What is an Audit? What It Means in Finance and Accounting?

Audit

The process of auditing involves checking the accuracy, completeness, and compliance with applicable rules and regulations of a company's financial records, transactions, and practices. Internal auditors who work for the company can perform audits, as can external auditors who are engaged to offer an unbiased evaluation of the company's financial standing but are not employees of the company.

What is an Audit? 

The main goal of an audit is to offer an opinion or assurance on the dependability and correctness of an organization's balance sheet, income statement, and cash flow statement. To ensure that transactions are accurately documented, categorised, and summarised in financial records, auditors review a variety of papers and financial records, including bank statements, invoices, receipts, and contracts.

The process of auditing is crucial because it protects stakeholders' interests, ensures the accuracy of financial data, and enhances organisations' overall accountability and transparency. Also, it may point out areas where an organization's financial and operational procedures need to be strengthened and offer suggestions for fixing any flaws or inadequacies.

History of Audit

Etymologically, the word "audit" comes from lat.  audio  - “I hear” and comes from the so-called public hearings of reports that were approved or disapproved by the auditors. The need for an audit, as expected, arose simultaneously with the emergence and development of barter and monetary relations.

The development of auditing was closely related to the peculiarities of the financial and industrial history of individual countries and was determined, first of all, by the nature of the development of the capital market.

In Europe, the audit appeared in the XII century, then in England, there was a procedure "Michaelmas Audit of the Sum of the Sheriff's Account", that is, "Mikhailo-Arkhangelsk audit of the number of sheriff's accounts."

In the Middle Ages, in European trading cities, at the request of merchants' contractors (usually other merchants or banking institutions), auditors checked merchants' books and testified to their authenticity. In the 19th century, the main customers of the audit were, in addition to creditors, the owners of companies, which is associated with the active development of joint-stock and limited companies in which the owners were not engaged in current management and, accordingly, needed to periodically check the hired managers.

The globalization of the economy and the creation of transnational corporations with many divisions, often scattered throughout the country and even worldwide, have significantly increased the need for independent business auditors.

In addition, as government intervention in the economy grew and the taxation system became more complex, companies began to feel the need for independent specialists who could check the company's accounting and tax statements to identify errors and distortions in reporting and prevent sanctions from state bodies.

In the 20th century, in connection with the active development of the stock market, a new category of people interested in auditing appeared - investors.

As a rule, each new wave of scandals related to the bankruptcy of companies whose shares or debt securities are listed on the stock exchange and are actively traded, turned into legal prosecution of auditors and tightened requirements for auditors and their performance of audits. A large number of investors have become the most active and demanding consumers of audit services.

From the middle of the 20th century, auditors began to expand the scope of their interests and began to carry out activities not only to confirm financial statements but also began to conduct accounting for third-party organizations, acting as a collegial corporate accountant and lawyer, as well as an investment consultant and trustee for their own clients. In addition, the scientific and technological revolution forced audit companies to master the functions of introducing modern technologies for enterprise management, accounting automation, introducing quality control systems and other related activities.

Types of audit

Ø  Communication audit: is one carried out by a professional, an expert in communication and image, on the states of internal and external communication of an organization.

Ø  Audit of financial statements: is that carried out by a professional, expert in auditing that performs the examination on the financial statements -called accounting in some countries- of an entity or entity, to issue an independent opinion on the adherence to said statements. to the International Financial Reporting Standards or other regulations applicable according to the legislation or particular guidelines according to the activity of the audited subject.

Ø  Administrative audit: it is the administrative control technique that systematically and comprehensively examines the degree of efficiency in the application of the administrative process to the different functions of an entity, as well as how this efficiency influences its effectiveness. ⁸ 9

Ø  Energy Audit – An inspection, study, and analysis of energy flows in a building, process, or system to understand the dynamic energy of the system under study.

Ø  Legal audit: the one carried out by a legal professional, with capacity and experience that performs the review, examination and evaluation of the results of the specific or general management of an institution or body, to inform or rule on them, carrying out the pertinent observations and recommendations to improve its effectiveness and efficiency in its performance.

Ø Financial audit: ensures reliability and integrity of financial information and complementary operational and administrative information, as well as the means used to identify, measure, classify and report that information.

Ø  Internal audit: it is a single function that is practised internally in an organization, and its focus will be administrative, operational or financial.

Ø Operational audit: this evaluates the efficiency, effectiveness and economy with which the resources are being used.

Ø  Computer audit: the process of collecting, grouping and evaluating evidence to determine if information systems safeguard the business asset. In addition, it maintains data integrity, effectively carries out the purposes of the organization, and efficiently uses resources.

Ø Web audit: process whose performance results in a report on vulnerabilities, risks, potential security flaws, analysis of performance and load times, code efficiency, etc. of a web page.

Ø Environmental audit: quantifying the environmental achievements and position of an organization.

Ø  Social audit: a process that a company or organization carries out to present an assessment of its social action and its ethical behaviour.

Ø Information systems security audit: analysis and management of systems to identify and subsequently correct the various vulnerabilities that may arise in an exhaustive review of workstations, communication networks or servers.

Ø  Innovation audit: the process of obtaining information on the current situation of the company regarding innovation.

Ø Political audit: a systematic review of the processes and activities, ideologically oriented, of decision-making of a group for the achievement of objectives, for the benefit of all.

Ø Electoral audit: the one carried out on the electoral systems of the different countries with a democratic system and is carried out to give reliability and transparency to the system.

Ø Accessibility audit – Review of the accessibility of a website by an expert.

Ø  Brand audit: methodology to measure the value of a brand.

Ø Application code auditing – Reviewing an application's code for errors at design time.

Ø  Sarbanes-Oxley audit or SOX audit: review is performed on the audit firms of publicly traded companies, by the provisions of the Sarbanes-Oxley law.

Ø  Scientific-technical audit: carried out to institutions in charge of scientific and technical research in the different areas of human work.

Ø  Pharmaceutical audit: verify that the delivery of medicines to customers has been correct.

Ø  Forensic audit: when historical data and documents of companies are reviewed and compared to mainly detect fraud, theft, tax tricks, accounting tricks or any other anomalous situation in which the intellectual and material involved in the event are investigated; estimates are regularly made in money of the embezzled figures.

Ø  Prevention Audit: it constitutes the only tool to be able to monitor the effective compliance of the preventive activities carried out by companies, whether they assume prevention or have it partially or completely outsourced.

Classification from Audit 

An audit can be classified into several types based on various criteria. Some common classifications include:

1. Based on the purpose of the audit:

Ø Financial audit: An audit conducted to provide assurance on the financial statements of an organization.

Ø Compliance audit: An audit conducted to evaluate whether an organization is complying with applicable laws and regulations.

Ø Operational audit: An audit conducted to evaluate the efficiency and effectiveness of an organization's operations and processes.

Ø Investigative audit: An audit conducted to investigate a specific issue or allegation of fraud or misconduct.

2. Based on the nature of the audit:

Ø Internal audit: An audit conducted by an internal team of auditors within the organization.

Ø External audit: An audit conducted by an independent external auditor who is not part of the organization.

Ø Statutory audit: An audit required by law, such as an audit of the financial statements of a company.

3. Based on the scope of the audit:

Ø Comprehensive audit: An audit that covers all aspects of an organization's operations and processes.

Ø Limited scope audit: An audit that covers only a specific area or aspect of an organization's operations.

4. Based on the timing of the audit:

Ø Interim audit: An audit conducted during the middle of a fiscal year.

Ø Final audit: An audit conducted at the end of a fiscal year.

Overall, the type of audit chosen depends on the specific needs and objectives of the organization or entity being audited.