Auditing

There are few words for an accountant, which cause as much concern as the word
audit. Audits, whether internal or external, carefully study the accountants work
and identify any errors or abnormalities.

In large firms audits are often used as a control for the work of the accounting
department, in these firms the accounts departments may deal with millions of
dollars a month and without a control process in place there would be no way of
verifying that the information produced was correct and that the company wasnt
being defrauded.

These internal audits can take one of two forms, either being carried out by the
CFO and his team or by a specially commissioned external firm of auditors. The
second option is by far the most popular as it ensures objectivity in the audit.

In either of these forms, the auditors are responsible for confirming the validity of
the records produced by the accounting department. This can be done by cross-
checking the accounts workings with the source information, although in larger
firms this can be too time consuming. In these cases statistical sampling, in which
a random sample is checked can provided reasonable proof of accuracy.

These audits may be financial or managerial in nature, in that they can confirm the
workings of the financial accounts or of management accounts.

The primary function of these audits is to demonstrate that the company is

following all expected standards whether they be accounting or production. Each
department can be audited to confirm that they adhere to set procedures and to
ascertain that each process is as described.

As the auditors are acting on behalf of the management board of the entity all
findings are kept in strict confidence and are only shared with the management
board and any stakeholders, who then interpret the results and act on the
recommendations of the auditors.

External audits confirm the entitys legal obligation to pay certain taxes and duties.
In the US this may be done by the IRS.
These audits cause both accountants and senior managers large amounts of stress
as the outcome of the audit can determine the future of the company being audited.
Of course, not all companies are audited every year.

The IRS choose the companies and individuals to be audited based on a series of
indicators including the level of income with both very high and low levels of
income having the potential to cause an audit, comparative studies of your past
years return and that of your competitors, dramatic changes in income, incomplete
or sloppy tax returns, and a high number of itemizations or charitable
contributions.

Once a company has been chosen for an audit, you are notified by mail informing
you of the type of audit: mail by post, office at an IRS office or field in the tax
payers premises. You will also be informed what documentation will be required.

The auditors duty is to confirm that the information which was submitted in the
tax return is true and that the methods of accounting comply with accounting
standards. The auditors findings are then shared with the IRS who will act on it.

Publicly traded companies are treated slightly differently in auditing. The focus is
on providing transparency to ensure investor confidence; this is done by imposing
criminal status to the filing of incorrect financial documentation.

In the US, government auditing is not only a process of confirming a tax liability
but also a method of establishing the performance of a non-profit organization
(NPO). These performance audits may include such checks as whether the NPO is
making sound investments, purchasing the correct goods and a fair price and that
employees of the NPO conduct themselves in a way reflecting the organizations
best interests.
Vocabulary

Please study the 15 vocabulary terms from Unit 10: Auditing. Then continue to
the activities.

abnormality

something which is not typical or appearing to be right

Several abnormalities were discovered during the audit, which resulted in the
company being taken to court.

act on

do something as a reaction

The board decided to act on the performance auditor's recommendations and

instituted new purchasing procedures.

adhere to

follow or obey

Each company should adhere to the accounting standards of the country that they
operate in.

audit

an examination of records or financial accounts to check their correctness

The IRS audit will take place next week, so make sure all documentation is ready
by then.

control

a standard of comparison for checking or verifying the results

The company has several control systems in place to ensure theft does not happen.

defraud

illegally take money from someone by using deceit

Mr Franks was convicted of defrauding the company out of millions.

itemization

to place individual items as a list

Itemization of expenses helps in identifying areas of high cost.

objectivity

the state of being uninfluenced by emotions or personal prejudices

Audits are often performed by external auditors to maintain objectivity.

outcome

the end result

The outcome of the meeting was the decision to relocate to Brazil.

sloppy

untidy or with mistakes

James was fired for being too sloppy in his work, after it was noticed that he had
made several serious mistakes.

sound

having a firm basis

John has a sound knowledge of financial matters but he has never dealt with an
IRS audit so the CFO insisted on being present during the audit.

statistical sampling

the process of checking an entity based on a small amount of data taken at random

The auditor chose one month at random for statistical sampling.

transparency

the state of providing clear visible information to all involved in an activity

Increased transparency in the accounting department has increased shareholder
faith in the company.

validity

being correct and valid

The validity of the accounts was questioned by the IRS and an audit was
performed.

verify

prove the truth of by presentation of evidence or testimony

The accounts manage must verify all payments over $10,000.