What is Auditing, Types & its Importance – Bank Notes


What is auditing?

Auditing is the process of checking financial transactions, related documents, ledger, financial statement, and documents by employee of the company internally or chartered accountant (CA), and register auditor (RA) externally for finding out the true and fair condition, evaluate documents, prepare report along with own opinion and submit it to the concern authorities.

Following diagram shown the auditing process

auditing process

Auditing refers to the process of detailed examination of the company’s account to assess accuracy. Auditing is concerned with the verification of accounting data and with determining the accuracy and reliability of accounting statements and reports.

Accounting is carried out periodically by the independent qualified auditor with the help of relevant records, documents, information.

Principles of Auditing

There are 5 principles of auditing. They are

  • Regularity
  • Efficiency
  • Effectiveness
  • Economic
  • Relevancy

Types of auditing

organizational structure and auditor position

There are two types of auditing process. They are

  1. Internal auditing
  2. External auditing

Internal Auditing

Internal auditing is done by employees of the organization from audit department. Internal auditing is done by population/census method. It is carried out to correct errors and frauds immediately. The report of the internal audit department will be submitted to board of director. Major principles follows in internal auditing are:

  • Regularity
  • Efficiency
  • Economy

External Auditing

External auditing is carried out by the chartered accountants (CA) or register auditor (RA) in order to find out any errors and fraud and prepare report. External auditing is prepared with sampling method. The final report of the external auditing is submitted to AGM. External auditing follow all the 5 principles of auditing. They are

  • Regularity
  • Efficiency
  • Economy
  • Effectiveness
  • Relevancy

External auditing is also called final auditing.

Importance of Auditing

Auditing is one of the major activities carried out by every organization. It is the compulsory activity imposed by the government of.every country. Auditing has majorly following importance.

  1. It corrects frauds and errors immediately.
  2. It protects assets and cash.
  3. It minimizes the organizational risks.
  4. It mobilizes the organizational resource economically. (economic)
  5. It follows the rules and regulations imposed by the government. (regularity)
  6. It operated the organizational resources in most productive way. (efficiency)
  7. It helps to achieve the goals and objective of the organization. (effeteness)
  8. It minimizes the irrelevant financial activities. (relevancy)
  9. Promotes transparency, internal control, corporate governance.
  10. Maintains financial discipline.
  11. It creates culture of accountability and responsibility.

Other Posts

  1. Format of Balance Sheet (Major Heading as Per NRB Directive)
  2. Format of PL Account (Major Headings as per NRB Directive)
  3. Accounting Concept, Principles of Accounting
  4. Double entry system concept 
  5. BAFIA 2073 Major Highlights


Comments Box