Audit

Audit: What is it?

Meaning and definition of an Audit

The general definition of an audit can be given as an appraisal of an individual organization, process, system, project, enterprise, or product. The term is most commonly used as a reference to audits in accounting, but alike concepts also exist in project management, energy conservation, and quality management.

Putting another way, an audit is an unbiased evaluation and examination of an organization’s financial statements. The process of auditing can be performed internally as well as externally. As explained by Investopedia, the auditors ascertain the financial accuracy and responsibility of an organization.

Benefits of Auditing Services

Auditing is a process that involves hiring professionals for evaluation of financial records thus ensuring their intactness. Besides, auditing is also helpful in understanding and analyzing the financial records easily and recognizing the key areas requiring improvement for desired growth. Auditing is helpful in assessing risks, economy, quality, and efficiency as well.

Some of the most important benefits of auditing are mentioned below:

  • Owner satisfaction

Auditing is helpful in ascertaining the satisfaction of the owner about the business operations in addition to the working of its various departments.

  • Detection and prevention of errors

The auditing process is helpful in detecting errors, committed deliberately or innocently, and also prevents future occurrences. The workers will, therefore, not commit any kind of financial errors or frauds for the fear of being detected as the accounts are audited on a regular basis.

  • Independent opinion

The process of auditing is very helpful in obtaining an independent opinion from the auditor pertaining to your business. Getting the accounts audited by independent auditors guarantees the reports to be fair and true in every respect.

  • Detection and prevention of Frauds

Akin to errors, frauds are also detected by auditing thus preventing future possibility for the same. Putting it simple, auditing is the best way for monitoring financial records against interference.

  • Moral check

The process of auditing establishes a thorough check thus ensuring the business operations to run smoothly and preventing the staff from committing irregularity ths making the staff more responsible and active.  


Audit Engagement

Audit engagement refers to audit performed by an auditor. It is the very first stage of an audit procedure where the client is notified by the auditor that the work pertaining to audit has been accepted by him/her and also provides clarifications with regard to the scope and purpose of audit. To be more specific, audit engagement can be referred to the written letter that the auditor uses to notify the client that he/she would be engaging in auditing services. Thus, the audit engagement procedure is basically a negotiation based on professional terms that takes place between prospective customer and a public accounting entity. This procedure is used for finding new customers and offer accounting related services to different businesses.

Audit Evidence

Audit evidence generally refers to the information collected for reviewing the financial transactions of a company in addition to its internal control practices and other essential factors required for the certification of financial statements. The type and amount of the considered auditing evidence varies significantly on the basis of the type of organization being audited in addition to the required scope of the audit. The audit evidence are important to be collected by an auditor during the process of his auditing work.

Audit Opinion

An audit opinion refers to a certification accompanying financial statements and is provided by the independent accountants involved in auditing of a company’s books and records in addition to being helpful in creating the financial statements. The audit opinion is helpful in setting out the scope of the audit, the accountant’s opinion about the procedures and records used for creating statements, and the accountant’s opinion about whether or not the financial statements present an accurate reflection of the organization’s financial condition.

Audit Plan

Audit planning is defined as the process in which the strategy is designed to conduct the expected result which also defines the scope of audit inside the company. The size, nature and the time for the audit plan may vary. It depends on the size of the business. If the business is spread to the large scale, the strategy making and its implementation will take more time and also the overall scope of Audit plan may also increase. It’s basically the step by step methodology where the audit in control reviews the financial process and the internal environment along with the engagement preparation.

Audit Procedures

The audit procedures can be divided into two categories...

Audit Report

Audit report, as recorded in the annual report, examines to check the compliance of a company’s financial statements with GAAP. The audit report is, sometimes, also referred as the clean opinion. An audit report includes three paragraphs – the first stating the responsibilities of the auditor and directors; the second stating the use of GAAP; and finally the third paragraph stating the auditor’s opinion.

