Definition: An audit is an analysis or study of an accounting system that summarizes its finding with an opinion on the accuracy of the system and its reports. In other words, an audit is an examination of the processes and procedures put in place by management to ensure that accounting information is recorded accurately and the financial statements are free from material misstatements.
What Does Audit Mean?
I realize this is kind of wordy, but it’s all important to the definition. There are generally two types of audits that come to most people’s minds when the subject is brought up–either public company audits or IRS audits. Both of these are similar in nature but have very different circumstances.
Public companies are required by the SEC to have the financial statements, internal controls, and a few other processes audited by an independent auditor from a public accounting firm. The auditor or audit team’s main job is to examine the books, records, and documentation to assure that there are no obvious errors and accounting processes were running appropriately. They are also in charge of evaluating the financial statements to assure external users that they are free of material errors that could mislead their judgment. In other words, CPAs are in charge of examining the business and making sure the financial statements accurately represent its financial activities for the period.
The dreaded IRS audit is another type of examination. In this case, the Internal Revenue Service reviews a taxpayer’s income tax return and supporting documentation to ensure all of the income was properly reported and the deductions that were claimed were legitimate. Since the tax laws and income tax returns are fairly complicated, many people have difficulties filing their taxes themselves. The IRS audits taxpayers to keep them honest and make sure they are following the tax code even if they don’t understand it.