AUDITING ….. Explained

May 17, 2013 5:30 pm0 commentsViews: 2834

The audit process is a vital part of managing a business.  Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances (financial or otherwise) of an enterprise for a stated purpose.   Financial audit specifically refers to the evaluation of the financial statements of an organization.  The audit functions are performed internally (by internal auditors) or externally (by an external audit firm or outside external auditors).  The roles of the auditors include the examination of records, collection and evaluation of evidences, and formulation of judgment through an audit report.  Auditors also ensure the fiscal accuracy and responsibility of companies that are subjected to internal revenue audit.

Financial audits are done with the following objectives :audit-2

  •  to ascertain the validity and reliability of information  
  •  to provide an assessment of a system’s internal control
  •  to express an opinion about a person, organization or system under evaluation

An audit must adhere to generally accepted standards established by governing bodies. These standards assure third parties or external users that they can rely upon the auditor’s opinion on the fairness of financial statements, or other subjects on which the auditor expresses an opinion.

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As a general rule, audits should always be an independent evaluation that will include some degree of quantitative and qualitative analysis.  Due to constraints, an audit seeks to provide only reasonable assurance that the statements are free from material errors. Hence, statistical sampling is often adopted in audits.  In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements – a concept influenced by both quantitative (numerical) and qualitative factors.

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Role of Internal Audit

The internal auditor is often described as the firm’s critical friend – the independent advisor who can challenge current practices, champion best practices and be a catalyst for improvement, with the objective of ensuring that the organization, as a whole, can achieve its strategic objectives.

Internal Auditors are responsible for the following:

  • Evaluating and reporting on the effectiveness and efficiency of the implementation of management policies
  • Evaluating internal controls and advising managers at all levels
  • Identifying and assessing the significance of key activities that are affected by the changing business trends and economic conditions
  • Evaluating the relevant risk factors associated with the key activities
  • Assessing the tone and risk management culture of the organization
  • Analyzing operations and confirming information
  • Working closely with line managers to review operations and report findings
  • Reviewing compliance and due diligence procedures

The compliance review performed by the internal auditor ensures that the organization is adhering to the rules, regulations, laws, standards, codes of ethics, guidelines and principles as they apply, individually and collectively, to all parts of the organization.

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Other Types of Audit

auditOperations audit

An operations audit covers the examination of the business operations.  In this audit, the auditor thoroughly examines the efficiency, effectiveness and economy of the operations based on its target to achieve the company objectives.  This audit goes beyond the issues of internal controls.  The objective of operational audit is to examine Three E’s, namely : Effectiveness – doing the right things with least wastage of resources;  Efficiency – performing work in least possible time; Economy – balance between benefits and costs to run the operations.   

Quality audit

Quality audits are performed to verify conformance to global standards and processes, to assess how successfully processes have been implemented, to judge the effectiveness of achieving any defined target levels, to provide evidence concerning reduction and elimination of problem areas and to formulate a hands-on management tool for achieving continual improvement in an organization.  This is usually performed to qualify a company for an International Standards certificate (ISO). 

Performance audit

Safety, security, information systems performance, and environmental concerns are increasingly the subject of audits. There are now audit professionals who specialize in security audits and information systems audits. With nonprofit organizations and government agencies, there has been an increasing need for performance audits, examining their success in satisfying mission objectives.

Internal Revenue audit

This audit refers to an Internal Revenue examination of a taxpayer’s return or other transactions.  The Internal Revenue auditor performs this examination to verify the accuracy of the financial statements filed with the Internal Revenue for a covered period (fiscal or calendar year). 

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