The purpose of an audit
/The purpose of an audit is for an independent third party to examine the financial statements of an entity. This examination is an objective evaluation of the statements, which results in an auditor’s opinion regarding whether the statements have been presented fairly and in accordance with the applicable accounting framework (such as GAAP or IFRS). This opinion greatly enhances the credibility of the financial statements with users, such as lenders, creditors, and investors. Based on this opinion, users of the financial statements are more likely to provide credit and funding to a business, possibly resulting in a reduced cost of capital for the entity.
The main reasons to conduct an audit are as follows:
Detect fraud. An audit can be targeted specifically at fraud detection, which is usually the case only when fraud is suspected. If so, the audit may be targeted specifically at the area in which fraud may be occurring. At a minimum, an occasional fraud audit can deter employees from engaging in fraud.
Identify risk issues. An audit can identify risk issues that can be brought to the attention of management for subsequent mitigation.
Meet investor and lender requirements. An audit may be required by investors and lenders, who want to see a clean audit opinion as part of their continuing involvement in the enterprise.
Verify compliance. An audit program includes steps to verify whether the client is in compliance with the relevant accounting standards and government laws and regulations. For example, a sales tax audit will ascertain whether the correct sales taxes are being withheld, and whether those taxes have been forwarded to the government in a timely manner.
Verify controls. An audit may examine a client’s system of internal controls, and may result in recommendations regarding where these controls can be improved, with such goals as reductions in the loss of assets or greater process efficiency.
Verify fairness of presentation. An audit is intended to verify the fairness of presentation of the client’s financial statements. This means that the statements are based on accurate information that is free of material misstatements, and that they fairly present its financial results, financial position, and cash flows.