Audit Risk

Also referred as residual risk, the audit risk can be defined as the risk that the auditor will not discern errors or intentional miscalculations during the process of reviewing the financial statements of a company or an individual. The audit risk generally features two categories – risk regarding evaluation of financial materials and risk regarding the affirmations created by evaluation of financial documents.

Audit Sampling

Audit sampling can be defined as the process of applying auditing procedures to under 100% of different items in an organization’s account balance in a way that every single unit might have an equal probability of being selected.

Audit Trail

The audit trail is a step by step record that shows what operations had been performed over a specific period of time. It is useful in tracking out any market activity that is improper. It is specially used in trade with the help of which any culprit in any particular trade can easily be identified.

Auditing Standards Board

The ASB, short for Auditing Standards Board, exists to serve the public interest by improving the existing audit and attestation services in addition to encouraging new ones. The Auditing Standards Board produces statements, standards, and guidance to certified public accountants (CPAs) for non-public company audits. The pronouncements issued by the Auditing Standards Board in the form of statements, interpretations, and guidelines should be essentially adhered to by all CPAs while performing audits and attestations.

Baker Tilly

Baker Tilly is one of the top ten audit firms and is ranked eight best. It is one of the most finest and prestigious accounting companies in the world which is renowned globally. Providing with great financial and advisory services, Baker Tilly has managed to keep up to its reputation by being one of the preferred choice of audit companies in the world. Spread across 120 countries, the Baker Tilly International has over 150 firms.

BDO

BDO is among the top ten audit companies in the world and is presently the sixth preferred Audit Company. BDO specialise in global professional financial services and has a wide network of accountancy firms dealing with local and international clients all over the world. BDO is spread over 135 countries and has around 48,000 professionals working for them. Incorporated in the year 1963, BDO is head quartered in Belgium

Big Four (Big 4)

The Big Four includes the four largest international professional services networks in accountancy and professional services. These professional services networks handle the wide majority of audits for publicly traded companies and various private companies thus creating an oligopoly in large companies’ auditing. This ‘Big Four’ group was once known as the ‘Big Eight’, and got reduced to the ‘Big Five’ through a series of mergers. The ‘Big Five’ further turned to ‘Big Four’ through further mergers.

Comfort Letter

In the auditing context, a comfort letter is a letter or a document from an independent auditor which is included in the preliminary prospectus and which states that though a complete audit has not been done, a review has been done by the auditor which is sufficient for assuring that the information in the financial statement in the preliminary prospectus is prepared properly to the best of his knowledge. The auditor also states that the final audit of the financial statement will not be substantially different from the review that the auditor has done and showed in the preliminary prospectus.

Compliance Audit

Compliance audit is essentially about comprehensively reviewing whether a company is adhering to the regulatory related guidelines or not. IT, security and independent accounting consultants conduct an evaluation of the thoroughness and strength of preparations pertaining to compliance. Auditors conduct a review of the security related policies, procedures pertaining to risk management and user access controls throughout the compliance audit course.

Computer Assisted Audit Techniques (CAATs)

Computer Assisted Audit Techniques (CAATs) is the tool which is used by the auditors. This tool facilitates them to make search from the irregularities from the given data. With the help of this tool, the internal accounting department of any firm will be able to provide more analytical results. These tools are used throughout every business environment and also in the industry sectors too. With the help of Computer Assisted Audit Techniques, more forensic accounting with more analysis can be done. It’s really a helpful tool that helps the firm auditor to work in an efficient and productive manner.

Computer Auditing

Computer auditing is the tool that facilitates the business in regard to data processing while putting a special concern to some targeted operations. The tool merges or reviews the data by the programmers or the accountants and the analysts and extract the data in the summarize form. These computer auditing tools save the time, money and the frustration. These auditing tools also serve for the purpose of monitoring any individual activity, the tool automatically picks the data from the linked PC that is being used by another employee who are usually the accountants and the analysts.

Conflicts of Interest

conflict of interest is believed to occur when an organization or an individual is caught up in multiple interests, one of which could probably distort the motivation for one act in the other. Moreover, a conflict of interest can exist only if an individual or testimony is delegated with some impartiality; a small amount of trust is required to create it.

