What is an audit? Audit, auditing or examination in a broad sense is an evaluation of an organization, process system or product. Audits are carried out by competent, objective and impartial parties called auditors.
The purpose of conducting an audit is to verify that the subject of the audit has been completed or is proceeding in accordance with approved or accepted standards, regulations and practices.
Definition of Audit According to Experts
Whittington, O. Ray and Kurt Pann (2012)
Whittington, O.Ray and Kurt Pann said that an audit is an examination of the results of an entity or company’s financial statements by an independent public accounting company. By observing, checking documents and assets and asking questions both inside and outside the company and carrying out audit procedures.
The auditor will obtain the data needed to determine whether the financial statements can describe the company’s financial position and activities during the audited period.
Arens and Loebbecke (2003)
Arens and Loebbecke stated that auditing is an activity of collecting and evaluating evidence regarding information to determine and report the level of conformity between information and predetermined criteria where the audit process is carried out by competent and independent people.
Konrath (2002)
According to Konrath, an audit is a systematic, objective process for obtaining and evaluating evidence of assertions regarding economic activities and events to ensure the link between these assertions and established criteria and communicating the results of the report to interested parties.
William F. Meisser. Jr. (2003)
The definition of audit is a systematic process with the aim of evaluating evidence regarding economic actions and events to ensure the level of conformity between assignments and predetermined criteria. The results of the assignment are communicated to interested users.
Sawyer (2005)
Sawyer states that an audit is a systematic and objective assessment carried out by an auditor/person who audits different operations and controls in an organization.
Mulyadi (2002)
According to Mulyadi, auditing is a systematic process for objectively obtaining and evaluating evidence regarding statements about economic activities. The aim is to determine the level of conformity between the report and the criteria and convey the results to the relevant users.
Sukrisno Agoes (2004)
According to Sukrisno Agoes, an audit is an examination of financial reports that management has prepared along with bookkeeping records and supporting evidence. This inspection is carried out by the company critically and systematically by an independent party. The purpose of this process is to provide an opinion regarding the fairness of the financial statements.
Types of Audit
Based on Commonly Conducted Audits
The following are the types of auditing that are commonly carried out:
1. Financial Audit
Examination of financial reports is an evaluation of the fairness of the financial reports presented by management as a whole compared to generally accepted financial accounting standards. In other words, financial reports in general are information that can be exchanged and can be verified and then presented according to certain criteria.
2. Operational Audit
Operational audit is a review of each part of an organization regarding standard operating procedures and methods applied by an organization with the aim of evaluating efficiency, effectiveness and economics.
Operational audits can be an effective and efficient management tool to improve company performance. The results of operational audits are in the form of recommendations for improvements for management, so that this type of audit is more of a management consultation.
3. Compliance Audit
A compliance audit is a work process that determines whether the party being audited has followed certain procedures, standards and rules that have been set by the authorized party. Compliance audits are usually commissioned by competent authorities who have established procedures or regulations within the company, so that the results of this type of audit are not to be published, but are for internal management.
Based on Audit Extent of Examination
Judging from the extent of the audit, the types of audit can be divided into several, including:
1. General Audit
General audit is a general examination of financial reports carried out by an independent Public Accounting Firm (PAF) with the aim of providing an opinion regarding the fairness of the financial statements as a whole.
2. Special Audit (Special Audit)
A special audit is a form of audit that is only limited to the auditor’s request carried out by the Public Accounting Firm (PAF) by providing an opinion on the part of the audited financial report, for example an examination of the company’s cash receipts.
Based on the Audit Implementer
Meanwhile, based on the group or audit implementer, audits are divided into 4 types, namely:
1. Auditor Extra
External or independent auditors work for public accounting firms whose status is outside the structure of the company they audit. Generally, external auditors produce reports on financial audits .
2. Auditor Intern
Internal auditors work for the companies they audit. Management audit reports are generally useful for the management of the company being audited. Therefore, the internal auditor’s task is a management audit which is a type of compliance audit .
3. Tax Auditor
Tax auditors are tasked with checking the audited taxpayer’s compliance with the applicable tax laws.
4. Government Auditor
The task of government auditors is to assess the fairness of financial information prepared by government agencies. In addition, audits are also carried out to assess the efficiency, effectiveness and economy of program operations and the use of government property.
Audits carried out by the government can be carried out by the Financial Audit Agency or the Financial and Development Audit Agency.
Audit Activities
In order to understand more about auditing, we will learn together about audit activities. The following are audit activities.
1. Process of collecting and evaluating evidence of information that can be measured
Qualitative things must be grouped in measurable form, so that they can be assessed according to clear standards, for example very good, good, fair, poor and not good with clear criteria.
2. Economic Entity
What is audited is an entity, whether in the form of a company, division or something else. Carried out by a person or a number of competent and independent people who are called auditors.
3. Determine the suitability of the information with the deviation criteria found
This determination must be based on clear measurements. That means, with what criteria is it said to be deviant?
4. Reporting the Results
This report contains information about the conformity between the tested information and the criteria, and shows the facts of the nonconformity.
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Differences between Auditing and Accounting
Auditing and accounting are terms that often appear in the field of business science. In general, these two terms have different purposes and methods. In accounting, you could say it describes an activity of identifying transactions and evidence that can influence companies and the government.
Apart from that, this activity also includes measuring, recording and classifying evidence and subsequent transactions in accounting records. The result of this process is the preparation of financial reports in accordance with general accounting principles.
The purpose of accounting is to communicate data that is relevant and can be useful in decision making. The parties involved include company employees and government employees, while company management is the person responsible for the final financial report.
Meanwhile, an audit can be said to be a financial report that includes activities in obtaining and assessing evidence related to financial reports. This activity allows auditors to examine the level of appropriateness or fairness of a financial report whether it has been presented fairly in accordance with Generally Accepted Accounting Principles or not.
