What Are the Objectives and Advantages of Auditing (Explained)

Objectives of Auditing

Auditors perform an audit to issue an opinion on financial statements. During the audit, the financial statements and relevant records will be verified by the auditor to ascertain if that they are true and fair. There are two major types of audit objectives.

1) Primary Objectives of Audit

Given are the main objectives of the audit. They include:

  • Confirming the existence and value of assets
  • Confirming the completeness of liabilities recorded
  • Checking the proper distinction between capital and revenue nature of expenditures
  • Checking mathematical accuracy by verifying posting, casting, balancing, etc.
  • Examining the internal control system
  • Verifying whether all the statutory requirements are fulfilled
  • Issuing opinion on the financial statements that they are true and fair

2) Secondary Objectives of Audit

These objectives are set up to help achieve primary objectives. They are:

  • Detection and prevention of errors
  • Detection of fraud

Errors

Errors are mistakes made either due to negligence or lack of experience and maybe committed with or without any vested interest. Some of the types of errors, which are:

  • Errors of duplication
  • Errors of principle
  • Errors of compensation
  • Errors of omission
  • Errors of commission

Frauds

Frauds are mistakes made intentionally with a vested interest, usually by the higher-level management. Fraud may be committed for manipulating the entity’s share price, evading tax, getting better pay, etc. It may result in:

  • Over or undervaluation of the stock
  • Misappropriation of goods or cash
  • Falsification or manipulation of accounting record

As frauds are usually committed intentionally by the higher-level management, they may be harder to detect. It requires an auditor to have a certain level of experience and a good understanding of the entity.

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Advantages of Auditing

Having the financial statements audited has many benefits, they include:

1) Lower risk of errors

The primary responsibility is to obtain sufficient and appropriate audit evidence that financial statements are free from material misstatement. It helps management to prevent such errors and frauds and take precautions to avoid them. They do so by examining a sample of financial transactions of an entity to determine whether or not there are any material misstatements.

This makes audit an effective way of detecting mistakes and preventing fraud. It minimizes the likelihood of material errors and the risk associated with such errors. It also helps the management determine if the financial records prepared by them are accurate and fulfill all statutory requirements.

2) Better efficiency

Auditing may motivate the management and employees to be more efficient in keeping track of an entity’s financial dealings. Accounting records are likely to be maintained more regularly as auditors may raise questions if they are not maintained adequately on a timely basis.

It may prompt the management and employees to be more diligent and meticulous as well, out of the fear that any errors they made may be discovered during an audit, affecting their performance review.

3) Making better decisions

A set of audited financial statements are verified by the auditors, who are the subject matter experts, to comply with applicable accounting standards and relevant legal and statutory requirements.

Such financial statements carry much more value to the management than a set of unaudited financial statements. They can use it to make important business decisions more effectively and confidently.

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4) Easier to get external financing

Having an audit report at hand will make it easier for the entity to obtain the funds it needs from the financial institutions or investors. Audited accounts are more reliable and carry better credibility than those produced by management, and can boost the confidence of the financiers or investors.

Do note that certain financial institutions may even ask for the audited reports of the entity for the past few accounting periods before they can approve the entity’s loan application.

5) Demonstration of transparency

Auditing demonstrates that the entity is transparent with its profitability and financial position, which builds the public’s trust in the entity. It enables the entity to enhance the confidence of its stakeholders, which could be beneficial to the entity’s business operation.

Some examples of these stakeholders include shareholders, employees, suppliers, customers, banks, investors, and so on.

6) Facilitating comparison

An auditor will help to ensure that the financial statements prepared by the entity’s accountants for the current accounting period are consistent with that of the previous accounting period.

This is especially useful when the management needs the information to evaluate the entity’s performance. The financial statements would be more reliable after being auditing and more accurate assessments can be produced.

7) Facilitating price negotiation

As auditors review the financial statements, they will help to check if the accounting policies are applied consistently across the entity’s assets and liabilities. Such audit procedures may affect the valuation of these assets and liabilities and will come in handy when determining the selling price of the business.

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Since the financial statements have been audited and have higher credibility, it will make it easier for the entity to negotiate its selling price with the buyer.

8) Facilitating tax filing

Tax authorities rely on the profit or loss figure calculated by the auditor to calculate the entity’s tax liabilities. Similarly, sales tax authorities also determine sales tax based on the sales amount shown in the audited income statement.

9) Easier to claim compensation

If there is any loss in the entity’s assets, the insurance company will rely on the assets’ values in the audited financial statements to provide compensation. If the auditor is sued for negligence, the audit evidence collected during the audit can be presented as evidence to settle the case.

10) Planning for future

The audited accounts are determined to be true and fair by auditors. Such true and fair accounts can help the entity’s management to better plan for its future.

If the entity, especially a private limited entity, needs to revaluate its share price due to the sudden departure of a business partner, it will also be easier as the assets’ and liabilities’ values are deemed by the auditor to be correctly represented.