Audit Definition: “An audit is an independent and systematic examination of books, accounts, legal records, documents and vouchers of a company to assess to what extent the financial statements (Balance Sheet, Income Statement, Cash Flow Statement etc.) and non-financial information give a true and fair picture of the company.” Auditing Definition: “Conducting an official financial examination of an entity’s books of accounts.” Companies are required to have their accounts audited yearly.
It also tries to ensure that the books of accounts are maintained carefully, as required by law. Auditing has become such a universal phenomenon in business and the public sector that scholars began identifying an “Audit Society”.The auditor realizes and identifies the statements before them for examination, obtains evidence, assesses the same and methodically devise an opinion on the basis of his judgment which is communicated through his audit report.
Every subject matter can be audited. Audits give third-party assurance/guarantee to various stakeholders (Internal users of financial information and external users of financial information) that the subject matter presents a true and fair view and is free from any material misstatement (ISA 315). The term is most often applied to audits of the financial accounts relating to an entity. Other areas which are commonly audited include: secretarial & compliance audit, internal controls, quality management, project management, water management, and energy conservation.
An audit process normally contain the following 8 steps:
- Planning: In this step the auditor plans the audit and apply different procedures to identify material problems
- Opening Meeting: In this step the auditor invites senior management and key administrations for an open meeting in which the auditor presents the scope of the upcoming audit.
- Fieldwork: In this step the auditor gathers and organize the information received during opening meeting and use this information to finalize the audit plan.
- Communication: Throughout the audit process the auditor keep in touch with his client and two-way communication between the auditor and the client continues.
- Report Drafting: The auditor then writes up a commentary describing the findings of the audit and recommended solutions to any problems. In this step the auditor prepares and finalize the auditor’s report, in this report the auditor give details of findings, mathematical errors, posting errors, authorized payments still pending, and other similar discrepancies.
- Management Response: After the finalization of the auditor’s report, the auditor requests responses of the management. These responses could be, whether the management agree or disagree, the management’s action place to correct the discrepancies, and the expected completion date.
- Closing Meeting: In this closing meeting everyone will discuss the report, management responses, and findings and if there is any other problem that will be sold out in this closing meeting.
- Report Distribution: In this final step, the auditor’s report will be distributed to every concern person, including senior management, administrators, internal auditors etc..
Types of Audit:
- Operations Audit
- Energy Audit
Public Sector Audit
- Integrated Audit
- Project Audit
Information System Audit
- Quality audit
- Performance Audit
- Security Audits
- Cost Audit
Unmodified Opinion: After conducting the audit of financial statements if the auditor’s report states that the financial statements presented show a true and fair picture of the business in all material respects, in accordance with GAAP. Unmodified opinion is also known as unqualified opinion.
Modified Opinion: A qualified opinion could be of three types.
- A Qualified Opinion: The auditor concludes that misstatements are material, but not pervasive, to the financial statements Or The auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion but concludes that the possible effects of undetected misstatements, if any, could be material but not pervasive.
- An Adverse Opinion: An adverse opinion is expressed when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements are both material and pervasive to the financial statements.
- A Disclaimer of Opinion: An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion and concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.
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