What is audit: what does a profession that began with "hearing" check today, and who needs it?
The first lesson of the course: what audit is in plain words, how it differs from a tax audit, which Latin verb the word comes from, and why a shop owner calls in an outside examiner.
Rustam opened three shops and put a sales assistant in each. Every month the assistants bring him a notebook and money. The figures look fine, but Rustam has a question on his mind: do the entries in the notebook match reality? If he checks himself, he will not have the time; if he asks an assistant, the answer will of course be "everything is in order". He needs an independent examiner.
What is audit?
Audit is when an independent specialist examines a business's accounting and financial statements and expresses their own opinion on whether they are correct or not. The examiner is called an auditor, and their final opinion is given in the form of a written report.
Remember three key words:
- Independent: the auditor must not depend on the business being audited, otherwise their opinion cannot be trusted.
- Evidence: the auditor does not say "I think"; they gather evidence through documents, counting and comparison.
- Opinion: the result of an audit is not a punishment but a conclusion. The manager, the bank or a partner makes decisions based on it.
It is important to tell audit apart from a tax audit. A tax audit is carried out by a state authority to establish whether tax has been paid correctly. An audit, by contrast, gives an opinion on the reliability of the financial statements, and it is often commissioned by the business itself.
Where does the word come from?
The word "audit" goes back to the Latin verb audire "to hear". According to the Merriam-Webster dictionary, the word auditus formed from it in Medieval Latin meant "hearing, listening" and later also took on the meaning "examination of accounts". The dictionary notes that this new meaning arose relatively late, on the basis of the word "auditor".
Why "hearing" of all things? A separate history article on the site answers this question in detail: «Why does the word audit come from "hearing"? 6 facts about ancient checks». In this lesson we will keep the main idea: audit has always been connected with listening to and checking another person's account.
Why it is needed: its function and purpose
The main purpose of audit: to give an independent and well-grounded answer to the question of whether the people who use financial statements (owners, the bank, investors) can trust them. In practice this shows up in the following:
- When the owner is far away. Rustam cannot sit in every shop. The auditor becomes his "eyes".
- So that the bank and investors can trust the figures. If an independent person has checked the statements of a business that is asking for a loan, the bank's confidence grows.
- To find errors in time. The auditor points out an error made in the till, in the storeroom or in the accounts, and the business corrects it.
- To strengthen order. The auditor points out gaps in internal control: for example, if the person who receives the money and the person who records it are one and the same, that is a risk.
| In everyday life | In audit |
|---|---|
| One craftsman checking the work of another craftsman hired for the house | Independent external audit |
| Comparing the money in a shop with the receipts | Gathering audit evidence |
| A verdict of "everything is in order" | Auditor's report |
| Someone in the family recounting the expenses | Internal audit |
Who it works with and who contributed
The auditor works with the business's manager and accountant and, if necessary, asks the business's customers and suppliers for confirmation. Their report is read by owners, banks and investors.
To learn how the profession took shape, here are the history articles: «The 19th century: when did audit become mandatory and where was the first society of accountants founded?» and «How international standards on auditing were born: from New York to Munich». The links are at the end of the page.
In the next lesson
In the second lesson we will look at a simple example of why audit gives "reasonable assurance" rather than an "absolute guarantee".
Test yourself
5 questions on this topic: pick an option or reveal the answer.
At year-end, "Pskent kafel" recorded an allowance for doubtful debts. To test the allowance, the auditor examined the January–February bank statements to see which debtors paid after the year ended. Which of the three approaches in ISA 540 is being applied?
To verify the balance a customer owes the company, the auditor sends a request to the customer and receives the reply directly. What is this audit procedure called?
The auditor compared annual payroll costs with the number of employees, found a significant difference from the expected amount and began investigating the cause. Under ISA 520, what kind of procedure is this?
During tests of details, the auditor found misstatements in the documents selected for the sample. Under ISA 530, what does the auditor do with these misstatements?
In the audit of "Dilkusho savdo" LLC, the auditor wants to check that revenue is recorded completely, i.e. that no shipment has dropped out of the books. Which direction of testing suits this aim best?
Answered: 0 / 50 of 5 correct
All tests →See also
- Audit section
- Audit
- Auditor's report
- Internal audit
- What is the difference between external and internal audit?
- What stages does an audit go through?
- Why does the word audit come from "hearing"? 6 facts about ancient checks
- The 19th century: when did audit become mandatory and where was the first society of accountants founded?
- How international standards on auditing were born: from New York to Munich
Sources
- Merriam-Webster: audit · Medieval Latin auditus («hearing, listening», later «examination of accounts») from the Latin verb audire «to hear»; the sense «examination of accounts» arose relatively late, on the basis of the word auditor
- Examples, names and figures · compiled by the author, hypothetical