Auditing is an act of evaluating a person, system, organization, process, project, enterprise or product. This term is mostly used to refer to audits in accounting, government auditing and internal auditing, but similar concepts also exist in quality management, project management, energy conversation and water management.
Auditing is a very crucial part of accounting. Traditionally, audits are mainly associated with digging up information about financial records and financial systems of a business or company. Financial audits are usually performed to test the reliability and validity of information and to provide an assessment of internal control systems. The main goal of auditing is to express an opinion of organization, person or system in question and it is done under evaluation, which is based on the work done on an actual test basis. An audit always seeks to provide only assurances, which are reasonable due to constrain and these statements are actually free from material error. This always guarantees the adoption of statistical sampling in audits. In a case where financial statement is concerned, a set of financial statements are believed to be fair and true only when they are free from material misstatements and this concept is influenced by qualitative and quantitative factors.
In recent discussions, there was an argument that auditing should extend beyond just fair and true, which is quickly gaining momentum. It is in accounting that cost accounting process is used. Cost accounting is an actual process that is used for verifying the cost of producing or manufacturing any article, and this article is on the basis of actual account measuring the particular used labor, material or other cost items. To simplify this, cost audit refers to accurate and systematic verification of records and cost accounts, and checking for adherence to the initial cost accounting objectives. An audit must comply with the generally accepted standards, which are established by the governing bodies. These standards actually assure external users or third parties that they can always rely on auditor’s opinion on the financial statements fairness or other subjects on which the auditor expresses his or her own opinion.
This is type of audit where auditors express opinions on the effectiveness on a particular company’s internal control, which is over financial reporting in addition to opinion of financial statements. In the recent world, there are new types of integrated auditing, which are coming up and are using unified compliance material. Because of the increase in need for operational transparency and regulations, organizations are adopting risk based audits. This is because these audits can cover multiple standards and regulations from a single audit event. Although very new, it is seen as a necessary approach in some of the sectors to ensure that all required governance can be simply met without event or product.
Financial statement auditors can be divided into two categories. The first one is external or statutory auditor. This is an independent firm, which is engaged by a particular client subject to the audit in order to express an opinion over company’s financial statement fairness of material misstatements or whether it is due to an error or fraud. External auditors are also effective in publicly related companies because they express an opinion over the effectiveness of actual internal controls over financial reporting. External auditors are also involved in performing other agreed-upon procedures, which can be related or not related to financial statements. These auditors are engaged and paid by the company that is being audited and they are also regarded to as independent auditors. Under external auditor, there is cost auditor or statutory cost auditor where an independent firm gets engaged by the client subject to the cost audit. The auditors express an opinion on whether that company’s cost sheet and cost statements are actually free of material misstatements, which can be due to either error or fraud. External auditors are also required for publicly traded companies to express an opinion on internal controls effectiveness over cost reporting. These audits are specialized and are also termed as cost accountants in India and can also be called cost and management accountant or certified management accountants.
The second one is internal auditors and these auditors are employed by organizations the audit. They work for publicly traded companies, government agencies for example federal, local and state, and for non-profit companies in all industries. In this essence, Institute of Internal Auditors is the internationally known and approved standard setting body for the profession. It has defined internal auditing as follows: for one internal auditing is an objective assurance, independent and consulting activity, which is designed to put more value and improve organizational operations.
Internal audits help an organization to scale their heights higher in its objective by chipping in a systematic and disciplined approach so as to evaluate and improve the risk management, control and governance processes effectiveness. In this essence, professinal internal auditor provides objective and independent audit and also consulting services, which put focus on evaluating whether shareholders, board of directors, corporate executives and stakeholders have a reasonable assurance that organizational risk management, governance and control processes are really designed properly and function effectively. Additionally, internal audit professionals known as Certified Internal Auditors are always governed by international professional standards and code of conduct Institute of Internal Auditors. Internal auditor is not independent on those companies they work for. Objectivity and independence are cornerstone if the Institute of Internal Auditors professional standards are discussed lengthily in the standards and supporting practice advisories and guide. Professional internal auditors are mandated to be independent of business activities they audit. Objectivity and independence of internal auditors are achieved through organizational reporting lines and placement of internal audit department.
Consultant’s auditors are actually external personnel contracted by a particular firm to carry an audit following the firm’s auditing standards. This brings out the difference between consultants auditors and external auditors because external auditors follow their own auditing standards while consultant auditors follows that of the firm. In this essence, the level of independence lies between external auditor and internal auditor. Consultant auditor can work as part of audit team which includes internal auditor or work independently. These auditors are used especially when the firm is short of expertise to audit certain areas or for staff augmentation when they are not available.
Internal audit, which is mostly focused when it comes to process of auditing is an objective assurance, independence and consulting activity which is designed to top up value and inject improvement in an organization’s operations. It helps any organization to accomplish its objectives by bringing a discipline that is also systematic to evaluate and improve the actual effectiveness of control, risk management and governance processes. Audit processes comprise of ten-step procedure which are as follows:
Notification, planning and opening meeting.
