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Auditors main duty is to record the information of financial systems and statements of a company with prove. It is a very important part of accounting to confirm the justifiability and trustfulness of an information and also to provide an evaluation of a system's internal control.
Audit has pointed out originally in constrict to find out whether all receipt and payments and also cash audit are properly. But actually, the objective of auditing is to verify the financial position disclosed by the profit and loss and the balance sheet or revenue account of the undertaking although cash transactions are also included.
We cannot judge generally that the full duty of auditor is just merely to compare financial statements by referring from the definition above. This may be too easy for their work. They must do this but, the books containing a proper record of the transaction entered with reasonable skill and diligence must also being done to satisfy them. This shows the method and the manner of an auditor to record the whole of the company's transaction.
First of all, accounting is a process of works being prepared where auditing is a process the work prepared being evaluated and scrutinized. These are some of the differences between auditing and accounting.
First difference is the objective of accounting and auditing the main objective of accounting is to provide a company with clear information about its organization economic activities and status of its assets and liabilities. Accounting reports is the ways of companies present their information which included balance sheet, income statement, statement of changes in equity and statement of cash flows. Audits are conducted to ensure a company's financial status prior to sale or transfer to second owners, to make decision about capacity areas of financial improvement or to detect for criminal wrongdoing in violation of federal financial laws, local or country.
The second difference of accounting and auditing is accounting requires an accountant must have accounting knowledge while auditing work required that an auditor must have accounting as well as auditing knowledge. Furthermore, current data is being concern by accounting and constructive in nature. At the same time, past data is being concern by auditing and analytical in nature. Accounting usually measured with one year time period, company normally takes one year to complete record. But, auditing is usually measured in less than one year; auditor may be completed within one month.
In a nut shell, there are two differences of accounting and auditing which is accounting is the process of recording financial information, whereas evaluated and scrutinized is the function of process in auditing.
Auditing is a systematic process of purposely evaluating and obtaining evidence regarding affirmation about economic actions and events to ascertain the degree of correspondence between those established criteria and communicating the results to interested users (RAFFA, 2003). Objective of auditing can be classified to two types which are primary objective and secondary objective.
First of all, primary objective can be defined as objective to ensure and judge the consistency of the financial statement. According to Indian Companies Act, 1956 organizations must appoint an auditor to examined and verified of the book of account, disclose his opinion towards the fairness and correctness of Profit and Loss account and Balance Sheet account (Indian Companies Act, 1956). Relevant documents and transactions of the companies must checked by the auditors during the auditing period in order to get a true and good view of the company affairs. Another objective of audit in primary objective is to disclose whether the Accounting system used in the organization is appropriate in recording the different transactions.
Next, secondary objective also called the incidental objectives as it is incidental to the satisfaction of the main objective. In addition, secondary objective is about report the financial condition of the business, at the same time auditor has to check the documents of accounts and relevant documents. The incidental objectives of auditing are detection and protection of frauds and errors. There are two types of error can be detected from auditing process, which is clerical errors and errors of principal. Example for clerical error, money received from Ali credited to Abu's account. Even though the account was posted wrong, but we still can get balance in our trial balance, this is what we call clerical error. Next, errors of principle is the error will not affect trial balance but affected profit and loss account, it may occur because scarcity of knowledge in principles of accounting. To detect such errors, auditor has to examine the books of account carefully.
The internal auditing function emerged with the external audit activities, but there are certain confusions that are still active. Actually, the two functions are clearly differentiated. But in the same time there are complementary relations between them. Based on the financial accounts, the external auditing is generally applicable to the accounting function only. There are several criteria that can indicate the differences between internal and external auditors.
The statue of internal and external auditors in company is different. Internal auditor is integrated to the trade company or an external specialized company or in other words is an employee to the company. However external auditor only integrated to external specialized company and is an independent person.
Besides, internal and external auditor also differs in goal and auditing procedure. For internal auditor, they monitor the management and check of the legal compliance of the financial statement. They also make appropriate recommendation for the improvement governance process. For external auditor, they identify and certify the financial statement. Besides, they also evaluate the internal control system but this is only valid for financial accounting elements.
