Audit is an examination of financial statements with a view to express an opinion on the fairness with which they present financial position, results of operations and changes in financial positions in conformity with generally accepted accounting principles.
In view of the above nature of audit its importance may be listed below:
a. detection of fraud.
b. detection of errors.
c. vigilance over personnel.
d. reliance by third parties on audited accounts.
e. reliance by owners on audited accounts.
f. improvement of internal control.
g. legal obligations.
Audit detects and prevents fraud by employees by limiting the temptation to perpetrate fraud. Sound system of audit detects errors and provides effective internal control. Due to fear of audit the employees become regular, vigilant and keep the books and record up to date and accurate. Audited statements are considered reliable for tax, claims, borrowing, and proposed sale. The joint owners of business rely on audited accounts. Internal control is improved in view of weaknesses pinpointed by auditor.
Advantages of audit:
(a) For the enterprise. (b) For owners of enterprise. (c) For other.
(a) Advantages for Enterprise
1. Accounting staff, is regular, careful, and systematic in work.
2. Errors and fraud are detected promptly as audit exercises moral check.
3. Enterprise
4. Liability or income-tax, sales-tax etc, can be easily determined.
5. In case of sale of business purchase consideration can be reasonably determined.
6. Disputes with employees for higher wages and other benefits can be mutually satisfactorily settled.
7. Insurance claims can be determined more speedily.
8. Remedial steps may be taken to improve internal check and internal control.
9. Maintenance of statutory records is ensured.
10. Enterprise
(b) Advantages to Owners:
1. Owners of Proprietary business: By securing audited accounts becomes satisfied that there are no errors and fraud.
2. Partnership: Audited accounts serve as an evidence of proper management and provide a solid basis for admission, retirement or death of a partner.
3. Companies: Shareholders, through audited financial statements become satisfied that their investment is safe.
4. Trusts, Co-operative Societies: Prove to the beneficiaries that their interest is being properly and effective safeguarded.
(c) Advantages to Others:
Audited financial statements are relied upon by outsider for a number of purposes.
(a) Banks: Largely rely on audited financial statements for making decision as to grant of loans, overdrafts etc.
(b) Insurance Companies: Depend on audited statements to settle claims for damages or loss of business assets.
(c) Tax-authorities: Unquestionably accept audited financial statements for determining tax liability.
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