I keep hearing this term from my accountant friend and have absolutely no idea what it means. I tried googling it but that just left me even more confused than I was.
In: 170
Companies produce a lot of different reports. They report their income and earnings to shareholders, they report their wages paid to the unemployment division of the state, they report their taxes paid to the state and federal revenue departments. They may also produce reports specific to their industry.
An audit is when another person or group of people are allowed to look at company data in order to verify if the report is accurate, complete, and correct.
So if a company reports that they had 45 full-time employees and paid all the unemployment insurance correctly, an audit would mean a person from the unemployment insurance agency could come in, and review their payroll records. If a company said it was worth $100 million, a financial auditor could look at their records of sales and purchases (their financial records) to verify how accurate that claim is. If a chemical company said it had 500 gallons of methylamine, an audit might involve someone physically counting the containers but also looking at records of sales and purchases.
Auditing means the same in accounting as anywhere else.
Someone goes to check that there are records where they’re meant to be, whether those records match each other and reality, and if they do not, Investigate why.
Audits can be internal (done by the company on its own) or external (bringing a third party in), although accounting audits are done externally because you’re trying to convince others (clients, shareholders, potential investors) that there’s no funny business goin on, and someone going “yeah, I checked it myself and everything is great, you don’t need to see it” doesn’t convince anybody.
**Mom:** Bright-Interest, did you finish your homework for tonight?
**Bright-Interest:** Yes mom! It’s all ready to hand in tomorrow at school!
**Mom:** Let me take a look at your homework, to check for any errors.
That’s auditing. Someone else checking to make sure that work was done properly.
Someone can audit your accountant, to make sure they did the math properly.
Someone can audit your taxes, to make sure you filled things out properly.
Auditing = fact checking. Auditors are independent third parties who are brought in to verify what a company is reporting is actually the case.
If there were not auditors, then companies could just make up financial information and we would just have to trust what managers are saying. It makes for poor market conditions and leads to economic uncertainty. Auditors step in between management and investors to validate what management is reporting.
Auditing is not perfect for a multitude of reasons. Due to the vast size and operations of many companies, it’s simply not feasible to verify every transaction that comes in and out of the company. Many accounting determinations are also subjective so the true value of an item can vary based on who made the determination, which in that case auditors would audit the valuation process to ensure that the logic is sound. Additionally, if management truly is intent on committing fraud, they are more likely to find/create a loophole that lets them hide it.
Auditing (like most things in our financial markets) is built on collective trust and “just go with it” mentality. Why does money have value? Because we all agree it does. Why is the share price of company ABC worth $10? Because enough market participants agree it does. Why is $1USD worth €.91EUR? Because enough people agree that it does. Why does an audit verify a company’s financials? Because enough people trust that the auditors did their work correctly to validate that the financials are materially consistent with the true operations
One very specific example:
Company: We spent a million dollars on office supplies.
Auditor: Checks receipts to make sure that they add up to a million dollars.
Accountants count beans.
Auditors make sure that the count is correct for the beans counted and that the beans counted are the correct beans.
there are different kinds of audits, but at its simplest it’s like a health check-up for a company and checking for its compliance to financial laws
Audit is an assurance activity that the company is operating as per regulations, policies, requirements, legislation.
External audit focuses on assurance of the financial statements, while internal audit focuses on internal controls, risk management, compliance.
I was a third-party financial statement auditor.
An accountant at the company being audited creates information throughout the year they are professing to be true and faithful as the normal course of business.
The investors, owners, and other stakeholders rely on that information to be fair and truthful and accurate to make decisions.
Auditors come into the company as a third-party and perform various investigative tests to ensure the information is fair, truthful, and accurate. They provide a statement saying they have validated the financial statements. The investors and stakeholders now can have more trust in the financial information created by the company’s accounting team.
As an example of how it is useful, let’s say an accountant is crooked and embezzling money from the company. Every time the company needs 10 chairs, the accountant orders 10 chairs, but then writes down twenty chairs were ordered, pays two invoices- one for 10 chairs from the chair company, one for 10 (imaginary) chairs from the accountant’s wife – this means $5000 stolen from the company each time. Or people claiming overtime they never worked. Audits make running these things much harder and catches a lot of these swindlers.
For example, if someone is running the cash register, they might be taking money out of the drawer, or they might be applying coupons but charging the customer full price (and pocketing the difference) , or they might be giving discounts to their friends… A good audit can catch these sorts of theft as well.
Latest Answers