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Audit

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For other uses, see Audit (disambiguation).
The examples and perspective in this article may not represent a worldwide
view of the subject. Please improve this article and discuss the issue on the talk
page.

Accountancy
Key concepts
Accountant
Bookkeeping
Trial balance
General ledger
Debits and credits
Cost of goods sold
Double-entry system
Standard practices
Cash and accrual basis
GAAP / IFRS
Financial statements
Balance sheet
Income statement
Cash flow statement
Ownership equity
Retained earnings
Auditing
Financial audit
GAAS
Internal audit
Sarbanes-Oxley Act
Big Four auditors
Fields of accounting
Cost • Financial • Forensic
Fund • Management • Tax
This box: view • talk • edit
The general definition of an audit is an evaluation of a person, organization, system,
process, enterprise, project or product. Audits are performed to ascertain the validity and
reliability of information; also to provide an assessment of a system's internal control.
The goal of an audit is to express an opinion on the person / organization/system (etc) in
question, under evaluation based on work done on a test basis. Due to practical
constraints, an audit seeks to provide only reasonable assurance that the statements are
free from material error. 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 and qualitative
factors.

Audit is a vital part of Accounting. Traditionally, audits were mainly associated with
gaining information about financial systems and the financial records of a company or a
business (see financial audit). However, recent auditing has begun to include other
information about the system, such as information about environmental performance. As
a result, there are now professions conducting environmental audits.

In financial accounting, an audit is an independent assessment of the fairness by which a


company's financial statements are presented by its management. It is performed by
competent, independent and objective person(s) known as auditors or accountants, who
then issue an auditor's report based on the results of the audit.

Such systems must adhere to generally accepted standards set by governing bodies
regulating businesses; these standards simply provide assurance for third parties or
external users that such statements present a company's financial condition and results of
operations "fairly."

Contents
• 1 Quality audits
• 2 Integrated audits
• 3 Types of auditors
• 4 See also

• 5 External links

[edit] Quality audits


Main article: Quality audit

Quality audits are performed to verify the effectiveness of a quality management system.
This is part of certifications such as ISO 9001. Quality audits are essential to verify the
existence of objective evidence of processes, to assess how successfully processes have
been implemented, for judging the effectiveness of achieving any defined target levels,
providing evidence concerning reduction and elimination of problem areas and are a
hands-on management tool for achieving continual improvement in an organization.

To benefit the organization, quality auditing should not only report non-conformances
and corrective actions but also highlight areas of good practice. In this way, other
departments may share information and amend their working practices as a result, also
enhancing continual improvement.

[edit] Integrated audits


In the US, audits of publicly-listed companies are governed by rules laid down by the
Public Company Accounting Oversight Board (PCAOB). Such an audit is called an
integrated audit, where auditors have the additional responsibilities of expressing
opinions on the management's assessment of the firm's internal control and the
effectiveness of internal control over financial reporting, based on their (the auditors')
own assessment.

[edit] Types of auditors


There are two types of auditors:

• Internal auditors are employees of a company hired to assess and evaluate its
system of internal control. To maintain independence, they present their reports
directly to the board of directors or to top management. They provide functional
operation to the concern. Internal auditors are employed by the organization they
audit, their familiarity with the organization provides more insight into potential
fraud and wrongdoing.

• External auditors are independent staff assigned by an auditing firm to assess and
evaluate financial statements of their clients or to perform other agreed-upon
evaluations. Most external auditors are employed by accounting firms for annual
engagements. They are called upon from outside the compan

Financial audit
From Wikipedia, the free encyclopedia

Jump to: navigation, search

Accountancy
Key concepts
Accountant
Bookkeeping
Trial balance
General ledger
Debits and credits
Cost of goods sold
Double-entry system
Standard practices
Cash and accrual basis
GAAP / IFRS
Financial statements
Balance sheet
Income statement
Cash flow statement
Ownership equity
Retained earnings
Auditing
Financial audit
GAAS
Internal audit
Sarbanes-Oxley Act
Big Four auditors
Fields of accounting
Cost • Financial • Forensic
Fund • Management • Tax
This box: view • talk • edit

A financial audit, or more accurately, an audit of financial statements, is the review of


the financial statements of a company or any other legal entity (including governments),
resulting in the publication of an independent opinion on whether or not those financial
statements are relevant, accurate, complete, and fairly presented. Financial audits are
typically performed by firms of practicing accountants due to the specialist financial
reporting knowledge they require. The financial audit is one of many assurance or
attestation functions provided by accounting and auditing firms, whereby the firm
provides an independent opinion on published information. Many organisations
separately employ or hire internal auditors, who do not attest to financial reports but
focus mainly on the internal controls of the organization. External auditors may choose to
place limited reliance on the work of internal auditors.

