Is Auditing a Necessity or a Luxury?

Last Updated at: May 19, 2020
Is Auditing a Necessity or a Luxury?
The Companies (Auditor’s Report) Order, 2020 (Caro 2020) will be applicable for audit of financial statements of eligible companies for financial years commencing on and after April 1, 2019, and would be applicable to all those companies on which Caro 2016 was applicable.


The Big Four Accounting and Auditing firms in India are KPMG, PricewaterhouseCoopers (PwC), Ernst & Young(EY) and Deloitte.

The Large audit firms have been engaged in the practice of law which is not permissible in India. More than 90% of the UK audits for large companies had been controlled by such audit firms. Due to the negligence on the part of auditors, scams like Satyam and Enron had taken place, resulting in huge losses to the client companies.

As per the recent reports,

  • On grounds of conflicting interest, the Big 4 firms have been refrained by the Bar Council of Delhi from providing legal services.
  • The Competition and the Market Authority (CMA) had proposed that audit firms will now have to break-up their audit and consultancy services.
  • The Auditors will further have to give a list of lawyers appointed by them and the duties that are divided among themselves. It is need of the hour, that government revamps the audit structure.
  • Suggestions are made for making joint audits mandatory with Non-Big Four Firms for redefining the quality of audit delivered by firms.
  • Audit Reporting and Governance Authority (ARGA) should be appointed as new audit regulator for holding audit committees accountable.
  • Strict actions should be taken against auditors certifying fraud documents or those who are found guilty in performance of duty.

Auditing deal with scrutiny and ratification of accounting records and statements. It is generally undertaken to assess the Profit and Loss statement and evaluate the image depicted by the Balance Sheet of the organization. The purpose of Auditing is conducting an evaluation and test on the authenticity and the accuracy of the information depicted by the books of accounts of an organization.

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Assessing the audit of the Company is important. Here are some of the basic reasons why it is necessary for the Companies to get their accounts audited:

  • Auditors are like the care-takers of the Company. They evaluate the potential losses and systemic weaknesses of the accounting system and provide a direction to the organization on how to improve in the future. In the case of external audits, auditors may present their independent viewpoint, that can help investors make wise decisions.
  • Auditing helps in detecting fraudulent activities and poor accounting processes. Therefore, helps to minimize the risks of errors that may otherwise take place in the books of accounts.
  • Auditing offers assurances to the owners, investors, and shareholders of the Company about the fairness of their books of accounts. A regular audit is necessary to reflect the credibility of the business for all stakeholders – clients, shareholders, creditors and employees. Healthy functioning of the company paves the way for new and prospective business opportunities.
  • Conducting an audit helps to take corrective measures by the company to take necessary steps that can be beneficial for the long-term. Important decisions like the status quo of the current business, profit margin expectation and profit maximization can be tackled. Moreover, the auditor can advise on tax planning for the company on a long-term basis and reduction of unscrupulous activities.

Internal Audit, External Audit, Financial Audit, Forensic Audit, Tax Audit, and Information System Audit are different categories of audit that can be conducted depending upon the size and need of the organization.

Small organizations may feel audit is a sheer wastage of time and funds as it creates disturbances in their routine work. It also involves too many formalities to be complied with.

However, Auditing may be a luxury for small businesses but absolutely necessary for big organizations.

Some people may be all jittery whenever the audit time is around the corner. But audit can be beneficial for entities of all sizes.

  • For large organizations, in which the huge stakes of shareholders are involved, Auditing becomes a necessity.
  • Audited Financial Statements are also required for those companies who want to avail loans from banks and financial institutions.
  • Those businesses who are planning to get themselves listed on the stock exchange will require to get their financial statements audited.
  • Entities that are wanting to enhance their internal control system, auditing is the best option.

Bottom Line

Companies should view Auditing as an opportunity and not a burden:

  • Helps add real value to their businesses
  • Helps their business to bloom
  • Helps businesses promote corporate governance
  • Helps in managing complex compliance requirements
  • Ensures better decision making

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