Deloitte

Deloitte Touche Tohmatsu Limited, usually referred to as Deloitte, is one of the Big 4 accountancy firms (other firms are PricewaterhouseCoopers, Ernst & Young, and KPMG). Deloitte is considered as the second largest professional services firm in the world, featuring 1,82,000 employees in more than 150 countries proffering tax, audit, enterprise risk, consulting, and financial advisory services. The company holds its headquarters in Paramount Plaza, New York City, New York, and Midtown Manhattan.

Detection Risk

Detection risk is actually the risk that the procedures applied by the auditors will fail to detect material misstatements in the financial statements.

Disclaimer of Opinion

Disclaimer of opinion is basically a statement provided by the auditor that doesn’t lay down any sort of opinion with regard to the financial position and condition of the company. Disclaimer of opinion is provided by certified public accountant wherein he clarifies that an audit related opinion/statement cannot be provided owing to limitations of the examinations conducted.

Ernst & Young

The Ernst & Young is one of the largest professional services firms around the world as one of the Bid-4 firms in conjunction with Deloitte, KPMG, and PricewaterhouseCoopers. Ernst & Young is an international organization of member firms in about 140 countries, with headquarters in London, UK. Besides, the firm was ranked as the 9th largest private company in US by Forbes magazine.

Financial Audit

Financial auditing refers to an accounting process applied in business. The process involves using an individual body for evaluating the financial transactions and statements of a business. The ultimate purpose of financial audit is presenting an accurate amount of the business transactions of a company. Besides, it ensures that the accounts presented to the public and shareholders are accurate and justified. The results of financial audit are useful for banks, shareholders, and anybody else with an interest in the company.

Generally Accepted Auditing Standards (GAAS)

Short for Generally Accepted Auditing StandardsGAAS refers to a set of systematic guidelines used by auditors while performing audits on companies’ financial statements, thus ensuring the consistency, accuracy, and verifiability of the actions and reports produced by an auditor.

Grant Thornton

Grant Thornton is a globally well known auditing company which has been rated the fifth best auditing firm in the year 2011. Grant Thornton has managed to retain its fifth position in the top 10 auditing companies. Grant Thornton is head quartered in London, UK. This company has known to provide the best audit, tax and consultative know-how and promotes the importance of connecting with the clients they work for.

Inherent Risk

Inherent risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls. Every company cannot apply the procedure that gives the accurate result to them, the result is basically inherited by the risk factors as the procedure is applied to just a small sample of the population rather than on the whole population. This can lead to the misstatement which is said to be the inherent risk.

Institute of Internal Auditors (IIA)

The Institute of Internal Auditors (IIA) implies a guidance-setting organization. Providing service to members in 165 countries, the Institute of Internal Auditors is the internal audit’s global voice, chief advocate, principal educator, and recognized authority, with global headquarters featured in Altamonte Springs, Fla., US.

Internal Audit

Internal audit can be defined as the evaluation, monitoring, and analysis of activities associated with the operations of a company, also counting the business structure, information systems, and employee behavior. An internal audit is designed in a way to review the activities performed by a company to recognize the probable threats to the company’s health and profitability, in addition to making suggestions for reducing risk related with those threats so as to mitigate the costs.

International Standards for the Professional Practice of Internal Auditing

Internal auditing is the process carried out in different legal and cultural environments; within the organizations that differ in purpose, size, structure, and complexity; as well as by individuals inside or outside the organization. Although differences might affect the practice of internal auditing in every environment, conformance with the IIA’s International Standards for the Professional Practice of Internal Auditing is important in congregating the responsibilities of internal auditors as well as internal audit activity.

International Standards of Auditing (ISA)

International Standards on Auditing (ISA) refer to professional standards dealing with the responsibilities of the independent auditor while conducting the financial audit of financial info. These standards are issued by International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB). The ISAs include requirements and objectives along with application and other explanatory material. The auditor is obligatory to have knowledge about the whole text of an ISA, counting its application and other explanatory material, to be aware of the objectives and to apply the requirements aptly.

KPMG

KPMG is one of the leading professional services firms in the world in addition to being one of the esteemed members of the Big-4 auditors, along with PwC, Deloitte, and Ernst & Young. The headquarters of the firm are located in Amstelveen, Netherlands. Moreover, the firm employs about 1,38,000 people and offers three basic service lines – tax, audit, and advisory. The advisory services of the firm are further categorized into three service groups counting Risk Consulting, Management Consulting, and Transaction & Restructuring.

Litigation Risk

Litigation risk is the risk that a legal action might be taken against the company soon. The litigation risk analysis provides the assessment to determine whether there is a chance that a legal action will be taken against the company in the future. This risk analysis also determines the possibility of litigation risk arising for the company from a certain contract or a transaction.

Materiality

Materiality concept in auditing and in accounting refers to the truthfulness of the material i.e. everything should be exact without the material misstatement or the misstatement in the financial transactions too. The concept in GAAP has no strong or hard rules to make every transaction or the recording with materiality, the truthfulness or the clearness.

Model Audit

model audit refers to the colloquial term used for the tasks performed while conducting due diligence on a financial model, with the purpose of eliminating spreadsheet error. Generally, model audits are appealed by banking organizations, with the purpose of reassuring lenders and investors alike that the calculations and assumptions contained in the model are accurate, and that the results obtained by the model are dependable. When an all-inclusive review of the model is needed, the scope of review is often extended to include tax and accounting, sensitivity testing, and the verification of data contained inside the model back to the legal documentation and original financing.

Modified Opinion

An auditor gives an unmodified opinion if the financial statements present true and fair view. In all other circumstances, the auditor gives a modified opinion. The auditor uses different techniques and methods and also applies different procedures to see if the financial statements are free of material misstatements. If all the information in the financial statement is materially correct, the opinion of the auditors will be un-modified opinion. In its contrary, if there are the chances that the information in the financial statement are having some material errors, the auditors gives a modified opinion.

Non-Sampling Risk

Non-sampling risk is the risk that despite having selected an appropriate sample, the auditors will arrive at wrong conclusion. If the auditor has chosen right sample and still makes the faulty conclusion due to other reasons, it is known to be a Non sampling risk. Auditors here have mistakenly used the inappropriate procedure for judging the entire sample which leads him to make the non-sampling risk.

PKF

PKF is one of the top ten audit firms in the world, ranked 10th. PKF is globally spread over 125 countries and has one of the widest accounting network providing with the best in financial services all over the world. Found in 1969 PKF is one of a kind international merger of accounting firms from Australia, Canada, UK and USA to for PKF.

PricewaterhouseCoopers (PwC)

Officially known as PricewaterhouseCoopers, PwC is an international global services firm with headquarters in London, United Kingdom. Besides being one of the members of the ‘Big-4’ accountancy firms, PwC is also the world’s largest professional services firm by revenue. Also, PwC has its offices in about 757 cities across 154 countries and 175,000 employees. The firm came into existence in 1998 through a merger between Coopers & Lybrand and Price Waterhouse. The trading name was thus shortened to PwC in September 2010 as a part of key rebranding exercises.

Professional Judgment

Professional judgment is a skill of that an auditor gains through experienced and training. Their judgment is said to be professional if they are well versed to the condition which they are facing. Suppose there is a condition where the accountants have prepared the financial statement, and auditors are there to check if the information in the financial statement is true and not flawed by the misstatement. The auditor who had got the experience and the training for analyzing the validity of the financial statement will make the judgment of that statement, and thus the judgment will said to be the professional judgment.

Professional Skepticism

Professional skepticism is the state of mind which is ready for the situation that grabs out the errors or questions the financial events and other events while conducting an assurance engagement. It’s basically a skill just like the professional judgment which makes the auditor alert for any particular situation. They are alert for any sort of reactions which may occur in the financial events of the company. They are relevant questions to make sure the reports or the information is true.

