IGNOU SOLVED ASSIGNMENTS

"ACCOUNTING IS A NECESSITY WHILE AUDITING IS A LUXURY"

Accounting is basically a service function that embraces the formal design, installation, and operation of a system of accounts in order that business transactions maybe properly recorded and reported. It is usually called the language of business, and an "aid to management".  It is therefore clear that Accounting is a NECESSITY in all kinds of business especially big companies, whether a single owner or a corporation. Even a family, father, mother and older children needs accounting to check their incomes and expenses. 

There are various users of financial statements who are mainly interested to safeguard their interests. Various parties who are interested in financial statements are 1. Management, 2. Creditors, actual and prospective, 3. Investors, actual and prospective, 4. Stockholders, 5. Employees’, unions, 6. Regulatory and taxing authorities, etc. But financial statements are suffers from various limitations due to which these statements are not very much useful for its users. Therefore auditing of financial statements is necessary to verify the accuracy and correctness of the books of accounts.

The main purpose of Auditing or object is to find the opinion of an auditor about the correctness and reliability of accounts and the financial position of the business concern. For this purpose auditor has to check the arithmetical accuracy of the books of account and to find out that whether the transactions entered in the books of account are correct or incorrect. This is done by various methods like inspecting comparing and checking. So all that work that is done by the auditor ensures him that figures are facts.

In the words of Spicier and Pegler ,“An audit is such an examination of the books, accounts and vouchers of a business as it enable the auditor to satisfy that the Balance Sheets is properly drawn up, so as to give a true and fair view of the state of the affairs of the business and whether the profit and loss accounts gives a true and fair view of the profit or loss for the financial period according to the best of his information and explanations given to him and as shown by the books, and if not, in what respects he is not satisfied”. 

In the words of Montgomery, “Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and report upon the facts regarding its financial operation and the result thereof”. 

In the words of Lawrence R. Dicksee,”An audit is an examination of records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some circumstances it may be necessary to ascertain whether the transactions are supported by authority. 

In the words A.W. Hanson,”An audit is an examination of such records to establish their reliability and the reliability of statement drawn from them”. 

In the words of R.B. Bose,”Audit may be said to the verification of the accuracy and correctness of the books of accounts by independent person qualified for the job and not in any way connected with the preparation of such accounts”. 

From the above definitions it is clear that the auditor’s basic duty is to examine the accounts and its arithmetical accuracy. He must ensure than the financial statements depicts true and fair view of the state of affairs of the business. Since, Auditing is a full and critical examination of the books of accounts to find out their accuracy.

Objectives of Auditing

The main objective of auditing is to form an independent judgment and opinion about the reliability of accounting records. The main purpose of auditing is the verification of financial statements, especially Balance Sheet and Profit and Loss account in the light of certain accounting principles to establish or not it is a true statement and correctly drawn up. The subsidiary objects of audit are:-

Ø  Detection of errors.

Ø  Detection of frauds.

Ø  Prevention of frauds and errors.

Advantages of Auditing

Auditing is not legally compulsory in all type of business.  Still in those businesses where it is not compulsory, accounts are audited.  This is because auditing of accounts gives certain advantages, which are as below:

Ø  It ensures the correctness of accounts.

Ø  It helps in detection of errors and frauds.

Ø  Audited accounts are more reliable and help the organization to grow.

Ø  Loans and credits can be easily obtained on the basis of audited accounts.

Ø  A business whose accounts are audited enjoys a better reputation

Ø  Audited accounts helps in the settlement of insurance claims.

Ø  Income tax authorities accept audited accounts for the purpose of taxation.

Disadvantages of Auditing

Some businessmen think that auditing is wastage of time and money.  It is merely a luxury.  Auditing has lots of advantages, but the following arguments go against auditing:

Ø  Remuneration charged by the auditor is wastage of funds.

Ø  Formalities attached to auditing create difficulties for an average businessman.

Ø  It is not a foolproof method of detecting errors and frauds.

Ø  Audit obstructs the routine work of accounts.

Auditing is actually a part of Accounting. It is a specialized area that deals with the examination and review of the accounting records mainly, to find out the effectiveness of the accounting internal control systems and procedures and also, management policies and practices. In short, not only finding errors and fraud, but to effectively assist management to avoid or reduce such occurrences. Based on above information’s, we can therefore conclude that Accounting, with Auditing systems is necessary in business and guides management in the effective implementation of its policies and procedures for the success of the company.