18. Auditing

Auditing is an official inspection of a company’s accounts by a qualified accountant as required by law to ensure that the company balance sheet reflects the true state of its affairs. There are three main roles of auditors: they are responsible for overseeing a company’s finances, responsible for informing authorities of malpractice and they must track down the instigators of malpractice.

There are two types of audit, an internal audit and an independent audit.

An internal audit is usually carried out by a company’s own accountants. Some large companies maintain a continuous internal audit by their own accounting departments. They check for complete, reliable and exact data, that current transactions of the company are recorded promptly and completely.

An independent audit is a review of financial statements and records by an independent auditor, i.e. an accountant not belonging to the company. The major steps of the independent auditing process are as follows:

• to become acquainted with the firm’s accounting, personnel, production, marketing and other systems;

• to evaluate the management and the accounting control system in operation;

• to analyse and review the accounting data of the company;

• to formulate a judgment on the basis of the inspection.

Not so many years ago the presence of an auditor suggested that a company was having financial difficulties or that irregularities had been discovered in the records. Nowadays independent audits are a normal and a regular part of business practice.

At the final stage of the inspection auditors write reports to the management on the current state of the company’s fiscal affairs in the form of Auditor’s Report or Auditor’s Opinion, where they may underline some weak points and recommend how to improve operating procedures. If the auditor finds any fraud he must take further investigations.

Who appoints auditors? Senior executives and advisors of the company do it. Then the candidates are to be approved by the owners of the share capital at the company’s meeting.

As we have already said, nowadays it is generally accepted that every business should be audited.

Comprehension:

1. What is auditing?

2. Name three main roles of auditors.

3. Who is an internal audit carried out by?

4. What are the major steps of an independent auditing process?