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Principal and Practice of Auditing

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Keshava Keshava
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26 views6 pages

Principal and Practice of Auditing

Uploaded by

Keshava Keshava
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Principal And Practice of

Auditing
Advantages and Disadvantage of Auditing
Auditing
• Meaning:- Auditing means verification and examination of accounts.
It is done to ascertain the reliability and validity of information.

• Definition:- According to R.K.Moutz, “Auditing is concerned with the


verification of accounting data with determining the accuracy and
reliability of accounting statement and record.
Advantages of auditing
1. Verification of Books and Statement: The main object of audit is the verification of
the books and the financial statements of the company concerned.
2. Detection and Prevention of errors and frauds: The main advantage of auditing is to
detect errors and frauds. It is the duty of auditors, while examining the books, they
should find out various kinds of errors and frauds. Therefore, audit is very useful in
preventing and detecting the errors and frauds.
3. Moral Check: When each employee of the company knows that this financial
transactions will be examined by the auditor then he fears to do the fraud. The fear of
their detection acts as a moral check on the employees of the company.
4. Independent Opinion: Auditing is very useful in obtaining the independent opinion of
the auditor about the business condition. If the accounts are audited by the independent
auditor, the report, of the auditor will be a true picture and it will be very important for
the management. Keeping view the report, owner of the business will be able to prevent
frauds and errors in future.
5. Protects the interest of shareholder: Audit protects the interest of shareholders in the case of Joint
Stock Company. Through audit shareholders are assured that the accounts of the company are
maintained properly and their interest will not suffer.
6. Check on Directors: Audit acts a check upon the directors and precaution against fraud on the part of
the management.
7. Valuable advice: The auditor has expert knowledge about the accounts and finance problems, so he
will be the right person to consult these problems.
8. Advantage for general public: Audited financial statements present the real position of the company
before the general public. The general public can make investments keeping in view the position of the
Company.
9. Useful for Tax Department: Assessment of tax becomes easy for the tax department. Taxes are
imposed keeping in view the audited accounts.
10. Information about Financial condition: Financial conditions of various companies can be judged
through their audited accounts. If these companies are improving their financial condition, it means it is
a good sign for the economy.
Disadvantages/ Limitations of Auditing
1. Non-detection of errors/frauds:-Auditor may not be able to detect certain frauds which are
committed with malafide intentions.
2. Dependence on explanation by others:-Auditor has to depend on the explanation and information
given by the responsible officers of the company. Audit report is affected adversely if the explanation
and information prove to be false.
3. Dependence on opinions of others:-Auditor has to rely on the views or opinions given by different
experts’ viz. Lawyers, Solicitors, Engineers, and Architects etc. He cannot be an expert in all the fields.
4. Conflict with others:-Auditor may have differences of opinion with the accountants, management,
engineers etc. In such case personal judgment plays an important role. It differs from person to
person.
5. Effect of inflation:-Financial statements may not disclose the true picture even after audit due to
inflationary trends.
6. Corrupt practices to influence the auditors:-The management may use corrupt practices to
influence the auditors and get a favorable report about the state of affairs of the organization.
7. No assurance about the company future:-Auditor cannot give any assurance
about future profitability and prospects of the company.
8. Inherent limitations of financial statements:-Financial statements do not reflect
current values of the assets and liabilities. Many items are based on personal
judgment of the owners. Certain non-monetary Facts cannot be measured.
Audited statements due to these limitations cannot exhibit true position.
9. Post-mortem examination: Auditing work begins where accounting ends then
the auditor fully depends upon the accounting transaction provided by the
accountant. So auditing work is not suitable for the current position of the
business. But it is useful to the future business situation.
10. Detailed checking not possible:-Auditor cannot check each and every
transaction. He may be required to do test checking.

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