Why is an external audit necessary for companies registered under the Companies Act ?

The main reason why an external audit is carried out for companies registered under the Company‘s Act is to fulfill statutory requirements. The Company‘s Act requires that every limited company shall within nine months after the end of its financial period hold a general meeting where audited financial statements shall be laid out before its members.
Other reasons why an audit may be carried out (advantages of an audit notnecessarily for limited companies) include: –
1. To provide assurance and credibility to the accounts in the audit report which is crucial to all parties who have an interest in the company.
2. Third parties who do not take an active role in the running of the business are protected by the audit. The auditor issues a report as to whether the financial statements show a true and fair view.
3. The audit could assist in the detection and prevention of errors and frauds in the entity.
4. An audit will keep the client‘s accountants vigilant and up-to-date. This ensures that complete and accurate records are maintained.
5. Audited accounts by independent auditors minimize chances of disputes among partners in a business e.g. in profit and asset sharing
6. In case a new partner wants to join, audited accounts will serve as a basis for such admission to determine how much such a partner has to contribute to existing capital.
7. In case of a retiring or dead partner the audited accounts will serve as a basis of determining what is due to the beneficiaries of the deceased.
8. The audited accounts are used as a basis for borrowing finance from banks and other financial institutions as this will highlight the performance (financial) of the company.
9. Audited accounts are acceptable as a basis of ascertaining tax liability and these are usually accepted by the Income Tax Department for the settlement of income tax for the year.

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