Many new businesses might not know of or heard of the word ‘‘audit’’. It is a planned and recognized action of qualified personnel to analyze the acceptability and compliance with the established processes and the effectiveness of application.
An audit is a vast field that monitors and analyses the different departments of a business like accounting, project, quality management, internal controls and energy conservation. The term ‘‘Audit’’is divided into two categories:
- Internal Audit
- External Audit
This function has a separate department in a business setting where it operates independently and reports to the audit committee. Employees of an organization are the members of an audit committee and perform both, financial and non-financial audits.
The internal audit has the key function of looking over the business environment for risk possibilities and managing those risks to achieve company’s objectives.
This department is independent of the organization and functions outside. They have a sole focus on financial statements of a company, their accuracy and reliability and for this purpose; the shareholders do the appointment of the audit team.
The external audit team performs the statutory annual audit and provides an opinion on the truthfulness and fairness of the financial position of a business.Their responsibility includes the examination and assessment of internal controls that are in place to negate risks related to financial accounts and to determine their intention.
An auditor works on a specific criterion using a company’s adopted policies, procedures and requirements for reference. The internal audit is a detailed internal inspection of the organization conducted by its independent employees because it is hard for the management to view the several activities in the organization. It is necessary for a company to observe the processes and match their performance with a proposed criterion.
Apart from the major function performed by external auditors, they also help the owners of a business and other organizations to place reliance on a company’s financial statements. Some stakeholders, other than the shareholders that count on the accuracy of the audited financial statements are:
- Tax Authorities
- Financial Institutions
Some companies do not know the exact work an auditor performs. What they do not do is:
- Audit information provided by members of the organization like the director’s report.
- Check every financial statement figure because audits are a product of selective testing.
- Judge the suitability of an organization’s activities, strategies and decisions.
- Test appropriateness of the internal controls of an organization.
- Comment on the quality of directors and their governance, to the shareholders.
What auditors cannot do is:
- Predict the future and provide assurance on a forward-looking strategy.
- Be at the organization at all times because audits require defined timeframes.
Audits are conducted to eliminate inefficiencies in the business process and to help present the true and fair financial position of the business.
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