In basic terms, to Audit means to review or to verify. The advent of the Industrial revolution moved business ownership from small business (sole proprietorship) to large scale production, giving rise to the need for audits.
The growth of business enterprises that accompanied the revolution resulted in the accounting system and the instigation of the appointment of individuals (managers) to manage businesses for its owners. Then, as businesses failed and collapsed, many business owners and governments began to think of ways of verifying the viability of businesses. This gave rise to the appointment of independent bodies to review business and their financial records. These independent bodies were to express opinions on financial statements prepared by those that managed the businesses on behalf of the owners. This action became the ‘audit’ and has come to be referred to as “Audit” to this day.
In recent times, there have been some misconceptions about audit and the role of the external auditor. Some popular misconceptions are highlighted below:
That an audit report should be 100% accurate and prevent business from financial loss or collapse
Audits are not a guarantee against all things that go wrong in the operations of an entity. According to the International Standards on Auditing (ISA), the auditor’s opinion does not assure the future viability of the entity or the efficiency or effectiveness with which a management has conducted the affairs of the entity.
That audits are unnecessary
This may seem true if you’re the sole owner/manager of a business. However, you need to consider other stakeholders, including lenders, customers and the community and what they’ll see of the financial statements you provide. Although an audit may not be mandatory for your business but recent demands on businesses to be transparent and provide more information regarding taxes, financial records and wages of their employees are not out of place. Some advantages of external audit, include:
- It’s perceived as a proactive strategy for improvement.
- The capability of its findings and recommendations, revealing management inefficiencies and areas to be improved on by the business.
- Ability to highlight risk and identify issues that could be damaging to business.
- Instilling confidence in third parties with their findings on business financials and reduction of cost of doing business.
- Encouragement of transparency in corporate organisations and infusion of such belief in its shareholders.
Auditors are responsible for preparing financial statements
The wrong impression also that auditors are responsible for preparing financial statements and are liable for them is absolutely wrong. The primary role and objective of an auditor is expressing an opinion on the financial statements prepared by management, who are expected to express in their financial statements. Although external auditors may have suggestions or best practices for content matter and provide comments on how to present certain disclosures or even draft portions of the financial statements based on obtained information from management, the financial statements are the management’s responsibility
Audits are extremely useful and important exercises that are beneficial to all the stakeholders of the businesses – from the business owners to the employees and the government and should not be avoided but embraced with the aid of trusted and qualified accountants.