An audit is a name given to an accounting procedure under which the financial records of a company or individual are closely inspected in order to make sure that they are all done with maximum accuracy. Many American taxpayers are afraid of an Internal Revenue Service audit, while independent audits of business practices creates serious problems for dishonest companies as they may reveal embezzlement and other misuses of funds. By doing an audit a company is kept honest and not only that but it also reassures employees and investors to the financial status of the organization.
Primary Type of Audits
There are two primary types of audit and these are as follows:
- internal audits and
- independent audits.
It should be assumed that an audit will be performed without bias, regardless as to what type of audit is being conducted.
Internal Audits
In the case of an internal audit, it can be difficult to perform an audit without bias, because an internal audit is carried out by the accounting staff of the same company that is concerned. Generally, only by a large accounting department an internal audit can only successfully be carried out. It is due to the reason that auditors cannot audit records to which they contributed. Usually on a regular basis internal audits are carried out by large companies in order to make sure that their finances are in order, and if the company is traded traded, then audit reports are available for inspection by stockholders.
Independent or External Audit
A neutral third party carry out an independent or external audit, such as a professional accounting firm which are specializes in audits. In both cases, whether it is an internal or external audit, all of the financial records of a company including ledgers, bank statements, payroll, tax information, internal financial reports, official published reports, accounts payable, and accounts receivable, will be examined. At the time of audit, these records are closely inspected for any discrepancies, and if there is any inaccuracy that has been uncovered by the auditors then it must be addressed and repaired.
What facts are revealed by an External Audit?
Commonly, a simple accounting mistake will be revealed by the audit. In other cases, during an audit more sinister issues may come to light. Companies which are struggling financially may have chosen to make unsound financial decisions in an attempt to protect the company, and by a close audit these decisions will be revealed. Sometimes it is revealed by an audit that a company is on the brink of bankruptcy just because of the gross misuse of funds by high ranking personnel, similar was the case with many American corporations in the early twenty first century such as Enron and WorldCom.
What procedure is followed if there is any inaccuracy?
By conducting an independent audit when an inaccuracy is revealed then it is addressed by the auditors in the final report that is made to the company. In some cases, an external organization may order an audit, such as the Securities and Exchange Commission, and a copy of that audit is also sent to that organization. The company must have to repair the issue. The common examples of repairable audit errors are failure to pay payroll taxes to the Internal Revenue Service, or any misuse of pension plans. If the errors cannot be fixed due to the reason that the company does not have the funds to address them, then the company may face bankruptcy proceedings, and after that the company’s assets are liquidated by an independent firm, major creditors will be reimbursed.
