What are the Objectives of an Audit?
Auditing is the systematic examination of the books of accounts and the other documents of the company which is conducted with the main objective of knowing that whether the financial statement prepared and presented by the company shows a true and fair view of the organizations.
The objective of an audit is to get reasonable assurance that Financial Statements of entity are free from Material Misstatement and Provide a Report on the Financial Statements in accordance with the auditor’s findings. The audit is independent and Systematic examination of Financial StatementFinancial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. and detailed investigation of Income and Expenses Reports, Accounting records such as Sales, Purchase, etc.
Auditors should keep in mind audit objectives at the time of the Examination of financial statements and finalizing the Current market price of the Assets. They are variable basis types of Audit.
7 Types of Audit Objective
Type of objective changes as per Type of Audit. Below is the list of 7 main types of audit and their objectives:-
- External – To check whether the Financial Statements that are prepared by the Management are providing an accurate and fair view. Financial Statements prepared are as per applicable Accounting and AuditingAccounting And AuditingAccounting is recording, maintaining and reporting the financial affairs, depicting the precise financial position of the company. In contrast, auditing is the systematic examination of accounts books and other documents to check whether the statement shows the correct information or not. Standards.
- Internal – To Check Internal Control over financial reporting, compliance of Policies, compliance of Legal Aspects such as the applicability of Companies Act;
- Forensic – Recognize fraud cases, Control and decrease instances of fraud through the application of suggestions and recommendations and internal Audit control in the entity,
- Statutory – To check that entity is following rules and regulations of Act under which that it registered, they have to appoint the statutory auditor, who will conduct the statutory audit.
- Financial – To get reasonable assurance that the financial statements are free of material misstatement.
- Tax – Proper maintenance of the Books of Accounts and other records of similar nature and to Maintain Proper records of Income and tax expenses and deductions of the TaxpayersTaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws..
- Special Objective: Conducted as per Laws, and objectives vary as per laws.
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- Board can check that the principals and policies formulated and designed by them are implemented and followed by manpower or not.
- Financial Statements that are prepared by the management as per applicable financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. and auditing standards.
- Internal audit Team can verify that the Policy of Internal Audit Control is implemented or not, which is designed by them.
- Recognize fraud Cases and decrease the % of fraud Cases through robust Internal audit control.
- Provide a better representation of Financial statements and give an accurate and fair view.
- Evaluation of capacity and efficiency of all level management of the entity;
- The audit helps for the rehabilitation of sick units, reconstruction of entity, mergerMergerA merger is a voluntary fusion of two existing entities equal in size, operations, and customers deciding to amalgamate to form a new entity, expand its reach into new territories, lower operational costs, increase revenues, and earn greater control over market share., and amalgamationAmalgamationAmalgamation is the consolidation or combination of two or more companies, known as amalgamating companies, usually in the same or similar line of business, to produce a new legal entity, known as the amalgamated company, with the same shareholders, assets, and liabilities. among the companies.
- An external audit can be fruitful if the internal auditor is not reliable.
- The audit protects the interest of the Owner of the Entity.
- The process of Audit is very costly as the entity bears expenses like auditor’s remuneration, there living cost during the audit, including staff, reimburse the official traveling expenses incurred during an audit by them.
- All the Data, Reports, and information relevant to the audit process are provided by the management.
- The auditor conducts the auditThe Auditor Conducts The AuditAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws. on the sampling basis method. Due to this, some errors can’t be identified.
- Auditors have limited time to conduct the audit and they need to submit the audit reportThe Audit ReportAn audit report is a document prepared by an external auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements. to the owner of the entity within a stipulated time.
- Results of internal audits do not publish to externals, and their results only provide to management.
- This is not possible for the auditors to find all errors and frauds in the Books of accounts and accounting records.
Limitations of Audit Objectives
- It does not cover audit of many vital aspects of an entity such as Management efficiency, Finances, and Business ethics.
- Clever manipulation and fraud in books of accounts and accounting records etc. are not disclosed by audit.
- Audit of Financial Statements does not provide exact confirmation of additional information and explanations which is taken by the auditor for an audit opinion.
- Design of Audit techniques and formulate of an Audit program for the collection of evidence may not be the same as the nature of Business.
- Explanations, data, reports, and other information provided by the management may not be correct and may affect the auditor for an audit opinion.
- There some type of audits which governs as per laws, in such audits, auditors appoint by regulating authority, so there is no independence of auditors.
- Financial Statements are prepared basis number of judgments depending on such elements, which may vary.
- Audit of Books of Accounts may not be entirely reliable as the evidence provided by the management.
- Audited Financial statements may not provide an accurate and fair view and exact position if the auditor takes faulty judgment/ Decision/ Opinion.
- Auditor can’t be an expert in all the verticals of the entity, he should believe upon a judgment of other experts like Valuers, Lawyers.
- There are some entities that can’t bear the expenses of the audit.
Important Points to Note
- The target of the audit objective is to form and express of True and fair view of financial statements, and audit is performed to get assurance that Financial Statements are free from all material misstatement.
- To check that Financial Statements are prepared as per accounting guidelines and reporting frameworks (IFRS) by the management.
- Employees, who will provide assistance to auditors and their staff, should have sufficient knowledge of Audit:- How is an audit to be conducted, what are the documents to be asked, what are the information, data, and report to be provided to auditors.
- It may be changed as per the requirement of an audit.
The company should employ some experienced manpower for its internal auditInternal AuditInternal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit. because if internal auditors find all the errors, fraud, etc., then investigation in such situations can be initiated at an internal level. The auditor should express audit opinion after consideration of audit objectives. The auditor should keep in mind all the relevant audit objectives during the audit because it helps them to find accurate information, errors, and frauds.
This has been a guide to what are the audit objectives. Here we discuss the Top 7 types of the audit with their objectives along with its advantages and disadvantages. You can learn more from the following articles –