Tuesday, 4 June 2013

The Basics of Auditing.

Many people confuse auditing with accounting. The distinction between the two is:
                Auditing is the opinion on the fairness and presentation of financial statements. Auditing is the auditor’s responsibility.
While:
                Accounting is the process of preparing financial statements. Accounting is the responsibility of the management.
                An audit can be compared to a periodic check up with a mechanic. Just as a crumbling car must pass through a series of tests to ensure a clean “bill of health”, a company’s financial “good health” also relies on whether its financial statements abide by the Generally Accepted Accounting Principles (GAAP). Therefore in this case, the auditor is the mechanic and the car is the business organisation.
Auditing doesn’t promise faultless financial statements but it does give reasonable assurance that the financial statements are free from unnecessary mistakes.
Almost every organisation prepares financial statements. These provide information for the managers (to make good decisions), governments (for tax purposes), banks (to extend credit facilities) and investors (to influence their decisions of whether to invest in that business or not). The statements therefore need to be accurate.
There are generally two types of auditors:
a)      Internal auditors
b)      External auditors

a)  According to Investopedia, internal auditing is "the examination, monitoring and analysis of activities related to a company’s operations, including its business structure, employee behaviour and information systems." Internal auditing reveals that the company’s financial statements are consistent and trustworthy.

b) External auditing is the reviewing of a company’s financial statements by another qualified personnel who is not affiliated with the organisation. Such professionals include public accountants.

Components of an audit:
a)      Auditors need something to audit. These include financial statements which have transactions. Auditors are professional accountants. They don’t prepare financial statements. That is the work for managers. Auditors verify the financial transactions and give opinions.
b)      There should be evaluation criteria. If there was no basis to follow when preparing and evaluating financial statements, the users would have difficulty in trying to understand what the statements portray. Auditors therefore follow GAAP.                                                                                      
Other types of criteria include:
·         Tax rules (for tax auditors)
·         Company policy (for internal auditors)
c)       Audit evidence. Just as an attorney gathers information for his client to prove his innocence, so do auditors. Auditors need to get financial statements to evaluate, test and support (if they are correct) or conclude that the statements are adverse in case they do not abide by GAAP.
d)      Auditors. Auditors are not just people pulled from anywhere to come and verify the statements. They need to have a deep background in accounting. They need training in accounting professions. Only CPAs can issue opinions in auditing.
e)      Reporting. Auditors need a way of expressing their opinions and disclose their findings that will benefit the users.
Auditing is an interesting career. The advantages are that: you get to work in teams and travel in different locations always making new contacts.
However the downside of it is that it can be tedious in some areas.


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