Auditing meaning and explanation

The term auditing is used to explain an individual that serves as a third party verifier on the books of accounts of a company. Audit is done both on businesses and projects. It helps to make a report credible to the user. In this article, we explain audit and auditing as well as its importance. 

1. What's auditing?

Auditing is defined as the examination of a company's accounting records and financial statements so as to provide an opinion with regards to those statements. Auditing includes and is not limited to objective verifications of the information presented in the financial statements. Confirming their material impact to shareholders and other stakeholders. As well as, stating the ability of an entity to remain as a going concern. 

As third party agents, auditing provides credibility to business stakeholders. Therefore, these individuals and institutions that were not involved in the preparation of financial statements can rely on them because those statements are audited. After completing an audit for a company or project, the auditor must provide an opinion with regards to the audit. Such opinion tells if the reports for the entities or projects can be relied on.

2. Who performs an audit?

An auditor is employed to perform an audit for an organization. Auditors are individuals who carry out the audit process and provide an independent opinion with regards to the financial statements. However, not all auditors are allowed to provide an opinion in the financial report of an entity. There are generally two types of auditors: internal and external auditors.

Internal auditors are employees in an organization (either private or government). They examine each record of the entity in detail, provide compliance protocol, and monitor them. The presence of auditors in an organization can scare staff who have bad intentions. A strong audit team serves as a deterrent to fraud in any organization. Individuals serving as internal auditors in an organization are not necessarily chartered accountants. But to get the best of them, a professional accountant is required.

External auditors, on the other hand, are individuals outside (or third party to) the entity. They are those referred to earlier in our definition. They examine the financial statements and provide an opinion with regards to those statements. To be qualified as an external auditor, rigorous accounting training is important. This begins with becoming a chartered accountant. 

3. Importance of auditing to an organization

Below are five significant aspects of auditing in an organization.

3.1 Credibility:

Auditing provides credibility to financial statements. Therefore, users of those statements can rely on them for decision making. 

3.2 Deterrent to fraud:

The presence of internal auditors in an organization can help prevent fraud by those who plan to do so. 

3.3 Ensure compliance:

Generally, every entity has policies. These policies must be complied with by every employee in the organization. It is the job of the internal auditor to ensure that staff complies with the internal policy of the organization. Also, entities in some industries, such as banks are required to comply with certain guidelines and policies provided by the industry leaders. It is the duty of the internal auditor to ensure that the entity follows them strictly.

3.4 Detect errors:

Auditors during the cause of an audit can help an entity to detect errors. Most of these errors are material and can affect the decisions of stakeholders. 

3.5 Alert stakeholders:

Shareholders and other stakeholders who go through the external auditor’s report can be alerted on the going concern of the entity they have a stake or interest in. This is because auditors are required to state the going concern status of the entity audited.