Audit – definition and meaning

An audit is a formal examination, inspection and verification of a commercial enterprise’s, organization’s or any entity’s accounts, usually by an independent party – called an auditor. The auditor must check that the accounts are internally consistent and show a true picture of the organization’s financial position and adhere to the accounting principles governing the entity’s legal jurisdiction or listing base.

In the retail business it is a formal examination of how much of a product has been sold at the store level, while warehouse withdrawal audits focus on how much of a product has been withdrawn from warehouses and sent to retailers.

Quality control, audits, which are carried out usually once every six months, are onsite verifications by a certification authority to determine whether a documented quality system is being properly and effectively implemented.

types-of-auditAccording to accounting-simplified.com: “Audit is an appraisal activity undertaken by an independent practitioner (e.g. an external auditor) to provide assurance to a principal (e.g. shareholders) over a subject matter (e.g. financial statements) which is the primary responsibility of another person (e.g. directors) against a given criteria or framework (e.g. IFRS and GAAP).”

According to BusinessDictionary.com, an audit is:

“Systematic examination and verification of a firm’s books of account, transaction records, other relevant documents, and physical inspection of inventory by qualified accountants (called auditors).”



Many situations have an audit

In fact, the term can be used for any methodical examination or review of a situation or condition, as in “She made an audit of all the trees in the park.”

Audits provide assurance by a third party to various stakeholders that the subject matter is as it should be and that it is free from material misstatement.

Auditor
When we think of auditors we imagine the tax authorities sending an army of inspectors to turn everything upside down and go through each file with a tooth-comb. Auditors exist in many different fields.

Auditing is used frequently regarding audits of the financial information relating to a legal person. Other areas that are typically audited include internal controls, secretarial & compliance audit, water management, energy conservation, project management and quality management.

Information Technology Audit

An Information Systems Audit, or Information Technology Audit, is an inspection or examination of the management controls within an IT (information technology) infrastructure.



Evidence is obtained and the auditors determine whether the IT systems are safeguarding assets, operating effectively, and maintaining data integrity to achieve the company or entity’s goals and objectives.

These audits may be carried out in conjunction with an internal or financial statement audit, or other form of examination.

The term ‘audit’ with its current meaning emerged in the English language in the fifteenth century. It comes from Latin auditus ‘a hearing, the past participle of audire ‘hear’. In medieval England, when manual bookkeeping was present, auditors used to ‘hear’ the accounts read out for them, and checked that the personnel of organizations were not fraudulent or negligent.

What are auditors?

Auditors are professionals who verify the accuracy of companies’ operational and financial records. Publicly-quoted companies in most countries are legally required to use a public accounting firm to carry out an audit of their financial statements periodically.

An auditor may be either an internal, external or independent auditor for accounting firms in the public or private sector. Auditors are commonly found in government departments, such as the IRS (Internal Revenue Service) in the United States or HM Revenue and Customs in the UK, or a local government.

United States: to become an auditor you would typically start by getting a bachelor’s degree in accounting, business administration or finance. Professional designations such as CIA (certified internal auditor), CPA (certified public accountant), CFSA (certified financial services auditor), or CCSA (certification in control self-assessment) are common routes for finance or accounting personnel who wish to improve their career prospects.

United Kingdom: to become an external auditor you must first qualify as a Chartered Accountant. A member of the Chartered Institute of Public Finance and Accountancy (CIPFA) can carry out audits in the public sector in Britain but not in private commercial enterprises.

Publicly traded companies

Most countries require that publicly traded companies have their accounts periodically audited by outside professionals, and then publish the accounts to their shareholders.

The  Public Company Accounting Oversight Board (PCAOB) is a non-profit corporation established by the US Congress to oversee the audits of publicly-listed companies “in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports. The PCAOB also oversees the audits of brokers and dealers, including compliance reports filed pursuant to federal securities laws, to promote investor protection.”

By law, US public companies’ annual financial statements are audited by independent auditors. They conduct a systematic examination of a company’s accounting books, transaction records and other relevant documents to consider whether the current financial statements are fairly presented. The auditors prepare a written report containing their opinion of the financial statements. Their opinion is filed with the Securities Exchange Commission (SEC) and is available to any interested party.

The Center for Audit Quality makes the following comment regarding the independent auditor’s goal:

“The independent audit’s overriding goal is to provide investors, capital market  participants and policymakers with “reasonable assurance,” beyond management’s own assertions, that the financial statements can be relied upon for investment decisions and other purposes.”

The annual accounts of all public limited companies (PLCs) in the UK must be audited by a certified auditor, regardless of how small their sales or revenues are. For compliance reasons, the auditor must be completely independent. All audits and company accounts are registered at Company’s House.

Video – What is an audit?

This video explains what an audit is by following some auditors while they go abou their work.