Professional auditors provide important insights on various aspects of business operations for management, external stakeholders (such as regulators) or internal audit organizations. Audits are a critical source of information for making informed decisions on business activities.
Auditing provides important insights on various aspects of business operations for management, external stakeholders (such as regulators) or internal audit organizations. Audits are a critical source of information for making informed decisions on business activities.
Auditing is an important task that organizations do to ensure they are following government and international guidelines. Fintalent’s Auditing Consultants observe that Audits are often conducted by people in high positions, close to the organization’s top management.
The audit process has many benefits for the organization including:
- Confidence in the Management of Organizations
- Compliance with Legal Requirements
- Improved Financial Performance
- Effective Use of Resources
- Enhancement of Organizational Performance and Effectiveness
Auditing is the exercise of examining and evaluating financial records, reports, activities, or any other form of organization data. Auditors are tasked with valuing assets and liabilities to determine if a company has acted in accordance with its own stated accounting policies. Auditing is an activity that provides critical feedback for management and shareholders to ensure that a company’s financial statements comply with regulatory requirements and legal obligations.
An Audit is the examination of a company’s financial records, documentary evidence and other relevant data related to its financial transactions. The objective is to confirm that the company has not cheated by having done things which are not proper – what are called ‘misstatements’ in accounting terms. Auditors help a company comply with its legal obligations, ensure that the company is acting in accordance with its own accounting policies and detect any potential fraud or improperly conducting business.
Auditing is the examination of a company’s financial records, documentary evidence and other relevant data related to its financial transactions. The objective is to confirm that the company has not cheated by having done things which are not proper – what are called ‘misstatements’ in accounting terms . Auditing provides important insights on various aspects of business operations for management, external stakeholders (such as regulators) or internal audit organizations.
Typically, the judgment of the auditor will be used to determine whether a company should be allowed to continue doing business under the auditor’s oversight. Auditors carry out a number of tasks:
- The audit team will go through all the financial statements to look for errors, including double-counting expenses, errors in entry into accounts (i.e., people counting money that they do not have), and hidden assets (such as cash or securities in bank vaults) that are not included in financial statements.
- Auditors will determine whether the organization has the financial resources to comply with laws and regulations that apply.
- They will examine the operations and control of the company, including operational procedures, internal controls and training programs.
- The auditor examines whether company policy is in place for making critical decisions about expenses, investments, personnel, and other activities.
- The auditor’s role is to tell the management team how it can improve its practices and improve efficiency without hurting its performance in any way. This will be done through a written report that goes to management with recommendations as well as some level of assurance to stakeholders that these recommendations have been followed by management.
- Finally, the auditor’s ultimate task is to figure whether the company has been able to use its assets properly and whether it is financially stable.
Auditing fulfills an important role in modern business by providing assurance to investors and creditors that the reporting of financial accounts is reliable and follows all legal requirements. Audits are also used in order to evaluate the performance of employees or managers, especially when compensation is based on company performance. The audit report typically expresses opinions on such matters as whether liabilities were properly recorded, costs were incurred for allowable purposes, expenses were in accordance with regulations and policies and contract terms were met.
Auditing is governed by professional bodies that use the standards of the International Auditing and Assurance Standards Board (IAASB), International Federation of Accountants (IFAC), Institute of Chartered Accountants in England and Wales (ICAEW) and the United Kingdom Association of Chartered Certified Public Accountants (UK ACCA).
The National Association of Certified Public Accountants (NAPAP) also has an auditing standard developed by its auditing standards committee.
Auditors are required to give advice only about what is contained in the financial statements, not about other matters that may be relevant. Those other matters may be relevant in a subsequent legal dispute, but they are beyond the scope of the audit. However, unless it is due to fraud, auditors are forbidden from disclosing information about other issues that they discovered in the course of their audit.
Auditing forms an important part of financial regulation and the role is performed by most countries’ government departments and agencies for their regulatory bodies. The purpose is to ensure that companies and individuals comply with the law. In some cases, people who carry out this activity are called ‘auditors’, while in others no formal title is used.
The auditor’s role is not to ensure that the company’s books are balanced, but only to ensure that assets are recorded properly and that their value has been maintained. This may be an issue for small companies that have little or no equity in their business and so will require the auditor to sign off on their financial statements.
In other cases, if a company has an overdraft facility from a bank or other lender, this will be reported in its accounts as an asset. This is assessed by auditors’ valuers who are trained in such matters, but does not require an audit.
The audit is limited to the financial statements, but it includes examining evidence to support the amounts and disclosures in them. In most cases, this will require the auditors to obtain supporting evidence from other people involved in the business or from documents such as vendor invoices, supplier records, contracts and so on.
In some cases, auditors may extend their examination to include non-financial matters if this is required by an authority that regulates them. For example, auditors of banks are required by law to also include a review of credit risk exposure and internal groupings of risk exposures.
Forms of Audit
In some cases, an auditor will not conduct the audit in the way described above, but will simply examine accounting records to check that they have been prepared in accordance with accounting standards. In this case, the auditor will give an “unqualified report” on the financial statements, meaning that there is no statement made about potential issues with them.
Audits may be used as part of other activities. For example, audits may be used to prepare a company’s annual report or other similar document. Audits are also often used to prepare a management report and similar documents.
Typically, an audit would be carried out by one of two people: the audit committee (sitting alongside the board) or the chairperson of a company. The roles are usually separated but they may sometimes be combined in certain circumstances. For a government department, its minister may carry out an audit. In some cases, auditors may perform both roles. In other cases, only one person will do so by delegating responsibility for specific tasks to staff auditor(s).
A report of an audit is often called the “Audit Report”. It will normally contain a brief statement about how the review was carried out and some general comments on the results of that review. The report will also contain formal (and sometimes legal) audit findings and advice to management, who are expected to comply with those findings, or face sanctions.
In the United States, state and federal agencies (i.e., the Securities Exchange Commission in the private sector) prescribe audit standards that private-sector companies must meet in order to gain or maintain a listing on either the NYSE or NASDAQ stock exchanges. This requirement applies to all publically traded companies, including registered investment advisors (RIA firms), security brokers, and market makers. The specific criteria vary by market. For example, NASDAQ has adopted a complicated set of standards that are more detailed than most companies have time to prepare an annual audit report to meet.
In the United Kingdom, statutory auditors are mandated for certain publicly listed companies by the Listing Authority. The first statutory audit in this country was required in 1765 by the Royal Stamp Act 1765, which required all publicly traded companies to have a company secretary and an auditor. Later, the Stock Exchange Act 1892 made it a requirement of listing to have a full-time statutory auditor, who would be appointed annually by Companies House.