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What Is an Audit?

The word “audit” can be thrown around a lot in casual conversation. When an accounting professional uses it, it means something very specific. We’ll discuss this and other uses of the term “audit” in this article.

Financial Audit

A financial audit is an official service designed to inspect the accounting records, technology, and processes of an organization. An audit can only be conducted by a licensed CPA that is independent of the organization.

Independence is a special term as well, meaning the CPA who audits the organization must have no relationship with the organization or its owners and employees. For example, if the organization’s owner is the sister of the auditor, that won’t work!

To conduct an audit, the CPA performs an audit program, which is a set of tasks that review the company transactions, balances, and accounting processes. The audit program is custom-designed to the company based on the risks perceived by the audit team, the type of organization being audited and other factors. Once the audit has been completed, the auditor will issue a formal report stating the findings of the audit. The report typically includes a letter, financial statements, and footnotes.

The auditor’s report can be utilized by the company’s management as well as third parties, such as lenders and stockholders.

While there are mandatory audit requirements for large public companies, government institutions, schools, and some larger nonprofit organizations, small businesses are not typically audited because of the expense. That’s when additional assurance services come in handy.

Other Assurance Services

An audit falls under assurance services in accounting, and it’s the most stringent of all. Other types of assurance services include:

Compilations. In this engagement, the CPA performs basic checks on your financial statements and puts them together with a cover letter. It basically tells a third party that you have a CPA, but it provides the least amount of assurance service.

Reviews. In a review, there are a few more checks and tests that a CPA will perform before issuing financial statements. This service provides more assurance than a compilation, but less than an audit.

Agreed-upon procedures. An engagement with agreed-upon procedures is a very specific engagement where one aspect of the business is reviewed in accordance with a specific goal.

For small businesses who are asked for documents from your accountant by a bank or lender, you can often provide one of these lower-level assurance reports and it will not only suffice, but save your money.

Auditing a Class

Auditing a class has nothing to do with accounting! It simply means you’re sitting in on a college course, but not getting any kind of credit or grade.

The Dreaded IRS Audit

The term audit can also be used informally to define an inspection that is narrower in scope, such as an IRS audit or a state agency audit. There is no assurance provided in this type of audit. The purpose of this audit is to produce whatever records you are asked for in order to verify the numbers you sent to the agency.

An audit may be somewhat of a stressful and unpleasant, but necessary, experience. Having your accountant support you along the way can be reassuring (pun intended).