Audit is the practice of conducting an official inspection of an organization’s accounts and activities generally by an independent body. The person who conducts an audit is generally termed a checker/auditor. It is done to ascertain the accuracy of financial statements and internal controls provided and implemented by the organization.
It is important that an auditor should be a different and independent party from those who are involved in making books of accounts and implementing internal controls.
Following are some of the types of audits conducted in an organization:-
- Statutory Audit:
This Audit is a legally required review of the accuracy of a company’s financial statements and records. The term statutory denotes that the audit is required by statute.
- Income Tax Audit:
This audit generally arises due to the requirement under Income Tax Act, of 1961. A taxpayer is required to have a tax audit carried out if the sales/turnover exceeds Rs. 1 crore or gross receipts exceeds Rs. 50 Lakhs in the financial year.
- Revenue Audit:
A revenue Audit is the audit of items governing income and expenditure. It is conducted with a view to verify the accuracy and relevance of expenditure incurred and income earned.
- Stock Audit:
It is also often termed as an inventory audit. It is the process of verifying whether the physical goods available at your warehouse match the results available at the stock registers.
- Cost Audit :
A cost audit assures the accuracy of cost accounting records to ensure they are in conformity with the cost accounting principles.
- Internal Audit:
This audit is about checking of the business day to day activities and operations.
It focuses on whether the organization is following its SOPs and how effectively business operations are carried out.
- Mystery Audit:
It is the process of reviewing a product, place or process by posing as a consumer or a customer. It is generally used to monitor the quality of services or products.
ROLE of AUDITS IN BUSINESSES
- Auditing ensures the integrity and compliance of your accounts with the acceptable accounting standards.
- Auditing ensures that books of accounts are kept up to date.
- Audit helps in preventing and detecting frauds.
- During audit process management can assess and mitigate various risks.
- Auditing is a means of evaluating the effectiveness of a company’s internal control.
- Auditing is used to improve decision making within a company by providing managers with actionable items to improve internal controls.
BENEFITS:-
An audit provides a second set of independent eyes on business activities. An audit can show that an organization’s operations are running effectively, that it’s in compliance with all regulations, and can also give management a sense of confidence.
Following are some benefits of conducting an audit:-
- Identify potential issues early:
Audit conducted at regular intervals may help identify potential threats to the business which will arise in foreseeable future and help the organization to be prepared for it.
- Obtaining loans:
Financial Institutions and banks provide loans to the organization on the basis of audited financial statements. It gives them assurance about the financial health of the business and its ability to pay back the loan.
- Provide assurance to Investors, owners, shareholders:
Independent checking of business day to day activities provides assurances to owners, investors and shareholders that their money is not being wasted.
- Helps to avoid lawsuits:
Audits help to avoid lawsuits by ensuring that the company meets all legal/regulatory needs.
- Determine the adequacy on internal controls
Audits such as Internal Audits helps the businesses to know about the effectiveness of internal controls implemented by them, whether the employees abide by the controls and do these controls keep a check on the activities of employees.
- Detect and Prevent fraud:
An external check on the business activities will help in detecting frauds done and will also keep a check on the people of the organization to prevent any future risk of frauds.
- Better Planning and Budgeting:
An audit confirms the accuracy of an organizations financial statements by analyzing its financial transactions. This critical examination with auditor’s financial expertise can be used by management for better financial planning and decision making for future.
- Increase Goodwill:
It is known that audit will bring out even the smallest details of the company and conducting an audit means that the company has nothing to hide which is a great booster the morale of stakeholders of the company.