The audit is one of the most dynamic areas of the accounting sciences.
The word “AUDIT” has Latin origins (audio, audire, means listening). During the time this word has known a lot of definitions and classifications. In general, it is a synonym to control, check, inspect, and revise.
While the accounting has suffered a little change in time, the audit has permanently evolved, answering to the changes in the environment and modifying its objectives starting the middle age, passing through the industrial revolution up to the 21st century.
Companies prepare financial statements of their activities, which represent their overall performance. These financial statements are examined and evaluated by independent persons, who assess them according to the industry’s generally accepted standards.
This examination and evaluation are referred to as audit.
Thus, an audit is an examination and verification of a company’s financial and accounting records and supporting documents by an independent professional against established criteria.
Definition of Audit
A precise definition of the term ‘auditing’ is difficult to give. Some of the definitions given by different authors are as follows:
According to the International Federation of Accountants (IFAC);
An audit is the independent examination of financial information of an entity, whether profit oriented or not and irrespective of its size, or legal form, when such an examination is conducted with a view to expressing an opinion thereon.
Spicer and Pegler, have defined audit as;
such an examination of the books, accounts and vouchers of a business, as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up,
so as to give a true and fair view of the state of the affairs of the business, and whether the Profit and Loss Account gives a true and fair view of the profit or loss for the financial period,
according to the best of his information and the explanations given to him and as shown by the books; and if not, in what respect he is not satisfied.
According to the American Accounting Association (AAA);
Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions
and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
According to Montgomery;
Auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or verify and to report upon the facts regarding the financial operation and the result thereof.
It is clear from the above definitions that;
- auditing is the systematic and scientific examination of the books of accounts and records of a business,
- enables the auditor to judge that the Balance Sheet and the Profit and Loss Account are properly drawn up so it exhibits a true and fair view of the financial state of affairs of the business and profit or loss for the financial period.
The auditor will have to go through various books and accounts and related evidence to satisfy himself about the accuracy and authenticity to report the financial health of the business. Companies are expected to pass their audits, as the results are very important to the company’s reputation and success.
Audits are very valuable to external company affiliates, such as shareholders and investors, because they provide an extra reassurance of their choice in investments when issues arise.
Definition of an Auditor
An auditor is a professional that accumulates and evaluates evidence to report on the degree a company’s assertions that they comply with an established set of procedures or standards (criteria).
While it takes a highly trained accountant to work as an auditor, there are different types of auditors with different aims.
An efficient auditor must have certain qualities besides Professional qualification. It is essential for him to carry out the audit efficiently and smoothly.
Auditing existed primarily as a method to maintain governmental accountancy, and record-keeping was its mainstay. From the time of ancient Egyptians, Greeks, and Romans, the practice of auditing the accounts of public institutions existed.
It wasn’t until the advent of the Industrial Revolution, from 1750 to 1850, that auditing began its evolution into a field of fraud detection- and financial accountability.
In the early 20th century, the reporting practice of auditors, which involved submitting reports of their duties and findings, was standardized as the “Independent Auditor’s Report.”
The increase in demand for auditors leads to the development of the testing process. Auditors developed a way to strategically select key cases as representative of the company’s overall performance.
This was an affordable alternative to examining every case in detail, and it required less time than the standard audit.
Essential Features of an Audit
From the definitions, the six essential features of auditing can be described as follows:
- Systematic process
- Three-party relationship
- Subject matter
- Established criteria
Objectives of an Audit
The objective of an audit is to express an opinion on financial statements. The objectives of the audit can be categorized into (i) primary objectives and (ii) subsidiary objectives.
Primary Objectives of Audit
The main objectives of the audit are known as primary objectives of the audit.
They are as follows:
- Examining the system of internal check.
- Checking arithmetical accuracy of books of accounts, verifying posting, casting, balancing etc.
- Verifying the authenticity and validity of transactions.
- Checking the proper distinction between capital and revenue nature of transactions.
- Confirming the existence and value of assets and liabilities.
Subsidiary Objectives of Audit
These are such objectives which are set up to help in attaining primary objectives.
They are as follows:
- Detection and prevention of errors.
- Detection and prevention of frauds.
- Under-or over-valuation of stock.
Scope of Audit
The scope of an audit is the determination of the range of the activities and the period of records that are to be subjected to an audit examination.
The scope of audit are;
- Legal Requirements.
- Entity Aspects.
- Reliable Information.
- Proper Communication.
Read More about Scope of Audit.
Organizations Establishing International Standards for Auditing
There are few international organization of Chartered accountants, who are responsible for setting Auditing standards. They are;
- International Federation of Accountants.
International Federation of Accountants (IFAC) is an independent global organization of accountancy profession for establishing international standards on ethics, auditing and assurance, accounting education, and public sector accounting.
- Institute of Chartered Accountants in England and Wales.
The Institute of Chartered Accountants in England and Wales (ICAEW) was established by a Royal Charter in 1880. It has over 147,000 members.
- American Institute of Certified Public Accountants.
The American Institute of Certified Public Accountants (AICPA) is the national professional organization of Certified Public Accountants (CPAs) in the United States, founded in 1887. AICPA has 394,000 members in 128 countries in business and industry, public practice, government, education, student affiliates and international associates.
The audit is a systematic process of obtaining an objective evaluation of the evidence referring the statements regarding documents or events with the economic character in order to appreciate the degree of conformity of these with pre-established criteria, to communicate the results of the interesting parts.