Contents
• 1 Purpose
• 2 History
o 2.1 Audit of government expenditure
• 3 Governance and Oversight
• 4 Stages of an audit
o 4.1 Planning and risk assessment
o 4.2 Internal controls testing
o 4.3 Substantive procedures
o 4.4 Finalization
• 5 Commercial relationships versus objectivity
• 6 Related qualifications
• 7 See also

• 8 References

[edit] Purpose
Financial audits exist to add credibility to the implied assertion by an organization's
management that its financial statements fairly represent the organization's position and
performance to the firm's stakeholders (interested parties). The principal stakeholders of a
company are typically its shareholders, but other parties such as tax authorities, banks,
regulators, suppliers, customers and employees may also have an interest in ensuring that
the financial statements are accurate.

The audit is designed to reduce the possibility that a material misstatement is not detected
by audit procedures. A misstatement is defined as false or missing information, whether
caused by fraud (including deliberate misstatement) or error. "Material" is very broadly
defined as being large enough or important enough to cause stakeholders to alter their
decisions.

Audits exist because they add value through easing the cost of information asymmetry,
not because they are required by law. For example, a privately-held company that does
not issue securities on a public exchange might engage a firm to audit its financial
statements in order to obtain more desirable loan terms from a financial institution or
trade accounts with its customers. Without the audit, the lending party would not have
assurance as to whether or not the company's financial position is accurate. In turn, the
lender could price protect against this information asymmetry.

The exact form and content of the "audit opinion" will vary between countries, firms and
audited organizations.

In the US, the CPA firm provides written assurance that financial reports are "fairly
presented in conformity with generally accepted accounting principles (GAAP)." The
measure for "fairly presented" is that there is less than 5% chance (5% audit risk) that the
financial statements are "materially misstated."

[edit] History
[edit] Audit of government expenditure

The earliest surviving mention of a public official charged with auditing government
expenditure is a reference to the Auditor of the Exchequer in England in 1314. The
Auditors of the Imprest were established under Queen Elizabeth I in 1559 with formal
responsibility for auditing Exchequer payments. This system gradually lapsed and in
1780, Commissioners for Auditing the Public Accounts were appointed by statute. From
1834, the Commissioners worked in tandem with the Comptroller of the Exchequer, who
was charged with controlling the issue of funds to the government.

As Chancellor of the Exchequer, William Ewart Gladstone initiated major reforms of


public finance and Parliamentary accountability. His 1866 Exchequer and Audit
Departments Act required all departments, for the first time, to produce annual accounts,
known as appropriation accounts. The Act also established the position of Comptroller
and Auditor General (C&AG) and an Exchequer and Audit Department (E&AD) to
provide supporting staff from within the civil service. The C&AG was given two main
functions – to authorise the issue of public money to government from the Bank of
England, having satisfied himself that this was within the limits Parliament had voted –
and to audit the accounts of all Government departments and report to Parliament
accordingly.

Auditing of UK government expenditure is now carried out by the National Audit Office.
Sing industry (acting through various organisations throughout the years) as to the
accounting standards for financial reporting, and the U.S. Congress has deferred to the
SEC.

This is also typically the case in other developed economies. In the UK, auditing
guidelines are set by the institutes (including ACCA, ICAEW, ICAS and ICAI) of which
auditing firms and individual auditors are members.

Accordingly, financial auditing standards and methods have tended to change


significantly only after auditing failures. The most recent and familiar case is that of
Enron. The company succeeded in hiding some important facts, such as off-book
liabilities, from banks and shareholders. Eventually, Enron filed for bankruptcy, and (as
of 2006) is in the process of being dissolved. One result of this scandal was that Arthur
Andersen, then one of the five largest accountancy firms worldwide, lost their ability to
audit public companies, essentially killing off the firm.

A recent trend in audits (spurred on by such accounting scandals as Enron and


Worldcom) has been an increased focus on internal control procedures, which aim to
ensure the completeness, accuracy and validity of items in the accounts, and restricted
access to financial systems. This emphasis on the internal control environment is now a
mandatory part of the audit of SEC-listed companies, under the auditing standards of the
Public Company Accounting Oversight Board (PCAOB) set up by the Sarbanes-Oxley
Act.

[edit] Governance and Oversight


Many countries have government sponsored or mandated organizations who develop and
maintain auditing standards, commonly referred to generally accepted auditing standards
or GAAS. These standards prescribe different aspects of auditing such as the opinion,
stages of an audit, and controls over work product (i.e., working papers).

Some oversight organizations require auditors and audit firms to undergo a third-party
quality review periodically to ensure the applicable GAAS is followed.

[edit] Stages of an audit


A financial audit is performed before the release of the financial statements (typically on
an annual basis), and will overlap the year-end (the date which the financial statements
relate to).

