What is an Audit?

While some may view audits as a negative experience for their business, they are not always something to dread. 

In fact, conducting regular audits can be likened to performing routine maintenance checks rather than an invitation for potential penalties.

What is an Audit?

An audit is a systematic examination of an organization's financial statements, operations, and processes to ensure that they are accurate, reliable, and compliant with applicable laws and regulations. Audits are typically conducted by independent professionals who are qualified to provide an objective assessment of an organization's financial health and performance.

The primary purpose of an audit is to provide stakeholders with confidence in the accuracy and completeness of an organization's financial information. This information may include financial statements, tax returns, and other financial reports that are used to make important business decisions. Auditors use a variety of techniques to evaluate an organization's financial information, including sampling, testing, and analysis.

In addition to evaluating an organization's financial information, auditors may also review its internal controls and processes. Internal controls are the policies and procedures that an organization has in place to ensure that its financial information is accurate and reliable. The auditor will evaluate these controls to determine whether they are effective in preventing errors, fraud, and other financial irregularities.

Audits can be conducted by internal auditors or external auditors. Internal auditors are employees of the organization who are responsible for reviewing and evaluating its financial information and internal controls. External auditors, on the other hand, are independent professionals who are hired by the organization to conduct an objective assessment of its financial health and performance.

External auditors are typically certified public accountants (CPAs) who have completed rigorous training and education in accounting and auditing. They may be employed by accounting firms or work as independent consultants. External auditors are required to follow strict professional standards and ethical guidelines to ensure that their work is objective and impartial.

Types of Audits

As mentioned before, audits can be performed by external or internal auditors, and the Internal Revenue Service (IRS) also routinely conducts audits.

External Audits - External audits are performed by third-party auditors who are independent from the company being audited. These audits seek to identify any material misstatements in the financial statements and provide financial statement users with confidence that the financials are both accurate and complete. External auditors follow a set of standards different from that of the company or organization hiring them to do the work, and their candid and honest opinions can help stakeholders make informed decisions related to the company being audited.

Internal Audits - Internal auditors are employed by the company or organization being audited, and their resulting audit report is given directly to management and the board of directors. The purpose of an internal audit is to ensure compliance with laws and regulations, maintain accurate and timely financial reporting and data collection, and identify flaws in internal control or financial reporting prior to review by external auditors. Consultant auditors, while not employed internally, use the standards of the company they are auditing.

Internal Revenue Service (IRS) Audits - The IRS routinely performs audits to verify the accuracy of taxpayers' returns and specific transactions. Audit selection is usually made by random statistical formulas that analyze a taxpayer's return and compare it to similar returns, or if the taxpayer has dealings with another person or company who was found to have tax errors on their audit.

Being selected for an audit does not necessarily indicate wrongdoing by the taxpayer. The possible outcomes of an IRS audit include no change to the tax return, a change that is accepted by the taxpayer, or a change that the taxpayer disagrees with, which may result in additional taxes or penalties. A taxpayer can follow a process that may include mediation or an appeal if they disagree with the audit's results.

How is an Audit Conducted?

The organization's management is responsible for preparing the financial report in accordance with legal requirements and financial reporting standards. The financial report is then approved by the organization's directors. Auditors begin their examination by gaining an understanding of the organization's activities and considering the economic and industry issues that may have impacted the business during the reporting period.

For each major activity listed in the financial report, auditors identify and assess any risks that could significantly impact the financial position or performance. They also evaluate the measures or internal controls that the organization has put in place to mitigate those risks. Based on the risks and controls identified, auditors examine the evidence and consider what management has done to ensure the financial report's accuracy.

After this evaluation, auditors make a judgement about whether the financial report presents a true and fair view of the organization's financial results, position, and cash flows. They also assess whether the report is compliant with financial reporting standards and, if applicable, the Corporations Act. Finally, auditors prepare an audit report with their opinion for the organization's shareholders or members.

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