Introduction- What is an Audit
The audit is the examination of various accounts by an auditor which is followed by a physical check to make sure that all the departments are following the documented system of recording transactions. The audit is done to make sure the accuracy of financial statements that are provided by an organization. It is done internally by the employees or heads of the departments or by an outside firm or an auditor. To check and verify the accounts are done fairly and that no fraud is being conducted.
Financial statements, such as income statements, balance sheets, and cash flow statements, are audited almost every year by most companies. A debt covenant often requires lenders to conduct annual external audits. It is a legal requirement for some companies to conduct audits due to the strong incentives to deliberately misstate financial information.
Three different Types of Audit
- Internal auditing
- External auditing
- Internal Revenue Service (IRS) Audit
Internal Auditing:
Internal audits figure out a company’s internal controls, including its corporate governance and accounting processes. In addition to ensuring compliance with laws and regulations, these audits help to ensure accurate and timely financial reporting. A company's management team hires an internal auditor on behalf of the company. By identifying problems and addressing lapses before an external audit, these audits also provide management with tools to achieve operational efficiency.
Internal audits take place on a daily, monthly, or weekly basis. For example Daily a manufacturing process may be audited for quality control whereas human resources may be audited once a year.
External Auditing:
Business financial statements are audited externally by an independent body. External audits are generally required by law. An internal audit differs from an external audit in that the people responsible for analyzing the financial statements are based on the business in question. In contrast, an external audit is performed by an outside company.
Internal Revenue Service (IRS) Audit
Tax laws (including the wash sale rule) are enacted and enforced by the Internal Revenue Service (IRS).
Abraham Lincoln established the IRS audit in 1862. It operates under the authority of the U.S Treasury Department and its primary purpose is the individual collection of income taxes and taxes on employment. Corporate, gift, excise, and estate taxes are also handled by the Indian Revenue Service (IRS).
The head of the IRS is Commissioner Charles P. Rettig as of November 2021. He was nominated for the post by Donald Trump in 2018. Also, he manages a workforce of 80.000 and a budget which is more than $11 billion. Rettig is the first Commissioner who graduated from New York University joined the job and started his career in tax law in the 1990s rather than managing a business.
Audits are performed by first parties, second parties, and third parties.
Organizations adopt (voluntary) or impose (mandatory) external standards using first-party auditors to measure their strengths and weaknesses against the organization's procedures and methods. Internal audits conducted by first-party auditors have no vested interest in the audit results of the area audited but are conducted by employees of the organization being audited.
External audits are conducted by customers or contracted organizations on behalf of customers and suppliers. It has been agreed that goods or services will be delivered by the contract. Second-party audits are subject to contract law as they provide contractual direction from the customer to the supplier. Since the results of a second-party audit may influence a customer’s purchase decision, second-party audits tend to be more formal
Audits performed by third parties are independently conducted by auditors who have no conflict of interest in customer-supplier relationships. Third-party audits must be independent. By submitting to the third-party auditor for certification, registration, recognition, an award, license approval, a citation, a fine, or penalty, the interested party may receive certification, registration, recognition, awards, citation, fines, or penalty.
Performance Auditing vs Compliance and Conformity Audit
Assessments that go beyond compliance and conformity are termed value-added assessments, management audits, and added-value auditing. These audits pertain to the performance of an organization. Compliance and conformity audits are not focused on good or bad performance. Therefore, for most organizations performance is an important concern.
The collection of evidence related to organization performance and evidence to verify conformity or compliance to a standard is the key difference between compliance and conformity audits and performance audits. For taking orders an organization may conform to its procedures, and if every order is changed two or three times the management might want to rectify the inefficiency.
An Audit Cycle Consists of Four Cycle
- Audit Planning & Preparation
Audit planning and preparation are done in advance by interested parties, such as the auditor, lead auditor, the client, and the manager of the program, to make sure that the audit complies with the client's objective. This audit begins with a decision to conduct the audit and it ends when the audit itself begins.
2. Performance Audit
The data-gathering portion of the audit covers a period from arrival at the audit location up to the exit meeting. Performance audit consists of multiple activities including on-site audit management, meeting with the auditee, understanding the process and control of the system and verifying these control works, team members' communication, and communication with the auditee.
3. Auditing Reporting
Communicating the result of the investigation is known as Auditing Reporting. The report of auditing should give correct and clear data that will be effective as a management aid in addressing organizational issues. The process of auditing ends when the report is issued by the leading auditor or after actions are completed.
4. Audit Follow up and Completion
According to clause 6.6, The audit is completed when the planned audit activities are carried out or agreed upon with the audit client. And clause 6.7 of 19011 states that verification of follow-up action might be a part of a subsequent audit.
- Improvement Work
Improvement work is taken to eliminate the cause of an existing nonconformity, defect, or other undesirable situation. This work is about eliminating the cause of problems and not just following problem-solving steps.
- Preventive action
Preventive action is an action taken to eliminate the causes of a potential nonconformity, defect, or other undesirable situation to prevent its occurrence (proactive).
Issues Related to Auditing and Auditors
Historically, audits have been used to hide internal deficiencies, defeating their purpose by covering up and hiding them.
Regulators worldwide have turned their attention to this matter and heightened the controls and scrutiny of such audits. Even external auditors have collided with organizations in this regard. In response to Enron's scandal, in which the auditors, Arthur Anderson, were found to be “in cahoots” with the management of Enron in cooking the books and covering up the malpractices, the United States passed several landmark laws, including Sarbanes Oxley.
The Importance of Auditing
Confidence and trust
Through an internal audit process, your company can create accurate and reliable financial reports from which you can gain insight into which segments or product lines are performing best and how to allocate resources efficiently. In addition, regular audits will give your shareholders confidence that your accounts are true and accurate and that your business is safe to invest in.
Prevent fraud
If the government audits your financial statements and finds that your business has used its financial health or hidden funds and losses, you will face serious charges and legal penalties. Your business will also gain a bad reputation and you will lose credibility with your customers and potential customers. Frequent internal audits by a professional auditor or corporate accountant play an important role in catching these types of fraud before they escalate into problems. Having a strong vetting process deters and scares employees or vendors from trying fraudulent schemes to destroy your business in the first place
Conclusion
As a result of an analysis, the auditor can make conclusions regarding various aspects of the financial statements. There should be no assumptions in the conclusion, and it should be independent and factual. Taxurban provides various types of Non-Statutory Audits like Performance Audits, Value for Money audits, Operational Audits, Compliance audits, Payroll audits, Internal audits, etc.