Audit

DEFINITION of 'Audit'
An audit is an objective examination and evaluation of the financial
statements of an organization to make sure that the records are a fair and
accurate representation of the transactions they claim to represent. It can be
done internally by employees of the organization, or externally by an outside
firm.

The IRS can perform audits to verify the accuracy of a taxpayer’s returns or
other transactions. When an audit is being preformed by the IRS, it usually
carries a negative connotation and is seen as evidence of some type of
wrongdoing by the taxpayer.

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BREAKING DOWN 'Audit'

Audits preformed by outside parties on private companies can be extremely
helpful in removing any bias when it comes to the state of a company's
financials. Audits look for what can be called a "material error" in statements
on any specific object. They help provide stakeholders with a sense of
accuracy when regarding the state of the subject being audited and can help
enable them to make better, more informed decisions regarding the subject
being audited. When audits are performed by third parties, the opinion on
whatever is being audited (a business’ books, an organization as a whole or
a system) can be candid and honest without it effecting daily work
relationships.
Most all companies receive an audit once a year, while even larger
companies can receive audits monthly. For some companies, audits are a
legal requirement due to the compelling incentives to intentionally misstate
financial information in an attempt to commit fraud. For some publicly traded
companies, auditors are used as a resource to evaluate the effectiveness of
internal controls on financial reports.

Types of Auditors
When it comes to external auditing, there are two different categories of
auditors. First, there is an external or statutory auditor who works
independently to evaluate financial reporting, and then there are external
cost auditors who evaluate cost statements and sheets to see if they’re free
of misstatements or fraud. Both of these types of auditors follow a set of
standards different from that of the company or organization hiring them to
do the work.

Internal auditors, as the name implies, are employed by the company or

organization for whom they are performing the audit. To the best of their
ability, internal auditors provide information to the board, managers, and
other stakeholders on the accuracy of their books and the efficacy of their
internal systems.

Consultant auditors, while not working internally, use the standards of the
company they are auditing as opposed to a separate set of standards.
These types of auditors are used when an organization doesn’t have the
resources to audit certain parts of their own operations.

Oversight, Rules and Regulation

In the United States as in many other countries, an audit has to meet a
general set of accepted standards as established by their respective
governing bodies.

Standards for external audits, called the Generally Accepted Auditing

Standards (GAAS) are set out by the American Institute of Certified Public
Accountants. A separate set of International standards, called the
International Standards on Auditing were set up by the International Auditing
and Assurance Board.
Rules for audits of public companies are made by the PCAOB, the Public
Company Accounting Oversight Board established in 2002.

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