The following are the stages of a typical audit:[citation needed]

[edit] Planning and risk assessment

Timing: before year-end

Purpose:

• To understand the business of the company and the environment in which it


operates.
o What should auditors understand?[1]
 The relevant industry, regulatory, and other external factors
including the applicable financial reporting framework
 The nature of the entity
 The entity’s selection and application of accounting policies
 The entity’s objectives and strategies, and the related business risks
that may result in material misstatement of the financial statements
 The measurement and review of the entity’s financial performance
 Internal control relevant to the audit
• To determine the major audit risks (i.e. the chance that the auditor will issue the
wrong opinion). For example, if sales representatives stand to gain bonuses based
on their sales, and they account for the sales they generate, they have both the
incentive and the ability to overstate their sales figures, thus leading to overstated
revenue. In response, the auditor would typically plan to increase the rigour of
their procedures for checking the sales figures.

[edit] Internal controls testing

Timing: before and/or after year-end

Purpose:

• To assess the operating effectiveness of internal controls (e.g. authourisation of


transactions, account reconciliations, segregation of duties) including IT General
Controls. If internal controls are assessed as effective, this will reduce (but not
entirely eliminate) the amount of 'substantive' work the auditor needs to do (see
below).

Notes:

• In some cases an auditor may not perform any internal controls testing, because
he/she does not expect internal controls to be reliable. When no internal controls
testing is performed, the audit is said to follow a substantive approach.
• This test determines the amount of work to be performed i.e. substantive testing
or test of details.[citation needed]

[edit] Substantive procedures

Financial audits exist to add credibility to the implied assertion by an organization's


management that its financial statements fairly represent the organization's position and
performance to the firm's stakeholders (interested parties). The principal stakeholders of a
company are typically its shareholders, but other parties such as tax authorities, banks,
regulators, suppliers, customers and employees may also have an interest in ensuring that
the financial statements are accurate.

The audit is designed to reduce the possibility of a material misstatement. A misstatement


is defined as false or missing information, whether caused by fraud (including deliberate
misstatement) or error. Material is very broadly defined as being large enough or
important enough to cause stakeholders to alter their decisions.

The exact 'audit opinion' will vary between countries, firms and audited organisations.

In the US, the CPA firm provides written assurance that financial reports are 'fairly
presented in conformity with generally accepted accounting principles (GAAP).' The
measure for 'fairly presented' is that there is less than 5% chance (5% audit risk) that the
financial statements are 'materially misstated'.

[edit] Finalization
Timing: at the end of the audit

Purpose:

• To compile a report to management regarding any important matters that came to


the auditor's attention during performance of the audit,
• To evaluate and review the audit evidence obtained, ensuring sufficient
appropriate evidence was obtained for every material assertion and
• To consider the type of audit opinion that should be reported based on the audit
evidence obtained.

[edit] Commercial relationships versus objectivity


One of the major issues faced by private auditing firms is the need to provide
independent auditing services while maintaining a business relationship with the audited
company. The auditing firm's responsibility to check and confirm the reliability of
financial statements may be limited by pressure from the audited company, who pays the
auditing firm for the service. The auditing firm's need to maintain a viable business
through auditing revenue may be weighed against its duty to examine and verify the
accuracy, relevancy, and completeness of the company's financial statements. Numerous
proposals are made to revise the current system to provide better economic incentives to
auditors to perform the auditing function without having their commercial interests
compromised by client relationships. Examples are more direct incentive compensation
awards and financial statement insurance approaches. See, respectively, Incentive
Systems to Promote Capital Market Gatekeeper Effectiveness and Financial Statement
Insurance.

[edit] Related qualifications


• There are several related professional qualifications in the field of financial audit
including Certified General Accountant (CGA), Chartered Certified Accountant,
Chartered Accountant and Certified Public Accountant.

Back to a fundamental question, what is the difference between accounting


and auditing from a financial perspective?

A quick answer is: Accounting is a process of preparing the works, Auditing


is a process of evaluating & scrutinizing of the work prepared.

In other words, accountants are in charged of the day-to-day duties of


maintaing the accounts, implementing the board financial strategy, if any.
At the end of the period, accountant would produce Financial Statement, a
summary report of the financial performance throughout the period.
Whereas, auditor conduct a check on the accuracy of the financial
statements, to ensure that there is no material misstatement of the
financial statement prepared.
Accounting
is concerned with the preparing of financial statements while auditing is concerned
with checking of financial statements. The purpose of accounting is to show the
performance and financial position of a business
. The purpose of auditing is to certify the true and fair view of financial statements.

Accounting requires that an accountant must have accounting knowledge while auditing
work required that an auditor must have accounting as well as auditing knowledge.
Accounting is concerned with current data. It is constructive in nature. Auditing is
concerned with past data. It is analytical in nature. The time period of accounting is
usually one year. It takes one year to complete record. The time period of auditing is
usually less than one year. It may be completed within one month.

The accountant is permanent employee of the business. The auditor is an independent


person. The work of an accountant starts when the work of the book keeper ends. The
work of an auditor starts when the work of accountant ends. An accountant may not be a
chartered accountant as per law. An auditor must be chartered accountant for public
companies. The accountant has no liability for preparing final accounts. The auditor has
liability after presenting audit report.