An audit is an independent examination of financial information of an 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. It also attempts to ensure that the books of accounts are adequately maintained by the concern as required by law.
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 effectively evaluate and improve the effectiveness of risk management, control, and governance over the subject matter.
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Audits of financial statements & non-financial information (including compliance audits) can be classified into three categories:
- External audit/Statutory audit is done by 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 remain the third party.
- Cost audit where an independent firm, engaged by the client subject to the cost audit, is 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.
- Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes. Internal auditors provide independent and objective audit and consulting services focused on evaluating whether the board of directors, shareholders, stakeholders, and corporate executives have reasonable assurance that the organization’s governance, risk management, and control processes are designed adequately and function effectively.
Apart from the above three broad classifications, the following kinds of audit exercises are also important:
Forensic audit: Forensic auditors are vital in the investigation and prosecution of white-collar crimes. A good forensic accountant reviews accounting statements and transactions, following the money to determine if a crime has occurred. If there is information that leads to a crime, the forensic auditors will work with the FBI, and state or local law enforcement to gather evidence and build a case.
Operational audit: Operational auditors are interested in process and practice. They are tasked with confirming that the established policies and procedures are followed and that they lead to the best outcome. The auditor will test a series of business operations, review documentation of prior transactions and interview involved employees to determine the efficacy of the policy and whether it is being followed. In most cases, operational auditors will provide suggestions for process improvements leading to increased internal controls.
Compliance audit: The compliance audit is focused on the organization’s compliance with external laws and regulations. They are found most frequently with organizations that receive federal funds. The myriad of federal requirements requires specific knowledge outside the scope of most audits. The auditor will conduct a review of policies and procedures to make sure all required statements are included. She will also conduct a sample testing of transactions, and review documentation supporting charges to the grant and inventory check.