Advantages, Disadvantages and Limitations of Audit

It is mandatory for public companies to have statutory financial statements audit.  Many business stakeholders have embraced auditing. So today we will look at the advantages of having financial statements audit and the disadvantages.

1. Advantages of Audit

1.    Audited accounts are readily accepted by Government authorities like Tax authorities and Central banks.

2.     By auditing the accounts Errors and frauds can be detected and rectified in time.

3.    Audited accounts carry greater authority than the accounts which have not been audited.

4.    For accessing finance from financial institutions like Banks, previous years audited accounts are evaluated for determining repayment capability.

5.     Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and errors.

6.     Audited accounts facilitate settlement of claims on the retirement/death of a partner.

7.    In the event of loss of property by fire or on happening of the event insured against, Audited accounts help in the early settlement of claims from the insurance company.

8.     In case of Public Company where ownership is separated from management, auditing of accounts reassure the shareholders that accounts have been properly maintained, funds are utilized for the right purpose and the management have not taken any undue advantage of their position.

9.    To determine the value of the business in the event of purchase or sales of the business, audited account will be the treated as the base for the evaluation.

10. The audit of accounts by a qualified auditor also help the management to understand the financial position of the business and also it will help the management to take decision on various matters like report in internal control system of the organization or setting up of an internal audit department etc.

11. If the accounts have been audited by an independent person, disputes between the management and labor unions on payment of bonus and higher wages can be settled amicably.

12.  In the event of admission of a new partner, audited accounts will facilitate the formation of terms and conditions for joining the new partner. Last 3 years audited accounts will give a general idea about the growth and financial position of the business to the new partner.

2. Disadvantages of Audit

1.    The payment of audit fees brings extra cost burden to the organization.

2.    During an audit the auditor requires the attention several company staff and therefore causes disruption.

 

3. Limitations of Audit

1.    An audit does not assure future viability of the organization audited

2.    An audit does not assure the effectiveness and efficiency of management.

3.    Auditors express opinion and therefore does not give total assurance of the true fair presentation of annual reports.