Understanding the Objectives of Auditing

Understanding the Objectives of Auditing

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Mar 30, 2024 21:10 IST

The main objective of auditing is to check if the financial statements of a company are reliable. Auditors verify whether these statements accurately present the company's financial status and its transactions. These professionals ensure that the balance sheet correctly reflects the company's financial position at a certain date. They also verify that the profit and loss statement accurately reports the company's earnings or losses for the period. Auditing allows auditors to give an independent opinion on whether the financial information is true and fair.

objectives of auditing

Table of Contents

Before we take a look at the objectives of auditing, let us understand auditing briefly. Auditing is a detailed and unbiased review of a company's financial records and activities. Its main goal is to offer an independent view. This view helps shareholders understand if the financial statements prepared by the company's management are accurate and fair. 

Now, let us go through the objectives of auditing.

Objectives of Auditing

Mainly, there are two objectives of accounting that are discussed in detail below:

1. Detection and Prevention of Errors

Errors can impact the accuracy and reliability of financial statements. Auditors use a thorough approach to uncover and rectify errors:

  • Checking and Vouching: This fundamental audit procedure involves examining evidence that supports transactions and balances. Auditors verify the accuracy of transactions recorded in the financial statements against invoices, receipts, contracts, and other documentary evidence.
  • Thorough Examination of Ledger Accounts: Auditors review ledger accounts for unexplained entries, missing documentation, or entries that do not match supporting documents. This includes a detailed analysis of journal entries, especially at the end of reporting periods, for any unusual or irregular transactions.
  • Analytical Review: By performing analytical procedures, auditors compare current period figures with those of previous periods, budgets, and industry norms to identify variances that may indicate errors. This can involve ratio analysis, trend analysis, and other financial analysis techniques.
  • Reconciliation and Cross-Verification: Auditors reconcile various accounts, such as bank statements with cash book entries, to detect discrepancies. They also cross-verify financial information across different sections of the financial statements to ensure consistency and accuracy.

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2. Detection and Prevention of Fraud

Another objective of auditing is detecting fraud and preventing it. Fraudulent activities in financial reporting are not only a breach of trust but also a significant legal and financial risk for organizations. The detection and prevention of fraud is important to safeguard the assets of an organizations and thus, maintain investor confidence. Here is a detailed look at the components:

  • Manipulation, Falsification, or Alteration of Records or Documents: Auditors check financial records and supporting documents for any irregularities or inconsistencies that may indicate tampering. This scrutiny involves comparing documents with external records, checking signatures, and verifying the sequence of transactions.
  • Misappropriation of Assets: To detect asset misappropriation, auditors perform physical inspections of assets, reconcile inventory counts, and review access controls. They also analyze patterns in transactions that might suggest embezzlement, such as unusual adjustments or write-offs.
  • Suppression of Transactions: Auditors look for unrecorded transactions by reviewing bank reconciliations, confirming transactions with third parties, and analyzing discrepancies between actual and recorded transactions. This helps in identifying omitted transactions that could distort the financial outcome.
  • Recording Transactions without Substance: This involves verifying the existence and rights to transactions recorded in the financial statements. Auditors may confirm transactions with third parties, review contracts, and assess the economic rationale behind transactions. This is done to ensure they have a genuine business purpose.
  • Misapplication of Accounting Policies: Auditors evaluate the organization's accounting policies for compliance with applicable standards. This includes assessing judgments and reviewing changes in accounting policies. It also involved understanding the reason behind such changes.

Advantages of Auditing

Auditing should be conducted for the following reasons:

  • Auditing verifies the accuracy of financial statements, ensuring they reflect the actual financial position and performance of the organization.
  • Investors, creditors, and other stakeholders gain confidence in the financial information, which is crucial for making informed decisions.
  • Auditing helps in identifying and correcting errors and detecting fraudulent activities, protecting the organization's assets.
  • It checks for compliance with relevant laws and accounting standards, reducing the risk of legal penalties and fines.
  • The audit process can reveal weaknesses in internal controls, leading to recommendations for strengthening these systems.
  • Audited financial statements can make it easier for businesses to obtain loans and attract investment by demonstrating financial health.
  • For public companies, auditing enhances credibility with the market, potentially leading to a higher valuation.
  • Auditing ensures that the financial records are in order, which simplifies the process of filing tax returns and reduces the risk of tax disputes.
  • Accurate financial statements enable management to make better strategic decisions, plan future activities, and allocate resources effectively.
  • Regular audits promote accountability and transparency within the organization, encouraging ethical financial practices.

Limitations of Auditing

Auditing has the following limitations:

  • Expensive: Continuous auditing leads to higher costs. This is due to frequent auditor visits and the need for specialized software. In case of small cap organizations, recurring audits are a difficult task since it may become out of budget. It becomes less suitable for small organizations. They often have limited budgets.
  • Dislocation of Routine Work: The regular presence of auditors disrupts normal business operations. Employees must allocate time to assist with audits. This affects productivity and the smooth flow of office work as the workforce is diverted from their regular duties.
  • Alteration of Figures: There is a risk that employees might fraudulently alter financial records. This can happen after the records have been audited. Employees may attempt to cover up discrepancies or misdeeds. This undermines the audit's purpose.

FAQs

How does auditing improve the reliability of financial statements?

Auditing improves the reliability of financial statements by providing an independent assessment of whether they are free from material misstatement, whether due to fraud or error, thereby increasing stakeholder confidence.

What is the difference between the objective of internal and external auditing?

The objective of internal auditing is to evaluate and improve the effectiveness of risk management, control, and governance processes within an organization, while external auditing focuses on providing an independent opinion on the organization's financial statements.

Does auditing involve the assessment of an organization's operational efficiency?

While the primary focus of auditing is on financial statements, auditors may also provide insights into operational efficiencies and inefficiencies as they relate to financial reporting and control systems.

How do auditors determine if financial statements are "true and fair"?

Auditors determine if financial statements are "true and fair" by verifying the accuracy and completeness of the financial records, assessing the application of appropriate accounting policies, and evaluating the overall presentation of the financial statements.

What is the significance of an auditor's opinion?

An auditor's opinion is significant because it provides stakeholders, such as investors, creditors, and regulators, with assurance about the accuracy and fairness of the financial statements, influencing their decisions related to the organization.

Can the objective of auditing be different for different organizations?

While the main objective of providing an independent opinion on the financial statements is consistent, the specific focus of an audit may vary based on the organization's industry, size, and specific risks.

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio