Auditing
Auditing is an accounting practice where specialists examine the accuracy of financial reports and records of an entity. The auditing team inspects not only the financial statements and records but also the policies and procedures of an organization to establish whether they comply with regulatory standards. The audit may also involve the inspection of physical assets, including real estate, equipment, and inventory.
The purpose of auditing is to ascertain the validity and reliability of information recorded in the financial books using supporting documents such as vouchers and other documents. Auditing seeks to establish whether the financial reports represent the actual financial position of the organization at a given date to discourage theft and fraud. The findings of an audit accentuate the credibility of the financial reports, which can be beneficial to the company in various ways, such as increased credit and funding from banks and investors.
There are three major types of auditing.
• Internal Auditing. Internal auditing is done by employees and other stakeholders within the organization. The main focus of internal auditing is to assess and evaluate whether the organization is operating in accordance with internal processes, norms, rules, as well as the regulatory standards. While internal auditing is vital, it is not accorded importance like external audit because the process involves employees who work in the same organization.
• External Auditing. External auditing is done by independent specialists, often third-party agencies whose work is to assess and evaluate organizations to establish their compliance with regulatory standards. Some organizations hire external audits to help them identify any irregularities that might not be obvious in the eyes of senior managers. External auditing is also mandatory for regulatory and compliance purposes and also as a shareholder requirement. The process can be done quarterly, half-yearly, or annually to be presented before the shareholders and board of directors during AGMs.
• Financial Audits. These are the most common forms of audits. Financial audits focus on the financial performance of a company. Investors and shareholders rely on financial audits to determine the returns and also establish whether the company is being run properly and that their capital is safe.
The increased complexity of modern organizations has given rise to other forms of audits, including strategic, operational, and IT audits. But it is important to note that no auditing technique is foolproof. After all, the auditors only use a small portion of information to come up with a final report. A common issue facing auditing in the US is the increased cases of auditing fraud where external auditors collude with management to cover up weaknesses and falsify documents. However, several stringent laws to prevent such cases from happening have been put in place.
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