Audit is one of the most dynamic areas of accounting science. This term has a Latin origin and means "listening". Today, there are a lot of definitions of audits, as well as classifications. Generally speaking, it is a synonym for control and verification.
Companies prepare financial reports on their activities that reflect their overall performance. This paper is reviewed and evaluated by independent individuals who verify it in accordance with industry standards.
Term
The audit definition states that this is an audit of financial and accounting statements, as well as documents confirming the activities of the company by an independent specialist in accordance with established criteria. This exam and assessment are revisions.
However, an accurate definition of an audit is difficult to provide. We suggest that you familiarize yourself with the wordings proposed by different authors.
By the International Federation of Accountants
An audit is a check of the financial information of an organization, regardless of whether it is profit-oriented or not. This process is also independent of the size or legal form of the organization. Such verification is carried out in order to express an opinion on the issue of the company.
Spicer & Pegler Audit Definition
This is a study of financial statements, accounts and payment checks, which allows the inspector to verify that the balance sheet is properly drawn up. An audit allows you to give a true and objective view of the state of affairs at the enterprise, as well as whether the profit and loss account gives a reliable and fair view of the state of affairs about cash flows for the financial period, in accordance with the information and explanations given to the inspector and reflected in the documentation.
According to the American Association of Accountants
An audit is a systematic process of objectively obtaining and evaluating evidence in relation to allegations of a company's economic performance. These are also measures to determine the degree of conformity between the activities of the audited organization and the established criteria for financial transactions.
According to Montgomery
An audit is a systematic review of the books of an enterprise or organization in order to establish if or not a violation has occurred, and to inform about facts related to a financial transaction and its results.
From the above definitions it is clear that the audit system is a scientific examination of books and business records. It allows the inspector to judge that the balance sheet and the profit and loss statement are properly prepared. Therefore, it shows a true and fair view of the financial situation of the company and the cash flow for the period provided.
Professional employee
The auditor should look at various books, accounts, relevant documents to ensure the accuracy and reliability of the report on the financial condition of the enterprise. Companies are expected to undergo such an examination, as this outcome is very important for their reputation and continued success.
The audit results are very valuable to shareholders and investors, as they provide additional confidence in the correctness of their choice regarding investment.
The inspector must be a professional who is able to correctly evaluate evidence in order to make a reliable verdict on whether or not the economic activity of the company complies with the established set of procedures and standards.
Although a highly qualified accountant is required to work as an auditor, specialists from some other professions can check, this depends on the objectives of the audit and its type. It is important for these employees to obtain effective audit results in order to apply certain sanctions or make a decision if necessary.
Origin and evolution
The primary audit used to be primarily a method of conducting government reporting. In the days of the ancient Egyptians, Greeks, and Romans, there was a practice of revising the monetary circulation of state institutions.
Only during the industrial revolution (from 1750 to 1850) did the audit begin to evolve in the area of fraud detection and financial reporting.
At the beginning of the 20th century, the practice of reporting, which included the provision of documents on the results of the audit, was standardized and became known as the “Report of the Independent Auditor”.
Increased demand for employees leads to the development of the testing process. Auditors have developed a way to strategically select key cases to determine the overall performance of the company.
It was an affordable alternative to a detailed study of each case. It took less time than a standard check.
Main characteristics
From the audit definitions presented above, six main factors of financial audit can be identified:
- System process.
- Tripartite relationship.
- Established audit criteria.
- Theme.
- Proof of.
- Opinion.
Goals
The objective of the audit is to express an opinion on the reliability of the financial statements. The goals of the process can be divided into two types:
1. The main ones include:
- Studying the internal control system.
- Checking the arithmetic accuracy of ledgers, cash flow, various castings, balancing, etc.
- Authentication and transaction validity.
- Revision of the correctness of the distinction between capital and income from the nature of transactions.
- Confirmation of the availability and value of assets and liabilities.
2. Auxiliary, which include:
- Detection and prevention of errors.
- Search and eliminate fraud.
- Detection of inaccuracies, for example, underestimation or revaluation of shares.
Audit range
Scope of the audit is the definition of the range of actions and the period of the records that should be subjected to examination.
The audit range is:
- Legal requirements
- Reliable information.
- Proper communication.
- Assessment of the economic activity of the company ..
- Test tasks.
