Audits Q & A clears the fog around the mysterious world of audit

Auditors are often guilty of assuming that everyone knows what they do.  In reality, most people don’t understand much about what an audit is or what an auditor does.  In order to clear the fog around the mysterious world of audit, we have written a series of brief articles answering frequently asked questions starting with …

So, why would we want an audit anyway?

Firstly, an audit provides comfort to shareholders or members (and other interested people), that the financial reports of the organisation have been looked at independently, and that the information presented complies with the necessary reporting standards.  This is especially important for people who are distant from the financial reporting process, and have limited or no control over the information provided to them.  The shareholders (or members of an organisation) appoint the auditor, and the auditor reports back to them directly, or via an audit committee.  Auditors report to the shareholders or members in the form of their audit report and auditor’s management letter.

When financial statements have been subject to an audit, they are considered to be more reliable than accounts that have not been audited.  An audit report therefore, lends credibility to the financial statements presented to potential investors, lenders, customers or suppliers.

An audit provides ‘fresh eyes’ over existing reporting and internal control systems, and may identify areas where management may improve controls or processes.  Auditors’ suggestions for improving internal systems are reported to management and the governing body.  Communications around findings can add value to the company, and enhance overall quality processes.

Many people have the impression that an audit is about finding fraud.  While this is not actually the focus of an audit, an auditor will always remain on alert for indicators of fraud, and will be sceptical about explanations and evidence provided to them.  If suspicions of fraud are identified (either in advance of commencing the audit or during the course of the audit), the nature and extent of audit communication, procedures, examination of internal controls and processes would be altered accordingly.  Often, merely spreading the word that an organisation is subject to regular external audits deters fraudsters, as it increases the risk that they will be caught.

Next time, we will look at the question: What is needed to assist a smooth and efficient audit process?

Spring 2014

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