Audit Meaning: What Is Auditing?

Modified October 19, 2021

Financial auditing is the process of examining an

organization’s (or individual’s) financial records to
determine if they are accurate and in accordance
with any applicable rules (including accepted
accounting standards), regulations, and laws.
External auditors come in from outside the
organization to examine accounting and financial
records and provide an independent opinion on
these records. Law requires that all public
companies have their financial statements externally
audited.
Internal auditors work for the organization as
internal employees to examine records and help
improve internal processes such as operations,
internal controls, risk management, and
governance.

the six essential features of auditing can be

described as follows:

 Systematic process
 Three-party relationship
 Subject matter
 Evidence
 Established criteria
 Opinion
 Main Types of Financial Audits
 Nearly all companies get an audit of annual
financial statements like cash flow, balance
sheet, and income statements. Some
businesses conduct an audit to meet industry
regulations or because it is a legal requirement.
Stakeholders or potential investors may also
require an audit. Regardless of the reason, it
does not have to be a stressful and negative
experience. Financial audits are classified into
different types.
 Internal Audit
 An internal audit is typically done in-house,
focusing on process assessments, control
assessments, the safety of assets, and legal
compliance. It is designed to improve an
organization’s operations and add value to the
company. The business leader initiates the
exercise, which is then performed by an audit
team. The audit’s scope is determined by
directors with equivalence authorization or the
audit committee.
 An internal audit report is issued to the
management teams. The results facilitate
improvements in internal controls and trigger
managerial changes. Suppose a company does
not have in-house auditors. In that case, it is
necessary to bring in consultant auditors who
conduct internal audits based on the specific
company’s standards rather than separate
procedures and standards.
 External Audit
 An external audit is carried out by an
independent party, such as a tax agency or the
IRS, following standards that differ from the
company’s. Using a third-party to do a financial
audit eliminates certain biases, providing an
honest and candid assessment of different situations
within a company without affecting colleagues’
relationships and the work environment.
 Similar to internal audits, an external audit’s
main objective is to gauge the accounting
records’ accuracy. Lenders and investors
usually need external audits to confirm that the
company’s data and financial data and
information are fair and accurate.