What is an Audit?
For most businesspeople and investors, the most familiar audit is the financial accounting audit.
For individuals, mention of the term audit brings to mind the spectre of a government audit of the person's income tax filing. On a personal level, "audit" therefore is a reminder of something annoying and possibly threatening. In business, however, audits and auditing are routine, required, and valued for building credibility for the firm.
An audit is a formal, structured review of information about an organization, person, or process that results in an auditor's opinion.
Depending on the nature of the company's business, audits may include formal reviews of the firm's financial statements, quality control process, service delivery, project management, environmental regulatory performance, sanitation, employee health and safety, and tax compliance,
In all cases, the auditor's opinion report may address questions such as these:
- Does the information presented represent the organization, person, or process fairly?
- Is the information believed to be true and reliable?
- Is the information free of misstatements, misleading information, and factual error?
- Does the information present conform to accepted standards or requirements for reporting?
- Is there sufficient control and measurement capability in place to ensure positive answers to the above questions?
Auditors may be
- Internal auditors working for the organization they audit, reporting to company management and boards of directors. In some cases, internal auditors report only to the Board and not to management, to avoid any risk or appearance of management influence.
- External auditors work for professional consulting/auditing firms, for themselves, or government regulatory bodies. External auditors report to the government, or industry regulators, or to the general public.
Explaining Audit in Context
Sections below further explain and illustrates the audit concept in context with business concepts from the fields of accounting, financial reporting, quality control, and project management.
- What is an audit?
- What are financial accounting audits?
- What are cost control and internal auditors?
- What are project management audits?
- What other kinds of audits appear business?
- For coverage in more depth on Financial Audits and their possible outcomes, see Auditors Opinion.
- For more on the accountant's role in financial reporting, budgeting, cost control, and auditing, see Accounting Profession and Accounting.
What Are Financial Accounting Audits?
Which Firms Must File Financial Statement Audits?
The most familiar audit to most people in business is the financial accounting audit, by which public companies hire external auditors to review the firm's financial statements and issue an auditor's opinion. The opinion gives the auditor's judgment whether or not the reports represent the organization's financial position fairly, are free from misleading statements or error, and conform to Generally Accepted Accounting Principles (GAAP).
A positive opinion in this regard is a virtual requirement for acceptance of the financial statements by the investing public, by lending institutions, or regulatory bodies (e.g., the Securities and Exchange Commission in the United States). In financial accounting, the best possible result of an audit is the Unqualified opinion, which affirms that the auditor believes the statements meet the above objectives (see Auditor's opinion for the different kinds of opinions possible).
Audits of public companies in the United States are subject to rules of the Public Company Accounting Oversight Board (PCAOB), a creation of the Sarbanes Oxley Act of 2002 (SOX). Under PCAOB rules, auditors must address all of the questions listed above, including the question of whether or not there are sufficient internal control and measurement capabilities to meet PCAOB standards (Auditing Standard No.5).
Audits in the United Kingdom address accounting standards from the Accounting Standards Board, a part of the Financial Reporting Council, an independent regulator funded by publicly listed companies.
In Canada, Canadian GAAP and standards are the responsibility of the Canadian Accounting Standards Board. There are accounting standards boards with similar names for Australia and New Zealand, with similar roles.
What Are Internal Auditors?
What Are Cost Control Auditors?
Whereas audits by external auditors assure independence and objectivity to those outside the audited organization, internal auditors can assure the company's management that internal controls are working and sufficient to manage the organization efficiently, comply with taxation and other regulatory requirements, and meet external reporting requirements. As mentioned, internal auditors may in some cases be required to report directly to boards of directors or the corporate officers, to minimize the risk of management influence in reporting their opinions.
In a hotel system, for instance, internal auditors will ensure that controls are in place and working to prevent bad debt or unpaid hotel bills: Internal auditors will ensure that hotel check-in staff collect payment or credit authorization from arriving guests, as the hotel requires, and do not overextend credit to guests.
In addition to financial accounting, businesses may focus internal auditors on such areas as
- Billings and receivables.
- Expenditures and expense management including especially areas such as employee travel expenses, employee reimbursement for out-of-pocket expenses.
- Cash management.
- Human resources (including hiring, promotions, and pay raises).
- Information Technology spending and utilization.
- Asset management/utilization of assets (e.g., the use of company facilities, company computers, and company vehicles).
What is A Project Management Audit?
What is a Project Health Check?
The term audit is also common in project management. Project Management Offices (PMOs), for instance, administer project audits (or project health checks ). An individual PMO may prescribe a project audit for any or all stages of the project management process. The audits check first whether the project has definition, proper specification, defined, and adequate planning. Subsequent audits will decide whether the project has effective management, and finally, whether the project is likely to deliver forecast results (and justify its cost).
More specifically, project management audits may be designed to ensure that
- Projects design identifies clear objectives, responsibilities, and ownership.
- Project objectives are in line with organizational objectives and priorities.
- The project manager has forecast project costs and benefits credibly, and whether project monitoring is in place.
- There is a good business case for the implementing the project.
- The project plan has a strategy for minimizing delays and cost overruns.
- There are adequate resources to complete projects according to plan.
- Project progress and timing estimates are realistic and likely to meet expectations.
- The project manager is managing the project to successful completion.
- Project staffing is appropriate for project and organizational needs.
Which Other Audits Appear in Business?
Taxes, Environmental Issues, Quality, Service Delivery
Governments and regulators undertake audits for a wide range of other purposes, usually to evaluate an organization's performance towards meeting objectives, or compliance with laws and regulations.
- Governments may engage in tax audits, specifically to evaluate compliance with tax reporting and payment requirements.
- Environmental audits are especially important for companies whose operations or products may have environmental impacts (electrical utilities or automobile producers, for instance).
- Manufacturing companies report historical performance with product quality control audits.
- Service delivery companies evaluate the quality and efficiency of their service performance through service delivery audits.