An audit is an "independent examination of financial information of any entity, whether profit-oriented or not, irrespective of its size or legal form, when such an examination is conducted with a view to express an opinion thereon." Auditing also attempts to ensure that the books of accounts are properly maintained by such entities as required by law. Auditors consider the propositions before them, obtain evidence, document their findings, and evaluate the propositions in their auditing report.
Audits provide third-party assurance to various stakeholders that the subject is free from material misstatement. The term is most frequently applied to audits of the financial information relating to a legal person. Other commonly audited areas include secretarial and compliance, internal controls, quality management, project management, water management, and energy conservation. As a result of an audit, stakeholders may evaluate and improve the effectiveness of risk management, control, and governance over the subject.
Lately, auditing has expanded to encompass many areas of public and corporate life. Professor Michael Power refers to this extension of auditing practices as the “Audit Society”.Power, Michael (1999), The Audit Society: Rituals of Verification. Oxford: Oxford University Press.
Optimal auditing is a research field in economic theory and computer science that considers that auditing is costly and aims to construct auditing policies that are optimal for the principal.
Etymology The word “audit” derives from the Latin word audire which means “to hear”.
History Auditing has been a safeguard measure since ancient times. During medieval times, when manual bookkeeping 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. In 1951, Moyer identified that the most important duty of the auditor was to detect fraud. Chatfield documented that early United States auditing was viewed mainly as verification of bookkeeping detail.
Information technology audit
An information technology audit, or information systems audit, is an examination of the management controls within an Information technology (IT) infrastructure. The evaluation of obtained evidence determines if the information systems are safeguarding assets, maintaining data integrity, and operating effectively to achieve the organization's goals or objectives. These reviews may be performed with a financial statement audit, internal audit, or other form of attestation engagement.
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 that 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 also assess whether a business or corporation adheres to legal duties as well as other applicable statutory customs and regulations.
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. The third-party auditor will express an opinion of the person, organization, or system in question. The opinion given on financial statements will depend on the audit evidence obtained.
A statutory audit is a legally required review of the accuracy of a company's or government's financial statements and records. The purpose of a statutory audit is to determine whether an organization provides a fair and accurate representation of its financial position by examining information such as bank balances, bookkeeping records, and financial transactions.
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. 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 any article, based on accounts measuring the use of material, labor, or other costs. The term “cost audit” refers to 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, 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 countries, 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. The audit must therefore be precise and accurate, containing no additional misstatements or errors.
Integrated audits In the 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.
New types of integrated auditing are becoming available; they 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 new approach in some sectors to ensure that all the governance requirements are 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. An auditor's objective is to determine whether financial statements are presented fairly, in all material respects, and are free of material misstatement. 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 Auditors of financial statements & non-financial information (including compliance audits) can be classified into various categories:
An external auditor or 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 on 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 and have the status of a third party. A cost auditor or 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 on the effectiveness of internal controls over cost reporting. These specialized auditors are called cost accountants in India and globally, either cost and management accountants or certified management accountants or certified professional accountants. Government auditors review the finances and practices of government bodies. In the United States, these auditors report their finds to Congress, which uses them to create and manage policies and budgets. Government auditors work for the U.S. Government Accountability Office, and most state governments have similar departments to audit state and municipal agencies. A secretarial auditor or statutory secretarial auditor is an independent firm engaged by a client subject to an audit of its compliance with secretarial and other applicable laws to express an opinion on whether the company's secretarial records and compliance of applicable laws are free of material misstatements, whether due to fraud or error, as these invite heavy fines or penalties. For bigger public companies, external secretarial auditors may also be required to express an opinion on the effectiveness of internal controls over the client's compliance system management. In India, these auditors are called company secretaries and are members of the Institute of Company Secretaries of India, holding a Certificate of Practice. (http://www.icsi.edu/)