Advantages and Disadvantages of Audit

"AUDIT" refers to an official financial inspection of a business entity or its account books. This is the due diligence of the functioning of the firm or business. This can either be done for a particular functionary of the business or an entire business. This process includes a proper inspection of financial statements and other pieces of information related to a business entity. The whole economic position of the business is analyzed under an auditor, the authority that does the auditing.

The process aims to determine the entity's profitability and if any misconduct is being done during the financial period. This can be defined as a systematic, independent, and documented process to obtain evidence, facts, and figures related to a firm for defining the actual position regarding profitability, accountability towards the standards, and requirements for improvement. This also includes the inspection of the policies and procedures of the business.

Process of Audit

The process includes an auditor examining or inspecting the books of accounts along with physical verification of the inventories to analyze the functioning of the departments. One of the intentions includes checking the records' accuracy, policies, and procedures. An external auditor is preferred for the auditing process. There also exists the concept of internal audit. Presenting a final audit report is the final step in auditing. The process of auditing involves:

1. Appointment of an auditor, which is also the very first step.
2. Initial planning for the blueprint for the audit.
3. Assessment of intention for audit.
4. Analysis of the risk.
5. Test of control for supporting the internal control assessment.
6. Evidence collection and analysis of financial statements.
7. Drafting of the final reports, which gives clean opinions.

Often, qualified opinions, adverse opinions, or disclaimers of opinion are given instead of reports.

Types of Audit

Audit is done to figure out the financial position, analysis of the current situation, and business process. Different types of auditing are-

1. Financial Audit:

This audit provides opinions on financial statements.

2. Tax Audit:

This audit is used to figure out the tax compliances of a business entity.

3. Operational Audit:

This involves an audit for the efficiency and review of the economy of operations.

4. Compliance Audit:

This audit checks procedures in compliance with the standards of functioning of a business firm.

5. Information System Audit:

This audit is done to generate information and check on data about tangible and non-tangible elements of a business entity.

6. Investigative Audit:

This audit is conducted to find irregularities in the business's financial and operational functioning.

7. Construction Audit:

This audit gives information related to the functionality, data, records, and performance of a construction project.

The objective of the Audit and Types

The audit is all about making suggestions on financial statements by analyzing the records. There are two types of objectives in auditing:

1. Primary objectives:

This is based on checking the internal system.

2. Subsidiary objectives:

This is also known as the subsidiary objective of auditing. This deals with fraud, error, and valuation of inventory.

Advantages of Audit

1. Assurance to Stakeholders:

This comes as one of the biggest advantages of auditing is that the final report of the audit is accepted by all and provides a clear picture of the business's position. The owners or investors get a proper idea of the accuracy of the books of accounts and, eventually, the performance of the business. This also provides them with satisfaction about the functioning of their employees and various departments. They get an idea about the overall profitability and efficiency of the business; this helps them be assured of their stake holding.

2. Fair Evaluation:

This process helps a business' evaluation be done fairly without any chance of manipulation as the auditor responsible for examining the books of account gives their viewpoint as an independent authority. The audit officer's remark is much valued among the owners and investors of the business entity. All the documents, financial statements, and inventory inspections are closely inspected and verified for getting a fair report and do not involve any biasness.

3. Fraud Identification:

Fraud is intentional misconduct on the part of the individual. At the same time, there is always a chance of unintentional mistakes by an individual. Both situations can be easily noticed after an audit, and accountability can be sought in both cases. Employees taking care of them might get examined for any of these cases. So, this creates a responsibility among them to do their tasks honestly and efficiently. The auditing process decreases the chance of committing fraud and errors in the functioning of the business entity.

4. Moral Policing:

This process does the task of teaching a sense of moral accountability towards the firm in the employees. They know their mistakes will be discovered, so this generates the responsibility for being honest and always avoiding irregularities and irresponsibility in their work.

5. Credibility:

Audit of the books of a firm allows their stakeholders, like creditors, investors, banks, and debenture holders, to have more confidence in them. These are important connections of a business entity as they help raise money, loans, and capital accumulation, a much-needed resource for their growth. As the auditing body has no agenda or biasness, the reports thus produced after analysis of the financial statements, accounts, etc., have high credibility for the stakeholders.

6. Overall Improvement:

An audit is the best way to get an idea about the functioning of the sustaining system and opportunities that can be grabbed for more development and business performance. Auditing also helps implement changes in the present situation as regular reports are obtained with overall performance.

7. Compliance With Rules and Standards:

The main objective of an audit lies in ensuring that all the policies and procedures comply with the standard norms. Also, with the help of the process, a proper analysis can be done to evaluate the company's conduct with that of good practices, and effectivity can be measured against the expected one.

8. Helps in Building a Good Reputation:

Audit reports at regular periods ensure the stakeholders about the firm's conduct. This builds a reputation for the firm in terms of teamwork, ethical working, and conduct. This also helps in the further development of a firm.

9. Legal Proof:

The report obtained after auditing a business firm acts as legal proof. This record can be used for the sake of insurance. Many firms like LIC, HUDCO, etc., consider the previous year's audit report more reliable for their services.

10. Dispute Settlement:

This helps settle disputes and claims between management. This contains independently done assessments about every transaction with defined all details. Which becomes a source for the identification of any claim or disputes involved.

Disadvantages of Audit

1. Expensive:

This process puts a heavy monetary cost on a firm for execution. This requires a cost of examination of all financial statements and records, which may include duplication of records for easy access and availability, by an auditor. Auditing firms charge a high fee for their services.

2. Not Suitable for Small Businesses:

An audit may not turn out to be of use for small-scale organizations, which include very limited business transactions.

3. Chances of Uncertainty in the Report:

There can be cases where errors can be found in audit reports if the staff involved is not careful or inexperienced and biased. The report helps in the future planning for the business entity, so any mistake may turn out to be a disaster.

4. Lack of Certainty in Standards:

There are no rules or general standards followed in the audit process. For every other firm, there must be a newly defined audit plan.

5. Lack of Participation:

The planning of an audit program does not include participation in terms of suggestions by efficient and competent staff. So this prevents their application of knowledge and caliber. Instead, turns into their harassment in a way.

6. Ignorance of Technology:

In modern times, the use of technology has been introduced in the process of accounting. The audit process still depends on manual examinations and ignores the internal control based on the particular technology used in the firm. The difference in technology creates a problem, but this audit system does not include prevention measures for these issues.

7. Less Guaranteed:

The report does not disclose any details about the data or figures involved in the analysis. So the report does not guarantee any explanations. Most of the components are based on information and disclosures made by departmental personnel of concerned departments.