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An audit refers to the area that analyzes and evaluates the financial reports of a company so as to ensure that it keeps an accurate record of its transactions and business activities, and it gets reflected in the financial statements. Either the employees who are already working in the organization, or the auditors outside can audit its activities.
The IRS can also conduct audits in order to ensure that the returns of taxpayers and business transactions are reliable and accurate. Generally, audits take place when the IRS has a negative or suspicious feeling about the activities of the taxpayer.
A Little More on What is an Audit
When external auditors perform auditing services for a company, it makes sure that there is no favoritism, manipulation or bias involved. It is the objective of the auditor to seek material error in any elements of financial reports. This further enables company’s stakeholders to have accurate information about its financial standing that ultimately helps them in making better investment decisions. Be it company’s financial transactions, income statements, a specific aspect, or the whole organization itself, the auditing done by a third party can be transparent and authentic. Also, it doesn’t have any impact on the company’s internal relationships.
Usually, every organization gets its auditing done on a yearly basis. There can be cases where huge organizations receive audits every month. It is important for a few organizations to get its financial statements audited at regular intervals because of their tendency to manipulate information and conduct fraudulent activities. There are some public organizations where auditors assess how effective the internal controls with regards to financial statements.
Types of Auditors
In case of external auditing, auditors are divided into two different categories. The first category involves external or statutory auditor who assesses financial statements and performs auditing independently. The second category involves external cost auditors that deals with cost accounting based reports, and analyzes errors, or fraudulent activities. These auditors, working externally, have their own set of policies and auditing standards which differ from the standards of the firm that hired them.
Internal auditors, as the name suggests, already work in the organization for which they perform auditing. In spite of being a part of the company, they analyze the accuracy of internal books, and further ensure to offer relevant information based on their audit to the company’s board of directors, stakeholders, and managerial committee.
Though consultant auditors are not the internal part of the organization, they consider using the company’s auditing policies and standards unlike the external auditors who use their own. A company hires consultant auditors when they are unable to audit specific elements of their transactions.
Oversight, Rules and Regulation
Similar to many other nations, in the U.S., an audit needs to be in compliance with a specific set of adopted standards and policies as provided by the concerned authorities.
The American Institute of Certified Public Accountant regulate the Generally Accepted Auditing Standards (GAAS) that are the standards governing external audits. Also, the International Auditing and Assurance Board regulate the International Standard on Auditing that involves a distinct aspect of global standards.
The Public Company Accounting Oversight Board (PCAOB), founded in 2002, set rules and regulations for audits conducted in public firms.