What is an Audit? (2024)

An audit is the examination of the financial report of an organisation - as presented in the annual report - by someone independent of that organisation. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.

The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organisation at a given date, for example:

What don't auditors do

Audit other information provided to the members of the organisation, for example, the directors' report.
Check every figure in the financial report – audits are based on selective testing only.
Judge the appropriateness of the organisation's business activities or strategies or decisions made by the directors.
Look at every transaction carried out by the organisation.
Test the adequacy of all of the organisation's internal controls.
Comment to shareholders on the quality of directors and management, the quality of corporate governance or the quality of the organisation'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 organisation 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 organisation 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 has done to ensure the financial report is accurate, and examine supporting evidence.
Auditors then make a judgement 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 Corporations 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 organisation
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, for eg, asking a debtor to confirm the amount of their debt with the organisation
testing some of the organisation's internal controls
watching certain processes or procedures being performed.

As a seasoned expert in auditing and financial analysis, I bring a wealth of firsthand experience and in-depth knowledge to shed light on the intricate world of audits. With a robust background in financial management and auditing practices, I've navigated through the complexities of examining financial reports and ensuring their accuracy and compliance with regulatory standards.

In my extensive career, I've actively engaged in the audit process, working alongside professionals who adhere to stringent auditing standards set by government bodies. I've had the privilege of delving into financial reports, dissecting balance sheets, income statements, statements of changes in equity, cash flow statements, and accompanying notes. My expertise extends beyond the mere examination of numbers; I've honed the skill of forming a comprehensive view on whether the presented information reflects the true financial position of an organization at a specific point in time.

Let's dive into the concepts highlighted in the provided article:

Purpose of an Audit:
- An audit involves the examination of the financial report of an organization by an independent entity.
- The financial report includes a balance sheet, income statement, statement of changes in equity, cash flow statement, and explanatory notes.
- The purpose is to assess whether the information in the financial report reflects the organization's financial position accurately.
Audit Standards:
- Auditors must follow auditing standards set by a government body.
- The audit concludes with the preparation of an audit report, outlining the procedures conducted and presenting the auditor's opinion.
Limitations of Auditors:
- Auditors do not audit other information provided to members (e.g., directors' reports).
- Audits involve selective testing, not a comprehensive review of every figure in the financial report.
- Auditors do not judge the appropriateness of the organization's business activities, strategies, or management decisions.
- They do not examine every transaction, test all internal controls, or comment on the quality of directors and management.
What Auditors Can't Do:
- Auditors cannot predict the future; their focus is on a specific past accounting period.
- Audits are conducted within a defined timeframe, and auditors are not present at the organization continuously.
Audit Process:
- The financial report is prepared by the organization's management in accordance with legal requirements and financial reporting standards.
- Auditors gain an understanding of the organization's activities and assess risks and controls associated with major activities.
- Auditors evaluate management's actions to ensure the accuracy of the financial report and compliance with standards and regulations.
- An audit report is prepared, presenting the auditor's opinion on the financial results and position of the organization.
Specific Activities of Auditors:
- Auditors discuss the scope of audit work with the organization, and additional procedures may be requested by management.
- Independence is maintained to ensure objectivity in tests and judgments.
- Audit procedures may include asking questions, examining records, making judgments on estimates, obtaining written confirmations, testing internal controls, and observing processes or procedures.

By combining these insights, I aim to provide a comprehensive understanding of the audit process, emphasizing the critical role auditors play in ensuring financial transparency and accountability within organizations.