Advantages and Limitations of Auditing

Advantages of auditing

1. Assurance of accuracy and reliability of the books of account.
2. Detects and prevents errors and frauds, and deters them through the mere knowledge that audit will occur.
3. Facilitates raising loans and credit — banks and creditors trust audited statements.
4. Helps in settling disputes — e.g. among partners, or in insurance claims for loss of stock, where audited figures are treated as reliable evidence.
5. Assists correct tax assessment by the tax authorities.
6. Helps in valuation of a business at the time of sale, merger, or admission/retirement of a partner.
7. Improves the efficiency of the accounting system, since staff maintain records more carefully knowing an audit will follow.
8. Provides moral check on employees handling cash and stock.

Limitations of auditing

1. Not a guarantee against fraud — a skilfully concealed fraud (e.g. involving collusion between employees) can escape even a careful audit.
2. Based on test-checking in practice — for a very large volume of transactions, an auditor cannot verify every single entry, and relies on sampling, which carries some residual risk.
3. Dependence on explanations and information given by the client's staff — the auditor cannot independently verify every fact and must reasonably rely on management's representations.
4. Post-mortem in nature — a statutory audit is typically conducted after the accounting year has closed, so it cannot prevent a loss that has already happened, only report on it.
5. Cost and time — auditing adds a genuine cost and time burden, which can be significant for a small business. …