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Auditing

Audit is a systematic examination of a company's accounting system to determine whether the company's financial statements fairly present its operation.

Auditing is an accounting function that involves the review and, evaluation of financial records. If earlier the presence of an auditor suggested that a company had financial difficulties or that irregularities had been discovered in the records, at present time, however, outside audits are a normal and regular part of business practice.

The purpose of the audit is to ascertain that the financial statements have been prepared in accordance with generally accepted accounting principles.

The auditor's report does not preclude minor or immaterial errors in the financial statements. However it does imply that, on the whole investors and creditors can rely on those statements. Historically auditors have enjoyed a strong reputation for competence and independence. As a result, banks, investors, and creditors are willing to rely on an auditor's opinion when deciding to invest in a company or to make loans to a firm that has been audited.

We distinguish two types of audit: internal audit (a review and evaluation of a company's financial records by accountants of the same company) and independent audit (an audit performed by someone from outside the organization).

Many companies employ their own accountants to maintain an internal audit, but those companies that do not conduct an internal audit need to maintain a system of internal control. Internal control has traditionally been defined as all the policies and procedures management uses to protect the firm's assets and to ensure the accuracy and reliability of the accounting records. As long as control procedures are performed by people, the internal control system is vulnerable to human error. Errors may arise from misunderstanding, mistakes in judgment, carelessness, distraction, or fatigue. Sound internal control procedures are needed in all aspects of a business, but particularly when assets are involved. Assets are especially vulnerable when they enter or lave a business. When sales are made, for example, cash or other assets enter the business, and goods or services leave the business. Procedures must be set up to prevent theft during those transactions. Likewise, purchases of assets and payments of liabilities must be controlled. The majority of those transactions can be safeguarded by adequate purchasing and payroll systems. In, addition, assets on hand, as cash, investments, inventory, plant, and equipment, must be protected. For example, cash payments for sales of goods and services can be received by bank transfer, mail or over the counter in the form of checks or currency. Whatever the source of the payment, cask should be recorded immediately upon receipt. This is usually done making an entry in a cash receipts journals.

Internal auditors continuously review operating procedures and financial records and report to management on the current state of the company's fiscal affairs. These accountants also report on any deviations from standard operating procedures; that is, the company's established methods for carrying on its operating and recording functions. The internal auditors also make suggestions to management for improvements in the standard operating procedures. Finally, they check the accounting records in regard to completeness and accuracy making sure that all irregularities are corrected. Thus, the internal auditors seek to ensure that the various departments of the company follow the policies and procedures established by the management.

The auditor's judgment or opinion on the fairness of the records contained in a document sent to the client upon completion of the audit. It consists of a letter addressed to the client that contains both a scope paragraph and an opinion paragraph. Usually such a report is short but its language very important.

1. The first paragraph identifies the financial statements subject to the auditor's report. It also identifies responsibilities. Company management is responsible for the financial statements, and the auditor is responsible for expressing an opinion on the financial statements based on the audit. In addition to the extent of the audit, the scope paragraph also states the standards that have been used for the audit. They cover technical competence, independence of attitude, and reporting standards.

2. The second paragraph, or scope paragraph, states that the examination was made in accordance with generally accepted auditing standards. The auditor states that he has examined the balance sheet, the statement of operations an other statements for the accounting period. This is called a complete examination because it includes all accounts in the general ledger. The scope section also contains a brief description of the objectives and nature of the audit.

3. The third paragraph, or opinion one, states the results of the auditors' examination. The use of the word «opinion» is very important because the auditors do not certify or guarantee that the statements are absolutely correct. The opinion paragraph can express several different opinions: unqualified opinion, qualified opinion, disclaimer of opinion, and adverse opinion. Nowadays it is generally accepted that every business should be audited. Auditors can help the business set up a reliable accounting system and advice management on financial matters.

Answer the following questions:

1. What does the auditing function of accounting involve?

2. How has the attitude toward auditing changed in modem times?

3. What kind of system for checking on operating and recording jobs is maintained by many organizations? What business papers are used in this kind of system?

4. What types of audit do we distinguish?

5. What are the various functions of internal auditors? What do they try to ensure?

6. What different emphases can be placed on an internal auditor's report?

7. What weakness exists in the internal auditing system? How can management overcome this problem?

8. Who can carry out an independent audit?

9. What do the independent auditors review?

10.What do they seek to determine?

11.In what way do they express their opinion to their clients?

12.What does a complete examination consist of?

13.What is stated in the scope paragraph in addition to the extent of the audit?

14.What must an independent auditor who examines a company's records follow?

15. What is usually included in the auditor's report?

16. What are the auditor’s opinion usually based on?

17. What are the different categories of opinion that an auditor can reach about an organization's financial records?

Exercises in word study:

Ex.1. Find the following words and phrases in the text, translate sentences containing them into your mother tongue. Make up your own sentences:

to present company's operations fairly; irregularities in the records; to be satisfied that accounting standard has been met; to enjoy a strong reputation for competence and independence; internal audit; independent audit; a system of internal control; to protect the firm's assets; to ensure to accuracy and reliability of the accounting records; control procedures; to be vulnerable to human error; misunderstanding; sound internal control procedures; to be safeguarded; deviations from; canceled checks; payroll records; cash receipts records; to keep fraud from going undetected; fairness; scope and opinion paragraphs.

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