Auditing is considered an independent examination of financial reports and financial statements of an organization. An auditor presents its opinion in the form of an auditing report that is generally based on auditors’ reviews. The opinion of your auditor can effectively enhance the credibility of the financial reports or statements with all users, like creditors, investors, and lenders, etc. Based on this opinion, all those users are more likely to provide funding and credits to a business. It positively results in a reduced cost of your capital for the organization. Still, the majority of the people seem confused about “What is auditing?”, “what are the different types of auditing,” “What is the purpose of auditing,” etc.
Generally, every organization or company hires or employs an auditor for auditing work, but do you ever think, “what is the purpose of auditing” in an organization or company? In this blog, we will discuss everything about auditing, including the main purposes of auditing?
Definition Of Auditing
The critical and intelligent examination of the financial books of an organization is considered auditing. Generally, auditing is done by the person or body of persons who are qualified for the auditing job. And with the help of papers, information, statements, and comments received from the authorities, the user can confirm the originality or authenticity of financial statements prepared for fixed short or long-term reports. An auditor must satisfy himself first by all the information and the records given to him. Being an auditor, they should also remember “what is the purpose of auditing,” and he should always provide 100% authentic reports.
Different Types Of Auditing
There are different types of auditing. Before you learn about “what is the purpose of auditing,” you should know about different types of auditing. So here we have mentioned about four types of auditing:-
As the name defines, internal auditing refers to the auditing done by the employees themselves or stakeholders within the company or organization. The main purpose of internal auditing by them is to assess and evaluate whether our company is following the internal norms, processes, rules, and regulations, etc.
Usually, external auditing is done by third-party persons or agencies involved in assessing and evaluating a specific organization’s compliance with its regulatory norms.
Undoubtedly financial auditing is one of the most common types of auditing for numerous reasons. Businesses exist to earn money, return profits and generate wealth for all their shareholders. Does it mean that all the shareholders and investors of a particular organization should have to know whether the business is running correctly or not? So that they can make an idea that their invested money is safe or not.
Strategic, Operational, and IT Auditing
There have been different types of additional auditing in the last few years, such as strategic, operational, and IT auditing becoming more popular. The prime causes behind this popularity are the complications of many organizational processes and the complicated infrastructure of the IT field.
How Is The Auditing Conducted?
If you desire to know “what is the purpose of auditing,” you should also know how the Auditing is Conducted first. Here we have mentioned the entire process of auditing:-
- First of all, the organization’s managers prepare the financial statements or reports. It is required for them to prepare those reports according to their companies’ requirements and financial reporting standards.
- The directors of the organization approve the financial statements or report after in-depth checking.
- Then the auditor of the organization independently starts examining by understanding the activities and considering the economic problems.
- For all significant activities listed in the financial statements, the auditor assesses and identifies any risks that may significantly impact the financial performance or position.
- After that, based on risks, an auditor considers what the manager may do to ensure the financial statements are accurate.
- Then the auditor builds a judgment that whether the financial report or statement taken as an entire presents an actual and reliable view of the financial results.
- Finally, the auditor makes an auditing report in which they set out their opinion for the company or organization employees, shareholders, or other interested users.
Top 7 Purpose Of Auditing
As we already discussed, the majority of the people seem confused about “what is the purpose of auditing” if you are also confused about it, then don’t worry. Here we have mentioned the Top 7 Purpose Of Auditing:-
Transparency In all Business Operation
Commonly all businesses prepare financial records of all the business transactions. With the growing complications of the business, these business transactions may increase in extensive level, and it can become harder to maintain necessary financial records for the business.
Undoubtedly misunderstanding of the business information may result in the preparation of misleading and overstated financial statements. To avoid underestimating or overstatement or to prevent fraud, the auditing process was created as a part of transparent and inclusive corporate governance. With the use of auditing, you can be able to make transparency in all your business operations.
Fair Opinion on How Business Works
Generally, an auditor independently collects, gathers data, and tests all the available evidence to frame an opinion. The prime purpose of an auditor is to discover the operational inefficiency in daily production. At the same time, the auditor provides you with independent advice regarding how your business is running. A well-qualified auditor can provide you with the best guidance on enhancing the productivity and performance of your business.
Determines the Quality of Financial Statements
The process of auditing also determines the authenticity or quality of the financial records. Thus, we can say that an auditor mainly highlights and shares his honest advice or opinions on the quality standard of financial statements.
Feedback on the Business Process Operations
In the auditing process, the review of financial or not financial operations and performances. The initial auditing process includes recognizing how the funds are allocated, managed, and used by the organization or business. The auditing gives 100% original and honest reports to the top management of the business. The feedback or reports provided by the auditor will become an input for management or high authorities for making decisions.
Build a relationship of trust among internal shareholders
Another essential purpose of auditing the financial statements is building or raising trust levels with all internal shareholders. All the employees of the business can anytime access the audited financial statements. The employees commonly desire to understand how the company works and any financial issues in the organization. The shareholders can analyze these auditing reports to determine the return on equity as previously committed by the business.
To Meet Legal and Administrative Requirements of the Business
Another one of the essential purposes of auditing is meeting all the legal and Administrative Requirements of the Business. It is also required for the auditor to make sure the comprehensive risk management and fraud disclosure methods.
To Keep Up with the Competition Environment
The more important purpose of auditing is to make sure that businesses can easily keep up with the continuously changing environment. If an organization time-to-time audits its financial accounts, it can quickly analyze the performance of its business and change it if required.
We have already discussed everything about auditing, including the Top 7 Purpose Of Auditing. So, we hope that our blog will become essential for you to, and it will additionally remove all your doubts regarding “what is the purpose of auditing? “
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Frequently Asked Questions
What are the reasons for an audit?
Here are the top 5 reasons behind conducting an audit:-
1. The ensure the productive operation of your organization.
2. To review all the business compliance with an abundance of administrative management.
3. To introduce an insight of confidence in management that their organization is functioning correctly.
4. For maintaining the reputation of your business.
5. To make a trust relationship with your shareholders.
How auditing is done?
In auditing, the auditor mainly examines your business financial records to ensure they are 100% authentic. The auditor did all this through a very systematic review of all your business transactions. Generally, all businesses have a routine of audits one or more times a year.