Wednesday, 5 June 2013

Merits and Limitations of Auditing.

It is important for companies to be audited. There advantages involved in auditing and some of them are as shown below:
  1. Auditing helps reveal fraud and errors.
  2. Auditing acts as evidence in court. If a case is filed against the company, it can provide the audited reports to prove its innocence.
  3. Audited accounts help facilitate settlement of claims incase a partner dies.
  4. Auditing gives room for suggestions and therefore improving the business organisation.
  5. Auditing shows the financial status of the company.
  6. Auditing helps the business to easily get loans since they have audited reports.
  7. In some countries, it's a requirement by the government for tax purposes.
  8. Auditing helps in proper valuation of assets.
  9. Auditing helps to maintain the company accounts regularly.
  10. Auditing provides information about the profit and loss of a company.

However, just like most things in life, auditing also has inherent limitations which include the following:
  1. Non-detection of errors. Auditors may not be able to detect errors that were "smartly" covered up by the managers.
  2. Effect of inflation. Financial statements may not give a true picture even after auditing has taken place because of inflation.
  3. Difference in opinions. Auditors may have various conclusions concerning the financial statements. If these differences are not settled peacefully, they can easily lead to wrangles.
  4. Alternative accounting principles. Different businesses use different GAAP. It is therefore the auditor's duty to find out which principles are being used by that company.
  5. Influence of managers. The auditors may be corrupted by the management of the company so that they file reports which are in favour of the managers.

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