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What You Need to Know About Audit Practices & Methods

What You Need to Know About Audit Practices & Methods

You are most likely familiar with the term "Audit." You may have even used it often in a statement. What exactly is an audit, and how is it done?

Every organization is governed by regulatory authorities, especially when finances are involved. Audits are one of the processes used to ensure that an organization's finances are run in line with approved accounting standards.

In a broad sense, audit refers to a financial examination, verification, and objective evaluation of an organization's financial statements. There are three main types of audit: Internal audit, External audit, and IRS  audit. We'll look at these more critically later on. 

Most companies are audited every year.

There are three major types of recorded transactions or financial statements. They are Income statements, Balance sheets, and Cash flow statements. These prepared statements give a summary of the company's financial state at a glance to the stakeholders.

The management prepares them, and this often creates a problem. Fraudulent staff may want to hide shady deals and theft from their creditors or shareholders. Since these prepared statements are made internally by professionals, it may be difficult for anyone else to spot the fraud. That's where the audit comes in.


Auditing Techniques

At the foundation of auditing is the gathering of evidence and documents. Every sound opinion is formed based on proper evidence gathering. The most crucial auditing techniques used to gather evidence include vouching, confirmation and reconciliation, testing, physical scanning verification, and inquiries. These techniques are used to verify, confirm and reconcile the differences in the accounts and spot errors. Auditors also carry out physical examinations and scrutinize assets to make inquiries.

Auditing techniques aim to extract as much in-depth information about transactions as possible.

After carrying out a detailed investigation using as many techniques as necessary, an auditor comes to an opinion detailed in an Auditor's  Report. If the account statements are accurate and no inconsistencies are found, the auditor comes to an unqualified or clean audit opinion. 

Audits are performed in line with specific standards. In the United States, audits are carried out in line with what is known as the Generally Accepted Auditing Standards as outlined by the American Institute of Certified Public Accountants.


Evidence in Audit

While auditing a firm, the auditor scrutinizes several pieces of evidence. They include physical evidence like assets; documentary evidence like payment vouchers and cheques and ledgers; oral evidence, which may be in the form of interviews; the accounting system and records. This is not an exhaustive list, as auditors may use anything relevant in the investigation as evidence.


Types of audit

  • Internal audit

Internal audits are done by the organization's staff and are only helpful for the management to guide their decision-making. The organization employs internal auditors.

  • External audit

The external audit is carried out by third parties and is more thorough than internal audits as they provide a more objective opinion of the financial statements. External audits are more likely to spot errors and detect fraudulent activity in the organization's finances because the auditing firm is independent of the organization. External auditors have to be from a Certified Public Accountant firm.

  • IRS audit

Government audits have to do with the organization's taxable income or individuals who have transacted with others. The IRS performs this audit to verify how accurate the organization's taxes are. The IRS randomly selected companies to be audited. IRS audits often reveal discrepancies in tax payments, and the accused may have to pay back taxes or appeal the decision if the opinion is disagreed with.


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