To much of the general public, the term auditing is associated with detecting fraud. Although the discovery of fraud is, in fact, on important facet of auditing, it is far from the only one. Auditing has many important uses, from validating the honesty and fairness of financial statements to providing a critical basis for management decisions. In this article, we will discuss two types of auditing external auditing and internal auditing.
The traditional external audit is largely a verification process involving the independent appraisal of the organization’s financial accounts and statements. Assets and liabilities are verified, and financial reports are checked for completeness and accuracy. The audit is conducted by accounting personnel employed by an outside CPA firm or by chartered accountants. The auditors’ purpose is not to prepare the company’s financial reports. Their job is to verify that the company, in preparing its own financial statements and valuing its assets and liabilities, has followed generally accepted accounting principles and applied them correctly.
The external audit plays a significant role in encouraging honesty, not only in the preparation of statements, but also in the actual operation of the organization. It is, in fact a major systematic check against fraud within the organization. For people outside the organization, such as bankers and potential investors, the external audit provides the major assurance that publicly available statements are accurate.
The external audit takes place after the organization’s operating period is finished and its financial statements are completed. For this reasons, and also because it generally focuses on a comparatively limited set of financial statements and transactions, the external audit does not usually make a major contribution to control of the ongoing operations of the organization. However, knowing that the audit will inevitably occur is a strong deterrent against actions that may lead to embarrassment if they are discovered during or after the audit.
The internal audit is carried out by members of the organization. Its objectives are to provide reasonable assurance that the assets of the organization are being properly safeguard and that financial records are being kept reliably and accurately enough for the preparation of financial statements. Internal audits also assist managers in evaluating the organization’s operational efficiency and the performance of its control systems. Because it concentrates on the operations of the organization, this process is also known as operational auditing.
The internal audit may be carried out as a separate project by assigned members of the financial department or, in larger organizations, by a full time internal auditing staff. The range and depth of the audit will also vary, depending on company size and policy. It can range from a relatively narrow survey to a broad, comprehensive analysis that goes beyond appraising the control systems to look at policies, procedures, the use of authority and the overall quality and effectiveness of the managerial methods being used. In this role, then, we can see that the management process is self correcting.
Auditing in addition to verification of proper documentation in accordance with the stipulated procedures required by CLB and other government authorities also performs the checking of internal cost efficient expenses by employees. The internal auditors make a detailed verification in the areas of supply chain and Financial Transactions and highlight any discrepancies or frauds to the higher management concerned. There are several cases in many companies where employees had to be sacked for irregularities. So the internal audit also acts as a sort of control on utilization of company’s funds.