What is an audit
: The audit is an evaluation done by an auditor in which he/she checks the financial statement of a company to ensure that the financial reports reflect fairly and accurately the transactions which they appear to represent.
It can be done internally or externally. In internal auditing, the head or employee does auditing and in external, an independent auditor is hired.
The idea is to review and validate the records through an impartial authority to verify that almost all accounts records are handled in a fair manner and that there is no misrepresentation.
All publicly listed companies must get an external auditor to review their financial records before they announce their performance for any period.
Types of Audits
Audits can be classified as internal and external audits.
Internal Audits –
Internal audits are performed by someone within the same organization. The main purposes of these auditors is to prevent financial mistakes and make sure that all the business financial information is accurate.
If a company has board members or shareholders then it is necessary to have an internal auditor who will keep an eye on the business finance.
External Audits –
These types of audits are done by an external individual. The individual has to follow the auditing standards issued by the regulatory body.
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These people are good at making an impartial evaluation of the company’s financial statements.
Audit Process
Every audit is unique and it consists of 4 stages –
- Planning
- Fieldworks
- Reporting
- Follow up
Planning –
Planning includes creating a thorough knowledge of the processes involved throughout the project. Planning usually includes face-to-face meetings, retrieval of data, and the creation of a fieldwork test plan.
The auditor also might want to question different department employees during preparation, follow them via transactions, or request just a small amount of data. Employees will also have to help with getting applications or locations.
Field Work
The fieldwork focuses mostly on the evaluation of transactions as well as informal communication. The auditor determines throughout this process if the measures recognized during the initial review are working correctly and even in the way described by the client.
The fieldwork phase ends with a list of important results through which the auditor must prepare an audit report draft.
Reporting –
In this third phase, the auditor expresses his opinion, presents his findings, and gives suggestions for improvements.
Department managers and staff will be actively involved in confirming that the report is completely accurate during this reporting phase.
Follow-ups
After around one year from the final report, Internal Audit will conduct a follow-up check to ensure clarification of the results of the audit.
How audit helps a company
Auditing helps business owners in lots of ways –
- Having an audit will help a lot of businessmen who do not have knowledge of accounting principles. A professional auditor will review the financial data and provide insight, into how accurate and valid is their accounting information to the owner.
- Business owner is liable for reporting the company’s financial information to lenders, investors, or the general public. Legal Problem arises when the owner provides inaccurate information to these people. Incorrect accounting may even lead to higher tax liability.
- Repetitive analysis of company accounting will help in detecting fraud. An Auditor may help you in designing or modifying the system to prevent fraud and irregularities.
When is the audit required?
The audit is compulsory for all publically listed businesses. In business, if the total turnover for the previous year is more than 1 crore and in profession, if the profit is more than 50 lakhs for the previous year.
How is the Audit fee determined?
Audit fee depends on various factors like
- Which type of audit are you conducting like Statutory Audit, Internal Audit, and many more…
- How much work is there and is the work complicated? Fees for the financial year 2019 will not be the same as FY 2020.
- Local auditing firms will charge less than a firm that does audits for big companies.
- If there is lot of competition you may also get a quote at far lower price.
- Other expenses like printing audit reports, traveling, etc. should also be taken into consideration.
