalties by preventing noncompliances under various heads of management department. It enhances the business and performance evaluation on a whole (Ruhnke & Schmidt, 2014). The internal and external auditor both should have mutual trust while performing the operations of audit and the External auditors should trust and be reliable on the work done by Internal Auditor which on a whole will result in accurate and perfect auditing.
Types of Auditing
An audit can be defined as a systematic, as well as an independent evaluation of books accounts, statutory records, registers, vouchers, and documents of an entity to project the extent to which an entity represents. There are different types of audit engagements which can be enumerated as follows:
The financial and statutory audit deals with the evaluation of the entity’s financial statements by an external auditor who is not considered by the organization. The external auditor provides assurance of reasonable nature to the company’s owners that the financial statements that are prepared by the directors are free from flaws (Carcello, 2012).
Internal audit can be said to be an activity that is voluntary in nature. It is undertaken by an organization that provides assurance over the internal control effectiveness. It even links to the organization risk management, internal control and governance that help in the attainment of the goals of an organization. Internal audit is undertaken to investigate the instances of theft or fraud, to monitor acceptance of rules and regulations, to evaluate the company’s risk management plans and policies (Carcello, 2012). Unlike financial audit that has a restricted range in matters associated with financial statements, internal audit’s horizon is very wide that can circumscribe every matter affecting the procurement of organizational goals.
Tax audit, such audits are administered to evaluate the efficacy of tax returns filed by a company. Therefore, overstatement or understatement of tax liabilities towards tax bodies can be easily evaluated by such audit.
Compliance audit, these types of audits are basically done to verify the reserves that are available for shareholders’ distribution prior to dividend declaration, to assess the statements submitted by the company on matters concerning assets and liabilities at the liquidation phase.
Both Auditing and Accounting are significant functions of business, which though are distinct concepts, can connect together. Accounting is related to small businesses that use it in order to maintain and record their financial data whereas auditing is related with the larger and the more established business houses. The procedure of storing, recording, and presenting the financial information of companies is called Accounting. It also maintains the complicated documentation of every financial transaction including payrolls and taxes in addition to sales, revenue, and expenses (Holland & Lane, 2012). On the other hand, the procedure of investigating and scrutinizing both financial and non-financial business aspects is called Auditing. It possesses a capability to identify and address significant weaknesses, and can easily supersede any temporary productivity loss. There are several differences between accounting and auditing, accounting is a day to day process whereas auditing is a periodic process (half yearly or quarterly), and accounting is done by the employees of the company whereas auditing is done by an independent auditor who is not related to the company (Parker et.al, 2011). The main object of accounting is to depict the financial position of the organization whereas auditing reveals the fact as to what extent the financial statements of the organization give a true and a fair view.
On one hand, Accounting is the procedure of recording transactions and designing reports based on such transactions for both internal and external dispersals. Similarly, on the other hand, Auditing is the procedure of appraising a business activity either through particular segments or as an aggregate entity (Parker et.al, 2011). Accounting is a starting process while auditing is an ending process i.e. auditing begins where accounting ends. Just like the differences, there are many similarities between the two, both accounting and auditing requires a thorough knowledge of the accounting procedures and is done by a person who has the expertise in accounts, both accounting and auditing processes aims to ensure the company’s records accurately reflect its financial position (Coram et. al, 2011). Thus, one can say that even though both auditing and accounting are specialized segments, yet the range of auditing is broader than that of accounting, as one needs to have a greater understanding of rules, acts and have a greater degree of knowledge as compared to accounting, never the less we have to admit that the importance of accounting cannot be underestimated as auditing can be done only if accounting is done in a proper manner.
Fraud means willful deception or suppression of facts in order to gain an unlawful advantage, it was seen that the organization would wilfully misinterpret the financial statements in order to evade taxes or gain an unlawful advantage. In such circumstances, the role of internal auditor becomes all the more important as he is the one who is entrusted with the management to detect fraud. As per Hoffelder (2012), internal auditors support management efforts to establish an atmosphere of trust and integrity. Internal auditors are not liable for executing the activities of a company, instead, they advise both the board and management as to how they can effectively execute their duties, and they act as advisors to the management and the board. They assist the management in assessing internal controls in order to detect fraud and help them in the assessment of fraud risk that might be involved in the investigations used to detect fraud. Internal auditors act as an appropriate source for assessing as to how successful the management are in implementing their decision (Niemi & Sundgren, 2012). They always look out for the potential frauds risks involved, they then access the adequacy of the controls that are been implemented by the management and make their recommendations for improvement wherever required. Since the internal auditors have access to key process throughout the organization and possess direct communication channels with the persons entrusted with the board, they become capable to play a key role in detection of fraud (Bedard et. al, 2014). The internal auditors expect the companies to have an approach of zero tolerance toward fraud and help to establish a mechanism in order to prevent and detect fraud; they also help to establish an adequate framework which involves the proper definition of policies that includes expectations of management and the Board in relation to risk management.
