Objectives of Auditing

Objectives of Auditing

This article outlines the objectives of auditing. Audit and assurance is an arm of accounting that is primarily with verifying the correctness of information provided in financial statements and within an organisation. It is split into two main functions which are internal audit (control) and external audit. Internal audit is primarily concerned with making sure that systems of internal control function correctly. This ensures that information for management and financial reporting is accurate. External audit is carried out by accountants outside of the organisation and is primarily concerned with making sure that information contained in financial statements is accurate, reliable and appropriately presented. Let’s look at the main objectives of auditing in depth.

Ensure control systems work

As mentioned before this is largely the function of internal audit. Businesses have systems in place to make sure that resources are utilised most effectively and efficiently to the benefit of owners. The internal audit function acts as a double check to make sure these systems are in fact working as they are supposed. Internal audit is performed on an ongoing basis in an organisation as it continually checks on the day to day running of the business. Internal audit is considered a first line of defence in this regard. In the same way though on a periodic basis, usually annually, external audit checks that controls are in fact as they have been stated through methods including physical site checks, transaction walk throughs and document sampling. Thus ensuring that control systems are working is one of the major objectives of auditing.

 

Validity of Financial Statements

Another objective of auditing is ensuring the validity of financial statements. There are many people who rely on the information contained in company financial statements. These range from shareholders, creditors, government authorities, debt finance providers, community members and other external stakeholders. As such auditing provides these users of financial statements with the assurance, or lack thereof, that the information contained in the statements they will use is in fact valid. The wide variety of users of financial information mean there is a gulf in the resources available to assess and contest the validity of information. While government tax authorities can challenge company reports openly an individual minority investor does not have the same power.The process of auditing is meant to perform this task for all users in advance. It’s one of the most important objectives of auditing.

 

Confirm assets and liabilities

Confirmation of assets and liabilities is one of the objectives of auditing. In the past, companies have not been insulated from scandals that involve falsifying of assets and liabilities in order to message balance sheet figures. The motivations for such a practice are many. Management may do so to present results that make it appear as though the are meeting targets and are due bonuses. Thus this is an essential objective of auditing which can’t be ignored. Accounting also involves some complex arrangements such as leases, service level agreements, buy and lease back and others which may present transactions in a form that looks different from their substance. Management may be intent on keeping certain information out of the public domain such as deficiencies in their systems or impending financial trouble. In some cases there may be blatant abuse and embezzlement of funds. Whichever the case audits seek to confirm all assets and liabilities as presented in financial statements.

 

Accuracy of Financial Statements

Perhaps the most underrated objective of audit is ensuring that arithmetical accuracy of information presented in financial statements. It may seem a bit obvious what the answer is when you add two figures but the preparation of financial statements is a very complex process. A small transposition error made in the original entry of a transaction affects every account that interacts with that transaction all the way to the balance sheet. Here internal and external audit come together to make sure that figures are indeed accurate and all calculations have been made accordingly. Ensuring the accuracy of financials statements is a key objective of auditing.

 

Ensuring Compliance

Audit also takes on the objective of ensuring compliance. Financial reporting is governed by the International Financial Reporting Council through International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). These set out how certain transactions, balances, events and activities are recorded and presented in financial reports. Audits also assist in making sure that compliance is observed in terms of local laws. In addition to making sure the figures presented are arithmetically accurate audits also make sure that they have been recorded and classified correctly. This is done to make sure financial statements presented by entities are comparable with other organisations as well as with previous and future periods for the same organisation. Ensuring compliance is an essential objective of auditing.

 

Reliability of Financial Statements

Financial statements have to be reliable, and this is one of the objectives of auditing. As discussed before users of accounting information rely on it to make some important decisions. Investors use the information to value investments. Creditors and other lenders use the information to assess the liquidity and solvency of a company. The government uses the information in financial statements to calculate tax revenue due to them. Community members may have a share ownership scheme with a company and will look to company performance to assess their return and what to do with it. There are many more. These various groups with different levels of sophistication and resources all depend on the same information and it is therefore necessary to have assurance that the information is in fact reliable. Ensuring the reliability of financial statements is a very useful objective of auditing.

 

Fraud Detection

When many people hear audit this is one of the first things that come to mind and yet fraud detection is not the primary objective of audit. The combination of all the aforementioned objectives of audit make it very good at sniffing out fraud and other types of practices that are dishonest or unethical. As the saying goes “many are caught in trying to cover up the crime”. Audit is able to spot cases were financial statements have been doctored because it looks at the validity, compliance, reliability and accuracy of information. It is not always possible to pick up all forms of fraud but many can be.

 

Other Objectives of Auditing

  • Checking accuracy of financial statements
  • Verifying if transactions are valid and authentic
  • To express opinion on the financial statements
  • To detect and prevent errors
  • To detect and prevent fraud
  • To confirm the existence and values of all assets and liabilities
  • To examine the internal checks of the system
  • To ensure compliance

Through it’s two arms of internal and external auditing the process ensures that all information presented in accounts and financial statements is accurate, reliable, compliant and free from bias. This enhances the agency relationship as a basic requirement for it to effectively work is transparency in reporting. For external stakeholders it makes it so that this information is not costly or time consuming to verify. The above are the top objectives of auditing.

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