Audit

The most general definition of an audit is an evaluation of an organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information, and also provide an assessment of a system's internal control. Auditing is therefore a part of some quality control certifications such as ISO 9000. An audit is based on random sampling and is not an assurance that audit statements are free from error. However the goal is to minimise any error, hence making information valid and reliable.

Traditionally audits were mainly associated with gaining information about financial systems and the financial records of company or a business (see financial audit). However recently auditing has begun to include other information about the system, such as information about environmental performance. As a result there are now professions that conduct environmental audits.

In financial accounting, an audit is an independent assessment of the fairness by which a company's financial statements are presented by its management. It is performed by competent, independent and objective person or persons, known as auditors or accountants, who then issue a report on the results of the audit.

Such systems must adhere to generally accepted standards set by governing bodies that regulate businesses. It simply provides assurance for third parties or external users that such statements present 'fairly' a company's financial condition and results of operations.

Financial Audits

An important type of audit is the financial audit. It is designed to determine whether financial statements are fairly presented in accordance with International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). In the United States, financial audits are required for all publicly registered companies.

In addition, financial audits may be performed for private companies, registered charities, and some governmental and public entities. Private companies typically request financial audits year after year because lenders may have required an audit or owners may want to have external unbiased eyes look at the financial statements to determine if the company is complying with all the required accounting principles. Charities would require a financial audit to show the financial status of the organization to potential donors. Governments and government businesses are usually required to be audited by statutes to determine if all the money budgeted has been properly spent. Government financial reports are not always audited by outside auditors. Some governments have elected or appointed auditors.

Other than testing the reliablility of a firm's controls, financial audits can alert management to area's of high risk. Strategic systems auditors are providing a top down approach to auditing by first examing a firm's business strategy and keys to competitive advantage.

Types of Auditors

There are two types of auditors:

• Internal auditor- are employees of a company hired to assess and evaluate its system of internal control. To maintain independence, they present their reports directly to the Board of Directors or to Top Management. They provide functional operation to the concern. Internal Auditors are employees of the company so that they can easily find out the frauds and any mishappening.

• External auditor are independent staff assigned by an auditing firm to assess and evaluate financial statements of their clients or to perform other agreed upon evaluations. Most external auditors are employed by accounting firms for annual engagements. They are called upon the out side of the company.

Major Audit Companies

There are four major companies that compete in the financial audits arena. They form what is known as the Big Four. These companies are international firms and are the most well known outside auditors in the industry. They are as follows in order of size:

1) PricewaterhouseCoopers, also known as PwC

2) Deloitte Touche Tohmatsu, also known as Deloitte

3) Ernst & Young, also known as E&Y

4) KPMG, used to be known as Klynveld Peat Marwick Goerdeler

There are many other audit firms competing with the big four. In the US, mid-tier firms such as McGladrey & Pullen, Grant Thornton, Johnson Lambert & Co. LLP, Beard Miller Company LLP(bmc), and BDO Seidman serve many mid-size companies while smaller entities may contract the services of local CPA firms.

In the UK the medium sized firms are also referred to as mid-tier. Many of these firms are international and increasingly are competing for work against the big four, especially following the recent large auditing scandals (eg PKF).

Auditing firms around the world

While the four major audit firms listed above provide audit services to the largest corporations in America, audit firms around the world are also in partnership with the Big Four. Since corporations held offices in other parts of the world, they tend to be audited by affiliates of the Big Four to maintain consistency and uniformity in their application of auditing standards.

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