There is massive confusion about what are the advantages and disadvantages of auditing and whether a firm should go for auditing or not. Before making any conclusion, let’s understand that auditing involves checking accounts’ books to ensure their accuracy and trustworthiness. There is a common question – What are the advantages of an audit? It is essential to understand that auditing is a critical process for a company, government, investors, creditors, and other stakeholders to make any binding financial judgments.
You might be thinking, if audits are so important, then why doesn’t every business owner opt for them frequently? Well, as most businesses nowadays opt for an outsourced financial planning service to audit their accounts, it comes with both pros and cons. Read the full blog to know what are the advantages and disadvantages of auditing.
Why is a financial statement audit important?
Financial audits are essential for an organization in many ways. Let’s take an example. Suppose you are an investor. Won’t you prefer putting your money on a company with credible bookkeeping and fair accounting means? A financial audit provides credibility to various stakeholders by reviewing and validating their financial statements.
If someone questions what are the advantages of an audit, the most straightforward answer is that auditing is an assessment of all the records relating to the company’s financial position. The purpose of a financial audit is to confirm that a company operates through fair means of accounting and reporting.
objectives of financial audits
From checking the authenticity of accounts to guiding a business based on its financial reports and statements, a financial audit serves various purposes for a business. Let’s look at some of the key objectives:
- Inspecting and analyzing the internal accounts system of a business
- Reviewing the authenticity of transactions
- Scrutinizing arithmetical accuracy of books of accounts
- Concluding the present assets and liabilities of an organization
- Finding out the difference between capital and revenue transactions
- Uncovering errors and rectifying them
- Preventing financial fraud
- Finding the valuation of unusual stock
What are the advantages of an audited financial statement?
Assurance to owners & investors
One of the most significant benefits of audited financial statements is that they comfort owners, investors, and shareholders. To business owners, the accuracy of the books of accounts guarantees that everything in the business is legitimate. It also pleases them in terms of efficiency, financial performance, and departmental operations of their business. The same is true for investors who find confidence in the audited account books.
checking errors and deceptions
An error is an unintentional blunder or a mistake made without the goal of defrauding the firm. On the other hand, fraud is an intentional act of stealing or laundering money through a business. With the help of financial auditing, you can find the errors and scams happening within an organization. In fact, auditing also aids in the prevention of such mistakes and fraud.
It instills a fear of being discovered. As a result, auditing assists us in reducing the danger of errors and fraud in our books of accounts. However, it does not eliminate the risk. There’s always a possibility that the mistake may go unnoticed and that the scam remains undiscovered due to its sophisticated concealment.
independent point of view
The business can acquire a second view of its financial accounts and financial position if the auditor is an outsourced financial planning firm. An external auditor will thoroughly examine the records and, because he has no hidden objective, will be absolutely honest and fair in his assessment. When he states that the accounting practice is truthful and unbiased, it weighs significantly on investors and owners.
checks your morale
Another benefit of audited financial statements is that the company’s staff members do not try to steal or mislead the company. Since they are aware of account audits and scrutiny, the chances of fraud decrease, and it becomes easy to spot and rectify any inconsistencies. In addition, it encourages employees to be truthful and accountable at all times.
Stakeholders such as creditors, investors, banks, debenture holders, and others can have increased confidence in the books of accounts after an audit. As a result, the accounting information has higher credibility after being audited by an independent authority.
Understanding profit or loss
Auditing is a great tool that helps gather information about the profits and losses of a company. In addition, the discussion gives a chance to employees to disclose their ideas on how they can tackle the obstacles or improve their efficiency.
An audit involves disclosing confidential information such as salaries, CPF accounts, etc. These details are significant to learn about the organization. However, an auditor has to keep all this information secret unless some particular legal situation arrives. Even a third-party auditor has to keep this information sealed.
Reputation of organization
Completing a financial audit, especially by an external auditor, affects an organization’s reputation significantly. If everything is fine, the company’s reputation enhances exponentially, ensuring the organization’s growth.
Easy procurement of funds
Auditing reports help lending institutions understand the current financial stand of a company. Consequently, acting as a tool for a business to acquire required funds conveniently from any institution. Besides, these reports depict an accurate financial position to investors resulting in a credible image of the concerned company.
Assists in decision making
It takes multiple accounts and finance experts to conduct an enterprise’s detailed financial audit. However, these subject gurus provide valuable information, advice, and solutions to managers that can help in making critical decisions. In general, these decisions prove to be beneficial as facts and numbers support them.
What are the disadvantages of audited financial statements?
factor of cost
A complete and detailed audited financial statement would be prohibitively expensive. Moreover, it might not be economically practical for every company, especially when it comes to small and medium-sized enterprises. As a result, and due to budget constraints, the auditor has to narrow the extent of his audit and employ sampling and test verification techniques.
factor of time
Auditors usually work on a strict schedule. Legal Obligations are sometimes the cause behind this. It implies that they have to audit accounts for a whole financial year in a matter of weeks. As a result, lack of time becomes one of the most significant obstacles in auditing.
Evidence that isn’t conclusive
Rather than being conclusive, the audit evidence gathered by the auditor is compelling in general. In most auditing situations, there is never 100 percent conviction of the evidence. It is one of auditing’s primary drawbacks. In accounting, estimation is also frequent. In the precision of these estimations, the auditor is unable to assess or comment. He has no choice but to rely on his expertise.
requirement of professional experts
Auditing is generally a challenging process and requires substantial knowledge and experience. It is also a process that needs ethical behavior in auditors as they have access to unprotected client data. It can result in committing fraud or theft in the workplace.
Impossible to examine all transactions
A company makes countless transactions in a financial year. It is close to impossible to scrutinize each transaction. And it turns out to be a key disadvantage of performing an audit. At the same time, constant monitoring can be a tremendous challenge for auditors.
Chances of fraud
Although you carry out an audit to rectify blunders and avoid fraud, it still doesn’t guarantee that everything written on a report is accurate. It is actually in the hands of auditing staff. If they perform their task carelessly or take a bribe, the information presented in an audit report can be inaccurate. Sometimes, you can also see instances where a company harasses and forces auditing staff to manipulate the figures for their convenience.
Since you are here, it means you know what are the advantages and disadvantages of auditing. So, we can conclude the subject by saying that auditing is probably the best tool to uncover fraud and errors. Besides, it is also a helpful instrument for making recommendations on how to avoid them. Moreover, auditing accounts bring authenticity, which is mandatory for business growth.
Auditors, as competent experts in the accounts and financial legislation field, also provide recommendations to the company’s management. Therefore, for a small or medium-sized firm, it is best to hire a suitable outsourced financial planning service that can help them manage their day-to-day finances and audit their statements at an affordable price.