Purpose of An Audit

Updated on April 4, 2024
Article byRishab Nigam
Edited byRishab Nigam
Reviewed byDheeraj Vaidya, CFA, FRM

List of Top 10 Audit Purposes

  1. To Achieve Transparency in Business Operations and Drive Accountability
  2. To Develop a Practice of Having Audit Trail for Each Transaction
  3. To Have Independent and Fair Opinion on How Business Works and Deliver Results
  4. To Ascertain the Quality of Financial Statements
  5. Deliver 360 Feedback on the Business Process Operations
  6. To Attract New and Potential Investors or Stakeholders for Business
  7. Improve overall business efficiency and build a relationship of trust among internal stakeholders
  8. To Meet Legal, Regulatory, and Compliance Requirements of the Business
  9. To Keep Up with the Competition and Ever Changing Dynamic Environment
  10. Role of Technology Driving Audit

Key Takeaways

  • The purpose of an audit is to provide an independent and objective examination of an organization’s financial statements, accounting records, and internal controls.
  • Audits are conducted to assure stakeholders that the financial statements are accurate, reliable, and comply with accounting standards and regulations.
  • Audits also provide recommendations for improvement to help organizations strengthen their internal controls and financial reporting processes.
  • Audits also review the performances and operations related to the non-financial data and information. Moreover, they provide a neutral report to the management of the company.

The primary purpose of the audit involves independent and unbiased verification of all the material information of financial and non-financial nature. Ascertain that they are in line with what is reported by the management. It can be very scientific and required as per the compliance requirements of the stakeholders who are involved with the business.

Purpose of An Audit

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If you want to learn more about Auditing, you may also consider taking courses offered by Coursera

  1. Auditing I: Conceptual Foundations of Auditing
  2. Auditing II: The Practice of Auditing

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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 prevent misrepresentation and fraud, the audit process was developed as a part of comprehensive and transparent corporate governance.

#2 – To Develop a Practice of Having Audit Trail for Each Transaction

  • Therefore, the audit is performed to develop an audit trail of every financial transaction.
  • It ensures that every financial number reported concerning the income earned and expense incurred by the business is accurate, 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 an Independent and Fair Opinion on How Business Works and Deliver Results

  • Therefore, the auditors would collect, gather samples, and perform testing of all the evidence to frame an opinion. Apart from independent advice, the audit process tries to catch hold of an operational inefficiency 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 audit process also involves the verification and review of performances and operations related to the non-financial data and information.
  • The preliminary audit process 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 the management’s decision-making.

#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 additional external financing. The external financing can be procured either through equity or through debt. The stakeholders who finance in the form of equity ask for audited statements. Such stakeholders know that audited statements ensure that the business shares quality and accurate financial statements.
  • 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 the auditor’s opinion and how well the business serviced its existing financial statements. In short, 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. The employees of the business itself can access the audited financial statements. The employees usually try to understand how the company is doing financially and its impact on their position in the organization. The existing shareholders can also utilize it to determine the return on equity as committed by the business. The auditing process ensures that there is absolute transparency as to how the business functions and maintains financial records.
  • The auditing is also required to meet the legal and regulatory requirements established by the government. The process of auditing also ensures comprehensive risk management and fraud detection methods.

#9 – To Keep Up with the Competition and Ever Changing Dynamic Environment

The auditing also ensures that the business can retain its competitive edge over its competitors when operating in a dynamic and ever changing industry.

#10 – Role of Technology Driving Audit

As technology progressed and attained a new level, it has ensured that the audit process is a part of it as a supplemental and supporting activity. The digitalization of financial transactions has ensured that a digital audit trail replaces manual paper trails. 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.

Frequently Asked Questions (FAQs)

What is the purpose of an audit trail?

The objective of an audit trail is to provide a chronological record of all events related to a particular transaction, process, or system. Moreover, an audit trail can be electronic or paper-based, including who acted, when the action was performed, and why it was performed.

What is the purpose of an audit plan?

An audit plan aims to provide a roadmap for performing an audit in an organized, efficient, and effective manner. In addition, it serves as a guide to an auditor to ensure that all the respective areas are covered during the process and that the audit is performed per professional standards.

What is the purpose of an audit report?

The purpose of an audit report is to provide a point of view or conclusion on the income statements or other information that has been audited

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