Reasons for Auditing and Types of Audits - Essay Example

Students’ name Lecturer name Course Date Issues in Auditing Introduction Auditing can be defined as a systematic process of examining books of accounts to authenticate their correctness and accuracy. An auditor thus examines financial statements prepared by the accounting function. Hence the auditor does not prepare financial statements neither does they maintain them (Gupta, 5). This enables them to exercise their entire independence. Financial statements are often the basis within which company executives and other stakeholders make decisions. Therefore, it is of utmost importance that such statements be authentic and devoid of material misstatements. The role of the auditor is to scrutinize financial statements so as to ensure that they represent a true reflection of the firm position. Gupta (12) observes that the work of an auditor is to ascertain the validity and reliability of information contained in the financial statements. Besides, the auditor plays a critical role of protecting the interest of stakeholders and other interested parties within the business and who do not, in any way, play a role in the management of the company such as shareholders. It is also important to point out that the extent of the audit exercise carried out is determined by a great level of factors. Among the most prominent issues is the quality of internal control systems.An organization with good internal control systems may require less scrutiny as compared to one whose systems is wanting. However, it is important to point out that it is still the auditors who should determine the extent of scrutiny to be applied as they are the ones who remains accountable to the report they prepare. Reasons for Auditing There are very many reasons why auditing is carried out. Some of these reasons include the satisfaction of the owner that all is well. The owner of the business hence the shareholder of a company, will be satisfied with the business and working of various departments whenever a good audit report is generated. It gives them confidence because they will now be sure that everything is working properly. Another reason why auditing is critical is that it helps in detection and prevention of errors and frauds.Audit process helps in unearthing errors whether innocent or deliberate.As such,employees will fear making deliberate mistakes for fear of being found out by the audit process. The same applies to fraudulent activities.Stakeholders of a business expect that the audit process will help stamp out any prospective fraudulent tendencies and prevent a recurrence in future. Audit process also plays a key role in verifying the books of accounts. As a result, it ensures that at all times, updated records are maintained. The audit process also gives an independent opinion as to the position of the company.As a result, various interested parties can make decisions based on the audit report.Investors can make decision on whether to buy a company’s shares, while the management can make expansion decisions based on the audit report. The audit process also gives shareholders the confidence that their interests are being taken care of. This is because they do not participate in the day to day running of the organization and it is only through the audit report that they can determine whether their interests are being taken good care of. As a result, the audit report must be factual and independent. Auditing of a firm book also enables the firm to comply with certain legal requirements.Gupta (11) points out that one of these requirements involves listing at the stock exchange where the company will be expected to present audited financial statements. Types of Audits In practice, we have very many kinds of audits depending on the expected results, the purpose of audit and the people carrying out the process. The most popular are the external and internal audits. Internal audit is conducted by internal audit staff who is basically employees of the firm. It is part of internal controls. External audit is conducted by an external independent party. Benefits of Internal Audit With internal audits, there is effective control in the business functions. Areas of weaknesses in the system are pointed out and corrective action taken to ensure that any bottlenecks are done away with and that there is smooth flow of functions. Internal audit also leads to protection of assets. Issues like embezzlement of funds, use of business assets for private purposes and misuses of assets can be curbed by the internal audit process. The work performed by the internal auditor can be used by external auditors to carry out their own audit. This is because their work is almost the same as they cover the same issues. However, it should be clear that the external auditor takes responsibility of external audit report. Given that the external auditor is based in the company,progressive review of company activities is possible.The firm will not wait till end of financial year to have its activities reviewed.The internal auditor can review activities as many times as needed. Even though internal audit is an important process, it may face serious limitations. Some of the limitations likely to be faced include the fact that the management many not feel obliged to implement recommendations of internal auditor. In this way the audit process will be a waste. Another issue is that there may be a shortage of staff who can be deployed to carry out auditing functions.This may be as a result of myriad issues such as inadequate resources to employ enough staff or lack of skills among existing staff. Another challenge is a case where the duties of internal audit staff are not properly divided to the point that there is an overlap between audit functions and the functions of other departments. This defeats the logic of having an internal audit function. Features of Auditing Auditing can be seen as a systematic and scientific examination of books of accounts.This means that auditing as a process must go through certain steps or processes and as much as possible, the outcome should be objective. Users of the audit report should be able to rely on it in making decisions. Another point to note about auditing is that it is a process that should be undertaken by an independent person or body of persons.Independence of those conducting the process forms the bedrock of auditing as a process. That such a person or persons should be free to arrive at their decisions,devoid of pressure, intimidation or being compromised. Auditor also verifies the results shown by the financial statements of a firm. To do this, auditors rely on the prepared statements and a host of other documents such as vouchers, receipts, information and explanations. Hence, the auditors must ensure that they are thoroughly informed while making these decisions. Any bit of information required should be perused to the auditor’s satisfaction. Gupta (41) also points out that besides just looking at the documents,auditors should also review the accounting and internal controls.The purpose of this exercise is to ensure any system weaknesses are identified and action taken before the firm incurs losses. Limitations of Auditing Process What is important to note is that the auditor’s work involves exercise of judgment. Thus, auditors has to decide the extent to which they are going to examine a concept or how reasonable a particular estimates which was used to prepare the financial instrument being reviewed.This makes auditing a relative concept, which is dependent on individual judgment and therefore, the possibility of the report failing to capture true position of a firm. Another weakness in auditing process rests with the fact that the process is dependent on internal system’s effectiveness. As a result, there is the likelihood that certain malpractices may go unnoticed by external auditors. For example, a case where employees collude to steal or the manager overrides controls, which are in place, by directing subordinates to record false details in the records or entirely conceal them. Another limitation is that auditors have to depend on explanations given by the officials of the company with regard to certain issues they might raise. In an event that the explanation given is false, then it means the report that will be produced by the auditor will be affected significantly. Furthermore, auditors cannot be experts in all fields. This means that once in a while they may rely on experts such as solicitors, engineers and architects. Consequently, another limitation to auditing process is that financial statements presented to the auditor may not reflect the current value of assets.This is because variations in value of assets such as buildings, land and machinery to take care of appreciation or depreciation in value is entirely personal judgment. Such non-monetary issues, which cannot be measured and costed, make the auditing process challenging. Generally, auditors are supposed to release a report within a particular timeline. The problem with this is that at times it may constrain the auditor. There may be no time to collect sufficient amounts of evidence required to make certain conclusions. Besides, there may be no time to resolve anomalies existing in the financial statements. In that case, conclusions the auditor arrives at may be marred with a certain probability of error. Sometimes, the auditing process is based on test checks.This means that only a small sample of the total material available is audited then a decision is reached. This is done with the assumption that the materials not audited have same characteristics as those materials audited which may not be true. Works Cited Gupta, K., Fundamentals of auditing, 1996, McGraw Hill, New Delhi Gajic, Christine. Modern auditing & assurance services: An overview of auditing, 2009, Wiley & Sons Publications. Print Read More