Finance

Auditing: Significance And Types Of Auditing

Do you want to know the significance and types of auditing? This article is an eye-opener on what auditing is all about, both the significance and types.

Auditing is derived from the Latin word “audio” which relates to hearing. Auditing is defined as an independent examination of and expression of opinion on the financial statement of an organization. It is done by an appointed auditor in line with his appointment and compliance with relevant statutory obligations.

American Committee on basic auditing concepts defined Auditing as “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the result to interested users”.

It can also be defined as “the accumulation and evaluation of evidence about quantifiable information of an economic entity to determine and report on the degree of correspondence between the information and established criteria”. Auditing Practices Board (APB) defined auditing as an “exercise whose objective is to enable auditors to express an opinion whether the financial statements give a true and fair view (or equivalent) of an entity’s affairs at the period end and of its profit and loss (or income and expenditure) for the period then ended and have been properly prepared by the applicable reporting framework (for example relevant legislation and applicable accounting standards) or where statutory or other specific requirements prescribed the term “presents fairly”.

Significance Of Auditing

Auditing is necessary for not only business entities but also the government for the following reasons:

1. It Serves As A Deterrent To Fraud

Periodic auditing of accounts and records of an organization acts as a deterrent to fraud as perpetrators realize that their actions will be detected. This will make them face the ugly consequence of their actions.

2. It Makes It Easy To Detect Fraud And Error

Auditing facilitates early detection of fraud and error. Auditors’ reports always mention material misrepresentation of facts whenever it occurs and bearing in mind that fraud comes in the form of intentional misrepresentation of facts, it becomes clear that auditing will expose it. In this regard, internal auditing becomes a ready instrument.

3. Provide Organization With Expert Advice

Auditors are experts in their field. By auditing an organization’s account, the organization tends to benefit from the expert advice emanating from its report.

4. To verify and report upon accounts prepared by the organization.

5. It gives credibility to accounts and reports presented by an organization.

Types Of Auditing

Auditing can be broadly classified into:

1. Internal auditing
2. External auditing

1. Internal Auditing

This is an audit carried out by the employee of an organization. The functions of the internal auditor cover all the activities of the organization and are a day-to-day role. The role of the internal auditor includes:

1. Reviewing and appraising the effectiveness, adequacy, and applications of accounting, financial, and other operating controls and promoting effective control at a reasonable cost.

2. Ascertaining the extent of compliance with management-established policies.

3. Ascertaining the extent to which organizational assets are accounted for and self-guided from losses of all kinds.

4. The reliability of management data developed within the organization.

5. Appraising the quality of performance in carrying out assigned responsibilities.

6. Recommending operating improvements within the systems and control. It is pertinent at this juncture to state that internal audit is a product of management policy and operates within the confines of its assigned responsibilities. Hence internal audit is defined as an independent appraisal function within an organization for the review of the system of control and quality of performance as a service to the organization.

Internal audit presently aims at the prevention of errors rather than detection.

auditing

2. External Audition

External audit as opposed to internal audit, is the audit carried out by a person or body external to the organization. The external auditor is therefore not on the payroll of the organization. The primary objective of an external audit is to conduct such texts/examinations that an auditor needs to enable him to form his independent and professional opinion on the financial statements of an organization.

The powers and duties of an external auditor as contained in S.360 of CAMA 1990 as amended include:

1. To find out whether proper accounting records have been kept by the company and proper returns adequate for their audit have been received from the branches not visited by them.

2. To find out if the company’s financial statements are in agreement with the accounting records and returns.

3. To find out if the information given in the director’s report for the year for which the accounts are prepared is consistent with those accounts.

4. To give their report to the shareholders.

Similarities Between Internal And External Auditing

They can be seen in the following forms:

1. Both share a common interest in the internal control system.

2. Both adopt common procedures and techniques in their operations, that is they both review, record, evaluate and test the internal control system.

Differences Between Internal And External Auditing

Their differences can be seen in the following:

1. Scope Of Work

Management engages the internal auditor and by extension determines his scope of work while that of the external auditor is determined by the relevant statute under which he is appointed.

2. Responsibility

Internal auditors are responsible to management while external auditors in the private sector are responsible to shareholders. In public-sector, however, the external auditor though an employee of the executive is responsible to the legislature in the performance of his duties.

3. Approach

In the public sector, internal auditing emphasizes more on the pre-auditing of transactions. It ensures that the accounting and internal control systems are effective and efficient. On the other hand, external audit focuses on post-auditing. That is, it tries to see the account whether in his opinion it represents a “true and fair view” of what transpired.

4. Qualification And Appointments

The external auditor as a professional is highly qualified and has a practicing certificate while the internal auditor may or may not be a professional and is not licensed to practice.

In conclusion, we promise to discuss the significance and types of auditing, well we have fulfilled it. So listed above are the significance of auditing and also the types of auditing. We also discussed the differences between internal and external auditing and we believe that this article is helpful to you.

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