Auditing is the accumulation and evaluation of evidence to determine the proficiency of a business process. The information obtained in the acquired evidence must have a high degree of correspondence with established criteria. It is essential for useful information to be verifiable and standardized. Financial statements, tax returns, and reports generated by a property management system are common types of information used in auditing. In order to harmonize information with established criteria, there must be a link between the two objectives. Finalized financial statements of publicly traded companies must be compliant with GAAP or IFRS and tax returns must be filed in accordance with the Internal Revenue Code. Naturally, auditing is a task performed by an auditor. An auditor needs to display professional neutrality and competency.
Accumulating and evaluating evidence is an integral competent in the auditing process. To achieve a premium audit, the auditor must obtain sufficient quality and quantity of evidence. Evidence can be presented as electronic data about transactions, an oral testimony by the auditee or client, or written communication with an external party. Regardless of how evidence is tendered, it must correspond with established criteria.
The evidence that has been compiled has little value if it is not evaluated by a competent and neutral professional. The auditor must be qualified to understand the amount and types of evidence needed to reach a proper conclusion. Additionally, they should be well versed with the criteria used. An auditor should not possess a stake in the entity that is being audited as an effective audit must be free of bias.
There are two types of auditors: independent and internal. Independent auditors are auditors reporting company financial statements. They are external auditors that are not employed by the company they are auditing. They should be proficient with GAAP or IFRS which aids them in catching reporting errors in financial statements. Internal auditors are auditors employed by the companies they audit. It is fair to argue that internal auditors violate the principle that auditors must be neutral. To minimize the conflict of interest, internal auditors report directly to the company’s President or the audit committee of the Board of Directors. They do not share a reporting relationship with the entity’s operational staff. The key expertise that internal auditors possess are operational auditing and evaluating computer systems. Operational auditing evaluates the efficiency and effectiveness of the organization’s operating procedures and methods, such as a newly installed payroll system.
Once evidence has been evaluated and has determined to meet established criteria, the auditor will report his/her conclusion to the auditee. If the auditor was auditing a tax return, the auditor (or in this case, an IRS agent) would examine supporting records that were provided by the taxpayer and once completed, would issue a report to the taxpayer assessing if additional taxes are owed.
Auditing is a four-step process. First, the auditor must be identified as a competent and independent professional. Once the auditor is chosen, the auditor then accumulates and evaluates evidence. Once a strong selection of evidence has been compiled, the auditor will weigh it against the appropriate established criteria. After the auditor has reached a conclusion on the relationship between the information and established criteria, he/she will provide the auditee with a detailed report.