Next, the scope of the audit is different as well. The scope of internal auditor is large which can cover the whole company's function. But for external auditor, the scope is focuses on verification the issues that determine the financial standing and company's performance.
Moreover, the working period of audit is also different. For internal auditor, they can have permanent activity within the trade companies which is according to the article of association. For external auditor, the targets are fitfully organized and at suitable moments for the certification of accounts.
There is difference between internal and external auditor in term of their independence. Internal auditor is relatively independence. But in other case, if the internal auditing is performed by a third company, they have the independence specific to the freelancers. For external auditor, they are independent to its client as representative of a free profession and regulated legally and statutory.
Furthermore, internal and external auditor also apply different auditing standard. Internal auditors may follow GAAS standard and sometimes they may follow IIA standard or they may not follow any other special standard. However, external auditors are required to follow generally accepted auditing standards or international auditing standards, but internal auditors do not.
Guidance make by internal auditor is different with external auditor as well. Internal auditor will give suggestion to the management for the improvement of business whereas external auditor does not need to provide suggestion unless he was asked.
Besides they also have different duties. Internal auditor primary duty is to find frauds and errors whereas external auditor has to determine the final accounts on whether it was true. If company found any mistake made by internal auditor, they can be removed by management. For external auditor, they can be removed by shareholders.
Financial statements were made by companies. Investors, creditors and bankers can make use of the company's financial statements to make their operating decision. Auditing exists in order to make user trust on these financial statement, identify the faithfulness of financial statement, and help the user makes final decision.
The users have to depend on financial records to make decisions but they cannot find out the details by themselves. Sometimes users depend on financial statements too much, but they could have done so if they could do it by themselves. These financial statements are professionally audited by independent and intelligent accountants or CPAs. Auditors will periodically examine each account in the financial statements for the application of users.
For example, auditors will check the balances of assets and also liabilities by sending a formal mail to the banks. Besides, they will also check their debtors and creditors balances by sending them a mail, too. In short, auditors are the user's representatives to examine the financial statements of reports. The users cannot determine the faithfulness and reliability of the financial statements if there is no auditing process being done.
Auditors should provide with enough accounting and others related knowledge. When there are new laws and regulations, they have to accept related training and motivation. Auditors should have the character of honest, upright, and independent. They cannot be influenced by the others in the companies. Besides, auditors also must have enough abilities and competence. There will have an exam held periodically to test whether accountants have enough related knowledge. Therefore, we can have a high standard of auditors.
The cost of auditing depends on the company's net income. The cost of auditing may also increase if sales incurred in a company grow up continuously and vice-versa. Although the cost of auditing may be very high, but we can demand from our auditors to prove that they deserve the high price with high qualities and standards. Therefore, a company is willing to pay for this costly expertise.
We can refer to their results in the financial statements because the auditors are trustable and reliable. Referring to their results, we can know whether companies overstate or understate their asset and liabilities and whether their statements are faithful. If the results of financial statements are trustable, this means the company did not overstate or understate their accounts. With their opinions, we can make our decision relaxingly by using audited financial statements.
There are several types of Audits in the world. These are the 4 main types of audits.
Financial auditing exists as an accounting process in a business. It checks the reliability of a company's transactions and statements by using an independent body. Financial audit is mainly to present a correct amount of a company's transactions to make sure that the accounts they present to the public or shareholders are justified. Besides it also makes sure that the company is financed fairly.
Financial audits summarises an audit's discoveries, which is requested by an agency or institution that brought out the company's name. The summary includes whether the financial statements are presented in a fair way and meet the current law and regulations.
An operational audit judges a company's internal operations that are used to produce their products sold to customers. This audit may be operated by either internal employees or external auditors with enough experiences regarding company's producing operations to check the efficiency and effectiveness of the company's producing power. Operational auditing can quicker turnaround times and also improves the workflow. The example of operational audit is selling and operating expenses.
