Auditing is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial reports as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. The financial statement includes balance sheet, income statement, cash flow statement, statement of equity changes and summary of accounting policies.
As a result of auditing, stakeholders may effectively evaluate and improve the effectiveness of risk management, control, and the governance process over the subject matter. The purpose of auditing is to view if financial reports present the true picture of organization's financial position.
Auditing can broadly be classified into three types i.e. product audit, process audit and system audit.
- Product Audit – Auditing or examining a particular product or service such as hardware, software and processed material to confirm whether it meets its customer requirements like specifications and performance standard.
- Process Audit – Auditing an operation or method to confirm if they meet their predefined instructions and standards.
- System Audit – It means auditing management system of an organization to conform if applicable elements of the system are effective and appropriate and implemented in accordance with specified requirements.
Phases of Auditing
Audit preparation – The preparation stage of an audit begins with the decision to conduct the audit and ends when the audit begins. Audit preparation consists of everything that is done in advance by interested parties, such as the auditor and the client to ensure that the audit complies with the client's objective.
Audit performance –It is the data-gathering portion of auditing and covers the time period from arrival at the audit location to the exit meeting. It consists of activities including on-site audit management, meeting, understanding the process and system controls and verifying that these controls work, communicating among team members, and auditee.
Audit reporting – The purpose of the audit report is to communicate the results of the investigation. The report should provide correct and clear data. The audit process may end when the report is issued by the lead auditor or after follow-up actions are completed.
Audit follow-up and closure – According to ISO 19011, "the audit is completed when all the planned audit activities have been carried out, or otherwise agreed with the audit client and continues by stating that verification of follow-up actions may be part of a subsequent audit.
Who Is An Auditor?
An auditor is a person or a firm appointed by a company to execute an audit. To act as an auditor, a person should be certified by the regulatory authority of accounting and auditing or possess certain specified qualifications. Generally, to act as an external auditor of the company, a person should have a certificate of practice from the regulatory authority.
There are two types of auditor - external / statutory auditor and internal auditor.
- External / Statutory Auditor – External auditor is 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.
- Internal Auditor - Internal Auditors are employed by the organizations they audit. They work for government agencies (federal, state and local); for publicly traded companies; and for non-profit companies across all industries.
Roles of An Auditor
Roles and responsibilities of an auditor can be defined as below
- Auditors discuss the scope of the audit work with the organization.
- Auditors maintain independence from management and directors so that tests and judgments can be made objectively.
- Auditors determine the type and extent of the audit depending on the risks and controls they have identified.
- Express an opinion over the effectiveness of internal controls over financial reporting.
- Engaged to perform other agreed-upon procedures, related or unrelated to financial statements.
- Express an opinion on whether the company's Cost statements and Cost Sheet are free of material misstatements.
- Examine financial and accounting records, other documents, and tangible items such as plant and equipment.
- Make judgments on significant estimates or assumptions that management made when they prepared the financial report.
- Ensures that checks are in place to help with the effectiveness of financial and operational reporting.
Internal and external auditors usually have a college or master's degree with business-related majors such as finance, accounting and economics. Apart from academic degrees, an auditor should have certifications such as Certified Public Accountant (CPA), Certified Information Systems Auditor (CISA), Certified Internal Auditor (CIA), Certified Government Auditing Professional (CGAP) or Certified Fraud Examiner (CFE), among others. Out of these, the CPA is regarded as the most credible, as auditors interface with employees, managers, executives, members of the board and external parties.
Career Profile for Auditors
Most of the industries employ auditors to provide policy and procedural oversight and to ensure accurate financial reporting. Different types of auditing roles are as mentioned below.
- Information Technology Auditor
- Internal Auditor
- External Auditor
- Audit Manager
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