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What is an audit?
An audit refers to the process of examining some aspect of an individual or company, be it financial or non-financial. When conducted within an organization, the intention is to spot and address potential weaknesses that may interfere with productivity.
Audit has several definitions:
- As a noun, it is refers to an official examination of a person’s or organization’s accounts, often by a third party.
- As a verb, it is the act of examining these accounts.
- The term audit is often associated with tax compliance, when a representative of government, such as the IRS, ensures that a taxpayer’s obligations have been met.
In finance, audits are carried out to determine if financial statements accurately reflect the transactions represented. Audits can also review an organization’s human resources policies, operational procedures, safety protocols and more.
An audit can be done internally — by the employees of the organization in question — or externally, by a third party.
Internal auditing is carried out to provide an organization with an objective and an impartial view of its position regarding governance, operational efficiencies and risk management. Internal auditors are, in most cases, independent of the departments they are auditing, and report to the highest level of the organization, such as the board of governors or trustees. For an internal audit to be effective, it should be carried out by experienced professionals who are compliant with the code of ethics and the standards set in the region or internationally. A good internal audit should project the company’s growth, make recommendations on how to improve its reputation, reduce employee turnover and discover ways to minimize operational costs. It should also point out the risks the organization is facing and recommend strategies for mitigating them.
External auditing, on the other hand, is carried out by an independent body from outside the organization. The auditing firm’s main responsibility is to review financial records and determine whether they are a fair representation of the company’s financial standing. Auditors also evaluate internal controls implemented with the purpose of managing risks that pose a financial threat to the business. Once an audit is complete, a report is sent to management that addresses issues that need improvement and makes recommendations. The systematic review of policies helps alleviate unethical conduct and policies in an organization.