Businesses spend a lot of time looking at their earnings to gauge performance. How can companies and investors be sure that financial statements and other records are accurate? Auditing plays a key role in helping organizations to operate efficiently, ferret out fraud and make sure procedures are in place to keep financial information secure. Auditing also ensures an organization’s financial operations comply with the law.
Ultimately, auditing builds trust in information and establishes its reliability. Accounting professionals use different types of auditing to help organizations improve their internal operations. They also keep investors and other stakeholders informed about key financial information.
Knowing how to use auditing strategically to glean valuable insights, as well as taking an expert analytical approach to financial business matters, provides accounting professionals with a competitive edge. Pursuing an online Master of Accountancy can give professionals the opportunity to cultivate the advanced skills they need to thrive in the accounting field.
Auditing at a Glance
Auditing seeks to objectively examine and assess financial statements and records to make sure they are fair and accurate. This process involves a review, followed by an assessment of the findings, along with the provision of recommendations about needed adjustments. Most organizations are audited on a yearly basis, and for some companies, audits are a legal requirement. Several oversight entities set rules and procedures for audits to ensure they meet specific standards.
Periodic examinations of a company’s financial documents, statements and records serve as a critical tool when it comes to maintaining economic compliance and accuracy for the government and shareholders.
The process allows an organization to regularly look at its internal controls — the mechanisms and procedures it uses to guarantee the integrity of its information. This examination helps identify areas potentially vulnerable to noncompliance with government regulations. It also highlights accountability, which can prevent employee theft and fraud, as well as increase efficiency. Additionally, audits allow shareholders to better track and verify an organization’s financial health.
Failure to comply with auditing results can leave a company at risk for fraud, inefficiency or legal liability.
Essential Types of Auditing
Accounting professionals perform several types of auditing. Audits can have different purposes and examine different departments in a company. When conducting audits, accounting professionals employ a variety of strategies to produce accurate results.
Thoughtful planning: Auditors should familiarize themselves with clients and their industries to better identify the potential risks and the areas that need the most attention. Next, they should map out their audits in a customized way.
Strong documentation: Auditors should document their work while processing an audit or shortly thereafter. This improves the accuracy of their recordkeeping.
Use of a standardized approach: Auditors should follow standardized procedures to avoid inefficiencies and ensure documentation complies with generally accepted accounting principles (GAAP), a set of accounting standards issued by the Financial Accounting Standards Board.
Companies conduct internal audits to gain deeper insight into their internal controls, comply with laws and regulations, and measure the accuracy and timeliness of how they report and collect financial data. Internal audits allow companies to find flaws or weak spots in their procedures or reporting, as well as assess their progress toward financial goals. With verified records, organizations can allocate their funds wisely, identify the profitable parts of the business and manage risk.
Specifically, internal audits help organizations examine how effectively their internal controls:
- Identify and stop irregular transactions
- Calculate performance
- Keep sufficient records
Using metrics determined by the organization’s executive leadership, internal auditors can focus on any area in a company. For example, they may evaluate the internal controls connected to the following facets:
- Corporate governance
- Financial reporting
They may also assess supply chain management and other important business operations.
While internal audits focus on business practices and risks, external audits focus on determining the accuracy and thoroughness of an organization’s financial records and issuing an opinion. An “unqualified opinion” indicates that an external audit has found a company’s financial statements to be accurate and correctly presented, as well as in compliance with GAAP.
Additionally, as the name implies, outside parties perform external audits. This allows for objectivity. Unlike internal audits, which are directed by standards set by company leaders, external audits follow standards and procedures uninfluenced by the company being audited.
While the purpose of an internal audit is to answer questions a company may have about its operations and give guidance to management, the purpose of an external audit is to provide information to entities outside the organization, such as lenders and investors, about the accuracy of financial statements. The standards for each type of audit reflect the different objectives.
Financial audits, most often conducted by outside parties, involve examining an organization’s financial statements and records in depth to assess whether they are correct and complete. Financial audits examine procedures, transactions and balance sheets. Auditors may conduct a number of tests, or audit procedures, during a financial audit. For example, they may follow procedures that test a specific internal control to measure how well it detects and prevents misstatements. They may also compare different sets of financial information to measure consistency and continuity as a tool to detect inaccurate or fraudulent reporting.
Investors, lenders and creditors rely on the results of a financial audit as proof that the company’s records are correct. While most financial audits focus on financial statements, they can target other areas, such as tax records.
Typically, organizations must comply with state and federal regulations. These regulations can relate to health insurance, occupational safety and financial reporting, for example. To ensure compliance, companies put into place compliance programs. Compliance audits review an organization’s policies and procedures and assess the effectiveness of its compliance programs.
Compliance audits can also assess an organization’s level of compliance with the following:
- The terms of its contracts
- Shareholder distributions
- IRS regulations
- Laws concerning payment of workers’ compensation
Organizations usually conduct operational audits internally. These audits determine the effectiveness of its procedures, operations and planning processes. They also assess company goals. Operational audits help a company identify ways to improve program performance. This type of audit also points out ways to lower expenses.
Operational audits can include:
- Assessing if regulatory and organizational goals are being accomplished
- Evaluating if a program is achieving its intended objectives
- Determining if expenses comply with law, contracts or agreements
The Skills of an Auditor
Accounting professionals need to master key skills to ensure their success as auditors. All types of auditing rely on objective analysis. Auditors need sharp analytical skills to assess data and uncover useful insights. This also requires a detailed-oriented and organized approach. Auditors must pore over large numbers of documents, working systematically to avoid any oversights. They also must possess a strong aptitude for math, since audits involve evaluating accuracy of calculations.
Additionally, strong communication ranks as one of the top sought-after skills in an auditor, according to a Forbes report that surveyed CFOs, controllers and audit committee chairs. An audit’s value lies in expressing clear ideas in an organized fashion, underscoring the importance for an auditor to have excellent communication and organizational skills.
Explore the Benefits of a Master of Accountancy
Businesses rely on audits to succeed. Not only do auditors ensure businesses comply with laws and regulations, but they also help organizations operate at peak levels. Developing the skills to master auditing work takes the right education. Rider University offers an advanced degree in accounting with a business analytics concentration designed to allow students to cultivate the technical knowledge they need to thrive in the field.
Explore how Rider University’s online Master of Accountancy program helps students build the necessary expertise to excel in all types of auditing roles.