Auditors

Definition
An audit can be defined as a systematic process of (1) objectively
obtaining and evaluating evidence regarding objects of importance, (2)
judging the degree of correspondence between those objects and
certain criteria, and (3) communicating the results to interested users
--Merchant and Stede, 2007--

Phase of Audit Process

PHASE 1

PHASE 2

PHASE 3

PHASE 4

PLANNING

AUDIT PROCESS

JUDGMENT

COMMUNICATING

Understanding of
the
established
criteria
of
the
groups who will use
the audit report
and the required
scope of the audit,
used to design an
audit program

Obtain and
evaluating evidence
objectively.
May involve:
Observation
Interviews
Review of report
Recomputations
Confirmation
Analysis
Objects of
importance

Based on evidence,
as to whether
criteria have been
met.

Conclude result to
interested users
(audit report)

External and Internal Auditors

Auditors can be classified as either external or internal:
External auditors are independent of management because they are
employed by professional service firms (i.e: public accounting firm)
employed by professional service firm
independent of management
experienced and licensed by professional association
Internal auditors are employees of the company they are auditing.

Common Audit Types

Financial audits
express an opinion
whether the financial
statements prepare by
management are fairly
presented in accordance
with GAAP

by: external auditors

Compliance
audits

Performance
audits*

express an opinion only as

to whether actual
activities or results are in
compliance with
established standards
(procedure, rule, law,
policy )

provide an overall
evaluation of the general
performance, or some
specific aspect of the
performance of an
activity, department, or
company, and its
management

by: both external and

internal auditors

by: broad-scope internal

auditors or external
auditors in consulting role

*sometimes referred to as operations audits, management audits, or comprehensive audits

The Value of Audits

Audits create value in two primary ways:
1. First, the audit report adds credibility to the information provided
to user groups.
2. The second benefit of audits is provide not by the audit itself but
the anticipation of the audit. -> knowing that an audit will or might
take place can have a strong motivating effect on the individuals
involved to conform to the standards they think the auditor will
use in their evaluation.

Situational Factors Affecting The Value of Audit

Audits potentially more valuable if:
a. Importance of the area to be audited is high-> The greater the potential
consequences (the higher the stakes), the greater the potential value of the audit.
b. The probability is high that either the established criteria are not being met or
would not be met in the absence of the audit. -> The criteria may not be met for
intentional reasons, caused by lack of goal congruence between the individuals
involved and the organization, or for unintentional reasons, such as carelessness or
incompetence.
c. Other control mechanism are not feasible -> i.e. reviews by independent auditors in
case of inability caused by complexity of subject matter, physical remoteness,
institutional barrier preventing access to some of the evidence needed (such as in
joint venture)
But in practice matter, the realizable value of audit may be low, where assessment are not
reliable (i.e. auditor qualification doesnt meet with the requirements of the job)

Situational Factors Affecting The Value of Audit

Audits can be extremely valuable tools in many management control
situations:
Auditors can serve as the eyes and ears of management in
assessing what is happening within the organization, and providing
recommendations for improvement.
Where audits are feasible, they can be an important alternative or
supplement to other management control mechanisms, such as
direct supervision or incentives.

Situational Factors Affecting The Value of Audit

Limitations and disadvantages of audit:
a. periodic basis > provide little protection against problems
occurring in the interim except to the extent that they provide a
deterrent effect.
b. job pressure or defensiveness -> individuals feel their integrity is
being questioned or their autonomy is being limited
c. costly -> consume considerable time from highly trained
professionals, as well as from company employees who have to
prepare information for the auditors to review