Auditing is a systematic process of objectively obtaining and evaluating evidence assertions about economic actions and events to ascertain of correspondence between those assertions and established criteria and communicating the results to interested users. It is the process of reviewing and investigating any aspect of a business, whether financial or nonfinancial. It is an official examination and verification of accounts and records, especially of financial accounts.
Need for and purpose of an audit:
(a) True and fair view: The main objective of an audit is to enable an auditor to report to the members of the company with regard to the truth and fairness of the financial statements and other records of the company.
(b) Discover errors and frauds: The auditor has to discover errors and frauds which might have been committed intentionally or unintentionally.
(c) Prevent errors and frauds: When the members of the staff of the accounts department know that the accounts prepared by them are subject to audit and hence they are rather very careful to see that no error or frond is committed as it would be detected by the auditor and they might be taken to task.
(d) Internal control: The auditor should assist the management in maintaining an adequate system of internal control by pinpointing the weak areas of internal control.
(e) Constructive advice and guidelines: As the audit has through knowledge about his client’s business, therefore, he should give constructive advice to his client for promoting his business and provide guidelines to the management for future decision making in all financial matters, analyzing and reporting.
(f) Maintaining account regularly: An auditor raises questions if accounts are not maintained properly. So, audit gives moral pressure on maintaining accounts regularly.
(g) Obtaining loan: Especially financial institutions provide loan on the basis of audited statements. A business organization may obtain considering the audited statement of last five years. So, an organization should make audit compulsory if obtain the loan.
(h) Helping to prepare future plan: All the audited statements remain true and correct. Such true and correct account helps to prepare for the future plans.
(i) Assessing tax: Tax authorities assess taxes on the basis of profit calculated by the auditor. In the same way, sakes tax authority calculates sales tax on the basis of sales shown in the audited statement.
(j) Facilitating comparisons: AN auditor instructs an accountant, in the same way, helps to compare of accounts of the current year with the accounting of the previous year.
As auditing is a compulsory task in the business, it brought advantages to the firm.