Audit Functions and Benefits
What are the audit functions and benefits that Mudalovers need to know? Here’s the explanation:
1. Checking the Accuracy of a Financial Report
The first benefit of an audit is checking the level of accuracy of a financial report. Sometimes, there is human error or fraud committed by individuals in the company. The auditor’s job is to find the criminal act, so that the report is in accordance with the facts on the ground.
2. Monitoring the Network System
Not only reports, but auditors can also independently monitor a company’s financial system. If acts of corruption and so on occur, the auditor can provide a written report regarding this behavior to the authorities.
3. Achieve financial goals.
By checking the finances if an error occurs, the auditor can advise the company to correct it. Report improvements can also be used as a basis for running the next financial system. When financial reports are healthy, a company’s potential to achieve profit goals will also be higher.
4. Accountability and Credibility
The next benefit of auditors is increasing the quality of accountability and credibility of the company. This company can increase investment value, be trusted by the public and so on.
Audit Objectives
The objectives of carrying out the audit are as follows:
1. Ensure Completeness
Audits are carried out to ensure that all transactions that occur have been recorded or entered in a journal with all the details.
2. Ensure Accuracy
This audit activity aims to ensure that all transactions and estimated balances have been properly documented, the calculations are correct, the amounts are correct and classified based on the type of transaction.
3. Ensure Existence
With an audit, the recording of all assets and liabilities has an existence according to a certain date. This means that all recorded transactions correspond to actual events.
4. Make an assessment (valuation)
Audit activities also aim to ensure that all generally accepted accounting principles have been applied correctly.
5. Create a Classification
The audit aims to ensure that all transactions recorded in the journal are classified according to the type of transaction.
6. Ensure Accuracy
Audit activities aim to ensure that transaction recording is carried out according to the correct date, the details in the account balance are in accordance with the
ledger figures and the balance is added up correctly.
7. Make a Cut-Off
Audit activities aim to ensure that all transactions close to the balance sheet date are recorded in the appropriate period. Recording transactions at the end of the accounting period is very likely to result in misstatements.
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Stages of Audit Implementation
To achieve audit objectives in accordance with company planning, there are several stages that need to be carried out, including:
1. Receipt of Materials
Before carrying out this activity, there is usually a mutually agreed upon agreement. Therefore, at this stage there will be an explanation of the auditor’s role as well as the contract requirements for the client to sign.
After that, the client will submit his financial report to the auditor to carry out the financial report auditing process according to his duties. These preparations involve training personnel as well as ensuring the completeness of records and documents.
Making financial reports must be careful to avoid mistakes. By using accounting software to create financial reports, errors will be avoided because the system is accurate. Apart from that, the time used is also more efficient because this system does it automatically.
2. Preparation and Planning
The preparation and planning process is a stage that auditors must know about. In general, this process can take just one day or even a week depending on the nature of the audit. There are several things that auditors need to understand before carrying out this process, including:
- Understand the client’s business industry.
- Perform analytical procedures.
- Determining materiality and assigning risk.
- Understand the internal control structure and determine control risk.
- Develop audit plans and programs.
3. Execution
The next stage after planning is execution. Auditors usually carry out this by collecting and analyzing data and information. Primarily to assess the organization’s internal control needs. In this process, auditors usually conduct interviews, examine documents and other things to develop auditing findings.
4. Reporting
Reporting is the result stage of audit work that has been completed. This report is a form of communication between the auditor and other parties so the auditor should not make it haphazardly. In this report, there are things that the auditor must include, such as the type of opinion, the services the company offers, the object, scope and objectives of the audit. This report also contains the auditor’s opinion and recommendations on how to correct errors.
5. Corrective Audit
The final stage in this process is the corrective stage. Completed reports definitely require corrective or preventive action. This action includes correcting failures or deficiencies in the audit findings.
Apart from that, at this stage we also take several precautionary measures. These preventive measures aim to prevent factors that could result in the failure of a company in the future.
Implementation Standards
In its implementation, there are several standards that need attention in financial auditing, including:
General Standards
This is a standard that regulates the expertise, continuous training, independence and professional skills of auditors. Some general standards that auditors must pay attention to are:
- The audit must be carried out by one or more people who have sufficient technical expertise and training as an auditor and not just an accountant.
- In all matters relating to ties, an auditor must be able to act professionally and must also act objectively without taking sides and without any suspicion of cooperation.
- Auditors must maintain a mental attitude towards all matters relating to engagement and independence.
- Auditors are required to utilize their professional expertise in the process of carrying out audits and reporting activities carefully and thoroughly.
- The audit must be carried out by a party who has adequate expertise as an auditor, not just an accountant.
Field Standards
Field standards are standards that regulate the field work process during auditing. This process is more specific in covering matters regarding audit performance in the field. There are several procedures that auditors must pay attention to in implementing this standard, namely:
- Field performance basically depends on the planning carried out. Therefore, as professionals, all work must be planned well and carefully.
- Informative disclosures in financial statements must be adequate, unless otherwise stated in the auditor’s report.
- If the preparation of the company’s financial statements is inconsistent, the auditor’s report must explain this and provide recommendations for improvement.
- There must be a statement or opinion about the financial statements being examined in the audit report.
Read Also : What is a Cash Account? Definition, Types and Criteria
Closing
From the explanation previously explained, Mudalovers already knows that audits play an important role in the running of a company. In order to obtain satisfactory and appropriate audit results, a company must consider the appropriate process for recording and presenting financial reports. Hopefully this article inspires you!
If Mudalovers is still confused, still needs references regarding the complete meaning, types, functions and benefits of audits, you can visit the Mudalovers article collection at mudabicara.com.