Auditing is a systematic examination of books, accounts, documents and vouchers of an organization to ascertain how far the financial statements present a true and fair view of the concern. It also ensures that the books of accounts are properly maintained by the concern as required by law.
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. In any auditing the auditor perceives and recognizes the propositions before him/her for examination, collects evidence, evaluates the same and on this basis formulates his/her judgment which is communicated through his/her audit report.
Any subject matter may be audited. 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 areas which are commonly audited include: internal controls, quality management, project management, water management, and energy conservation.
As a result of an audit, stakeholders may effectively evaluate and improve the effectiveness of risk management, control, and the governance process over the subject manner.
Due to strong incentives (including taxation, misselling and other forms of fraud) 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 are performed to ascertain the validity and reliability of information, as well as to provide an assessment of a system's internal control. As a result of this a third party can express an opinion of the person / organization / system (etc.) in question. The opinion given on financial statements will depends on the audit evidence obtained.
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 (numerical) and qualitative factors. But 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. In simple words, the term, cost audit means 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 of Pakistan, 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.
In US audits of publicly traded companies are governed by rules laid down by the Public Company Accounting Oversight Board (PCAOB), 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 (see the unified compliance section in Regulatory compliance). 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.
The purpose of an assessment is to measure something or calculate a value for it. 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 of financial statements can be classified into two categories:
- External auditor / 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 over 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.
- Cost auditor / 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 over the effectiveness of internal controls over Cost reporting. These are Specialized Persons called Cost Accountants in India & CMA globally either Cost & Management Accountants or Certified Management Accountants.
Further information: Cost auditing
The most commonly used external audit standards are the US GAAS of the American Institute of Certified Public Accountants; and the ISA International Standards on Auditing developed by the International Auditing and Assurance Standards Board of the International Federation of Accountants.
- Internal auditors are employed by the organizations they audit. They work for government agencies (federal, state and local); for publicly traded companies; and for non-profit companies across all industries. The internationally recognised standard setting body for the profession is the Institute of Internal Auditors - IIA (www.theiia.org). 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 (Certified Internal Auditors - CIAs) 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 the 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 (typically the audit committee), and not to management except for administrative purposes. As described often in the professional literature for the practice of internal auditing (such as Internal Auditor, the journal of the IIA) -, 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 (CSA) as an effective process for performing their work.
- Consultant auditors are external personnel contracted by the firm to perform an audit following the firm'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 the 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.
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.
Quality audits are performed to verify conformance to standards through review of objective evidence. A system of quality audits may 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 showing conformance to required processes, to assess how successfully processes have been implemented, and to judge the effectiveness of achieving any defined target levels. Quality audits are also necessary to provide evidence concerning reduction and elimination of problem areas, and they are a hands-on management tool for achieving continual improvement in an organization.
To benefit the organization, quality auditing should not only report non-conformance and corrective actions but also highlight areas of good practice and provide evidence of conformance. In this way, other departments may share information and amend their working practices as a result, also enhancing continual improvement.
- Regular Health Check Audits: The aim of a regular health check audit is to understand the current state of a project in order to increase project success.
- Regulatory Audits: The aim of a regulatory audit is to verify that a project is compliant with regulations and standards. Best practices of NEMEA Compliance Center describe that, the regulatory audit must be accurate, objective, and independent while providing oversight and assurance to the organization.
An energy audit is an inspection, survey and analysis of energy flows for energy conservation in a building, process or system to reduce the amount of energy input into the system without negatively affecting the output(s).
An operations audit is an examination of the operations of the client's business. In this audit the auditor thoroughly examines the efficiency, effectiveness and economy of the operations with which the management of the entity (client) is achieving its objective. The operational audit goes beyond the internal controls issues since management does not achieve its objectives merely by compliance of satisfactory system of internal controls. Operational audits cover any matters which may be commercially unsound. 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
Also refer to forensic accountancy, forensic accountant or forensic accounting. It refers to an investigative audit in which accountants with specialised on both accounting and investigation seek to uncover frauds, missing money and negligences
- Academic audit
- Big Four auditors
- Comptroller, Comptroller General, and Comptroller General of the United States
- Continuous auditing
- COSO framework, Risk management
- Financial audit, External auditor, Certified Public Accountant (CPA), and Audit risk
- Independent review
- Information technology audit, Information technology audit process, History of information technology auditing, and Auditing information security
- Internal audit
- Audit Plan
- INTOSAI (International Organization of Supreme Audit Institutions)
- Lead Auditor, under the Chief Audit Executive, or Director of Audit
- Quality audit
- Cost audit
- Technical audit
- Management audit
- Operational audit
- Risk based audit
- "Audit assurance".
- McKenna, Francine. "Auditors and Audit Reports: Is The Firm's "John Hancock" Enough?". Forbes. Retrieved 22 July 2011.
- "CONCEPT RELEASE ON POSSIBLE REVISIONS TO PCAOB STANDARDS RELATED TO REPORTS ON AUDITED FINANCIAL STATEMENTS". Retrieved 22 July 2011.
- Ladda, R.L. Basic Concepts Of Accounting. Solapur: Laxmi Book Publication. p. 58. ISBN 978-1-312-16130-6.
- "Pages - Definition of Internal Auditing". Na.theiia.org. 2000-01-01. Retrieved 2013-09-02.
- "Pages - International Professional Practices Framework (IPPF)". Na.theiia.org. 2000-01-01. Retrieved 2013-09-02.
- "Professional internal auditors, in carrying out their responsibilities, apply COSO's Integrated Framework-Internal Control". Theiia.org.
- Different Types of Audits (June 2013) Auditronix Guidance Note
- Gilbert W. Joseph and Terry J. Engle (December 2005). "The Use of Control Self-Assessment by Independent Auditors". The CPA Journal. Retrieved 10 March 2012.