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Choosing an Auditor
An organization may rely on an internal or external auditor or use a combination of both services,
depending on its needs and the law. In the U.S., the Securities and Exchange Act of 1934 requires
publicly traded companies to hire an outside party. Chosen by a committee, this professional has
to ensure that financial statements accurately depict a company's financial performance, since
public investors often rely on this information when purchasing stock. Private companies may or
may not use an outside professional, but when they do, it's usually only in situations in which they
are required to do so by the law or because of a major event, like a merger.
In some instances, a third-party's services are required by a regulatory agency or shareholders that
believe that a company's financial claims are questionable. If the auditor finds evidence to support
their suspicions, he is usually required to report them. The company is generally given the
opportunity to defend its position either in writing or orally.
Planning
Audit planning is a formal process that an auditor must perform before the actual examination
begins. First, he must prove that he has a working knowledge of the business and its operations.
Next, he must identify the risks associated with misreporting financial statements for this
particular entity and then develop an approach based on the results of the previous two steps. The
entire review process can take anywhere from weeks to months, depending on things like an
organization's size and reporting risks.
Auditing Standards
Most countries have organizations that establish the standards for financial auditors. Professionals
typically follow the Generally Accepted Auditing Standards (GAAS), which attest to their training,
independence, and diligence. The International Standards on Auditing (ISA), released by the
International Auditing and Assurance Standards Board (IAASB), are enforced in many countries as
well, including all members of the European Union. In the U.S., the Public Company Accounting
Oversight Board (PCAOB) oversees the auditing industry and sets standards.
Despite having these guidelines, there are times when the auditor needs to rely on his own
experience to draw some conclusions. He is trained to challenge the truth of the material he
encounters to find mistakes and fraud, and to identify areas that need improvement. For instance,
he might notice that a company could be more efficient in its accounting, internal controls, or
spending habits. He may suggest solutions like reducing overhead through staff reductions or
better inventory control.
Irregularities
More problematic are irregularities, which are misstatements or lies from client. They can happen
in many ways, including when a company manipulates its financial performance. This may mislead
investors and can force a company to admit wrongdoing, recalculate past profits, and delay the
disclosure of future financial performance if discovered. Another type of irregularity is related to
the classification assigned to company positions, which affects the way employees are paid.
To find irregularities and to avoid oversights, independent reviewers create tests during the
planning to locate mistakes or fraud. The higher the risk for errors in financial reporting, the
greater the depth of the test and the less an outside partner will rely on a company's official input
for accuracy.
Findings
Once the job is completed, an external auditor will present his findings to the company's
executives or board. His report normally covers the state of accounts payable and receivable as
well as his opinion of the company's record-keeping systems and financial health. His comments
on these topics are expected to be constructive and include recommendations for improvements.
An auditor's findings strongly influence the companys reputation. There can be serious
consequences if his conclusions about assets, debts, tax responsibilities, and payments do not
match the company's. In the U.S., the auditor must assign a rating to the client, ranging from
"unqualified," which means acceptable, to "adverse," which suggests that the company is
misrepresenting its financial performance. These ratings often influence whether a company can
stay in business.
Qualifications
Most jobs in this field require the applicant to be a Certified Public Accountant (CPA), which in the
U.S. indicates that he passed the Uniform CPA Examination and is a licensed professional. In other
countries, this job is done by a chartered accountant. Experience in auditing, financial analysis, or
business administration is also valuable for anyone planning to go into this field.