Auditing – ACCT 420
October 30th, 2012
Auditing was primarily as a method to maintain governmental accountancy and for record-keeping. It wasn’t until the 1800s during the Industrial Revolution that auditing expanded into a fraud detection and financial accountability field. Now audits are performed to manage and confirm the correctness of a company's accounting procedures. Auditing evolved into a business necessity once it became evident that a standardized form of accountancy must exist to avoid fraud. Today it has developed into a standardized yet complex field that is regarded as an important procedure in the management of business finance. Financial audits are performed to ascertain the validity and reliability of information. They are a formal examination of an organization or individual's accounts or financial situation. Audits also provide an assessment of a system’s internal controls. The goal of an audit is to express an opinion of the company in question based on the evidence and tests performed from the audit. The role of the auditor is the verification of a company’s financial records. They study various situations, check and analyze the company’s bookkeeping and accounting methods, and compare books of different departments within the organization. An audit is a spot check of information, not an exhaustive review of all financial transactions. An auditor’s reports and analyses often help management cut costs, save on taxes, and increase profits. Further, auditors are charged with determining the accuracy of the financial statements only "in all material respects." A clean bill of health from an auditor means that the auditor is convinced that the financial statements do not misrepresent the organization's financial position in any significant way; it does not guarantee 100 percent accuracy. There are two types of auditors external and internal. External auditors, also known as independent auditors work for public accounting firms or are self-employed. Businesses, industries, and government agencies contract with auditors to verify and certify their financial statements. Well-run companies usually have their books audited once a year. An independent audit gives shareholders and creditors an outside, expert opinion of a company’s financial condition. External auditors are hired by a company to provide an opinion on whether the company's financial statements are free of material misstatements, whether due to fraud or error. An external auditor performs an independent, third-party review all the financial records of a company or corporation. They evaluate all accounting, payroll and purchasing records, as well as any documents related to investments, stocks or loans. There job is to provide an accurate, unbiased analysis of the company’s financial condition. External auditors can also provide an array of different agreed upon procedures including taxes for the business. For publicly-traded companies, external auditors may also be required to express an opinion over the effectiveness of internal controls over financial reporting. Most importantly, external auditors, though engaged and paid by the company being audited, are regarded as independent auditors and are managed by an audit committee. External auditors report directly to the audit committee not to management. Most external auditor positions require the applicant to be a certified public accountant. Some companies may require a bachelor’s degree in accounting or finance. Most companies prefer experience in auditing, financial analysis or business administration. Having experience in the field is valuable to companies, because as an auditor you are required to use professional judgment which is gained from knowledge that can only be learned from experience. According to the standards adopted by the Public Company Accounting Oversight Board “The...