In notification, an auditor receives a letter to inform him or her of an upcoming audit. The auditor the sends a preliminary checklist which comprises of organization charts and financial statement that helps the auditor to learn the organizations unit before planning the audit. Planning on the other hand, is done after reviewing the information where an auditor conducts a risk workshop simply to identify important risks and then raise risk awareness, after that draft an audit plan and then schedule for an opening meeting. The opening meeting includes senior managements and any administrative staff who may be involved in audit. It is in this meeting that scope of audit is discussed and one is always free to ask the auditors to look at the areas the organization is concerned about and discuss the time needed to complete the auditing.
Fieldwork, communication and report drafting.
This comes after opening meeting and it is where the auditor finalized the audit plan and begins fieldwork. The fieldwork entails talking with staffs, reviewing procedure manual, testing for compliance and learning about business processes. In the whole process, the auditor keeps the organization informed thus giving it the opportunity to hold discussions on issues noted and the solutions. Report drafting consists of the distribution lists, the follow-up date, general overview of the audit, scope of audit, any major concerns, the overall conclusion and detailed commentary which gives the description of the findings and recommended solutions. The draft should be read carefully to avoid errors and if a mistake is found the auditor should be informed right away so that it can be rectified before the issue of final report.
Management response, closing meeting and report distribution.
Once report is finalized management responses is requested. The response consists of whether you disagree or agree with the problem, the action plan to correct the problem and the anticipated completion date. The closing meeting is held so that everyone can have a chance to discuss the audit report and review the management responses. This offers an opportunity to discuss how the audit was carried out and the remaining issues. The report is then distributed to staffs, the manager, university administrators, internal audit and the university’s external auditor. An audit survey is also distributed to the audit unit in order to solicit feedback about the audit. This is because the feedback helps in the improvement of the process.
It is performed on an issue-by-issue basis and it occurs shortly after the anticipated completion date so that the agreement on corrective actions can be put into implementation. The objective of follow-up is to make verifications that there was implementation on agreed-upon corrective actions. The auditor the iinterviews the staffs, perform tests or make a review on new procedures to perform verifications. Then the organizations receive a letter from the auditor showing whether the organization management has made corrections on problems encountered or whether further actions are necessary. Auditing should be done continuously for example in an interval of one or three months. This will entail thorough examination of account books at regular intervals. In this essence the visits his or her client at regular intervals especially during the financial year and that is when he or she checks each and every transaction that has been made. At the end of every year, the auditor makes a check on loss and profits account and balance sheet. A continuous audit is not of much important to small firms is its account can be simply audited at the end of each financial year without much loss of time. In a business where continuous auditing is applicable must have the following characteristics: it must have a large volume of transactions, it has a desire to present the actual accounts immediately after the close of financial year for example bank. It is applicable where the statements of accounts are required to be presented to the organization management after every quarter or month and also where there is no satisfactory system to check internal operations.
Advantages of continuous auditing include easy and quick discovery of an error. Frauds and error in any organization can quickly and easily discovered through auditing because the auditor checks the accounts regularly and in detail. When the auditor visits his or her client after a month, two month or so, the count of transactions is always small and so the errors will be detected quickly and easily. Secondly, quick presentation of accounts. In continuous auditing, most of the checking works are usually done during the year and final audited accounts are presented to the company’s shareholders immediately after the closure of the financial year at every annual general meeting. In addition to this, knowledge of technical details helps the auditors strings to remain more in touch with business hence remain in a good position to know the technical details and so they can be of very great help to the client they are working for by making appropriate and valuable suggestions.
Continuous auditing keeps the client’s staffs alert because of regular interval visits that require the client’s clerks to keep the account up-to –date. They make sure that every transaction is done in accurate manner because if they don’t do so the auditor will detect it automatically. Moral check on the staff in cases of a circumstances where auditors pay surprise visits, is always a considerable especially on the clerks preparing the accounts because they are caught unaware. Moral check is very important because it makes the staff to be alert and careful always.
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Disadvantages of continuous audit include alteration of figures. The figures in the account books especially which have been checked by the auditor on his or her previous visit can be altered by an unfaithful clerk and commit a fraud. Disturbance of client’s work can be demonstrated where the auditor visits the staff clients frequently hence causing inconvenience to the latter. Continuous audit is very expensive because the auditor authorized to do that work spends more time and so the company has to pay more amount as remunerations of that auditor. The company’s audit clerk can lose the thread of work thus making the queries which he or she wanted to put forth remain outstanding because of long interval which may occur between two visits. Finally extensive note taking is very necessary so that one can avoid any alteration of the figures after every audit.
Auditing plays a very important role in any company if at all the procedure is done accordingly. An effective audit system is very important for any given company because it enables that company to pursue and attain its corporate objectives. Forms or internal control are needed in business processes especially to facilitate monitoring and supervision, prevent and detect frauds, maintain adequate business records, measure ongoing performance and also promote operational activities. In any company’s financial report, auditor is able to assess the risk of material misstatement. Without an audit system or system of internal control, a company cannot be able to create a financial report, which is reliable for external or internal purposes. In this essence, the company will not be able to determine on how to allocate its resources and will also be unable to detect which segment of the company is profitable and which is not.
Internal audit plays a very important role in fraud prevention. Regular analysis of a company’s operations can prevent and detect certain forms of fraud and other irregularities, which are associated with accounting. In general, it is important to carry out the auditing process may it be internal or external so as to determine the operation of the company especially to detect the areas which are profitable to the company and which are not. This will help in solving the issues, which hinder the company to be profitable and again it helps in improving those areas, which are profitable to be more profitable than they are.