Information Systems Audit (IT Audit)
The safety of an organisation's information can be determined by IT audits who evaluate the effectiveness of the IT security systems. To make it clear, IT audits use their IT knowledge to appraise an organisation's power to protect their own information assets and also the safeness when sending their private information to another party. The examples of an IT audits are setting an internet security protocols to avoid hackers stealing their information. Their main aims are as below:
System's security and confidentiality
Investigative Audit (Forensic Audit)
Investigative auditors have both specialised knowledge in accounting and investigation. They are being assigned to duties such as discovering fraud of stocks and missing money or stocks. Investigative audit are usually asked to determine the individual responsible for the missing stock or money when a fraud or theft is determined. An example of investigative auditing is to find out a fraud happened with proven evidence which can be sued in a court.
True and fair view (TFV) concept is the paramount in the presentation in company's financial statements and reports. This accounting principle suggests every single company should provide a true and fair view about its operating results and financial conditions conformity with generally accepted accounting principles (GAAP). An audit process is about gathering sufficient evidence required to verify whether the company's claim of profits are true and fair. The auditor will write an Auditor's Report, based on the evidence gathered, to sets out their opinion on the truth and fairness of the company's financial statements.
Under Section 174 (2)(a) of the Companies Act 1965, an auditor shall, in a report, state whether the accounts in accordance with the provisions of this Act so as to give a true and fair view of the company's affairs. The 'true and fair view' is legislative requirement on financial statements; however, there is no authoritative definition of this phrase. TFV principle is flawed and has limitations (McEnroe & Martens, 2003). This concept is bringing considerable debate on its meaning. Under law, lawyers interpret 'true and fair view' by its ordinary meaning and treat it as a legal concept. Yet, accounting professions suggest this phrase is an accounting concept and has its own technical meaning.
Auditors used 'true and fair view' term to convince the stakeholders that the company's audited financial statements are truth and free from error. According to Walton (1993), 'true and fair view' defined by current accounting practice, it is a concept used to give an opinion by auditors on a company's financial statements.
After the audit process where the auditor gather evidence to verify the 'true and fair' view of a company's financial statement, a written report- audit report is going to be prepare. This audit report however, is only an opinion on whether the information presented by the company is correct and free from material misstatements, company's stakeholders should make their own decision. Audit report is issued by an internal or external auditor as a formal opinion or disclaimer to evaluate a company's financial statements. There are four categories of audit reports.
When an auditor gives the financial statements a true and fair view opinion, it is said to be an unqualified opinion or a clean report. This is the best type of audit report that an auditee may received from the external auditor. Most audit reports is classified as unqualified report where it is a report without any reservation on part of the auditor. However, an unqualified opinion does not mean it is completely accurate because auditor can only provide reasonable evidence to proof that there are no material misstatements in the company's financial statements. Everything in the financial statements should presents fairly in accordance with Generally Accepted Accounting Principle (GAAP) and free form material misstatements. To meet the unqualified opinion requirements, one's financial statements will have to comply with relevant statutory requirements and regulations. There are three types of unqualified opinions, which is the standard unqualified, unqualified with modified wording and unqualified with ending explanatory paragraph.
Qualified opinion or modified opinion will be reported when an auditor gives an opinion subject to certain reservations. This type of audit report will be use when the auditor believes that the overall financial is not fairly stated. Qualified reports are somewhat similar to unqualified reports. It is usually expressed if there are departures from the accounting standards or other mandatory requirements. It reports as certain records of the statements may be missing or some parts of the information may not be up with GAAP. Qualified opinion will be given when the auditor encountered one of the two conditions which the financial statement is materially misstated and inability to obtain sufficient appropriate audit evidence where there is a limitation of scope. There are some examples when audit report is qualified. When there are no proper books, unable to obtain information, not agreeing with books, non-disclosure of prescribed information and wrong accounting policies.
An adverse opinion is the worst that will be issued to the audit reports when the auditor gives a negative response in result of the company's record are uninformative and not in comply with GAAP as a whole. Other than that, the records have been fabricated, in other words, erroneous should be also be reported as this type of auditing reports. With an adverse opinion report, the information contained is materially incorrect, inaccurate and unreliable. This report mean the financial statement do not present a true and fair view of the company's financial positions. Adverse opinion is generally unacceptable by the investors, lenders, governments, and other relating parties. So, the company must correct its financial statement and have it re-audited.
