What Exactly Is An Audit?

In the heady world of business management, auditing brings the entire machine into sharp compliance focus – but, to the uninitiated, auditing can seem a little complex.

So here is the Renaix guide to everything Audit!

What is an Audit? A summary

The ISO (The International Organisation for Standardisation) defines an audit as a “systematic, independent and documented process for obtaining objective evidence and evaluating it objectively to determine the extent to which the audit criteria are fulfilled”.

The audit criteria, naturally, varies from industry to industry, but standardisation of auditing procedures helps solidify a base level of expectation across businesses for the benefit of stakeholders.

In effect, an audit is an examination of certain elements of, or on almost any process within, an organisation, such as a financial audit, production audit, documentation audit, or corrective audit.

Sometimes confusingly, “financial audit” and “audit” are referred to as the same thing.

Public and private companies, authorities, charities, and government departments can all complete an audit, with some having to complete them annually.

Why do we do audits?

An audit is accountability in action.

Audits are used to improve internal controls; meet legal requirements and provide oversight and accountability to senior leadership and stakeholders that the company is being run the right way. They provide assurance, guidance, and hold companies accountable for mistakes or mismanagement. They also are used as benchmark documents to help improve services and processes, and therefore business outcomes.

For the purposes of our financial readership, and as one of the global superstars of auditing PwC says, “the purpose of a (financial) audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organisation at a given date, for example: Are details of what is owned and what the organisation owes properly recorded in the balance sheet?”.

Unless companies are exempt, audits are a legal requirement. A full list of exemptions are provided here, here and here.

Who is responsible for an audit?

Audit examinations are often completed by an external entity (although not exclusively, see below), with the intention of analysing whether the processes, management, and running of the audited item meet the aforementioned “criteria” – often industry compliance, legal and governance standards, particular health and safety expectations, or meeting the demands of corrective measures put in place after failing a previous audit.

Each industry will have its own verified audit firms. For example, financial audits are done by Certified Public Accounting (CPA) firms. Some of the biggest names in global business are auditing firms such as KPMG, Deloitte and PwC, who also provide high-level advisory and research services to a wide array of companies, both public and private.

Three main auditing types

Process audit

  • “A process audit is an examination of results to determine whether the activities, resources and behaviours that cause them are being managed efficiently and effectively”.

Product audit

  • “An examination of a particular product or service, such as hardware, processed material, or software, to evaluate whether it conforms to requirements (i.e., specifications, performance standards, and customer requirements)”.

System audit

  • “The review and evaluation of controls and computer systems, as well as their use, efficiency, and security in the company, which processes the information”.

What are first-party, second-party and third-party audits?

There are essentially three “tiers” of audits

First-party audits are internal audits for companies to measure their performance against their own standards.

Second and third-party audits are completed by external auditing companies: second-party audits are generally audits completed by a customer evaluating a service they are either in the process of contractually purchasing, or will purchase. Third-party audits are completed by external, independent companies, free of any conflict of interest or purchasing responsibility between customer and provider, and utilised for a dispassionate analysis of service provision and financial reporting.

What is an internal audit?

A key definition of an internal audit is that it’s one part of the effectiveness of an external audit, yet still nominally important enough to hold its own place in the auditing pantheon.

An internal audit “offers risk management and evaluates the effectiveness of a company’s internal controls, corporate governance, and accounting processes”.

It’s the responsibility of senior management and designed to help a board of directors and leadership figures to both hold their actions accountable and help guarantee legal, compliant management of a company.

What is an external audit?

An external audit is when a second or third party auditing organisation “performs an audit, in accordance with specific laws or rules, of the financial statements (processes, or systems) of a company, government entity, other legal entity, or organisation, and is independent of the entity being audited”.

To find out more about a career in Audit, please visit our resources page, or search for Audit jobs here.

Photo by Kelly Sikkema on Unsplash

30-08-2022

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