Why are Audits Important?

 

The Meaning and Definition of Auditing

'Audit' is derived from the Latin word 'audire,' which means 'to hear.' In early days, one had to listen to an accountant read over the accounts for verification. He was known as the auditor.

The purpose of an audit is to determine the reliability and validity of the information. Detecting and preventing future errors/frauds by examining books of accounts, vouchers, and documents is the main function of auditing. It protects the company's financial interests. In developed countries like the USA, expatriate taxation can be a tricky matter. In this article, Certified Public Accountant Jim Liggett CPA, will take a look at the importance of an audit system to a company.

 

The Importance of an Audit System to Companies

The purpose of auditing is to evaluate the effectiveness of internal controls in a company. It is important for companies to maintain an effective internal control system to achieve their business objectives, to obtain reliable financial reports on their operations, to prevent fraud, and to minimize their cost of capital. Internal and independent auditors provide different but equally important contributions to an audit system.

 

Ensures the achievement of business objectives

As Jim Liggett CPA explains, in order to achieve its various corporate objectives, a company needs an effective audit system. To facilitate supervision and monitoring, prevent and detect irregular transactions, measure ongoing performance, maintain appropriate business records, and promote operational productivity, business processes require various forms of internal control. If warranted, internal auditors review the design of internal controls and suggest improvements, and document any material irregularities for further investigation by management.

 

Identify potential misstatements

The auditors evaluate the risk of material misstatements in a company's financial statements. A company cannot produce reliable financial reports internally or externally without a system of internal controls or an audit process. The company would not be able to determine how to allocate its resources or which product lines and segments are profitable.

Moreover, it would be unreliable in the marketplace due to its inability to consistently produce its goods and services in a reliable manner, rendering it incapable of managing its affairs. The importance of an audit system in preventing debilitating misstatements in a company's records cannot be overstated.

 

Prevention and detection of fraud

A company's internal audit plays an important role in preventing fraud. By analyzing a company's operations frequently and maintaining rigorous internal control systems, fraud and other accounting irregularities can be prevented and detected. A professional auditor such as Jim Liggett CPA assists with the design and modification of internal control systems that are aimed at preventing fraud, among other things. The act of deterrence is an important part of prevention, and if a company is known to have an active and diligent audit system in place, it may prevent an employee or vendor from attempting a fraud scheme.

 

Cost of Capital

It is important for every company, no matter its size, to understand its cost of capital. An investment's cost of capital is largely determined by its risk, and if there is more risk in an investment, the return required by the investor will be higher. As well as reducing information risk (the risk of material misstatement of financial reporting), fraud and misappropriation of assets, and suboptimal management due to insufficient information on the company's operations, strong audit systems can reduce a variety of enterprise risks.