Audit refers to the analysis and study of an accounting system. It involves the review of all financial documents, activities or reports that a company has engaged in the past few years. It can be done internally by the head or employee of a particular department and externally by an independent auditor of an outside firm. The main motive is to check and verify the accounts by an independent authority to make sure that all the books of accounts are carried out in a fair manner and no fraud is being conducted. All the firms that are public listed have to get their accounts audited by some independent auditor before declaring their results for any quarter.
There are two types of audit
1. Internal Audit
An Internal Audit is an audit that is initiated by you and conducted by someone within your own business. You might have someone to conduct an internal audit to check in on company goals and to prevent financial mistakes. This type of auditing just doesn't look at your business's finances rather it examines the operations and management to ensure whether everything is functioning efficiently.
2. External Audit
This type of auditing is done by some external party like an insurance company, IRS or local tax agency. The external audit should follow the standards for auditing known as GAAS (Generally accepted auditing standards).
Some auditors may examine specific aspects of business operations while some might want to look at the complete information of your business's financial records.
Who can perform Audit in India? In India, the institute of chartered accountants in India or ICAI can do independent audits of an organization. CPA (Certified Public Accountants Conducts audits) can conduct audits in the USA.
1. Requesting for Financial Documents
After notifying the organization about the upcoming audit, the auditor requests for the documents. These documents may include a copy of the audit report that was done previously, Original bank statement, ledgers and receipts. In addition to the documents, the auditor may request organizational charts, along with the copies of the board and copies of bylaws and standing rules.
2. Preparing an Audit plan
After analyzing all the information contained in the documents. An Auditor plans how the audit will be conducted. A risk workshop may also be conducted to measure and identify possible problems. The audit plan is then drafted.
3. Opening meeting is scheduled
Key administrative and senior management staff are then invited to an opening meeting during which the auditor presents the scope of the audit. Time for the audit is determined and if any issue comes in the timings it is discussed and handled.
4. Conduct an On-site fieldwork
The auditor then collects the information from the open meeting and uses it in order to finalize the audit plan. Fieldwork is then conducted by reviewing procedures and processes and by speaking to staff members. To ensure that the internal controls are adequate they are evaluated. An auditor can discuss problems as they arise to give opportunities to the organization to respond.
5. Drafting a Report
In this process the auditor prepares the report detailing the findings of the audit which includes Posting problems, Mathematical errors, payments authorized but not paid, etc. The auditor then writes up a commentary that describes the finding of the audit and also recommends solutions to any problems.
6. Conduct a closing meeting
The auditor then request a response from the management whether they agree or disagree with the problems in the report In the closing meeting, all parties that are involved discuss the report and management responses. If there are some issues remaining they resolved it at this point.
1. Assurance to the owners
One of the advantages of auditing is that it offers assurance to the owners, shareholders, investors about the accuracy of their books of accounts. This gives them satisfaction with the working of various departments and overall profitability and efficiency of their business operations.
2. Prevents error and frauds
Error is something that is done without any intention to harm the company whereas frauds, on the other hand, are done to harm the company During the process of auditing both frauds and errors are generated and auditing helps to prevent them both. So auditing helps us to minimize the risks of frauds and error in their books of accounts but does not abolish the risk entirely.
3. Build stakeholders confidence
After the auditing process stakeholders like investors, banks, creditors will rely on the books of account with more confidence. Once the auditing is done by an independent authority, the financial statement will have more credibility.
4. Helps to increase Goodwill
Auditing shows the financial and profitability position of an organization which builds the trust of people over the organization, Thus, auditing helps to increase the goodwill of an organization.
5. Independent viewpoint
If the auditor is external, the business can get the external opinion on their financial standing and financial statement as well. The external auditor will closely inspect the book of account and will be completely fair in his opinion. If the auditor says the account is true and fair that means it has a lot of weightage with investors as well as the company.
1. Non-Economical process
It is not cost-effective. A very detailed and thorough audit will be costly so the auditor has to limit the scope of his audit and use tactics like sampling and test checking.
Auditing is a time-consuming process sometimes it takes months to do auditing of a single firm and if in case there are errors found in the financial statement of a company then it can even take longer time then that.
3. Frauds by management
Sometimes management can even play tricks to manipulate the accounts in order to hide their inefficiencies. Therefore, Auditor fails to check the planned frauds.
4. Misleading clarification
Sometimes management may not provide correct clarification so the auditor is bound to prepare the report even if the clarification is not true Therefore, Auditing fails to disclose correct information.
1. What is an Audit?
Audit refers to the inspection of the financial report of an organization by an auditor. The financial report includes a balance sheet, income statement, a cash flow statement, statement of changes in equity and notes consisting of a summary of significant accounting policies.
2. What are the steps in the auditing process?
Requesting for Financial Documents
Preparing an Audit plan
Opening meeting is scheduled
Conduct an On-site fieldwork
Drafting a Report
Conduct a closing meeting
3. What are the four phases of an Audit?
Audit follow-up and closure
4. What does the auditor do?
Auditors are the specialists who review the accounts of an organization or a company to ensure the validity and legality of their financial records.
5. Is it mandatory to appoint an auditor?
If you have a private limited company, it is mandatory to appoint an auditor unless it's a startup. The first auditor should be appointed within 30 days of incorporating a company.
6. For how many years an auditor can audit a company?
The company will have to appoint an auditor mandatorily for 5 years.
7. What are the benefits of auditing for the business?
Helps the management in the detection of frauds and errors
Helps the management in obtaining loans from banks
Builds a reputation in the market
It can provide a concrete suggestion regarding the improvement of business
8. What are the benefits of auditing for the owners of a business?
An audit helps to know about the true financial position when the business is managed by some representative of the owner.
In the case of a partnership, partners can rely on the auditing to settle disputes between them.
In the case of joint-stock companies where ownership and management are separated. Auditing helps to ensure the shareholder about a true and fair reporting of the financial position of a company.
9. What is the difference between internal audit and external audit?
Internal auditors are the employees of a company whereas external auditors work for an outside audit firm.
Internal auditors are hired by a company itself, while external auditors are appointed by shareholders.
Internal auditors are responsible to management while, external auditors are responsible to the shareholders.
Internal auditors will examine and give suggestions regarding the issues related to company risks and practices whereas, the external auditor will examine the financial records and will give an opinion regarding the financial statement of a company.
10. What will happen if you get audited by the IRS and fail?
If you fail to pay the taxes you owe, you will be charged 5% to 25% of the unpaid tax each month. If you fail to pay the taxes within 21 days after the audit, IRS (Indian Revenue Service) will charge you additional penalties of 0.5% for each month you are late in paying the tax.