Accounting and Finance Foundations

Unit 13

Accounting and Finance Foundations Unit 13: Auditing 988

Auditing Student Guide

Chapter 30

Lesson 30.1 Introduction to Auditing

In previous units, you learned the fundamentals of accounting and finance. Now, in this unit, you’re go-

ing to take an up-close look at auditing, which is related to—yet different from—accounting and finance.

Accounting involves recording, classifying, and interpreting financial data, while the finance function in a

business involves all money and money management matters. The purpose of auditing is to verify that a

business’s accounts and financial records are accurate and complete.

Why verify that a business’s accounts and financial records are correct? Because both internal stakehold-

ers (such as management and business owners) and external stakeholders (including shareholders and

potential investors) can’t make good decisions without accurate information. So, these stakeholders look

to auditors to review company accounting records and supporting documents to determine if the busi-

ness’s financial statements are true. In other words, auditors (who are often Certified Public Accountants)

provide assurance to individuals making financial decisions that a business’s accounting and financial

data are correct.

When businesses are audited, auditors and company managers develop either verbal or written agreements

identifying what areas, processes, or data will be audited. Then, the auditors gather and evaluate relevant

evidence. This evidence is any data that auditors can use to determine if a company’s accounting and

financial data are stated correctly. Finally, after analyzing the evidence, the auditor develops an audit report

that details and communicates his/her audit findings to the internal and external stakeholders.

Types of Audits

There are three main types of audits: financial statement audits, operational audits, and compliance audits.

Let’s take a closer look at each.

Audit Type Purpose Evidence Used

Financial Statement Audit To determine if a company’s financial

statements are correct and complete

Ledgers, documents, records, reconcili-

ations, and outside resources

Operational Audit To determine if operational processes

(e.g., accounts payable) are operating

efficiently and effectively

Evidence will vary based on the

process being audited. For example,

when auditing accounts payable, cash

disbursement journals, general ledger

transactions, bank statements, can-

celled checks, and other supporting

documents would be required.

Compliance Audit To determine whether a company is

following specific procedures, rules,

and regulations established by a higher

authority

Regulations, expert guidance, internal

standard operating procedures, desk

procedures, company records, laws,

loan agreements, contract agreements

(including bid information), and finan-

cial statements