Auditing is means evaluating the effectiveness of a company’s internal controls. Maintaining an effective system of internal controls is very important when it comes to achieving a company’s business objectives, obtaining reliable financial reporting on its operations, preventing fraud and misappropriation of its assets, and minimizing its cost of capital. Both internal and independent auditors contribute to a company’s audit system is important by different ways.
There are some important reasons why every company needs an audit system: –
1. An Audit System Allows to Pursuit the Business Objectives
Having an effective audit system is crucial for a company because it enables a company to pursue and attain various corporate objectives. Business processes require various forms of internal control to facilitate supervision and monitoring, prevent and detect irregular transactions, measure ongoing performance, maintain adequate business records and to boost the overall operational productivity. Internal auditors would review the design of the internal control and informally propose improvement and to enable further investigation by management if it is warranted under the circumstances.
2. Implementing an Audit System can Prevent and Detect Fraud
Internal audit serves an important role for company in fraud prevention. Recurring analysis of a company’s operations and maintaining rigorous systems of internal controls can prevent and detect various kinds of fraud and other accounting irregularities. Audit professionals assist in the design and modification of internal control systems for the purpose of which includes, among other things and fraud prevention. An important part of prevention can be deterrence, and if a company is known to have an active and diligent audit system in place, by reputation alone it may prevent an employee or vendor from attempting a scheme to defraud the company.
3. An Audit System Can Reduce the Cost of Capital
The cost of capital is crucial for every company, regardless of the size of the business company. The cost of capital largely consists of the risk associated with an investment. If an investment has more risk, the investor will need a higher rate of return to invest. In this way, implementing a strong audit system can lower various forms of risk in an enterprise, including its information risk (such as the risk of material misstatement in financial reporting), the risk of fraud and misappropriation of assets, as well as the risk of sub-optimal management because of the insufficient information on its operations.
4. An Audit System Can Assess the Risk of Misstatement
Auditors assess the risk of material misstatement in a company’s financial reports. Without a systematic internal control or an audit system, a company would not be able to create reliable financial reports for internal or external purposes. Hence, it would not be able to determine how to allocate its resources and would be unable to know which of its segments or product lines are profitable and which are not.
Furthermore, an audit system could not manage its affairs, as it would not have the ability to tell the status of its assets and liabilities and would be rendered undependable in the marketplace due to its inability to consistently produce its goods and services in a reliable method. An audit system is crucial in preventing debilitating misstatements in the company’s records and reports accordingly.
Overall, there are a number of benefits that come with implementing an audit system in one’s business. If you are interested or considering investing an audit system for your company, you should consider contacting L & Co PLT as they are offering a range of auditing system services for their clients.