Audit

Reviewed by Sujaini | Updated on Aug 27, 2020

What is Audit?

The term audit typically refers to a review of the financial statements. A financial audit is an impartial analysis and evaluation of an organization's financial statements to ensure that the financial reports are a fair and correct reflection of the transactions that they appear to represent. The audit can be carried out internally by the organization's employees or externally by an independent Certified Public Accountant (CPA) company.

Understanding Audits

Nearly all businesses provide an annual audit of their financial statements, such as the statement of income, balance sheet and statement of cash flow. As part of their debt covenants, borrowers also allow the findings of an external audit annually. Audits are a legal necessity for individual businesses because of the persuasive reasons to misinterpret financial details to commit fraud deliberately.

Types of Audits

External Audits

Audits carried out by third parties can be extremely helpful in eliminating any prejudice in the analysis of the financial state of a corporation. Business reviews are intended to determine whether the financial statements contain any material misstatements. An unqualified, or clean, opinion from an auditor gives consumers of financial statements confidence that the financial statements are both correct and full. Therefore, external audits enable stakeholders to make smarter, more informed decisions about the business being audited.

Internal Audits

Internal auditors are appointed by the corporation or entity for which they conduct an audit, and the resulting audit report is presented directly to the management and the board of directors. Although not working internally, consultant auditors use the business standards they are auditing, as opposed to a different collection of guidelines. Such types of auditors are used when a company does not have the capacity in-house to audit those parts of its operations.