Auditing Meaning, Definition, Evolution, Objectives, Importance

An audit is an “independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditors consider the propositions before them, obtain evidence, and evaluate the propositions in their auditing report.

Audits provide third-party assurance to various stakeholders that the subject matter is free from material misstatement. The term is most frequently applied to audits of the financial information relating to a legal person. Other commonly audited areas include: secretarial and compliance, internal controls, quality management, project management, water management, and energy conservation. As a result of an audit, stakeholders may evaluate and improve the effectiveness of risk management, control, and governance over the subject matter.

Auditing has been a safeguard measure since ancient times, and has since expanded to encompass so many areas in the public and corporate sectors that academics have started identifying an “Audit Society”.

Features of an Audit

• The audit is always done by an independent authority or a body of persons with the necessary qualifications. They have to be independent so their views and opinions can be totally unbiased.
• Auditing is a systematic process. It is a logical and scientific procedure to examine the accounts of an organization for their accuracy. There are rules and procedures to follow.
• Once again, an audit is the examination of all the books of accounts and financial information of the company. So, it is essentially a verification of the final accounts of the organization, i.e., the profit and loss statement and the balance sheet at the end of the financial year.
• To conduct the audit, we need the help of various sources of information. This includes vouchers, documents, certificates, questionnaires, explanations etc. He may scrutinize any other documents he sees fit like Memorandum of Association, Articles of Associations, vouchers, minute books, shareholders register etc.
• Auditing is not only the review of the books of accounts but also the internal systems and internal control of the organization.
• The auditor must completely satisfy himself with the accuracy and authenticity of the financial statements. Only then can he give the opinion that they are true and fair statements.

Evolution

During medieval times, when manual bookkeeping was prevalent, auditors in Britain used to hear the accounts read out for them and checked that the organization’s personnel were not negligent or fraudulent. In 1951, Moyer identified that the most important duty of the auditor was to detect fraud. Chatfield documented that early United States auditing was viewed mainly as verification of bookkeeping detail.

However, Auditing started assuming its present form in the eighteenth century when the Industrial Revolution gave rise to joint-stock companies characterised by the separation of ownership and management.

With the stakeholders now being the real owners of the company, Auditing increasingly became an essential instrument for checking the administrative activities of the company managers.

To ensure that the financial efforts of an organisation are fairly portrayed, the International Accounting Standards Committee have set out specific standard auditing and accounting practices to guide the day to day activities of Auditors and Accountants, respectively.

Objectives

• To help the management executives in the effective discharge of their duties.
• To improve the profitability of the organisation.
• To help the management executives in the effective discharge of their responsibilities.
• To ensure that the management is going to achieve the objectives.
• To identify the level of achievement of the main objectives of the organisation.
• To obtain or utilise the full efficiency of the management.
• To suggest to the management the ways and means available to achieve the objectives.
• To help the management to do efficient administration of the operations.
• To identify the defects or irregularities of management executives.

Importance

• It provides scope to the business to interact openly with the environment and maxmises the benefit of the environmental opportunities and controlling the effects of environmental threats.
• It helps the management in improving its performance in execution of policies and in utilising resources.
• Management Audit sets the policies and objectives right in view of changing environment, competitors’ strategies, changes in technology, consumers’ preferences etc.
• It sets the direction of objectives policies and business definition.
• It helps the management in improving its systems in view of developments or creations in management principles, techniques and approaches.