A close inspection of an individual or company’s financial records is known as an audit. This accounting practice helps to keep companies honest, as well as inform investors, employees and managers of the state of the company’s financial status. Many companies (and individuals) fear the threat of a governmental audit, while dishonest companies fear the possibility of an independent auditor that may reveal mismanagement and misuse of funds or embezzlement.
There are two main types of audits: internal and external (or independent). No matter which type is performed, the examination should be an unbiased look at a company’s financial records. An audit deals with all of the financial dealings of the company: bank records, payroll, tax information, accounts payable, internal financial reports as well as official reports and more.
The internal audit is typically conducted by a company’s own accounting department. An internal audit is performed on a regular basis by most large companies, with the results being published for review by shareholders. It is often difficult for an internal audit to maintain an unbiased position, which leads to the second type of audit: the external audit.
Sometimes referred to as an independent audit, the external audit is conducted by a third party – typically an accounting firm that has experience in conducting audits. With a neutral party conducting the audit, it is sometimes easier to discover accounting inaccuracies and discrepancies.
Discrepancies and inaccuracies that are uncovered by the auditors are detailed in a final audit report to the company. If the audit was requested by an outside organization, such as the Securities and Exchange Commission, the final report including inaccuracies will be provided to that organization as well. Any correctable errors must be handled and the company may face bankruptcy or liquidation as a result of gross negligence or misuse of funds.