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Audit

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Title: Audit  
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Audit

Some typical stages in the audit process

Auditing refers to a systematic and independent 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 attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing has become such an ubiquitous phenomenon in the corporate and the public sector that academics started identifying an "Audit Society".[1] The auditor perceives and recognizes the propositions before him/her for examination, obtains evidence, evaluates the same and formulates an opinion on the basis of his judgement which is communicated through his audit report.[2]

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 matter.

The word audit is derived from a Latin word "audire" which means "to hear".[3][4] During the medieval times when manual book-keeping 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.[5]

Contents

  • Accounting 1
    • Integrated audits 1.1
    • Assessments 1.2
    • Auditors 1.3
  • Performance audits 2
  • Quality audits 3
  • Project management 4
  • Energy audits 5
  • Operations audit 6
  • Forensic audits 7
  • See also 8
  • References 9
  • Further reading 10

Accounting

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 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.[6] And the US Public Company Accounting Oversight Board has come out with a concept release on the same.[7]

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.

Integrated audits

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 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. 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.[8]

Auditors

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.

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.

  • 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.

Performance audits

Safety, security, information systems performance, and environmental concerns are increasingly the subject of audits.[12] There are now audit professionals who specialize in government agencies, there has been an increasing need for performance audits, examining their success in satisfying mission objectives.

Quality audits

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.

Project management

Projects can undergo 2 types of Project audits:[12]

  • 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.

Energy audits

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).

Operations audit

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

A control self-assessment is a commonly used tool for completing an operations audit.[13]

Forensic audits

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

See also

References

  1. ^ Power, Michael. 1999. The Audit Society: Rituals of Verification. Oxford: Oxford University Press.
  2. ^ "Audit assurance". 
  3. ^ "Evolution of auditing" (PDF). David Publishing. 
  4. ^ Assurance, Auditing and. Chapter 1, Volume 1: Institute of Chartered Accountants of India. p. 1 http://www.icai.org/post.html?post_id=6193. 
  5. ^ Derek Matthews, History of Auditing. The changing audit process from the 19th century till date. Routledge-Taylor & Francis Group. p. 6. 
  6. ^ McKenna, Francine. "Auditors and Audit Reports: Is The Firm's "John Hancock" Enough?". Forbes. Retrieved 22 July 2011. 
  7. ^ "CONCEPT RELEASE ON POSSIBLE REVISIONS TO PCAOB STANDARDS RELATED TO REPORTS ON AUDITED FINANCIAL STATEMENTS" (PDF). Retrieved 22 July 2011. 
  8. ^ Ladda, R.L. Basic Concepts Of Accounting. Solapur: Laxmi Book Publication. p. 58.  
  9. ^ "Pages - Definition of Internal Auditing". Na.theiia.org. 2000-01-01. Retrieved 2013-09-02. 
  10. ^ "Pages - International Professional Practices Framework (IPPF)". Na.theiia.org. 2000-01-01. Retrieved 2013-09-02. 
  11. ^ "Professional internal auditors, in carrying out their responsibilities, apply COSO's Integrated Framework-Internal Control". Theiia.org. 
  12. ^ a b Different Types of Audits (June 2013) Auditronix Guidance Note
  13. ^ 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. 

Further reading

  • Amat, O. (2008). Earnings management and audit adjustments: An empirical study of IBEX 35 constituents. Available at SSRN 1374232.
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