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An audit is the examination of the financial report of an organization. An audit is a systematic and independent examination of books, accounts, statutory records, documents, and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. Due to strong incentives to misstate financial information, auditing has become a legal requirement for many entities who have the power to exploit financial information for personal gain. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a business.


Auditors of financial statements & non-financial information (including compliance audit) can be classified into three categories:

  • External auditor/Statutory auditor is an independent firm engaged by the client subject to the audit to express an opinion on whether the company’s financial statements are free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion on the effectiveness of internal controls over financial reporting. External auditors may also be engaged to perform other agreed-upon procedures, related, or unrelated to financial statements. Most importantly, external auditors, though engaged and paid by the company being audited, should be regarded as independent.


  • Cost auditor/Statutory cost auditor is an independent firm engaged by the client subject to the cost audit to express an opinion on whether the company’s cost statements and cost sheetare free of material misstatements, whether due to fraud or error. For publicly traded companies, external auditors may also be required to express an opinion on the effectiveness of internal controls over cost reporting. These are specialized persons called Cost Accountants in India & CMA globally either Cost & Management Accountants or Certified Management Accountants.
  • Secretarial auditor/Statutory secretarial auditor is an independent firm engaged by the client subject to the audit of secretarial and applicable laws/compliances of other applicable laws to express an opinion on whether the company’s secretarial recordsand compliance of applicable laws are free of material misstatements, whether due to fraud or error and inviting heavy fines or penalties. For bigger public companies, external secretarial auditors may also be required to express an opinion on the effectiveness of internal controls over compliances system management of the company. These are Specialized Persons called Company Secretaries in India who are the members of Institute of Company Secretaries of India and holding Certificate of Practice

What don’t auditors do?

  • Audit other information provided to the members of the organization, for example, the directors’ report.
  • Check every figure in the financial report – audits are based on selective testing only.
  • Judge the appropriateness of the organization’s business activities or strategies or decisions made by the directors.
  • Look at every transaction carried out by the organization.
  • Test the adequacy of all of the organization’s internal controls.
  • Comment to shareholders on the quality of directors and management, the quality of corporate governance or the quality of the organization’s risk management procedures and controls

What can't auditors do

  • Predict the future – The audit relates to a specific past accounting period. It does not judge what may happen in the future, and so cannot provide assurance that the organization will continue in business indefinitely.
  • Be there all the time – The audit is carried out during a defined timeframe, and auditors are not at the organization all the time. The prime purpose of the audit is to form an opinion on the information in the financial report taken as a whole, and not to identify all possible irregularities. This means that although auditors are on the look-out for signs of potential material fraud, it is not possible to be certain that frauds will be identified.


How is the audit conducted?

  • The organisation’s management prepares the financial report. It must be prepared in accordance with legal requirements and financial reporting standards.
  • The organisation’s directors approve the financial report.
  • Auditors start their examination by gaining an understanding of the organisation’s activities, and considering the economic and industry issues that might have affected the business during the reporting period.
  • For each major activity listed in the financial report, auditors identify and assess any risks which could have a significant impact on the financial position or financial performance, and also some of the measures (called internal controls) that the organisation has put in place to mitigate those risks.
  • Based on the risks and controls identified, auditors consider what management does have done to ensure the financial report is accurate, and examine supporting evidence.
  • Auditors then make a judgment as to whether the financial report taken as a whole presents a true and fair view of the financial results and position of the organisation and its cash flows, and is in compliance with financial reporting standards and, if applicable, the Company Act.
  • Finally, auditors prepare an audit report setting out their opinion, for the organisation’s shareholders or members.

What do auditors do, specifically

Auditors discuss the scope of the audit work with the organisation – the directors or management may request that additional procedures be performed. Auditors maintain independence from management and directors so that tests and judgments are made objectively. Auditors determine the type and extent of the audit procedures they will perform, depending on the risks and controls they have identified. The procedures may include:-

  • Asking a range of questions from formal written questions, to informal oral questions – of a range of individuals at the organization;
  • Examining financial and accounting records, other documents, and tangible items such as plant and equipment;
  • Making judgments on significant estimates or assumptions that management made when they prepared the financial report;
  • Obtaining written confirmations of certain matters, asking a debtor to confirm the amount of their debt with the organization;
  • Testing some of the organisation’s internal controls;
  • Watching certain processes or procedures being performed.

Why do companies have audits?

  • The Audit is mandatory for all form of companies.
  • Investor / Lenders or creditors take decisions based on the audited financial statements of a company.
  • The review of financial statements should be conducted by an industry expert possessing CA/ CPA qualification.
  • Strong Audit eliminates the chances of any fraud or financial misapplication in business.