The forth types of audit reports is disclaimer of opinion. This will be issued when an auditor is unable to complete an accurate audit report, where he or she does not want to or cannot give an opinion on audited financial statement. Sometimes, it is due to lack of sufficient evidence to proof the financial statements. Statements on Auditing Standards (SAS) claims certain situation where a disclaimer of opinion report may be appropriate, includes, lack of independence between auditor and the auditee. When there are significant scope limitations that hinder the auditor's evidence collecting and task performing, disclaimer of opinion can be issued. Besides, if there is any significant uncertainty within the auditee, auditor can issue a disclaimer of opinion, and stating that the company's financial status couldn't be determined.
Unqualified Opinion can also be called as "clean opinion". This is issued by an auditor when the presented financial statements are free of misstatement or misinterpretation and prepared according to the Generally Accepted Accounting Principles (GAAP), which is the best types of audit report a company can succeed. An Unqualified Opinion indicates that the financial reports meet the terms of relevant constitutional requirements. This type of report consists of a title, a main body, signature and address of auditor and the issuance date.
Typically, the word "independent" is consisted in an Unqualified Opinion report. The main reason is to make it clear that the report is prepared by an unbiased third party. After the title is a main body which normally consist of three paragraph. The first paragraph is an introductory paragraph which states the responsibilities of auditors. The second paragraph is about the area of audit work and provides a general description of the work. The third paragraph is the opinion paragraph that states the opinion on the financial statements and whether they are prepared according to GAAP or not. Through this, we can deduce that Maxis Berhad has received an Unqualified Opinion report for their year 2011 annual report.
A Qualified Opinion occurs when a company's financial statements are not prepared according to GAAP but no there are no misinterpretations. The writing of a qualified opinion is similar to an unqualified opinion. There are two types of situations which would cause an auditor to issue this opinion. The first one is when the financial statement has one or more area that does not follow the GAAP. For example the company did not calculate the depreciation of a fixed assent correctly, but since the rest are prepared according to the GAAP format, the auditor will issue a qualified opinion report. The second situation is when the auditor could not audit one or more areas of the financial report. For example, the auditor could not calculate or examine the exact amount of company's inventory of goods, then he or she will states that the report are fairly presented, with the exception of the inventory.
A qualified opinion will include an additional paragraph which highlights the reason of disqualifying the audit report. There will be an opening "In our opinion, except for the effects of the Company's incorrect determination of depreciation expense, the financial statement referred to in the first paragraph presents fairly, in all material respects, the financial position ofâ€¦" (Wikipedia). Through this, we can conclude that Metronic Global Berhad has received a qualified opinion report for the year 2011 annual report.
From our perception, unaudited financial statements have fewer guarantees with the accuracy of the financial statements than the audited financial statements. In other words, we cannot tell if the data comply with GAAP. There are many disadvantages if a company does not prepare an audited financial report. An unaudited report may not be accepted when it comes to Government authorities like income tax department. If the company wants to obtain loan for bank, they might be rejected because the bank could not determine their capability to return the loan.
Besides, errors like errors of commission, errors of omission or compensating errors will not be detected without auditing the financial reports. Frauds always happen when a company does not have an audited report. Frauds are always committed purposely and intentionally to deceive the owners of the organization. If the fraud remains undetected, it might affect the financial condition and the working results of the organization. Therefore, it is necessary for a company to have an audited financial report.
Company can prepare unaudited financial statements for a few reasons. They can use this in a loan application process or during the due diligence part of a corporate growth and expansion plan, like merger, acquisition or joint venture. "Due diligence" means investigating a business or person before signing a contract. Business partners, suppliers and contractors, also request a temporary financial statement to measure a company's economic stability. These reports enable business partners to determine a firm's bestselling products, paying attention to risky processes that flare across the company's operations.
Unaudited financial statements are the standards for most of the private businesses. It is much less expensive to prepare compare to audited reports at the same time remain adequate and serve the purpose of summarizing the firm's financial positions. However, this type of financial position is not subjected to rigorous independent verification and needed to undertake some additional analyses when facing a major financial decision.