By Simran Kaur, Flywork.io Team, Flywork.io.
When one thinks of the word Audit, they imagine agents or officials arriving unannounced with calculators in hand ready to go through boxes of invoices, receipts, and notes, well that's certainly is one type of audit but it's not the only kind. Most of the audits that the big firms do have nothing to do with tax day and none of them are unannounced. Companies which trade publicly are required to validate financial positions with an audit, on the other hand privately held companies even though they are not legally required often performs audit at the request of banks, investors and other stakeholders to ensure that their cash flows, balance sheets, profit, and loss statements aren't misstated. But what exactly are Audits? How are they important? What are its types? Read on to know all about it.
WHAT IS AN AUDIT?
International Organization of Supreme Audit Institutions define Audit as :
"Evaluation or examination of systems, operations, and activities of a specific entity, to ascertain they are executed or they function within the framework of a certain budget, objectives, rules, and requirements."
In simpler terms, we can say that the word "AUDIT" means to evaluate. They are often executed by Auditors. An Auditor is a person or a firm appointed by a company to execute an Audit, that is to examine the accuracy of recorded business transactions. However, Employees or the head of a particular department in a Company can also execute an audit internally. The whole idea of an Audit is to check that no fraud or misrepresentation is conducted financially in the books of accounts.
In India, Chartered Accountants from ICAI or THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA does independent audits of any organization.
IMPORTANCE OF AUDITS
Audits have become an important term used in Accounting. It examines and verifies a Company's Financial records.
Ways how Audits are important:
- It helps in preventing as well as detecting frauds and mistakes.
- It helps in maintaining the books of accounts
- It satisfies owners of how their business operates and also how its various departments function.
- It creates confidence among stakeholders, creditors, banks, etc.
- It allows verifying potential risks and helps improve a company's internal controls and systems.
TYPES OF AUDITS
There are three main types of Audits.
- Internal Audits
These types of Audits are performed internally by employees of the company or organization. They are usually done for the use of stakeholders and management.
They help improve decision makings and the functioning of various departments of the company. Also, they help ensure that compliance with laws and regulations are maintained timely and fair and no mistake or fraud is done in financial statements.
- External Audits
These types of Audits are performed by external organisation or firms. It gives a Company an unbiased opinion which an internal audit might not be able to. They determine and check if any error or mistake is done with the financial records of the Company. They help stakeholders, investors, banks make decisions with Externally audited firms confidently as they are made sure that their money is in safe hands and away from frauds.
- Government Audit
These types of Audits are done to ensure that the financial statements of a company are prepared accurately and the amount of taxable income is not misrepresented. Misrepresenting a taxable income, whether intentionally or unintentionally amounts to tax fraud. These audits keep companies safe from frauds which might have become a huge liability for the company in the future both legally and financially.
Today almost every company considers Audits and executes them eventually after a fixed time either internally or externally to ensure and evaluate where money is coming from, where it's going, and what's it doing each step of the way. There are many channels in a company where money can flow through. The bigger the organization, the more accounts there are to follow.
Audits have come a long way from saving Companies from frauds to providing risks taking potential in companies. They not only save a company but also helps them grow.