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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Basic Principles Governing an Audit

SA- 200 describes the nine basic principles that govern the procedure of auditing. It lists out the roles and responsibilities of the auditor and his general code of conduct during an audit. 1] Integrity, Independence and Objectivity The auditor has to be honest while auditing, he cannot be favoring the organization. He must remain objective throughout the whole process, his integrity must not allow any malpractice. Another important principle is independence. So the auditor cannot have any interest in the organization he is auditing, which allows him to be independent and impartial at all times. 2] Confidentiality The auditor has access to a lot of sensitive financial information of the organization. It is important that he respect the confidential nature of such information and documents. He cannot disclose any sensitive information to any third party unless it is a requirement by law. And he must also be very careful with documents, certificates etc. that the organ...

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...

Banking and its Functions

Banking is an industry that handles cash credit and other financial transactions. Banks provide a safe place to store extra cash and credit. Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn profit. Sec. 5(b) of The Banking Companies Act of 1949 , defines a banking company as “accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise and withdrawable by cheque, drafts, order or otherwise”. According to Walter Leaf , “ A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque.” Thus, banks are a business of accepting deposits and lending money. It is carried out by financial intermediaries, which performs the function of safeguarding deposits and providing loans to the public. Functions of Commercial Banks: Modern commercial bank...

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