An Audit
An audit is the examination of the financial report of an organization - as presented in the annual report - by someone independent of that organization. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organization at a given date, for example:
- Are details of what is owned and what the organization owes properly recorded in the balance sheet?
- Are profits or losses properly assessed?
When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work. With some exceptions, all organizations subject to the Corporations Act must have an audit each year. Other organizations may require or request an audit depending on their structure and ownership or for a special purpose.
Who Gets Audited and Why
The types of auditing clients and the reasons they require audits are, of course, expansive. Here is a short list of clients and types of audits:
- Publicly run companies: Public companies sell their shares of stock to investors and must be audited by independent auditors. The main reasons for the audit are to provide reasonable assurance that the financial statements are free from material misstatements and errors and to ensure that all events that can adversely affect the company have been disclosed.
- Companies with state or federal contracts: U.S. companies doing business with the government are also frequently subject to audit. These audits ensure that the companies have been complying with the terms and conditions of the contracts.
- Companies requiring bonding: Bonding companies all have different rates, requirements, and standards. Some companies are very liberal about whom they approve, while others approve only those clients with great credit ratings. With these differences come different premium rates, and some companies even require cash collateral. The purpose of an audit is to make sure that the facts the business provides to the bonding company are accurate so that the bonding company can evaluate risk and charge the customer an appropriate rate.
- Governmental and tax-exempt entities: Government audits include those for federal, state, and local governments and Indian tribal governments. For example, financial statement audits are conducted for American Indian tribes that operate casinos to make sure they comply with state gaming requirements. In the case of governmental agencies, these funds come from tax dollars. Your audit reports on how well government programs and policies are meeting their objectives.