What is an audit?

Hannah Langworth gives you the key facts about this important part of the work accountants do
Introducing accounting

What is an audit?

In general terms, an audit is a systematic review and assessment of a quantity of information.

In the context of professional services, an audit is an assessment of an organisation's financial records and procedures, and sometimes other aspects of the way in which they work.

The key purpose of the audits professional services firms conduct is usually to assess whether or not an organisation's financial records give a "true and fair" view of that organisation's financial position.

The kind of issues that this kind of audit might address include:

  • whether its financial records agree with those held by its bank
  • whether its assets and investments have been correctly valued in its financial statements
  • whether its financial procedures and controls are efficient and sufficiently rigorous whether it's in compliance with all relevant regulation.

What are the different kinds of audit?

There are several different kinds of audit, including:

  • External audit: Most large and medium UK businesses, public sector organisations and charities must be audited by an independent external organisation, which is usually a professional services firm, every year.
  • Internal audit: Many organisations choose to undertake ongoing reviews of their finances and ways of working to ensure that they're well prepared for their annual external audit and to maximise their efficiency and performance. This process could be conducted by teams within the organisation or by a professional services firm.
  • Non-financial audit: Some external and internal audit procedures include reviews and assessment of non-financial aspects of an organisation's operations. These aspects could include an organisation's environmental record, health and safety procedures, human resources or market reputation.

Why is auditing important?

The audit procedure is important for a number of different reasons and for a number of different parties.

Management: Those running an organisation need to have access to an accurate assessment of the company's finances and operations in order to manage it effectively day to day and plan for its future.

Shareholders/stakeholders: Those who own shares in a company, or other kinds of stakeholders in an organisation, will want reassurance that the organisation is being properly run so that their investment is protected to the extent possible.

Lenders: Banks and other parties who have lent money to the organisation will want reassurance that the company is on track to repay the money lent to it (plus interest) on the schedule agreed.

Potential investors: Those considering investing in an organisation will want access to an accurate audit of an organisation in order to decide whether or not to proceed.

Regulators: Regulators require organisations to be audited to ensure that they can monitor that organisation effectively.

Other parties: Tax authorities, suppliers, customers and employees may also take an interest in a company's audit.

Who can conduct an audit?

Those involved in conducting an audit must be of an appropriate professional competence, which in practice means that they must be suitably qualified chartered accountants, or supervised chartered accountants in training, employed by a professional services firm.

How are audits conducted?

Audits usually require an in-depth examination of organisation's financial records, assets and ways or working. For this reason, it's usual for the staff conducting the audit to work at the organisation's premises while they do so.

How long does an audit last?

The length of an audit procedure is dependent on the size of the organisation being audited. The process can take anything from a few days to a few months.

What current issues are there surrounding audits?

There are a number of issues around the conduct of audits currently being debated in the professional services world.

*The Big Four monopoly: *Currently, the vast majority of large corporates and financial services organisations in the UK are audited by the "Big Four" professional services firms - Deloitte, Ernst & Young, KPMG and PwC. This monopoly has arisen through a combination of strong historic relationships between these firms and their clients and the fact that many large organisations are required in their constitutional documents or by their investors to use a Big Four firm. Many in the professional services industry and other commentators see this monopoly as breaching the anti-competition principles enshrined in UK and EU law. Measures to combat the monopoly, such as joint audits or rotational systems, have been proposed and are currently under consideration.

*Auditors and the financial crisis: *As the question of how the circumstances arose that led to the financial crisis and the subsequent global economic downturn continues to be considered, it's been suggested that in some cases auditors were not sufficiently rigorous in their analyses of the financial records of banks and other financial institutions.

*Audit and non-audit services: *In the US, there are strict rules preventing a professional services firm from offering consulting services to its audit clients on the grounds of protecting auditor objectivity. The European Commission is now proposing that similar rules be introduced in the EU.

Why is audit a good field to go into?

There are number of good reasons to consider a career as an auditor:

  • Good business education: Qualifying and working as an auditor means you're required to look closely at the financial records and general workings of organisations, giving you an excellent insight into how they function.
  • Variety: Working as an auditor usually means that you'll be working closely with a number of different organisations in turn, meaning that you'll get an insight into a range of sectors and ways of operating, and an understanding of the different stages that organisations go through as they evolve.
  • *Professional prospects: *Because it gives you an excellent business and methodological grounding, experience as an auditor is well-regarded and can be a springboard into a senior position at a corporate or other organisation. As you'll work with a range of different clients, you'll come to find out what kind of organisation suits you best and make plenty of professional contacts which could come in useful should you decide to leave your professional services firm to work for a client organisation.

How do I become an auditor?

The standard way to become an auditor is to join an audit graduate training scheme at a professional services firm.