Auditing and Its Importance in Accounting System

• The process of checking financial transactions, related documents, ledger, financial statement, and document by employees of the organization internally and by CA, RA externally for finding the truth and fair condition, evaluate documents, prepare report along with personal opinion and submit to concern authority is known as auditing.
• Auditing refers to the process of a detailed examination of the company’s account to access their accuracy.
• Auditing is concerned with the verification of accounting data and with determining the accuracy and reliability of accounting statement and reports.
• Accounting is carried out periodically by the independent qualified auditor with the help of relevant records, documents, information, and explanation.
• Systematic examination of accounting records prepared by others of business enterprise or other economic unit ascertaining that they correctively reflect the related transactions to the satisfaction of qualified auditor who has to report giving his opinion to the concern authorities.

Types of Auditing in Accounting System

1. Internal auditing – done by the internal auditor. An internal auditor is appointed by BoD.
2. External auditing – done by the external auditor. An external auditor is appointed by AGM.

Principles of Auditing

There are 5 major principles of auditing in accounting system the are listed below.

• Regularity
• Economy
• Efficiency
• Effectiveness
• Relevancy

Difference between internal and external auditing

SN	Base	Internal	External
1	Method	Internal audit is prepared by population/census method	External audit is prepared with sampling method
2	Objective	To correct error and fraud immidiately	To submit error and fraud by means of report
3	Time	Conducted tri-monthly	Conducted once at the end of fiscal year
4	Auditor	Internal auditor from audit department	External Expert like Chartered Accountant or Register Accountant
5	Report Submission	Submitted to BoD	Submitted to stakeholders in AGM
6	Principle	Follows 3 principles – Regularity – Economy – Efficiency	Follows 5 principles – Regularity – Economy – Efficiency – Effectiveness – Relevancy
7	Policy used	Policy made by BoD is followed while preparing internal audit	Prevailing audit and its fundamental policy is followed while preparing external audit

Audit and its Importance

1. To correct error and fraud immediately
2. To protect assets and cash
3. To strengthen the internal control system
4. To minimize risk
5. To follow the rules and regulation to avoid regularity punishment (regularity)
6. To mobilize the use of resources economically (economic)
7. To operate organizational activities in order to increase production and productivity (efficiency)
8. To achieve the goal of the organization and expenditure heading(effectiveness)
9. To minimize irrelevant financial activities (relevancy)
10. To increase transparency
11. To maintain financial discipline
12. To create a culture of accountability and responsibility
13. To maintain corporate governance

For the importance of internal auditing – skip 8 and 9

For the importance of external auditing – skip 1,2,3

For similarities – write except 1,2,4,8,9

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Some questions

Q) Auditing is called the eye and ear of the organization. Explain.

Q) Auditing is also called an examination of the dead documents. Explain.

Q) Auditing begins when accounting ends. Explain.

Answer-

The process of checking financial transactions, related documents, ledger, financial statement, and document by employees of the organization internally and by CA, RA externally for finding the truth and fair condition, evaluate documents, prepare report along with personal opinion and submit to concern authority is known as auditing.

Due to the following reasons, it is said that auditing begins when accounting ends.

1. There should be a financial transaction in the organization which is used while conducting auditing.
2. All the financial transaction should be recorded in the journal voucher which is required while conducting auditing.
3.  The individual journal voucher transaction should be posted in the ledger which is needed while conducting auditing.
4. There should be required documents or the financial statement ready while conducting auditing.

So, because of these reasons, it is said that auditing begins when accounting ends.

Q) What are the provisions required for the effective auditing?

Answer –

• Use of risk-based auditing method
• Development of policy-making mechanism by BoD.
• Periodic amendment of the audit act.
• Culture of improvement of immediate corrective mechanism.
• Provision of adequate expert manpower for auditing activities.
•  Activities of reward and punishment system.
• Implementation of international auditing standard.