Internal audit is an audit carried out by the employees of the company which provides a surety that the internal control procedures, governance plans, and risk management policies of the organization are working effectively. It assists an organization to accomplish its goals by bringing in a regulated and systematic strategy to assess and enhance the efficiency of internal control, governance, and risk management policies. The persons entrusted with the task of internal audit are called the internal auditors. As per Cappelleto (2010), internal audit’s range is very wide and may incorporate areas such as management of risk, management’s control, and governance over the efficiencies of operations in order to ensure compliance with rules and regulations and reliability of corporate reporting. Internal audit also involves in implementing proactive audits related to fraud in order to identify the potential fraudulent acts and thereby conducting the after investigation audits of fraud to recognize control disruptions and establish economical loss (Baldwin, 2010). Internal audit acts like a way over betwixt who knows about the prevalence of risks of fraud, but has nil strength to restrict them, and who doesn’t know about such prevalence of risk of fraud, but pursues the strength to restrict them, thereby effectively enhancing the internal control system. Furthermore, it can play a key role in safeguarding fraud by implementing fraud risk evaluations. Thus, we can say that internal audit helps to detect fraud by evaluating the effectiveness of organizations risk management activities and helps to monitor the potential risks that could significantly influence the ability of an organization to procure its objectives and targets (Roach, 2010). The internal audit helps the organization to mitigate its risk of fraud through evaluations of fraud risk by utilizing the theories of fraud deterrence.
References
Baldwin, S. (2010). Doing a content audit or inventory. Pearson Press.
Bedard, J. N, Gonthier, B, & A. Schatt. (2014). Costs and Benefits of Reporting Key. Harvard Press
Blay, A. D, Geiger, M. A. & North, D. S. ( 2011). The Auditor’s Going-Concern Opinion as a Communication of Risk. Auditing: A Journal of Practice & Theory, 30 (2), 77- 102.
Cappelleto, G. (2010). Challenges Facing Accounting Education in Australia. Melbourne
Carcello, J. (2012). What do investors want from the standard audit report? CPA Journal 82 (1), 7.
Christensen, J. (2011). Good analytical research. European Accounting Review, 20(1), 41-51
Church, B, Davis, S & McCracken, S. (2008). The auditor’s reporting model: A literature overview and research synthesis. Accounting Horizons, 22(1), 69-90.
Coram, P, Mock, T. J, Turner, J & Gray, G. (2011). The communicative value of the auditor’s report. Australian Accounting Review 21(3), 235-252.
Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press.
Holland, K & Lane, J. (2012). Perceived auditor independence and audit firm fees’, Accounting and Business Research. 42(2), 115-141.
Mock, T. J, Bédard, J, Coram, P, Davis, S, Espahbodi, R. & Warne, R. (2013). The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory, 32, 323-351.
Niemi, L & Sundgren, S. (2012). Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs. European Accounting Review, 21(4), 767-796.
Parker, L, Guthrie, J & Linacre, S. (2011). The relationship between academic accounting research and professional practice, Accounting. Auditing & Accountability Journal, 24(1), 5-14.
Roach, L. (2010). Auditor Liability: Liability Limitation Agreements. Pearson.
Ruhnke, K & Schmidt, M 2014, The audit expectation gap: existence, causes, and the impact of changes, Accounting and Business Research, vol. 44, no. 5, pp. 572-601.
Tepalagul, N. & Lin, L. (2015). Auditor Independence and Audit Quality A Literature Review’, Journal of Accounting, Auditing & Finance, 30(1), 101-121.
Wright, M.K & Charles, J 2012, ‘Auditor independence and internal information systems audit quality’, Business Studies Journal vo. 4, no. 2, pp. 63-84.
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