Accounting is a necessity, while auditing is a luxury for a enterprise. Explain.

Every businessman maintains accounts but he invariably thinks that auditing is a luxury. Auditing of accounts is a sheer wastage of time and money. Let us have a glance on this thinking.

Accounting is a Necessity.

A businessman considers accounting as a necessity and expenditure on accounting is justified on the following grounds L.

A businessman cannot remember all the transactions for a long time unless they are recorded.

Businessman wants to know the correct trading results and his financial position which is not possible unless proper records of all transactions are kept and financial statement (P&L account and Balance Sheet) are prepared.

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Management of an entity takes several important decisions which are based
on the financial statements and other records.

Written accounting records are a source of evidence in a court of law.

Written records may facilitate a comparative study of his financial position between two periods and also between various firms.

Tax liability is calculated on the profit/loss revealed by the financial statement.

Valuation of goodwill, value of business, at the time of amalgamation etc. can be ascertained on the basis of written records.

Success and failure of the business can be measured on the basis of financial records.

Financial institution and other creditors frame their opinion about the solvency of the business before granting loan etc. on the basis of accounts.

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Auditing is a luxury.

From the viewpoint of an ordinary businessman, auditing may be said to be a luxury on the basis of the following arguments:

  1. Expenses and remuneration paid for audit work is wastage of funds and profit is reduced thereby.
  2. During audit procedure, normal routine work is disrupted and there is wastage of time.
  3. With audit of accounts, there is no surety that all errors and frauds are detected.
  4. It seems burdensome for a businessman who has to observe a number of formalities.

Thus, audit may be a luxury for a small businessman. But for a large organization where the owner’s participate in the conduct of business, audit becomes a necessity due to the following reasons:

  • Without auditing, financial statement prepared by accountant is not reliable and would be of little relevance to the users of such report.
  • Public funds invested in Private sector need proper control of the Government to check their improper use.
  • Audited accounting statements are accepted by financial institutions, tax-authorities and other institutions.

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Various social groups, interested in the affairs of a business entity need to be assured that the business entity is discharging its function well in the interest of the society.

Shareholders who are widely dispersed get assurance that the figures shown in the profit and loss and Balance Sheet are fair representation of financial position of a business.

Thus, to conclude, we may say that it is normal to say that audit is luxury. Accounting and auditing both are necessity to a large business organization.

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