Advantages and Limitations of Audit - Auditing Concepts, Auditing & Secretarial Practice | Auditing and Secretarial Practice - B Com PDF Download

An auditor is not bound to assume when he comes to do his duty that he is dealing with fraudulent and dishonest people. If circumstances of suspicions arise, it is his duty to probe them to bottom. To sum up, an auditor is not an insurer against errors and frauds. That he does not guarantee that the books do not contain any errors and frauds. However, he has always to be very careful about errors and frauds. He must exercise reasonable care and skill in the detection of errors and frauds. Once he suspects the existence of errors and frauds, he must go in to the roots and unearth them. In short, an auditor is not just a watch dog. But, at the same time, he need not be blood hound.

Advantages of Audit:

Audit offers several advantages. They are:

1. Advantages of Audit to the business enterprise and Management

1. Audit ensures the accuracy or correctness of the books of accounts
2. Audit ensures the authenticity and reliability of the financial statements.
3. Audit helps in the detection and rectification of errors and frauds.
4. Audit helps the enterprise and management to ascertain whether the legal requirements are complied with.
5. Audit point out the weakness of the existing system of internal check and internal control.
6. Audit examination makes the employees in charge of accounts and records vigilant, regular and up- to –date in their work.
7. Loans and credit facilities can be easily obtained by a concern on the basis of audited accounts.
8. Liability of an enterprise as to income tax, wealth tax, and value added tax etc can be easily determined on the basis of audited accounts.
9. A business can enjoy better reputation, if its accounts are audited by an independent professional auditor.
10. Audited accounts are more reliable as evidence in courts of law.
11. Facilitates calculation of purchase consideration.
12. The insurance claim can be easily determined on the basis of audited accounts.
13. Audited accounts serve as a basis for solving the disputes as to higher wages.
14. Comparison of accounts from year to year becomes easier since the accounts are uniformly prepared.

2. Advantages of audit to the owners of the business: 

1. In the case of a sole trader, auditing assures him that all business transactions have been duly accounted for and there are no errors or frauds. It also helps him to know the true facts about the business.
2. In the case of partnership firm, audited accounts serve as an evidence of proper management of the affairs of the business. Audited accounts are help in the valuation of goodwill and settlement of accounts on the admission, retirement or death of a partner. Again audited accounts minimize the chances of disputes among the partners.
3. In the case of a joint stock company, audit of accounts assures the shareholders that the affairs of their company are smoothly and their investment is safe. The shareholders of a company can value their shares on the basis of audited accounts.
4. In the case of a co – 0p society or a trust, audit assures the members or the beneficiaries that the affairs of the society or trust are conducted properly and their investment are looked after properly.

3. Advantages of Auditing to others: - 

1. Lenders can depend on audited financial statements while taking a decision to grant credit to the business concern.
2. Tax authorities can depend on audited statements in assessing sales tax, income tax and wealth tax of the business.
3. Audit of accounts safeguards the interests of the workers and is helpful in the settlement of claim for higher wages and bonus.
4. Insurance company can rely on audited accounts to settle claims in respect of damage or loss of any business asset by fire, theft etc.
5. The purchaser of a business can easily calculate the amount of purchase consideration on the basis of audited accounts.
6. Audited accounts create confidence in the minds of investors in a joint stock company

Limitations of Auditing: - 

Generally following are the Limitations of auditing

1. Non-detection of errors or frauds: - Auditor may not be able to detect certain frauds which are committed by the clients.
2. Dependence on explanation by others: - Auditor has to depend on the explanation and information given by the responsible officers of the company. Audit report is affected adversely if the explanation and information prove to be false.
3. Dependence on opinions of others:- Auditor has to rely on the views or opinions given by different experts viz Lawyers, Solicitors, Engineers, Architects etc, he cannot be an expert in all the fields
4. Conflict with others: - Auditor may have differences of opinion with the accountants, management, engineers etc. In such a case personal judgement plays an important role. It differs from person to person.
5. Effect of inflation : - Financial statements may not disclose true picture even after audit due to inflationary trends.
6. Corrupt practices to influence the auditors: - The management may use corrupt practices to influence the auditors and get a favourable report about the state of affairs of the organisation.
7. No assurance: - Auditor cannot give any assurance about future profitability and prospects of the company.
8. Inherent limitations of the financial statements: - Financial statements do not reflect current values of the assets and liabilities. Many items are based on personal judgement of the owners. Certain non-monetary facts cannot be measured. Audited statements due to these limitations cannot exhibit true position.
9. Detailed checking not possible: - Auditor cannot check each and every transaction. He may be required to do test checking.
10. Auditing is a post mortem examination of accounts.