Organizations Setting International Auditing Standards
There are several institutions whose staff includes certified accountants responsible for establishing GOSTs. One is IFAC or the International Federation of Accountants (IFAC). It is an independent global organization that sets international standards for ethics, support, audit procedures and public sector accounting.
Founded in 1977, IFAC has 179 members and associate employees in 130 countries and jurisdictions. The organization unites more than 2.5 million accountants working in public practice, industry, trade, and government.
It is IFAC, through independent advice on setting standards, that defines generally accepted and implemented standards of ethics, audit, and accounting education.
To ensure that the activities of IFAC and the independent standardization bodies supported by IFAC are community-friendly, the International Council for Oversight of Public Interests (PIOB) was established in February 2005.
Types of audit
Let's consider what classification of checks exists. An audit can be either external or internal. Consider each type separately.
External is also called financial and mandatory. It includes checking the accuracy of the financial statements of the organization by an external employee who is independent of the enterprise and operates in accordance with the IFRS system. The law in most jurisdictions requires an external audit on an annual basis for companies with high cash turnover.
Internal is often called operating. This audit is a voluntary assessment activity undertaken by an organization to ensure the effectiveness of internal control, risk management and to help achieve organizational goals. Internal audits are conducted by company employees who report to the board audit committee. These persons are required to report to shareholders by drawing up a general opinion on the result of the work performed.
This form of audit usually focuses on certain key actions, which include:
- Monitoring the effectiveness of internal control and proposals for improving economic activity.
- Investigation of fraud and theft.
- Monitoring compliance with laws and regulations.
- View and verify, if necessary, financial and operational information.
- Assessment of company risk management procedures.
- The study of the effectiveness and efficiency of operations, processes.
The two types of verification considered are the main ones. According to the nature of the order, an audit happens:
By type of activity there are such types of audit:
- Banking (for financial organizations, for example, banks).
- Insurance (for insurance company).
- Exchange (for currency exchanges and investment organizations) ..
- General (for all industries).
In the direction of the audit, the audit happens:
- Horizontal (one process is checked from start to finish).
- Vertical (affects all processes associated with the audited financial transaction).
- In the forward direction (verification goes from the initial operation of production to the final).
- In the opposite direction (first, an assessment is made of the work performed by the company, then all processes that led to the final result are checked).
By frequency, types of audit:
- Primary control.
- Regularly repeated (for example, once a year).
According to the stage of development, an audit happens:
- Risk-based (check selective operations where maximum risk is possible).
- Confirming (general scrutiny, during which the reliability of financial information about the activities of the organization is confirmed).
- System-oriented (based on the analysis of the internal control system existing at the enterprise).
Other types of audit
Separately, several more types of audit can be distinguished. And the first one is judicial. It involves the use of verification and investigative skills in situations that may have legal consequences. It is performed by a forensic accountant. Such checks may be required in the following cases:
- Investigations of fraud related to misappropriation of funds, money laundering, tax evasion and insider trading.
- Quantification of losses on insurance claims.
- Calculation of the share of profit of business partners in the event of a dispute.
- Definition of the requirements of professional negligence related to the accounting profession.
The results of a forensic examination can be used in court as an opinion on financial matters.
A tax audit is conducted to evaluate the accuracy of the declarations filed by the company. Used to determine the amount of any overstated or understated liabilities to tax authorities.
Information audit includes an assessment of the management tools related to the IT infrastructure in the organization. Verification of the information system may be carried out as part of the assessment of control during internal or external examination.
An information audit usually consists of the following aspects:
- Design and internal control of the system.
- Information security and privacy.
- Operational efficiency and effectiveness.
- Information processing and data integrity.
- System Development Standards.
Environmental gives an assessment of compliance by an enterprise operating in any sphere of the national economy with regulatory and legal norms and requirements for environmental protection. Auditors check the environmental safety of the raw materials, equipment and technologies used, make an economic assessment of environmental pollution during the activities of the enterprise, and develop measures to solve the problems found.
Social audit is the last kind. A feature of the audit is that specialists evaluate the effectiveness of the company, the style of its work, measures and the nature of its impact on society. Social audit makes it possible to determine the degree of corporate responsibility. The audit assesses the formal and informal principles that exist within the organization, the opinions of partners and other parties interested in the activities of the audited company.
Conclusion
An audit is a systematic process of obtaining an objective assessment of evidence relating to statements relating to documents or events of an economic nature, in order to assess the extent to which they meet predetermined criteria and report the results.