An audit is an independent and systematic examination of accounts, books, documents, statutory records and vouchers of a company to ascertain that the financial statements and non-financial disclosures present a fair and true view as well as maintained as required by law. Audits provide an assurance by the third party that the subject matter does not contain a material misstatement. While the term is most frequently used to evaluate the financial information of a legal entity, there are various other areas that are commonly audited: internal controls, secretarial and compliance audit, quality management, water and energy management and conservation as well as project management. As a result, various stakeholders can effectively evaluate and, if necessary, improve the effectiveness of risk management, governance and control processes of the legal entity.
Organization of an audit Most companies receive an audit once a year, while some, usually large corporations, can receive audits even on a monthly basis. Often, audit is a legal requirement in order to eliminate the intentional misstatements of financial information in an attempt to commit fraud. For some companies, especially publicly traded ones, audits are used to evaluate the effectiveness of internal control measurements. During the process of auditing, auditors are required to follow auditing standards set by the government body. The process is usually organized in six steps:
Requesting documents – auditor requests certain documents listed on the preliminary checklist. These documents may include a previous audit report, bank statements, receipts and ledgers as well as organizational charts, bylaws and standing rules and copies of the board and committee minutes. Preparing an audit plan – after the auditor has received all required documents, an audit plan is drafted. During this stage, a risk workshop might be conducted in order to identify possible problems. Scheduling an open meeting – senior management together with key administrative staff are invited to a meeting during which a scope of the audit is explained. Other details, such as time frames, scheduled vacations and interviews with the auditors are discussed. Conducting fieldwork – auditors are speaking with staff members, reviewing processes and procedures, testing compliance with laws and policies, evaluating internal controls as well as discussing possible problems with the organization. Drafting a report – auditor prepares a report with detailed findings of the audit. Such details as posting problems, mathematical errors, payments that are authorized and not paid along with other discrepancies and concerns are listed. Finally, the auditor writes a commentary about the findings of the audit and possible solutions for the found problems. Setting up a closing meeting – management of the audited company discusses the highlighted problems and describes the action plan to address them along with projected completion date. Finally, the management indicates whether it agrees with the problems pointed out by the auditors. It is important to point out that auditors seek to provide only a reasonable assurance that the audited information is free from material error. Which means that they do not check every figure in the financial statements; they also do not look at every transaction that is carried out by the organization. Auditors do not judge the appropriateness of the business activities, strategies or decisions made by the company’s management. Types of auditors There are generally three types of auditors:
Internal auditors – employed by the company for whom they are performing the audit. They provide information to the management of the company about the accuracy of their books and the efficiency of their internal control system. Consultant auditors – performing the same function as internal auditors, but are not employed by the company. External auditors – follow a set of generally accepted set of standards to evaluate the financial reporting and possible misstatements of the company. Legally required audits need to be performed by external auditors.