Auditing

Auditing is a systematic process of gathering and evaluating evidence related to assertions on economic transactions to determine the level of agreement between the assertions and established criteria, and disseminating the results of the evaluation to interested users. Auditing can be classified as financial or operational auditing. A financial audit focuses on financial statements and records, and determines whether they follow generally accepted accounting principles as well as following the policies of management. An operational audit focuses on the activities of an entity in regard to the entity’s specified goals to evaluate performance, identify areas for improvement, and recommend specific actions or improvements.

Another way to classify different types of audits is to divide them into external, internal, and governmental audits. External auditing is done by public accounting firms that are obviously not employees of the entity being audited. Internal auditing is performed by employees of the entity itself. Governmental auditing is performed by local, state, and federal governmental organizations. Some examples of governmental auditing would be when an entity is audited by the city or state it operates in to determine if it is meeting its sales tax liability properly, or when the Internal Revenue Service audits an individual or business income tax return.

Auditing is based on a clear-cut theoretical framework. There are several assumptions that make up this framework. The auditing function is operated on the assumption that financial statements and financial data are able to be verified. A short-term conflict may exist between auditors and management of the audited entity. However, there should not be any long-term conflict, since both sides desire fair presentation of the financial statements. The possibility of fraud or irregularities is minimized by effective internal accounting controls. Consistent following of generally accepted accounting principles will result in fair presentation of financial statements. In the absence of evidence to the contrary, what was true in the past should be true in the future. The financial statements do not contain any collusive or other unusual irregularities. During the financial audit, the auditor acts only in the capacity of an auditor. The professional stature of the independent auditor carries with it appropriate professional obligations. These assumptions and beliefs should be kept in mind by all auditors, as well as the management of audited entities.

The result of an audit is an audit report in which the auditor expresses an opinion. If the auditors have not discovered any problems, they will issue a favorable opinion report. Some of the wording that would need to be included in the opinion is that in the opinion of the auditor, the financial statements present fairly the financial position of the entity, and the results of their operations and changes in their financial position, in conformity with generally accepted accounting principles applied on a consistent basis.

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