Audit
An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon." Auditing also attempts to ensure that the books of accounts are properly maintained by such entities as required by law. Auditors consider the propositions before them, obtain evidence, document their findings, and evaluate the propositions in their auditing report.
Audits provide third-party assurance to various stakeholders that the subject matter is free from material misstatement. The term is most frequently applied to audits of the financial information relating to a legal person. Other commonly audited areas include: secretarial and compliance, internal controls, quality management, project management, water management, and energy conservation. As a result of an audit, stakeholders may evaluate and improve the effectiveness of risk management, control, and governance over the subject matter.
In recent years auditing has expanded to encompass many areas of public and corporate life. Professor Michael Power refers to this extension of auditing practices as the "Audit Society".
Etymology
The word "audit" derives from the Latin word audire which means "to hear".History
Auditing has been a safeguard measure since ancient times. During medieval times, when manual bookkeeping was prevalent, auditors in Britain used to hear the accounts read out for them and checked that the organization's personnel were not negligent or fraudulent. In 1951, Moyer identified that the most important duty of the auditor was to detect fraud. Chatfield documented that early United States auditing was viewed mainly as verification of bookkeeping detail.The Central Auditing Commission of the Communist Party of the Soviet Union operated from 1921 to 1990.
Information technology audit
An information technology audit, or information systems audit, is an examination of the management controls within an Information technology infrastructure. The evaluation of obtained evidence determines if the information systems are safeguarding assets, maintaining data integrity, and operating effectively to achieve the organization's goals or objectives. These reviews may be performed in conjunction with a financial statement audit, internal audit, or other form of attestation engagement.Accounting
Due to strong incentives to misstate financial information, auditing has become a legal requirement for many entities who have the power to exploit financial information for personal gain. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business. Financial audits also assess whether a business or corporation adheres to legal duties as well as other applicable statutory customs and regulations.Financial audits are performed to ascertain the validity and reliability of information, as well as to provide an assessment of a system's internal control. The third party auditor will express an opinion of the person, organization, or system in question. The opinion given on financial statements will depend on the audit evidence obtained.
A statutory audit is a legally required review of the accuracy of a company's or government's financial statements and records. The purpose of a statutory audit is to determine whether an organization provides a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records, and financial transactions.
Due to 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. Recently, the argument that auditing should go beyond just true and fair is gaining momentum, and the US Public Company Accounting Oversight Board has come out with a concept release on the same.
Cost accounting is a process for verifying the cost of manufacturing or producing of any article, on the basis of accounts measuring the use of material, labor or other items of cost. The term "cost audit" refers to a systematic and accurate verification of the cost accounts and records, and checking for adherence to the cost accounting objectives. According to the Institute of Cost and Management Accountants, a cost audit is "an examination of cost accounting records and verification of facts to ascertain that the cost of the product has been arrived at, in accordance with principles of cost accounting."
In most nations, 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. The audit must therefore be precise and accurate, containing no additional misstatements or errors.
Integrated audits
In the US, audits of publicly traded companies are governed by rules laid down by the Public Company Accounting Oversight Board, which was established by Section 404 of the Sarbanes–Oxley Act of 2002. Such an audit is called an integrated audit, where auditors, in addition to an opinion on the financial statements, must also express an opinion on the effectiveness of a company's internal control over financial reporting, in accordance with PCAOB Auditing Standard No. 5.There are also new types of integrated auditing becoming available that use unified compliance material. Due to the increasing number of regulations and need for operational transparency, organizations are adopting risk-based audits that can cover multiple regulations and standards from a single audit event. This is a very new but necessary approach in some sectors to ensure that all the necessary governance requirements can be met without duplicating effort from both audit and audit hosting resources.
Assessments
The purpose of an assessment is to measure something or calculate a value for it. An auditor's objective is to determine whether financial statements are presented fairly, in all material respects, and are free of material misstatement. Although the process of producing an assessment may involve an audit by an independent professional, its purpose is to provide a measurement rather than to express an opinion about the fairness of statements or quality of performance.Auditors
Auditors of financial statements & non-financial information can be classified into various categories:- An external auditor or statutory auditor is an independent firm engaged by the client subject to the audit to express an opinion on whether the company's financial statements are free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion on the effectiveness of internal controls over financial reporting. External auditors may also be engaged to perform other agreed-upon procedures, related or unrelated to financial statements. Most importantly, external auditors, though engaged and paid by the company being audited, should be regarded as independent and have the status of a third party.
- A cost auditor or statutory cost auditor is an independent firm engaged by the client subject to the cost audit to express an opinion on whether the company's cost statements and cost sheet are free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion on the effectiveness of internal controls over cost reporting. These specialized auditors are called Cost Accountants in India, and globally either Cost and Management Accountants or Certified Management Accountants.
- Government auditors review the finances and practices of government bodies. In the United States, these auditors report their finds to Congress, which uses them to create and manage policies and budgets. Government auditors work for the U.S. Government Accountability Office, and most state governments have similar departments to audit state and municipal agencies.
- A secretarial auditor or statutory secretarial auditor is an independent firm engaged by a client subject to an audit of its compliance to secretarial and other applicable laws to express an opinion on whether the company's secretarial records and compliance of applicable laws are free of material misstatements, whether due to fraud or error, as these invite heavy fines or penalties. For bigger public companies, external secretarial auditors may also be required to express an opinion on the effectiveness of internal controls over the client's compliance system management. In India, these auditors are called company secretaries, and are members of the Institute of Company Secretaries of India, holding a Certificate of Practice.
- Internal auditors are employed by the organizations they audit. They work for government agencies ; for publicly traded companies; and for non-profit companies across all industries. The internationally recognized standard setting body for the profession is the Institute of Internal Auditors, or IIA. The IIA has defined internal auditing as follows: "Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes". Thus professional internal auditors provide independent and objective audit and consulting services focused on evaluating whether the board of directors, shareholders, stakeholders, and corporate executives have reasonable assurance that the organization's governance, risk management, and control processes are designed adequately and function effectively. Internal audit professionals are governed by the international professional standards and code of conduct of the Institute of Internal Auditors. While internal auditors are not independent of the companies that employ them, independence and objectivity are a cornerstone of the IIA professional standards, and are discussed at length in the standards and the supporting practice guides and practice advisories. Professional internal auditors are mandated by IIA standards to be independent of the business activities they audit. This independence and objectivity are achieved through the organizational placement and reporting lines of the internal audit department. Internal auditors of publicly traded companies in the United States are required to report functionally to the board of directors directly, or a sub-committee of the board of directors, and not to management except for administrative purposes. They follow standards described in the professional literature for the practice of internal auditing, or other similar and generally recognized frameworks for management control when evaluating an entity's governance and control practices; and apply COSO's "Enterprise Risk Management-Integrated Framework" or other similar and generally recognized frameworks for entity-wide risk management when evaluating an organization's entity-wide risk management practices. Professional internal auditors also use control self-assessment as an effective process for performing their work.
- Consultant auditors are external personnel contracted by a client to perform an audit following the client's auditing standards. This differs from the external auditor, who follows their own auditing standards. The level of independence is therefore somewhere between the internal auditor and the external auditor. The consultant auditor may work independently, or as part of an audit team that includes internal auditors. Consultant auditors are used when the firm lacks sufficient expertise to audit certain areas, or simply for staff augmentation when staff are not available.