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What is Auditing? Difference Between Auditing and Accounting

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Auditing is a term that most business owners crumble upon hearing, but the truth is that auditing is not a bad thing for your business. Once you are fully aware of what an audit is and how it works, you will see that there are some ways in which your company can benefit greatly from the auditing process. When an audit is completed, it can reveal some special things about your company that you may not know.

In fact, business owners are sometimes surprised by the outcome of the audit, and this process helps them see that they may have overlooked some of the financial situations that were occurring in their company. In this blog below you will also know what is auditing, its purpose, importance, benefits, and limitations. 

# Definition of Auditing

Auditing is the process of checking the financial statements and other information of the entity in an organization. In which a qualified person examines the books of accounts and collects evidence to make an assessment of the same. By this process, you check whether your company is making a profit or not. It is a systematic process in which you analyze the economic status and functions of your organization. 

# Purpose of Auditing

Primary Purpose: As per Section 143 of the Companies Act, 2013, the primary purpose of the auditor is to report to the owners that the accounts, financial statements give a true and fair view of the state of the company’s affairs at the end of its financial year, profit or loss and cash flow for the year. The auditor is to express his opinion to the owners of the business, even if the account shows a correct and impartial view of the state of affairs of the business. You must remember that in the case of a company, it reports to the shareholders who own the company and does not report to the director. The auditor is also concerned with verifying how successful the accounting system is in recording transactions incorrectly. He has to see whether accounts are prepared according to recognized accounting policies and practices, statutory requirements.

Secondary Purpose: A secondary objective is also known as a contingent objective. The contingent objective is:- 

  • Fraud detection and prevention
  • Detection and prevention of errors
  • Under-stock or over-valuation.

# Importance of Auditing

Here are some importance of Auditing:

  • The audit satisfies the business owner about the operations of his business and the functioning of its various departments.
  • The audit helps in detecting and preventing errors and frauds occurring in the company.
  • Audits help maintain records and verification of books of accounts in your company.
  • The audit assures the shareholders that their accounts are being managed properly while protecting the interests of the shareholders in the case of joint-stock of the company and at the same time their company will not be harmed under any circumstances.
  • The auditor instills trust among the stakeholders of the company, debenture holders, and banks, etc.

# What are First-Party, Second-Party, and Third-Party Audits?

  • First-Party Audit: The first-party audit refers to when an audit is conducted within any organization by its processes, methods, or auditing resources. We also know it by the name of internal audit.
  • Second-Party Audit: The second party’s audit is an external audit performed by a supplier, customer, or contractor, often against their proprietary requirements. Audit contracts of the other party are subject to the rules of law, as they are intended to provide contractual direction from the customer to the supplier. Second-party audits are more formal than first-party audits because the results of this audit can influence a customer’s purchasing decisions.
  • Third-Party Audit: A third-party audit is an audit conducted by an audit organization independent of the customer–supplier relationship and is free from any conflict of interest. The independence of any audit organization is a key component of a third-party audit. This may result in certification, registration, recognition, an award, license approval, a citation, or a fine issued by a third-party organization or an interested party.

# Features 

These are the features of auditing:

  • An audit is a systematic and scientific examination of the books of accounts of any business.
  • The audit is conducted by an independent person or persons who are qualified for the job.
  • The audit is a verification of the results shown by the profit and loss account of the business and the state of affairs shown by the balance sheet.
  • Auditing is a critical review of accounting and internal control systems.
  • The audit is done with the help of vouchers, documents, information, and explanations received from the officials of your business.
  • To establish the correctness of all accounts of the business to the auditor, examine, compare, scrutinize, review vouchers of transactions, check correspondence, minute book of shareholders, directors, memorandum of association and articles, etc.

# Benefits

Here some key benefits of auditing

  • Audited all accounts in your business are found to be authentic records of transactions.
  • Auditing detects and fixes errors and frauds that occur in your business.
  • It boosts the morale of the employees and thus it prevents fraud and errors.
  • Due to his expertise, the auditor can advise his clients on various matters related to the business.
  • An auditor acts as a trustee of its shareholders. Therefore he protects his financial interest.
  • The auditor helps you in account managerial decisions while auditing.
  • Auditing is useful for securing debt on amalgamation, absorption, reconstruction, etc.
  • Auditing protects the interests of owners, creditors, investors, and workers.
  • It is useful to take some financial decisions like the issue of shares, payment of dividends, etc.

# Limitations

Here are a few limitations of Audit:

  • If the auditor receives biased information, the accounts will not reveal the correct picture.
  • A detailed check is not possible.
  • It is more useful for the future but less for the past.
  • Auditing has nothing to do with policies, ethics, and efficiency.
  • If auditors are not bold enough to point out deficiencies, it may not serve the real purpose.

# Difference between Auditing and Accounting


MeaningAudit refers to the inspection of books of account and financial statements of an institution.Accounting means systematically keeping the records of the accounts of an organization and preparation of financial statements at the end of the financial year.
Governed ByStandards on AuditingAccounting Standard
Work is done byAuditorAccountant
PurposeTo reveal the fact, to which extent the financial statement of an organization gives a correct and fair view.To show the performance, profitability, and financial condition of an organization.
StartAuditing begins where accounting ends.Accounting begins where bookkeeping ends.
PeriodAuditing is a periodic process.Accounting is a continuous process, i.e. day to day recording of transactions are done.

# Conclusion

Auditing is the analysis of books of accounts or financial statements by an independent person known as an “auditor”. This is done to ensure that the section of the organization is following the chronicle system of reporting transactions. It is executed by the organization to determine the efficiency of the intending financial statements. A balance sheet prepared by others and examining the profit and loss account, together with books, accounts, and vouchers in such a way that the auditor may be able to satisfy himself and report honestly. In his opinion, such as the balance sheet is properly prepared, and shown by the books, to display the correct view of the property of matters of special concern according to information and explanation.

It is very beneficial for all types of businesses, it helps us in detecting and preventing frauds, errors in our organization. Also, the auditor gives advice for your business, how you can correct it. As the owner of any business, auditing should be a very important task for you. So that you can easily grow your business even further.

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