Purpose of Audit
The primary purpose of audit involves independent and unbiased verification of all the material information of financial and non-financial nature and ascertain that they are in line with what is reported by the management. It can be very scientific in nature and may be required as per the compliance requirements of the stakeholders who are involved with the business.
Top 10 Purpose of an Audit
Below is the list of audit purposes.
#1 – To Achieve Transparency in Business Operations and Drive Accountability
- The business maintains financial records of all the transactions it is involved in. With the increasing complexity of the business, these transactions may increase to an extent wherein it would be hard to maintain any paper trail or audit trail for the same. Lack of information would result in a business preparing an understated financial statement.
- Misrepresentation of information can result in the preparation of overstated and misleading financial statements. Therefore, to handle the problem of understatement or overstatement or to prevent misrepresentation and frauds, the process of the audit was developed as a part of comprehensive and transparent corporate governance.
#2 – To Develop a Practice of Having Audit Trail for Each Transaction
- The audit is therefore performed to develop an audit trail of each and every financial transaction.
- This ensures that each and every financial number reported with respect to the income earned and expense incurred by the business is accurate in nature and no material information is skipped or omitted.
- The auditor, therefore, would perform a careful examination of the evidence presented, records, vouchers, and material documents and ascertain that they match with the numbers presented in the book of accounts or the financial statements.
#3 – To Have Independent and Fair Opinion on How Business Works and Deliver Results
- The auditors would therefore collect, gather samples, and perform testing of all the evidence for the purpose of framing an opinion. Apart from independent opinion, the audit process tries to catch hold of an operational inefficiency arising in day to day production. The qualified auditor would then give apt recommendations on how the business can improve productivity and efficiency.
#4 – To Ascertain the Quality of Financial Statements
- The process of the audit also determines the quality of the financial statements. Therefore, the auditor would specifically highlight and share his unbiased opinion on the quality of the financial statements.
#5 – Deliver 360 Feedback on the Business Process Operations
- The process of the audit also involves the verification and review of performances and operations related to the non-financial data and information.
- The preliminary process of audit attempts to understand how the funds are utilized and allocated by the business.
- They give an unbiased report to the top management of the business. This report would then become an input for decision making for the management itself.
#6 – To Attract New and Potential Investors or Stakeholders for Business
- Additionally, if the business plans for future growth and investments in high growth projects, they would require some additional external financing. The external financing can be procured either through equity and through debt. The stakeholders who finance in the form of equity ask for audited statements. Such stakeholders know that audited statements ensure that quality and accurate financial statements are shared by the business.
- They would utilize the audited financial statements to compute and analyze the return on equity offered by the business. Similarly, the stakeholders who finance debt also ask for audited statements to see whether the business performance shared by the business matches with the auditor’s opinion and how well the business serviced its existing financial statements. In short, the purpose of getting financial statements audited ensures that the business has easy access to external finance as auditing raises the trust level between the business and its prospective stakeholders.
#7 – Improve overall business efficiency and build a relationship of trust among internal stakeholders
- The financial statements are also audited to raise trust levels with the internal stakeholders as well. The audited financial statements can be accessed by the employees of the business itself. The employees normally try to understand as to how the business is doing financially and how it impacts their position in the organization. It can be utilized by the existing shareholders as well to determine the return on equity as committed by the business. The process of auditing ensures that there is absolute transparency as to how business functions and maintains financial records.
#8 – To Meet Legal, Regulatory and Compliance Requirements of the Business
- The auditing is also required to meet up with the legal and regulatory requirements as established by the government itself. The process of auditing also ensures comprehensive risk management and fraud detection methods.
#9 – To Keep-Up with the Competition and Everchanging Dynamic Environment
The auditing also ensures that the business is able to retain its competitive edge over its competitors when operating in a dynamic and everchanging industry.
#10 – Role of Technology Driving Audit
As technology progressed and attained a new level, it has ensured that the process of audit is a part of it as a supplemental and supporting activity. The digitalization of financial transactions has ensured that manual paper trails are replaced by a digital audit trail. Each digital audit trail would cover the time of booking, time of receipt, amount of transactions, and the parties involved in that transaction with a unique reference number ensuring an enhanced transparency level.
This has been a guide to the purpose of an audit. Here we discuss the list of different purposes like how an audit is performed. You may learn more about financing from the following articles –