January 29, 2022

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Meaning of the Objectives of an Audit and Key Explanations

Meaning of the Objectives of an Audit and Key Explanations
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Audit comes in as a way of verifying if the entries and financial statements of an entity shows truthfully and without bias the financial performance and position of the entity as at a particular time. This is one of the core areas of audit and boosts its objectives. Here, the objectives of such an audit is explained.

Main Objective of an Audit

The primary objective of an Audit is for an auditor to give an opinion on if the financial statements of an entity are prepared in accordance with applicable financial framework.

Read: Meaning of Audit (Auditing) and Key Explanations

Key Explanations

An Opinion. After a complete examination of the entity’s books and how the financial statements are prepared, the auditor will give an independent opinion. Generally, the opinion given is unqualified. Unqualified opinion on a financial statement means that investors and other stakeholders can rely on the reports.

The auditor can also give a qualified report or a disclaimer if certain conditions have occurred that affects the reliability of the financial reports of the entity.

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Financial statements. It includes, statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flow. These statements are expected to comply with local laws and standards applicable in the country.

Meaning of the Objectives of an Audit and Key Explanations

Applicable financial frameworks. These are local laws and standards that are applicable in a country in the preparation and presentation of those statements. The objective of an Audit is to examine the financial reports prepared by the entity to see if it comply with the laws and standards.

In Nigeria, the financial framework depends on the industry the entity emanated. But all organisations must comply with laid down laws on the Companies and Allied Matters Act, 2020 (CAMA). And the International Financial Reporting Standards (IFRS). Banks, in addition to the above, must comply with Banks and Other Financial Institutions Acts (BOFIA). Insurance companies must comply with BOFIA and the Insurance Act.

Other Objectives of an Audit

There are secondary objectives of an Audit, these are explained below.

To examine the books of accounts. The auditor examines the books of account by carrying out an audit trail. This is done by checking transactions from source documents to trial balance.

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Compliance to company policies. Another objective of an auditor is to ensure that the entity staff comply with policies in the organisation. When policies are not followed by employees there will be no rule and it will be difficult to hold employees responsible for their actions and inactions.

Detecting and preventing fraud. It is not the duty of the auditor to detect fraud. However, during the cause of its job it is possible that he or she may detect a fraud manipulated by a staff member. Also, it is the duty of the auditor to set down procedures that are followed by the employees. This procedures can make it difficult for fraud to occur within the entity.

Ensuring strong internal control. It is the objective of the auditor to ensure that the internal control processes are strong. If this is so, it will make the job of the external auditor easier.

Compliance with covenants. It is important that the company comply with covenants it is committed to. Covenants arise when a company takes loans from banks or international financial institutions.

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Read: Concept of Accountability in Audit. What you need to know

A covenant might say that the company must keep collateral in good shape. Or might be that the company should maintain 20 percent of cash in the books of account. It is the responsible of the auditor to ensure that these covenants are complied with by the entity. As a risk assessment measure.

Conclusion

To conclude, the objective of audit is to express an opinion with regards to the company’s financial reports whether it complied with applicable financial frameworks. When an entity fails to comply with laid down frameworks the auditor shall give a qualified report or a disclaimer if the company is at verge of winding off.

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