Importance of Auditing

The importance of auditing can be judged from the fact that even those organizations which are not covered by the companies Act get their financial statements audited. It has become a necessity for every commercial and even non-commercial organization. The importance of auditing can be summed in following points:

Audited accounts help a sole trader in knowing the value of the business for the purpose of sale.
Dispute over the correctness of profits can be avoided.
Shareholders, who do not know about the day-to-day administration of the company, can judge the performance of management from audited accounts.
It helps management in detecting and preventing errors and frauds.
Management gets advice on financial affairs from the auditors.
Long and short term creditors depend on audited financial statements while taking decisions to grant credit to business houses.
Taxation authorities depend on audited statements in assessing the income tax, sales tax and wealth tax liability of the business.
Audited accounts are useful for the government while granting subsidies etc.
It can be used by insurance companies to settle the claims arising on account of loss by fire.
Audited accounts serve as a basis for calculating purchase consideration in case of

amalgamation and absorption.

It safeguards the interests of the workers because audited accounts are useful for

settling trade disputes for higher wages or bonus

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Financial statements & analysis

Financial statements & analysis Financial statements are written records that convey the business activities and the financial performance of a company. The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The three major financial statement reports are the Balance sheet Income statement Cash flow statement Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Sources of financial information To effectively evaluate the financial performance of the business requires financial information from three sources: a balance sheet, an income statement and a cash flow statement. Balance Sheet A balance sheet is a statement of assets, liabilities, and capital of a business or an organization at a particular point in time, detailing the balance of income and expenditure ov...

Difference between Vouching , Verification and Valuation

Difference between Vouching , Verification and Valuation Vouching Verification Valuation Meaning Vouching is a process of comparing the entries in the books of accounts with the bonafide vouchers Verification is a process which proves the existence, ownership and title to the assets Valuation is a process which certifies the correct value of the assets and liabilities at the date of balance sheet. Subject Matter Vouching is made of the entries recorded in the books of original entry and their posting in the ledger Verification on the other hand is made of assets and liabilities appearing in the balance sheet at the end of the year Valuation is also made of assets and liabilities appearing in the balance sheet at the end of the year By whom Vouching is done by the senior auditor and audit clerks. Verification on the other hand is done by the auditor himself or his associates Verification on the other hand is done by the auditor himself or his associates When Vouching is done...

Elements of audit report

1. Title of the report The title of the audit report should help the reader to identify the report. It should disclose the name of the client. The title distinguishes the audit report from other reports. 2. Name of the Addressee The addressee normally refers to the person who appoints the auditor. If a company appoints the auditor, the addressee should be shareholders. As per law, the complete address of the addressee is required. Addressee for the statutory audit shall be shareholders and in case of Special Audit, it is Central Government. 3. Introductory Paragraph The introductory paragraph should specify that it is the auditor’s opinion on financial statements audited by him. The period covered by financial statements should be stated with exact dates. 4. Scope This part should include the matter-of-fact relating to the manner in which the audit examination was made. The audit examination should cover the company's accounts, Profit and Loss Account, Balance Sheet and Cash Flow S...

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