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Audit: Definition, Importance And Objectives

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Abstract

We will talk about the definition of Audit and then will continue with it’s importance and objectives and then go to main research title which is “The Different Types Of Audit” and speak about everyone of them in details. the objectives of the audit can be categorized into (primary objectives, and subsidiary objectives). And there are many importance of auditing. And what is the goal of all this types.

Introduction

The term audit usually refers to a financial statement audit. A financial audit is an objective examination and evaluation of the financial statements of an organization to make sure that the financial records are a fair and accurate representation of the transactions they claim to represent. The audit can be conducted internally by employees of the organization or externally by an outside Certified Public Accountant (CPA) firm.

Body

Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud. As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls. Standards for external audits performed in the United States, called the generally accepted auditing standards (GAAS), are set out by Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA). Additional rules for the audits of publicly traded companies are made by the Public Company Accounting Oversight Board (PCAOB), which was established as a result of SOX in 2002. A separate set of international standards, called the International Standards on Auditing (ISA), were set up by the International Auditing and Assurance Standards Board (IAASB). Auditing are one of the most important department in any company or banks etc. (1)

*Importance of audit: An audit is important as it provides credibility to a set of financial statements and gives the shareholders confidence that the accounts are true and fair. It can also help to improve a company’s internal controls and systems (2)

*The objective of an audit is to express an opinion on financial statements, to give the opinion about the financial statements, the auditor examines the financial statements to satisfy himself about the truth and fairness of the financial position and operating results of the enterprise.

Types of Audits

External Audits

Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, Auditors opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited. External auditors follow a set of standards different from that of the company or organization hiring them to do the work. The biggest difference between an internal and external audit is the concept of independence of the external auditor.

Internal Audits

Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards. These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations.The results of the internal audit are used to make managerial changes and improvements to internal controls.

IRS tax audit

IRS tax audits are used to assess the accuracy of your company’s filed tax returns. Auditors look for discrepancies in your business’s tax liabilities to make sure your company did not overpay or underpay taxes. And, tax auditors review possible errors on your small business tax return. Auditors usually conduct IRS audits randomly. IRS audits can be conducted via mail or through in-person interviews.

Financial audit A financial audit is one of the most common types of audit. Most types of financial audits are external. During a financial audit, the auditor analyzes the fairness and accuracy of a business’s financial statements.

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Auditors review transactions, procedures, and balances to conduct a financial audit.

After the audit, the third party usually releases an audit opinion about your business to lenders, creditors, and investors. (3)

Operational audit

This is a detailed analysis of the goals, planning processes, and outcomes of business processes. The review can be conducted internally or by an external source. The intended result is an evaluation of the operations, most likely with recommendations for improvement. (3)

Compliance Audit

In many countries, all companies are required to perform specific audits as opposed to legal audits to comply with the requirements of specific laws and regulations. (4)

Environmental & Social

Environmental and social audits include an assessment of the environmental and social impacts of the organization resulting from economic activities. Things are increasing to environmental scrutiny due to the rise in the number of companies that report environmental and sustainability reports in their annual report describing the impact of their business activities on the environment and society and the initiatives they take to reduce any other negative consequences.

Environmental auditing has provided a means to provide confirmation of the accuracy of the data and claims presented in these reports. If a company detects, for example, the level of carbon dioxide emissions during a period in the sustainability report, the environmental auditor will verify the validity by collecting the relevant audit evidence.

High- level Review of Procedures

High-level auditing is a special type of audit that measures general compliance with the company’s main policies and sound business practices aimed at reviewing and providing the auditor with an understanding of the process and determining the nature of detailed tests that may be required in certain areas. (6)

Despite the different types of accounting audit, all types facilitate and work to achieve the goal of the organization.

Conclusion

Audit plays a valuable role for companies and charitable organizations to maintain integrity and specific goals. And it protects organization from financial misstatements, presenting a reliable health picture of the organization to the markets. The types of audit performed on a particular auditable unit can be any combination of the types described below. The type of audit to be performed is determined in the initial planning process. Audit had different types and that helps to complete auditing quickly and effectively.

Reference

  1. Tuovila, Alicia. www.investopedia.com. [Online] 14 July 2019. https://www.investopedia.com/terms/a/audit.asp.
  2. Morey, Chris. www.plusaccounting.co.uk. [Online] https://www.plusaccounting.co.uk/knowledge/blog/why-are-audits-important/.
  3. audit, Finance gateway internal. [Online] https://finance.columbia.edu/content/types-audits.
  4. Bragg, Steven. www.accountingtools.com. [Online] 7 May 2018. https://www.accountingtools.com/articles/types-of-audits.html.
  5. Note, IEDU. www.iedunote.com. [Online] https://www.iedunote.com/audit-types.
  6. Services, SW Office of Audit and Consulting. [Online] https://www.alaska.edu/audit/types-of-audits/.

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Audit: Definition, Importance And Objectives. (2022, February 17). Edubirdie. Retrieved December 2, 2022, from https://edubirdie.com/examples/audit-definition-importance-and-objectives/
“Audit: Definition, Importance And Objectives.” Edubirdie, 17 Feb. 2022, edubirdie.com/examples/audit-definition-importance-and-objectives/
Audit: Definition, Importance And Objectives. [online]. Available at: <https://edubirdie.com/examples/audit-definition-importance-and-objectives/> [Accessed 2 Dec. 2022].
Audit: Definition, Importance And Objectives [Internet]. Edubirdie. 2022 Feb 17 [cited 2022 Dec 2]. Available from: https://edubirdie.com/examples/audit-definition-importance-and-objectives/
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