All you need to know about auditing
Auditing is the objective examination and evaluation of a company’s financial statements. This is usually performed by an external third party but can also occur with internal parties as well as government entities.
Auditing is very important in the accounting world, and audits will take place by examining and verifying a company’s financial records to make sure that transactions are represented fairly and accurately.
The three main financial statements that will need to be prepared, checked and set to their relevant accounting standards for an audit are income statements, balance sheets ad cashflow statements.
These statements are prepared internally before auditing and are used to provide useful information to creditors, shareholders, customers, government entities, partners and suppliers.
Financial statements aim to capture the operating, financing and investing of a company through it’s recorded transactions. All of these statements are recorded and developed internally, which means there can be a high risk of fraudulent behaviour. Without standards and regulations in place, businesses can present themselves to be more profitable and successful than they are in reality. This is why auditing is so important. It ensures that a company is representing their financial position accurately and fairly.
There are three main types of audits. Internal, external and government.
Internal audits occur within a business itself. The audit is performed by an internal employee or company organisation. This particular type of audit is not made to be shared and distributed outside of the company, but rather prepared for management or for other internal stakeholders.
These audits can help with improving decision making withing a company by giving managers a good overview of the company’s financial position, as well as provide them with action items that can help improve internal controls. It is also a good opportunity for them to ensure that all laws and regulations are being followed.
The second type of auditing is external audits. This occurs when an external organisation performs the audit in order to provide an unbiased opinion that can sometimes be hard for internal staff to perform. These external audits are used to determine whether or not there are any errors or misstatements in a company’s financial statements.
External audits are really important when it comes to allowing various stakeholders to confidently make decisions surrounding the company that is being audited. This is an even more reliable source than an internal audit as the information represented is more honest ad there are no personal factors tied to the company like there may be if the audit was performed internally.
The last type of audit is a government audit. Government audits are performed by entities that relate to ensuring that financial statements have been prepared accurately to prevent the misrepresentation of the amount of taxable income a company has.
Misstating taxable income, whether it be a mistake or intentional, is considered tax fraud.
Once a government audit has occurred, it can result in no change to the tax return, a change that is accepted by the taxpayer or a change that is not accepted. If the latter option occurs, the issue will go through a legal process of mediation or appeal.
Auditing is an extremely important business process that needs to be regularly and thoroughly carried out in order to avoid any misrepresentation of a company’s financial situation. If you need any help or advice in regards to your company’s audit, please don’t hesitate to get in contact!