Audit

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The most general definition of an audit is an evaluation of a person, organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information, and also provide an assessment of a system's internal control. Auditing is therefore a part of some quality control certifications such as ISO 9001. The goal of an audit is to express an opinion on the person/organization/system etc. under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, random sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors.

Traditionally audits were mainly associated with gaining information about financial systems and the financial records of a company or a business (see financial audit). However recently auditing has begun to include other information about the system, such as information about environmental performance. As a result there are now professions that conduct environmental audits.

In financial accounting, an audit is an independent assessment of the fairness by which a company's financial statements are presented by its management. It is performed by competent, independent and objective person or persons, known as auditors or accountants, who then issue a Auditor's report on the results of the audit.

Such systems must adhere to generally accepted standards set by governing bodies that regulate businesses. It simply provides assurance for third parties or external users that such statements present 'fairly' a company's financial condition and results of operations.

Financial audits An important type of audit is the financial audit. It is designed to determine whether financial statements are fairly presented in accordance with IFRS (IFRS) or Generally Accepted Accounting Principles (GAAP). In the United States, financial audits are required for all publicly registered companies.

In addition, financial audits may be performed for private companies, registered charities, and some governmental and public entities. Certain forms of private companies are required to have an external audit. Private companies typically request financial audits year after year because lenders may have required an audit or owners may want to have external unbiased eyes look at the financial statements to determine if the company is complying with all the required accounting principles. Charities would require a financial audit to show the financial status of the organization to potential donors. Governments and government businesses are usually required to be audited by statutes to determine if all the money budgeted has been properly spent. Government financial reports are not always audited by outside auditors. Some governments have elected or appointed auditors.

Other than testing the reliablility of a firm's controls, financial audits can alert management to weaknesses in the firm's controls, as well as suggest operational improvements that could be undertaken. These are highlighted in the Management Letter from the auditors. Strategic systems auditors provide a top down approach to auditing by first examing a firm's business strategy and keys to competitive advantage.

Integrated audits In the US, audits of publicly-listed companies are governed by rules laid down by the Public Company Accounting Oversight Board (PCAOB). Such an audit is called an Integrated Audit, and auditors have the additional responsibilities of expressing opinions on management's assessment of the firm's internal control, and on the effectiveness of internal control over financial reporting based on their (the auditors') own assessment. These requirements are consistent with Section 404 of the 2002 Sarbanes-Oxley Act.

Types of auditors There are two types of auditors:

' Internal auditor- are employees of a company hired to assess and evaluate its system of internal control. To maintain independence, they present their reports directly to the Board of Directors or to Top Management. They provide functional operation to the concern. Internal Auditors are employees of the company so that they can easily find out the frauds and any mishappening.

External auditor are independent staff assigned by an auditing firm to assess and evaluate financial statements of their clients or to perform other agreed upon evaluations. Most external auditors are employed by accounting firms for annual engagements. They are called upon from the out side of the company.

Major auditing firms The four largest accounting firms in the world; are collectively referred to as the Big Four auditors. They are as follows:

PricewaterhouseCoopers, also known as PwC

Deloitte Touche Tohmatsu, also known as Deloitte

Ernst & Young, also known as E&Y

KPMG, formerly known as Klynveld Peat Marwick Goerdeler

There are many other audit firms competing with the big four for major audit engagements. Competition has intensified in response to independance issues and other legislative requirements introduced as a consequence of the Arthur Anderson Scandal. In the US and Australia, these firms are referred to as "mid-tier". Some of these include:McGladrey & Pullen, Grant Thornton, PKF, Pitcher Partners, Johnson Lambert & Co. LLP, Beard Miller Company LLP(bmc), and BDO Seidman.

In the UK the medium sized firms are also referred to as mid-tier. Many of these firms are international and increasingly are competing for work against the big four, especially following the recent large auditing Enrol scandal.

Auditing firms around the world While the four major audit firms listed above provide audit services to the largest corporations in America, audit firms around the world are also in partnership with the Big Four. Since corporations held offices in other parts of the world, they tend to be audited by affiliates of the Big Four to maintain consistency and uniformity in their application of auditing standards.

See also

Academic audit
Auditor's report
Single Audit
Audit risk
Clinical audit
Computer security audit
Conformity assessment audit (ISO, HACCP, JCAHCO)
Environmental audits
Financial audit (the oldest)
Information technology audit
Internal audit
Performance audit
Auditing (Scientology)
Software audit
Audit (telecommunication)
Why are Auditors needed
Audit Planning and Controls
Benford's Law

External links

National Information Assurance (IA) glossary
Internal Audit Knowledge Center & Free Source for Audit
Glossary of auditing terms
National Information Assurance (IA) glossary
IFRS List - The online community about IFRS/IAS and Auditing

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