What is Auditing? | Definition, History, Goals and Working
Auditing, an essential component of the accounting practice is a process that entails examining and inspecting the activities, records and operations of an organisation to ascertain compliance with the established or standard organisational framework and regulatory requirements.
Despite being a staple of accounting, it differs insofar as the latter is concerned with generating and maintaining financial reports of an organisation or business.
In contrast to that, Auditing is concerned with verifying, checking and evaluating the accuracy of the financial statements generated through accounting.
Origin and Evolution of Auditing
Auditing as a process or practice is as old as Accounting. Both of them trace their origin in the ancient civilisations of Mesopotamia, Egypt, Greece, Rome and India.
While ancient texts like the Vedas provide a brief reference to the task of Accounting and Auditing, Kautilya’s Arthashastra presents a detailed description of Accounting and Auditing.
It must be noted that the term ‘Audit’ has been derived from the Latin word ‘Audire’ meaning to hear or listen. Earlier, the auditors used to listen to the accountant’s reading of the accounts to check their accuracy and prevent frauds and errors.
However, Auditing started assuming its present form in the eighteenth century when the Industrial Revolution gave rise to joint-stock companies characterised by the separation of ownership and management.
With the stakeholders now being the real owners of the company, Auditing increasingly became an essential instrument for checking the administrative activities of the company managers.
Accordingly, the goals of Auditing shifted from mere detection of frauds and errors to verification of the accounts being fair and trustworthy.
To ensure that the financial efforts of an organisation are fairly portrayed, the International Accounting Standards Committee have set out specific standard auditing and accounting practices to guide the day to day activities of Auditors and Accountants, respectively.
Besides that, the advent of computers has further enhanced accounting and auditing systems.
Goals of Auditing
There are mainly two goals of Auditing.
- Exposure and thwarting of frauds, and
- Disclosure and thwarting of errors.
How is Auditing done?
Being a rigorous process, Auditing helps in uncovering the real financial status of an organisation. However, the scope of an audit differs according to the organisation’s size and needs. Accordingly, the following steps are followed by the auditor during an Auditing process.
Advantages of Auditing
Auditing provides several benefits, not only to the concerned organisation but also to the investing stakeholders. The following table will enunciate the advantages of auditing more clearly.
| From the organisation’s Perspective | From the stakeholders’ Perspective | Other Benefits |
| 1. Exposure of frauds and errors. | 1. Protection of shares and interests. | 1. Estimation of current financial position. |
| 2. Getting loans from banks. | 2. Accurate estimation of investments. | 2. Quicker settlement of demands. |
| 3. Accurate valuation of liabilities and assets. | 3. Ascertaining the accountability of the management. | 3. Using audit reports as evidence in courts. |
| 4. Building and retaining good reputation. | 4. Ensuring adequate security. | 4. Ease in filing tax returns. |
| 5. Gaining acceptance from the government. | ||
| 6. Getting recommendations on potential reforms. | ||
| 7. Updation of accounts. |
Disadvantages of Auditing
Despite its several advantages, Auditing has some inherent limitations.
References
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