What is Audit and its Types
Definition of Audit
The term ‘audit’ has been originating from the Latin word ‘audire’ which means ‘to hear?’
Earlier, in late nineties, a people had to listen to their accounts read over by an accountant to check them. He was known as the auditor.
Purpose of Audit
The purpose of auditing is classified into two categories:
- Primary Objective
- Secondary Objective
The primary objective of the auditor is to report about the financial statements, accounts, its profit and loss, cash flow for the year and give fair view of the company’s affairs at the end of its financial year to the owner, according to the Section 143 of the Companies Act, 2013.
Secondary objective or Incidental Objective
The Secondary objectives are:-
- Detection and prevention of frauds
- Detection and prevention of errors
You May Also Read: What is Accounting – A Basic Overview
Types of Audit
An internal audits is conducted internally by the company itself through their employees, after conducting auditing, the committee of the board of directors, is to be reported the findings of auditing.
Internal audits may assist a company in defining areas which need improvement and also provide important information to reach the goal of company.
The scope of an internal auditing is comprehensive and can comprise anything that may have an influence on attaining company goals.
Situations that require a internal auditing are monitoring regulations and law compliance as well checking the effectiveness of control inside the company and examining the economy, efficiency of company’s operational process, assessing the risk associate with management procedure and policies, any kind fraud and investigation thereof.
An external audit is conducted by a third party who is independent with no connection to the business, such as the IRS or an independent accountant. External audit regulated by generally accepted auditing standards. External audit determining the accuracy of accounting records is the main objective.
Company law in most of its jurisdiction requires certain size of annual external audit. The separation of control and ownership in companies arise indication to for conducting an external auditing, whereby shareholders suggest directors to run the company on their behalf in order to know and to confirm that financial reports of companies are accurate or not.
It delivers sound self-assurance to the shareholders that the financial statements are free from material misstatements.
A forensic audits is necessary. Situations that require a forensic auditing are, any type of fraud investigation which involve tax evasion, embezzlement of funds, evaluation of loss for insurance claim etc.
Court of law often requires finding of forensic audit findings, as an expert opinion on financial matters.
Tax audits evaluate the accuracy of company he amounts paid or refunded and tax returns. Some Companies needs Regular tax audits. However, in other jurisdictions, companies randomly select tax auditing through a balloting system.
Public Sector Audit
In various jurisdictions, public sector auditors audit the state-owned companies. It supervised by the auditor general, an institute that strengthens public sector accountability. In public sector audit, the financial matters of state-owned enterprises are evaluated for whether operations and standard procedures comply according to good governance.