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. 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 commonly audited areas include secretarial and compliance, internal controls, quality management, project management, water management, and energy conservation.
There are three main types of audits:
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Financial statement audit: This is an objective examination and evaluation of the financial statements of an organization to make sure that they are free from material misstatement. External audits are commonly performed by Certified Public Accounting (CPA) firms and result in an auditors opinion which is included in the audit report. An unqualified, or clean, audit opinion means that the auditor has not identified any material misstatement as a result of his or her review of the financial statements.
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Internal audit: This serves as a managerial tool to make improvements to processes and internal controls. Internal audits are performed by the employees of a company or organization and are not distributed outside the company. Instead, they are prepared for the use of management and other internal stakeholders. Internal audits are used to improve decision-making within a company by providing managers with actionable items to improve internal controls. They also ensure compliance with laws and regulations.
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Government audit: This is performed by a government entity, such as the Internal Revenue Service (IRS), to verify the accuracy of a taxpayer’s return and specific transactions. When the IRS audits a person or company, it usually carries a negative connotation and is seen as a punitive measure.
Auditing is crucial to ensure that companies represent their financial positioning fairly and accurately and in accordance with accounting standards.
