Updated Feb 19, 2022

What is an Audit?

What is an Audit?

 

A detailed examination or inspection of financial records and accounting documentation is known as an audit. While the phrase is most usually associated with an organization's financial audit, there are different sorts of audits. We'll learn more about what an audit is, the many sorts of audits, and the advantages of doing one in this post.

 

 

Audit

 

A review of financial statements is usually referred to as an audit. A financial audit is an unbiased examination and evaluation of an organization's financial accounts to guarantee that the financial statements are a true and accurate representation of the transactions they purport to represent.

The audit can be conducted either internally by the organization's personnel or externally by a certified public accounting (CPA) firm.

 

 

Introduction of Audit

 

Almost every business conducts an annual audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Borrowers must approve the findings of an annual external audit as part of their loan covenants. Because of the compelling motives to intentionally misinterpret financial facts to conduct fraud, audits are a legal requirement for individual firms.

 

Types of Audits

 

Financial audits are the most common type of audit, followed by operational and strategic audits, and IT (Information Technology) audits, which are becoming more common. Furthermore, auditing has grown so common and mandatory around the world that companies spend a significant amount of time having their books of accounts and operations examined by both internal and external auditors.

 

Internal Audits

Internal audits are performed by employees and stakeholders within businesses to analyze and assess if the organization is adhering to internal processes, norms, rules, and regulations, as well as to determine whether it conforms to regulatory standards.

 

Internal audits are frequently the first checkpoints for firms to evaluate whether their books of accounts, operational processes, IT infrastructure, and security protocols comply with both internal and external regulatory standards.

 

However, it should be emphasized that, because internal audits are conducted by employees and persons within businesses, the seeming lack of objectivity and thoroughness, as well as a proclivity to "cover things up," external audits are typically regarded as more trustworthy.

 

External Audits

External audits are conducted by independent and third-party agencies and firms that are responsible for examining and evaluating an organization's regulatory compliance.

 

Furthermore, some firms appoint external auditors to "hold a mirror to themselves," in the sense that any shortcomings or anomalies that would otherwise go unnoticed by senior leadership and management throughout the process of performing daily operational business can be discovered.

External audits are also required for legal and compliance reasons, as well as shareholder requirements, which require external audits to be performed annually, quarterly, and half-yearly and presented at Annual General Meetings and Board of Directors meetings.

 

Furthermore, external audits may be required if authorities think "something is wrong" in the companies and order such companies to be reviewed by independent and third-party auditors to determine the "real picture" of those companies' finances and operating information.

 

Financial Audits

Financial audits are the most popular type of audit, as previously said, for a variety of reasons, including the fact that businesses exist to create money, return profits, and generate wealth for their shareholders. This means that investors and other stakeholders need to know if the firms are being operated effectively for their money to be safe and generate the expected returns.

Furthermore, financial audits are the most prevalent types of audits since any anomalies in the books of accounts reveal company mismanagement, in addition, to finance, affecting practically all operational and strategic areas of the company and its enterprises.

 

Furthermore, financial audits are the first line of defense in determining if organizations are telling the truth and whether they are concealing or covering up something that a forensic audit can detect and reveal.

 

Conceptual, Operational, and IT Audits

Other types of audits, such as operational, strategic, and IT audits, have grown in popularity in recent years, owing to the increasing complexity of organizational processes, as well as IT infrastructure, and the fast-paced external marketplace, which necessitates an assessment of whether organizations' internal processes and strategies are aligned with external strategic drivers and imperatives.

 

IT audits are also being sought to review and evaluate the readiness of an organization's IT infrastructure, systems, and processes to accomplish stated goals and objectives as well as withstand IT threats and security breaches. Indeed, as the nature, type, and variety of IT risks have grown, as has the complexity of IT infrastructure, IT audits have become as common as financial and operational audits, because both internal and external stakeholders want to know if the organization's IT infrastructure is up to snuff and capable of the meeting stated aims and objectives.

 

 

Characteristics of an Audit

 

• Auditing is a methodical procedure. Examining an organization's accounts for accuracy is a rational and scientific method. There are procedures and rules to adhere to.
• The audit is always conducted by an independent authority or a group of qualified individuals. They must be self-sufficient to have completely unbiased views and opinions.
• An audit, once again, is the inspection of the company's books of accounts and financial information. As a result, it's simply a review of the organization's final accounting, such as the profit and loss statement and balance sheet at the end of the fiscal year.
• Auditing includes not only the inspection of the books of accounts but also the organization's internal processes and internal control.
• We'll need a variety of sources of information to conduct the audit. Vouchers, paperwork, certificates, questionnaires, and explanations are all examples of this. He has the authority to examine any other documents he deems necessary, such as the Memorandum of Association, Articles of Association, vouchers, minute books, shareholders registry, and so on.
• The auditor must be satisfied with the financial statements' accuracy and authenticity. Only then can he say whether or not the remarks are true and fair.

 

What exactly is the goal of an audit?

 

Organizations rely on audits for a variety of reasons. In general, they can assist a company gets back on track by uncovering financial irregularities or bookkeeping errors. Here are some of the specific advantages of an audit:

 

Compliance

One of the most essential reasons for an audit is to guarantee that the company complies with industry rules and legislative requirements. An audit assures a company's owner or shareholders that it is in compliance with all regulatory responsibilities and is not at risk of costly fines or a tarnished reputation.

 

Enhancement of the system

Because an audit focuses on systems and controls, auditors frequently make recommendations to increase an organization's efficiency.

 

Enhanced budgeting and planning

Because an audit verifies the correctness of financial accounts by scrutinizing income, expenses, assets, and liabilities, the data gained can aid future financial planning, decision-making, and budgeting.

 

Fraud detection and prevention

Workplace fraud can go undiscovered for years, causing irreversible damage to a business. An audit is a useful tool for detecting fraud or fraud opportunities by identifying organizational system flaws and implementing solutions and controls to avoid fraud.

 

Conclusion

 

An effective audit should be conducted using a risk-based strategy that aims to identify and assess specific risks of substantial misstatement in an entity's financial statements, and then address those risks with audit methods that produce sufficient, relevant audit evidence.