It is not just compulsory but also mandatory for every registered business to keep accounting records. Failure to do so attracts a fine. And such fines can erode the business profit. Aside from keeping accounting records, audit or auditing of the accounting books is also important. In this article, the definition of these terms will be explained along with key points to note.
Definitions of Audit and Auditing
The terms audit and auditing has the same meaning. However, auditing is seen as a continuous act on the part of the auditor.
Audit can be defined as the independent examination and evaluation of an entity accounting records and financial statements in order to give an opinion in respect to the true and fair view of the entity in question.
Also, audit or auditing is defined as an objective examination of the financial statements of an entity to ascertain if it complies with generally acceptable accounting principles.
Audit is an act. Although, audit follows a process, it is mostly seen as an act. The auditor (a person or group of individuals that carries out the audit) takes certain actions to ensure that the entity complies with policies, principles and practices guiding the business and the accounting profession.
Auditing is a process. In a sense, audit follows a process. In many firms, audits start by examining source documents. And ends with examining the financial statements. In other organisations, audits may begin with the financial statement and work back to the source documents.
An audit must be independent. For an audit to be credible, the auditor must be independent from the business management and Board of Directors. If the independence of the auditor cannot be ascertained it is likely that the audit may have been influenced by the company’s management.
Objectivity of the audit. This relates to independence. It is when the auditor is independent that it can give an objective opinion as opposed to a subjective one. At the end of the audit, the auditor is expected to express his or her opinion. If such an opinion is unqualified, it is said that the financial statements can be relied on by users. However, a qualified report or an audit report with a disclaimer will affect not just the credibility of the financial statement but also the entity.
It is necessary for every registered business to engage an external auditor or a consultant auditing (in the case of small businesses) for external and internal audit respectively. The Company Act makes it mandatory for every business registered under the Corporate Affairs Commission (CAC) to audit their financial statements.
An audit reveals if the entity’s staff complies with its policies. This is true with internal audits. A strong internal audit means strong internal control. This helps reduce risks within the entity.
A better internal control will reduce the job of an external auditor. Moreover, external audit makes sure that the company complies with regulations and generally accepted accounting principles (GAAP). The regulations include the Company Act, Bank and other Financial Institutions Act (BOFIA), Insurance Act, and the Financial Reporting Council of Nigeria (FRCN).
More to it, the GAAP is the Conceptual Framework for Financial Reporting, International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and other local applicable standards. GAAP is complied with when preparing and presenting financial statements.
Audit is not a means to discover fraud within a business entity. Although, it is likely that during the audit process fraud may be detected. The primary objective of auditing is to give an opinion as to the true and fair view of the financial statements of the company.
To wrap it up, audit or auditing is important to business. Big companies do not fail to engage audit firms to carry out these tasks. Auditing ensures the examination and evaluation of financial statements and records of the entity concerned. Finally, when an audit is done correctly, it gives credibility to the company and its financial reports.