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Uploaded Date: 17 September 2020

Basic concepts of auditing, its meaning, functions, objectives, limitations and advantages

“Auditing is a systematic examination of financial statements, records and related operations to determine adherence accepted to generally accepted accounting principles management policies or stated requirements”.

In simple terms Auditing is a process of checking of the transactions of the business with its books of accounts and evidence with a view of find out the arithmetical accuracy of the accounts, the correctness and truthfulness of the transaction recorded in the books and their results thereon.

Salient Features of Auditing 

(i) The audit is a systematic examination of the books, accounts, documents and vouchers of a business organization.

(ii) The purpose of the examination of books, accounts, documents etc. is to ascertain how far they present a true and correct view of the state of affairs of a particular concern.

(iii) The auditor has to satisfy himself that the books have been drawn up properly and they give a true and fair view of the state of affairs.

(iv) Audit conducted in a haphazard manner does not serve the desired purpose.

(v) The report of the auditor is prepared for a particular financial period.

Main function of Auditing 

(i) Auditing helps to ascertain the systems to accounting, internal control, management of a business organization.

(ii) Auditing helps to test-check the system of the internal control of a business concern.

(iii) Auditing plays an important role in verification of the assets and liabilities of a business organization an also ensures that assets are valued properly.

(iv) To check the arithmetical accuracy of records.

(v) auditing helps to ensure that Books of Accounts are maintained according to the requirement of statue governing the business.

(vi) To ensure that the opinion covers all aspects by the professional standards.

Advantages of Auditing 

  • It ensures the correctness of the accounts of the concern.
  • Errors and fraud are detected very easily with the help of auditing.
  • Audited accounts are considered more reliable as evidence in the court of law.
  • Loans and credit can easily be obtained from banks on the basis of audited accounts.
  • Audited accounts are considered more reliable for the purpose of various type of taxation.
  • The auditing of accounts make the clerk who maintain them at least careful and verigilent.
  • The audited accounts are helpful in the settlement of claims by the insurance company in case of fire.
  • Audited accounts are taken as more reliable and useful during the course of amalgamation.
  • In the case of employer employee dispute, audited accounts are helpful in the determination of profits and trends of profitability. 

Limitations of Auditing

Audit have lots of benefits, but it also have some limitations which are following - 

  • An audit may not reveal the complete truth. This may happen when accounts are prepared with malafide intentions.
  • The author’s report depends upon the explanations and information given by the management. Incorrect information and explanations affect the author’s report.
  • An auditor may not always work independently. Reason being that theoretically he is appointed by the shareholders but actually it is the director who appoint him.
  • Auditing is a post-mortem examination. There is no use o such an examination when the events have already happened.
  • Audit work generally depends on the prevalent system o internal control, but it may not be effective.

"Auditing begains where accountancy ends"

Auditing and accountancy have a very close relationship, yet their nature and scope are quite different.” Accounting comes first. When accounts are finalized, thereafter audit works begins. Here are some diffrence between auditing and accountancy.

Difference between Accounting and Auditing




1. Meaning

 Arts of recording, classifying and summary-sing transactions.

 Independent examination of financial statements.

2. Objective

 Recording of transactions for preparation of financial statements.

 Examination of financial statements to express an opinion.

3. Personal judgment

 No personal judgment involved.

 Personal judgment involved in various areas such as sampling.

4. Qualification

 No specified qualification.

 Statuary Auditor must be member of ICAI.

5. Periodicity



6. Appointment

 Accountant is generally appointed by the management.

 Auditor is generally appointed by the shareholders.

7. Necessity

Compulsory for all organizations.

As per the statuary requirements.




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