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Chapter: 11th Auditing : Chapter 1 : Introduction to Audit

Advantages of Auditing

Auditing provides benefits to the business, owners and to the outsiders in the following ways:

Advantages of Auditing:


Auditing provides benefits to the business, owners and to the outsiders in the following ways:


I.  Benefits to the Business


1.        Exhibits a True and Fair View of the Financial Statements: Audited accounts enables to reveal that the Profit and Loss Account and Balance Sheet of the business concern shows a true and fair view of the state of affairs of the business concern.


2.        Detection and Prevention of Errors and Frauds: When books of accounts are audited, errors and frauds can be detected and necessary action can be taken to prevent it.


3.        Expert Advice: Auditors who possess professional outlook provide expert advice to the company on various aspects such as tax matters, internal check, internal control and submission of various reports to the statutory authorities, preparation of project reports etc.


4.        Check on Employees: When accounts are audited it creates a moral pressure on the employees to be very cautious and regular in their work, as a result the chances of errors and frauds will be minimized.


5.        Helps in Resolving Disputes: Audited accounts provides a basis for settling disputes and conflicts among the partners in the case of partnership firm and to settle disputes with regard to bonus, wages etc. in the case of companies.


6.        Helps in Determination of Claims: An insurance company settles claims to the companies for the loss due to damage of business property only on the basis of audited accounts.


7.        Helps in Obtaining Loan: Loans can be easily borrowed from banks and other financial institutions on the basis of audited accounts, as the audited accounts authenticate the truthfulness of the books of accounts and financial statements.


8.        Helps in Decision-Making: Audited accounts are relied upon for the purpose of decision-making by the management.


9.        Helps to Determine Future Trends: By comparing the audited accounts with past years, the trend of financial activities can be determined. On the basis of review, weaknesses are found out and policies for the future period can be determined.


10.   Increase in Goodwill: Audit of business on a regular basis increases confidence to the interested parties and general public, as a result goodwill of the business can be enhanced.


II.  Benefits to the Owners


1.  Benefits to the Sole Proprietors: Audited accounts provide assurance to the proprietor about the accuracy of accounts maintained by his employees and also enables to know the financial performance of the business. It further enables the proprietor to obtain loan and in computation of income tax liability.


2.  Benefit to the Partners: In case of partnership business, audited accounts help the partners in settlement of accounts among the partners at the time of admission, retirement or in the case of death of a partner.


3.        Benefit to the Shareholders: Share­ holders are the owners of the company. With the help of audited accounts, they get a real picture of the financial position of the company and that directors and managing directors have not taken any undue advantage of their position.


4.        Benefit to Trust, Co-operative Societies: Audit of accounts of co-operative societies and Trusts provide evidence that the interest of the beneficiaries and members are properly protected.


III. Benefits to the Third Parties


1.        Bank and Financial Institutions: Banks and other financial institutions grant loan to the business concern on the basis of audited financial statements.


2.        Creditors: Creditors who supply goods to the business may assess the solvency and liquidity position of the business on the basis of audited accounts.


3.  Insurance Companies: For settlement of insurance claims, insurance companies can rely on audited accounts.


4.  Statutory Authorities: Statutory authorities like income tax, sales tax, wealth tax etc. accept audited statements for determining the liability which arises due to income, sales and wealth.


5.        Prospective Investors: Prospective investors who wish to invest money in shares and debentures of a company rely on audited accounts.



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11th Auditing : Chapter 1 : Introduction to Audit : Advantages of Auditing |

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