What are the Types of Audits? Purpose & Importance
types of audit

What is an audit?

An audit refers to the autonomous inspection of financial information of any organisation, regardless of whether they’re for-profit or non-profit, their size, or legal form at the time of the audit. In simple words, an audit examines a company’s financial statements or organisation.

Auditing endeavours to guarantee that the books of accounts are appropriately updated and maintained according to legal standards and norms. Auditors think about the propositions before them, acquire evidence, and assess the proposals in their auditing report.

Why are audit reports important?

An audit is significant as it gives believability to a set of financial statements and gives the shareholders certainty that the accounts are valid and reasonable. It can likewise assist with improving a company’s internal controls and systems. Audits are also performed to guarantee that financial statements are set up per the applicable bookkeeping guidelines. The three essential financial statements are:

  1. Income statement
  2. Balance sheet
  3. Cash flow statement

Here are a few reasons highlighting the importance of audits:

  • Auditing helps detect and prevent blunders and frauds. 
  • An audit helps in maintaining business records and verification of the books of accounts. 
  • The independent assessment of an auditor is fundamental for the efficient management of any company. 
  • An audit establishes a moral check on the staff so that they remain ethical and mindful of their actions. This makes the team more dynamic and responsible. 
  • Audits protect the interests of the shareholders in a joint-stock company by guaranteeing them that their accounts are being overseen appropriately and their interests won’t suffer under any conditions. 
  • Audits offer assurance and boost the confidence of stakeholders, including creditors, debenture holders, and banks. 
  • Audited statements guarantee compliance with legal requirements, such as listing the stock exchange requirements. 
  • Auditing reinforces and fortifies internal control and gives ideas important to the internal control framework. 
  • Timely audits enable easier access to loans since it gives a clear picture of a business’s records to the banks.

What are the different types of audits?

There are three types of audits:

1. Internal audits

Internal audits are performed by the employees of a company or association. These audits are not dispersed outside the company. Instead, they are done for the perusal of company management and other internal stakeholders. 

Internal audits aim to improve a company’s inner functionings by allowing managers to identify key areas of improvement and gain more control over company operations. Management professionals can also use internal audits to distinguish flaws or failures inside the company before permitting external auditors to review the financial statements.

2. External audits

Performed by external organisations and outsiders, external audits give an unbiased assessment that internal auditors cannot provide. External financial audits help identify any material misinformation or blunders in a company’s financial statements. 

External audits are significant for permitting different stakeholders to settle on choices encompassing the company being audited unbiasedly. The critical distinction between an external auditor and an internal auditor is that an external auditor is independent and unbiased. It implies that they can give an objective assessment as opposed to an internal auditor, whose freedom might be undermined because of the employer-employee relationship. 

There are some grounded bookkeeping firms that normally conduct external audits for different enterprises. The most notable are the Big Four – Deloitte, KPMG, Ernst and Young (EY), and PricewaterhouseCoopers (PwC).

3. Government audits

Government audits are performed to guarantee that financial statements have been arranged accurately to not distort the company’s taxable income. In India, the Comptroller and Auditor General of India (CAG) performs audits that check the precision of taxpayer’s tax returns and transactions. 

Audit determinations are made to guarantee that organisations are not misrepresenting their taxable income. Misquoting taxable income is viewed as tax fraud. The CAG currently utilises measurable recipes and AI to discover taxpayers at high risk of submitting tax fraud. 

Playing out a government audit may bring forth a conclusion that there is: 

  • No adjustment of the tax return. 
  • A change that is accepted by the taxpayer.
  • A change that isn’t accepted by the taxpayer.
  • On the off chance that a taxpayer winds up not accepting a change, the issue will go through a legal interaction of mediation or appeal.

What are the stages of an audit?

How an audit is conducted differs depending upon the size of the corporation and the complexity of the case. In any case, an audit, as a rule, has four primary stages: 

  1. The first stage is the Planning Stage. In this stage, a corporation draws in with the auditing firm to set up subtleties, like the degree of commitment, procedures, and targets. 
  1. The second stage is the Internal Controls Stage. In this stage, auditors accumulate financial records and some other relevant data to direct their audits. The data is vital to assess the exactness of financial statements. 
  1. The third stage is the Testing Stage. In this stage, auditors analyse the exactness of the financial statements utilising different tests. It might include verifying transactions, regulating procedures, or mentioning more data. 
  1. The fourth stage is the Reporting Stage. After completing the tests, the auditors set up a report that communicates an assessment of the exactness of the financial statements.

How does myBillBook help with audits? 

1. Simplify your billing operations 

  • You can make bills inclusive and exclusive of GST. All you need is: 
  • GSTIN of both parties.
  • The billing and shipping address of the party.
  • Consecutive invoice numbers.
  • Date of issuance.
  • HSN code of items. 
  • CGST/SGST/IGST on items (as applicable). 
  • Share the invoice instantly over e-mail or WhatsApp. 
  • Create vouchers, payment receipts, sale & purchase orders, sale & purchase returns, delivery challans, etc. You can also send a notification to parties whenever a voucher is created in their name. 

2. Keep track of your business with timely business reports like: 

● Sales summary 

● Profit and loss reports 

● Party statements 

● Stock summary 

● GSTR-1 (Sales) [paid feature] 

● GSTR-2 (Purchase) [paid feature] 

GSTR-3B [paid feature]

3. Keep track of accounts payable and accounts receivable 

● myBillBook automatically sends out payment reminders and collects payments with a single click. 

● It also notifies you of any overdue payments you need to make.

Categories: Finance
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