Qualified Opinion

An unqualified audit opinion is given when the financial statements present a true and fair view and comply with the legislation. In all other circumstances, a qualified opinion is given. A qualified opinion suggests that the information provided was limited in scope and/or does not comply with the accounting standards or legislation.

Ratio Estimation

Ratio estimation uses the known population totals for variables to improve the weighting from sample values to population estimates. It compares the sample estimate of the variable with the population total. The ratio of the sample estimate to its population total is used to adjust the sample estimate for the variable of interest.

Risk of Material Misstatement

The risk of material misstatement refers to the risk that the financial statements are materially misstated and do not present true and fair view. The risk of material misstatement is assessed at two levels (i) financial statements level and (ii) assertions level.

RSM Tenon Group

RSM Tenon group is one of the top ten audit companies. Founded in 2000 and headquartered in London, RSM is a professional financial company that provides with all types of financial services to its clients including risk management, financial management, tax and advisory. RSM Tenon Group is spread over 80 countries and is globally well known for its various financial services and achievements.

Sampling Error

Sampling error, generally, refers to a statistical error to which an analyst exposes a model only because he/she is working with sample data instead of population or census data. However, using sampling data involves the risk that results found in an analysis might not represent the results that would be acquired by using data involving the whole population from which the sample was derived.

Sampling Risk

Sampling risk is actually occurs when the auditor applies the procedures to the sample to judge the entire population. Sampling risk is the risk that the auditors opinion would have been different if the procedures were applied to the entire population of the data.

Sarbanes-Oxley Act

Commonly known as the “Public Company Accounting Reform and Investor Protection Act” and “Corporate and Auditing Accountability and Responsibility Act”, the Sarbanes-Oxley Act was implemented on July 30, 2002. This act is generally addressed as Sarbox or SOX. It is a US Federal law which set new or improved standards for all US public company boards, management and public accounting firms. The act is named after sponsors US Senator Paul Sarbanes (D-MD) and US Representative Michael G. Oxley (R-OH).

Smith and Williamson

Founded in Glasgow in the year 1881, Smith and Williamson has catered to various financial business needs of the customers providing with great advisory and chartered accountant services to its clients. Being one of the top ten audit companies in the world, Smith and Williamson has managed to hold its reputation in the financial world. Spread in over 100 countries and having a great reputation for providing great financial services, Smith and Williamson provides its client with varied financial services.

Statutory Audit

The term statutory audit refers to the review or the record of the company of the government organization which is required by the law or the municipal authority of any particular region. This is done to monitor the performance of the firm or the government organization. The company here the auditors who provide the auditing report and submit those reports annually or semiannually to the law or the concerned municipal law authority. This statutory auditing finally does the cross checking of the financial reports which are provided by the companies. They do cross checking by gathering the transaction information from the company’s bank and also from other various sources.

Statutory Auditor

Statutory auditors, in most of the countries are referred to the external auditors or the external public accountants who are certified. A statutory auditor is an external or outside service supplier who has the responsibility to certify the financial statements in accordance to specific professional auditing standards like the ACA, ACCA, INSTOSAI standards.

Unqualified Opinion

The judgment of an independent author that the financial records and statements of a company are presented appropriately and fairly and in accordance with the Generally Accepted Accounting Principles (GAAP) is called unqualified opinion

Vouching

The term vouching is the core thing of auditing which refers to the inspecting of documentary evidence by an auditor to support and substantiate a transaction. The main objective of this practice is to establish the authenticity and accuracy of the transactions that are written in the primary books of account. Vouching involves verification of a transaction which is recorded in the books of account by checking it with the appropriate authority and documentary evidence based on which they have made the entry. It also involves confirming and checking whether the amount that has been stated in the voucher is posted to a right account that would reveal the transaction’s nature when it is included in final statements of accounts. Valuation is not included in vouching.

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