ICU EXPAND

What is it?

Audit is one of the main functions performed by accountants (alongside financial planning and tax preparation).
While accounting by itself provides information on the financial health of a business (profitability, performance...), audit is about determining whether the information provided by accounting is correct.

Why is it performed?
For firms over a certain size (listed and limited liability firms), audits are generally required and for other firms, it provides credibility over their numbers.
The objective of an audit is to have an independent opinion about a firm’s financial statements. This enables to determine whether the latter are accurate, reliable and present the actual position of a firm at a given date

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Audit Types:

• Internal: Company employees examining issues related to the firm’s financial and business practice. Findings are used to ensure compliance with laws, improve internal controls…

• External: Work outside of the firm and independently examine financial reports. After analysis, findings either confirm that the firm’s financials are accurate and complete or provide guidance to help the firm comply and make informed decisions

• IRS: Internal Revenue Service: accountants will here verify the accuracy of a firm/individual’s tax returns and specific transactions

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Audit process

• The client firm’s management prepares financial reports. Must be prepared according to reporting standards

• The client firm’s directors approve the financial reports

• Auditors start examination: understand the organization’s activities, consider economic issues the client might have faced

• Auditors identify + assess any risks that could impact the financial position/performance (for major activities listed in the reports) + measures the client firm has put in place to mitigate the risks (controls)

• Based on identified risks and controls, auditors look at what management has done to ensure financial reporting accuracy

• Auditors judge whether financial reports (as a whole) present fair view of the client firm’s position and is in compliance with legal requirements

• Auditors prepare audit report, with their opinion, for the client’s shareholders/members

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Drawbacks 

• Auditors only check the main figures (not all figures are checked) of financial statements

• The appropriateness of management’s decisions and business activities are not judged

• Auditors do not check the adequacy of all internal controls (measures the client firms has put in place to mitigate risks to financial report figures)

• No direct comments are made to shareholders regarding the quality of the client firm’s management and their risk management procedures and controls

 

Final Thoughts

• Despite the apparent drawbacks of current practices and past scandals, audit still helps organizations gain a deeper insight into their business

• Audit can offer a transparent view on the current state of a business, offering insights that can inform decision-making