What is an Audit? An Overview an Audit? An Overview

Cubes - 157 - AUDITAudits are independent, third party examinations of the financial report prepared by a company or organisation. In the UK, annual audits are required of most organisations under statutes contained in the Corporations Act. Most organisations that are not required to have an annual audit often request an audit on a regular basis although once a year may not be necessary.

Audits are relevant. Considering how fruitful and important the audit can be to an organisation or corporation, it is important to understand the range of services provided by and limitations of a third-party audit.

The Purpose of an Audit

An audit forms a view as to the accuracy of representations made by an organisation through its financial reports for a specific period of time. Included in the financial reports are important financial data in the balance sheet, income statement, the statement of changes to the organisation’s equity, the cash flow statement and notes that comprise the summary of significant accounting policies and any explanatory notes stated by the organisation.

An organisation’s financial report depicts the financial state of the organisation at a specific point in time. The audit expresses opinions relative to the accuracy of this information. Some entities request that the audit include other details but these items are outside the scope of the typical audit and will be noted as such in the auditor’s report.

Upon the completion of an audit at least two conclusions will be reached:

Conclusion 1 – Whether the amount an organisation owes is properly stated on the entity’s balance sheet.

Conclusion 2 – Whether the profits and losses are stated accurately in the entity’s income statement.

Obviously this information is vital to companies that are publicly held and those companies that expect to enlist private or public support.

About the Auditor

Auditors are third-party, independent examiners who follow strict standards as set forth by government. Auditors are authorised to discuss the scope of their work with director or management of the audited entity. Yet, auditors are required to maintain their independence and not to affiliate with the organisation’s directors or management team.

The auditor determines the range of the audit and the procedures that will be deployed to complete the audit.

Usually auditors are prepared to:

  • Ask questions orally or in writing of a wide range of persons associated with the company.
  • Examine all financial and accounting records.
  • Form opinions as to the assumptions made by the organisation’s management personnel at the time of the financial report.
  • Request and receive written confirmation of matters related to any aspect of the financial report.
  • Test the internal controls utilised by the organisation.
  • Observe operations performed by the entity.

Things Auditors Do Not Do

Many persons misunderstand the role of UK auditors. While the scope of their work can be broad, it is usually limited. These are a few of the activities in which auditors do not normally engage.

Auditors do not:

  • Review internal memorandums
  • Verify the accuracy of every figure in every financial report
  • Evaluate or critique the appropriateness of the entity’s business activities
  • Examine every single transaction listed in the financial reports
  • Make public comments regarding the performance of management or directors of an entity
  • Predict outcomes based on information in financial reports
  • Perform audits based on partial information

How Audits Transpire

Before an audit can be performed, the entity’s board of directors must first approve the organisation’s financial report.

  • When the audit is scheduled, the first thing the auditor will do is gain an appreciation and understanding of the type work and business activities performed by the entity. The auditor will usually have an understanding of industry trends and challenges before commencing.
  • The auditor will attempt to identify and assess risks that could have a positive or negative impact upon the entity and that are contained in the financial report.
  • The auditor will evaluate the effectiveness of internal controls to mitigate the existing risks.
  • Auditors will evaluate the steps taken by management to ensure accuracy of the financial reports.
  • Auditors will form an opinion as to the accuracy of the financial reports and determine if the reports comply with standards set forth in the Corporations Act.
  • Opinions of the auditor will be state din the audit report at the conclusion of the audit.

In order to have a successful and productive audit, it is essential that the auditor have an independent relationship and independent working relationship with the entity and its staff. However, auditors normally are granted access to any personnel associated with the entity in order to assess the accuracy of the financial reports and to attest to the entity’s physical operations and performance.

Many investors review audits of organisations they support or of entities they are considering supporting. Entities that have not posted audit results by an independent auditor are unlikely to acquire financing or gain investor support. Lenders and investors rely heavily on the integrity of the auditor and integrity of the audit process.

This is an article by Clark Howes Group, an established firm of business accountants with offices across the UK. Their clients include both early-stage and mature businesses, ranging from start-ups, sole traders and partnerships, through to limited companies and international groups.


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