Auditing overview - Auditing One of the most common...

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Auditing One of the most common services provided by Certified Public Accountants (CPA’s) is the audit. In general, to audit means to conduct a thorough assessment. In accounting, to audit an entity means to examine the bookkeeping records and financial accounts of that entity. An entity could be a partnership, corporation, trust, or governmental unit. Audited financial statements are the accepted manner in which the company reports the status of its operations to interested parties outside the company . Any company whose stock is traded on a public exchange is required by the Securities & Exchange Commission (SEC) to have an annual audit. Also, stockholders who are not involved in the operations of the business may require an audit to help them understand how well their investment is being managed. In a corporation the stockholders elect the “ board of directors ”. The basic responsibility of the board of directors is to determine the mission and purpose of the organization. The Board hires the “ chief executive officer (CEO) ” as well as other top management and periodically reviews their performance. The Board sets policies for the organization. It is responsible for ensuring that the company has sufficient resources to operate and when necessary to raise additional funds, to make the decision as to how these resources should be raised. Overall it is the responsibility of the Board to represent the interest of the stockholders, who are often too distant from the company to do this for themselves. In a financial audit , the objective is to form an opinion on the financial statements produced by the management of the company. There are other types of audits that businesses may undergo, including operational audits, informational audits, investigative audits, tax audits, and follow-up audits. The independent (or external ) auditors are CPAs qualified to provide audit services and they must not be affiliated with the company being audited. The “independent” component of the external auditors is important because the public needs assurance that the auditors are separate and apart from management and do not have a vested interest in the outcome of the audit. Many companies also have internal auditors . These auditors are employed by the company and audit various departments of the company. While internal auditors are not independent of the company, they typically report directly to top management as well as the audit committee, which is a subcommittee of the company’s Board of Directors. This gives internal auditors considerable power in the company as well as making them independent from the departments they are auditing. It is the responsibility of the internal auditors to create and manage internal controls. Internal controls are covered in more detail later in this reading but basically these are the rules and procedures that help ensure that the employees comply with the policies of the company as well as those of outside regulators, which includes the SEC, FASB, IRS, etc.
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