What Is an Audit?

What Is an Audit? was originally published on Forage.

Auditing involves closely reviewing financial statements to ensure accuracy in reporting. Individuals, small businesses, and large corporations go through audits that can be conducted either internally (by the company itself) or externally (by a hired accounting firm). The U.S. Internal Revenue Service (IRS) also conducts audits of tax filings. 

In this guide, we’ll go over:

• What Is Auditing?
• Types of Audits
• The Auditing Process
• Showing You Understand Auditing on Resumes
• Related Skills for Finance Careers

What Is Auditing?

Auditing essentially means investigating — audits can be simple reviews of a specific company process or large-scale independent examinations of an organization’s finances. In accounting, an audit usually involves looking at an individual’s or company’s financial records and determining if they are accurate. 

For large corporations and public companies, proving accurate financial reporting is vital — investors, lenders, and government entities rely on a company’s financial statements to make informed decisions. If a company lies about its situation, the consequences can be far-reaching: investors lose money, and the company may face legal action for committing fraud. Additionally, if a highly influential public company commits fraud, it can sway the market as a whole. 

Who Handles Audits?

An audit is conducted by an auditor, though that auditor differs depending on the type of audit. For example, auditors and accountants who are employees of the company itself often conduct internal audits. On the other hand, external audits are completed by certified public accountants (CPAs) through accounting firms like EY and KPMG. These external auditors are independent of the client being audited. 

However, clients are encouraged to participate in the audit — the auditing process goes smoother if companies and individuals cooperate with the auditing team, be it internal, external, or through the Internal Revenue Service. Companies, clients, and individuals have advance notice of an audit, so preparing all the necessary documentation beforehand can make the auditors’ lives easier. Additionally, clients should always ensure accuracy in financial statements to avoid messy or complicated audits. 

>>MORE: Learn what being an auditor is really like with KPMG’s Career Catalyst: Audit Virtual Experience Program. 

Types of Audits

The three main types of audits are internal, external, and U.S. Internal Revenue Service (IRS) tax audits. 

Internal Audits

An internal audit reviews a company’s structure and accounting processes to ensure accurate collection and reporting of financial data. During an internal audit, companies can also look at how effectively areas of the business are performing. 

Internal audits are performed by a team selected by the company, which can lead to more fluid communication about the auditing process, findings, and recommendations. A company will most often use an internal audit for internal purposes: assessing the company’s structure, strengths, and weaknesses. 

>>MORE: Explore the nitty-gritty of internal auditing with JPMorgan’s Internal Audit Analyst Virtual Experience Program. 

External Audits

External audits look at similar aspects to internal audits. However, independent auditing teams, typically from financial services firms like PwC or Deloitte, handle external audits While companies can choose which firm to use, they have no control over who is on the auditing team, ensuring an unbiased approach to the auditing process. 

External audits are often required for public companies and to show investors and lenders that the organization is accurately reporting its financial information. An external audit also requires a certified public accountant (CPA) to verify all documentation.  

>>MORE: Learn about external auditing at a Big Four accounting firm with PwC’s Financial Audit Virtual Experience Program. 

IRS Audits 

An IRS audit involves a review of a company or individual’s tax filings. These audits are performed by the Internal Revenue Service or through a state tax agency. Although being audited by the IRS may sound like a bad thing, the IRS often randomly selects people and companies to audit — these random selections help the IRS set baselines for what a “normal” tax return looks like. 

However, the IRS may audit some individuals and organizations because of discrepancies or red flags found during the filing process. Additionally, if a company is audited, the IRS will likely audit any business partners of that company, too. 

Other Types of Audits

Because an audit is simply an investigation, countless processes can be audited within a company. For example, a company can audit a specific department to ensure everything works as it should. 

Certain companies may face compliance audits, too, which determine how well a company is adhering to government regulations and standards. For instance, a large farming company may need to be audited by the U.S. Department of Agriculture to ensure the farm’s processes follow the standards set by the department. 

Forensic audits are a special class of audits done by forensic accountants that seek to determine if intentional fraud, theft, or inaccuracies exist in a client’s financial records. 

>>MORE: What Is Forensic Accounting?

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The Auditing Process

Each audit is slightly different — no two clients are the same, so the exact process for one client may differ from another. However, audits generally follow a four-step process: research and planning, fieldwork, summarizing and reporting, and follow-up. In an audit, the term client describes the company or individual being audited, regardless of the audit type. 

Research and Planning

In this stage, auditors will notify the client about the audit and explain the general plan. The auditor will also begin gathering information about the client, such as their internal control design — how the company operates and what risk areas exist. 

The auditor and relevant client employees meet often so the client can understand what is happening and the auditor can get a clear picture of the company as a whole. 

Fieldwork

Fieldwork involves diving deep into a client’s documentation. The auditor will test these documents to make sure the information is correct and that the company’s system for recording and reporting transactions (and its internal control design) is working correctly. 

Some of the key documents looked at include:

• Financial statements like balance sheets and cash flow statements
• Organization charts
• Questionnaires filled out by the client
• Flowcharts detailing the client’s transaction reporting processes 

Auditors document fieldwork findings in working papers, which detail the information reviewed to support their final recommendations to the client. 

Summarizing and Reporting

Once auditors complete their fieldwork, they will summarize their findings, detailing any major concerns and recommendations for improvement. The client receives an audit report explaining the results, and both the auditing team and the client meet to discuss the report’s details. The report also includes guidance for resolving the issues.

Clients should respond to the report explaining plans to fix the problems found in the audit and giving an approximate time frame for this process. 

Follow-Up

Auditors periodically review the final reports to ensure any issues found are properly addressed. An auditor then creates a follow-up report that includes any unresolved issues and the client’s plans to fix them. 

>>MORE: See how the auditing process works in the real world with KPMG’s Audit and Assurance Virtual Experience Program.

Showing You Understand Auditing on Resumes

The first place you can mention your experience with auditing is in the skills section of your resume. Here, you can list skills like: 

• Performance of internal audits
• Financial auditing
• Tax auditing 
• Financial account analysis
• Knowledge of federal, state, and local tax regulations

In the description of your relevant work or internship experience, highlight a key instance showing your auditing skills. For example, you can mention if you participated in an external audit that resolved a company’s reporting issues before any big problems arose. Additionally, you can explain a school project or internship that involved completing mock audits and ensuring adherence to federal tax regulations. 

>>MORE: Expand your auditing and accounting knowledge with Forage’s accounting and finance virtual experience programs. 

Related Skills for Finance Careers

Accountants, auditors, and finance professionals need to be familiar with financial statements, especially to conduct and help with audits. Other skills that can make auditing an easier process include: 

• In-depth knowledge of the generally accepted accounting principles (GAAP)
• Understanding how assets and liabilities work in a company’s finances 
• Knowing the types of expenditures
• Familiarity with vital formulas, like the accounting equation

Check out more accounting skills you need for your resume. 

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The post What Is an Audit? appeared first on Forage.