Audit is a systematic process of examining the financial statements of public companies to verify its accuracy, fairness and compliance with certain standards such as – International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
Depending on size of the company, the audit process may take several weeks or months. These audited financial results are represented in company’s annual report. The audit is one of the valuable tools for businesses to identify inefficiencies and improve decisions making, control and operations. The preparation of financial statements is a key responsibility of company and financial statements are prepared by the company, not by the auditors. Company’s financial statements include – a balance sheet, an income statement (also known as the profit & loss statement, or simply P&L statement), a cash-flow statement and a statement of changes in equity and explanatory notes. Independent means – an accountant, who is an external and not an employee of the company and who doesn’t have any internal interest into company. Regular audit is necessary to maintain transparency, stakeholders trust and integrity of company and their financials.
Auditors must follow the GAAS (Generally Accepted Auditing Standards). Auditor’s report must follow a standard (a set of rules). Investors, lenders, partners, regulatory authorities, creditors and public are got confident by Audit that reported financial results by an organization is true and reflecting actual financial position. An audit report is known as the “Unqualified Report” when financial statements of the company are in accordance with accounting standards and principles, this unqualified report is issued to public with the financial statements. The unqualified report also known as the clean opinion, which ensures the fairness of financial statements. When auditors identify some problems or specific issues in company’s financials during audit, they release a qualified report.
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Standard Audit Report –
When all the financial statements of the company are examined by the auditors and auditors have followed the GAAS (Generally Accepted Auditing Standards). And they determine that all the financial statements are in accordance with certain accounting standards and principles, and auditors have the sufficient evidence to give an opinion, this report is issued as a part of audit’s report is the standard unqualified audit opinion (by the auditors who are independent from the company that is being audited). Every standard audit report must have followed information –
The title of the report, for example – “Audit Report by The Independent Auditors”.
The address, for example – “To the Board of Directors and Stakeholders of the company”.
Introductory Paragraph, for example – “We have audited that….”.
Scope Paragraph, for example – “We conducted ……”.
Opinion
Signature of CPA or CPA firm/company.
The date of audit report; this is the date of audit was completed, not the date of report issued.
Accounting vs Auditing –
Accounting is the language of Business. Accounting is the process of recording, classifying and summarizing business- transactions through certain rules and standards. In other words, to record economic events of business according to certain rules and standards is Accounting. Accounting plays an important role in every business; it may be a single person sole proprietorship or a multinational business – the fundamentals and basic principles of accounting are same.
Auditing is an evaluation process; it examines the financial statements of business and determine that whether it is presented properly utilizing certain accounting standards and principles such as – International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
Importance of Audits in Finance and Accounting –
1. Reliability:
The audit determines that the presented financial statement by the company is accurate and in accordance with the certain rules of accounting; Investors, lenders, partners, creditors, analysts and regulatory authorities may rely on this.
2. Fairness:
Audit gives an assurance that financial statements are presented fairly by the company.
3. Risk:
Audit minimizes the chances of fraud and false representation. If roots of raw data are manipulated then it is hard to detect by auditors, as financial statements are prepared internally, there is a very high chances of manipulation, fraud activities and false representation of data during preparation to show false position of business.
4. Legal requirements:
Regular Audit is a mandatory to meet legal requirements and regulatory compliance by the public listed companies.
5. Resources:
Companies need to audit financial statements to obtain the fund through resources such as – bond issuance, equity shares issuance, loan approval etc.
6. Control:
Companies need to audit for identification of inefficiencies and to determine the remedy of it and to internal control in their businesses.
Types of Auditors and Audits –
An Auditor may be an individual or a firm/company who serve the needs of Audit to provide the assurance that the financial statements of a company are represented fairly and accurately in accordance with International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). There are three most common types of auditors described below:
1. Certified Public Accountant (CPA):
External audit performed by the external auditors or CPAs provide an unbiased opinion. The objective of an independent audit is to assure the readers that the financial statements of company are free of material errors and fraud. This assurance is necessary to making analytical and investement decisions. Audit through an independent firm is mandatory to make the integrity into entire financial system. The accountant must be certified to practice as a public accountant by the state. The ICPA (Independent Certified Public Accountant) must carefully examine the company’s financial statement and must determine that whether or not company’s financial statements are in accordance with accounting principles. The Certified Public Accountants (CPAs) must have a license issued by the state in which they practice. The laws to obtain such license may vary state to state. Most states also require that CPAs must take a certain minimum coursework every year in order to have their license renewed and practice as a public accountant. CPAs and CPA firms/companies must be independent from the entities that they are auditing. CPAs can work as an employee of an audit firm/company or as an individual. These audit firms/companies may be big such as – an international entity with thousands of employees which provides its services around the world. These largest firms may have offices worldwide. The largest four companies are – Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC). CPAs provide auditing, management consultation and tax planning & preperation services. The CPAs have the ultimate responsibility to determine that the presented financial statements are in accordance with IFRS or GAAP, they sign the report that is presented to public.
2. Governmental Auditors:
Government Audit is performed within or on behalf of the governmental organizations by the individuals who are governmental auditors. These governmental auditors must also be independent from the entities that they are auditing. Government audits are performed to ensure that companies are not making false representation of their taxable income. Whether it is deliberately or not, false representation of taxable income is considered as fraud. Usually, tax-audit create an anxiety for smaller companies as well as big corporations.
3. Internal Auditors:
Companies need Internal Auditors to audit own financial records to establish an internal control system. Usually, Internal auditors report the highest authority in the company such as – The Board of Directors and/or audit committee of The Board of Directors. Audit performed by the internal auditors are not distributed outside the company. The functions of internal auditors depend upon the needs and expectations of management. Internal audit helps the management to review the business for efficient use of resources and decision making to make business more profitable. During an external audit of company by CPAs, internal auditors may work closely with CPAs to in order to reduce the audit time.
Limitations of Audit –
Many people may believe that auditors may detect all the frauds within a company through audit process, but this is not the complete truth. Audits also have their limitations. The audit only assure that the presented financial statements of the company are in accordance with certain accounting standards and principles. Auditors do follow the procedures that help in fraud detection, but they cannot detect all such instances.
Ans. Audit is a systematic process of examining the financial statements of public companies to verify its accuracy, fairness and compliance with certain standards such as – International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). The audit is one of the valuable tools for businesses to identify inefficiencies and improve decisions making, control and operations. Depending on size of the company, the audit process may take several weeks or months.
Q. What is the purpose of an Audit?
Ans. The main purpose of an audit is that – Investors, lenders, partners, regulatory authorities, creditors and public are got confident by Audit that reported financial results by an organization is true and reflecting actual financial position.
Q. Who is an Auditor?
Ans. The individual or firm/company who checks the accuracy and fairness of the accounting records and financial statements of an organization/company and issue a report.
Q. What are types of Audits?
Ans. There are three main types of audits – 1. Internal Audit 2. External Audit 3. Governmental Audit.
Q. What is the objective of an Audit?
Ans. Audit is one of the valuable tools for businesses to identify inefficiencies and improve decisions making, control and operations. Auditing is an evaluation process, it examines the financial statements of business and determine that whether it is presented properly utilizing certain accounting standards and principles such as – International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
