Reading

1. Read the text and say why it is important to understand auditing and what difference between accounting and auditing is?

Auditing

Most people in the business world rely on the services of auditors. Investors in equity and debt securities rely on financial statements and other financial information that are given enhanced credibility by audits. Business managers rely on auditors to add credibility to the internal information they use to make a wide variety of decisions. Auditing is a pervasive part of business and government. Auditing in a broad sense may be defined as "a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users." There is a difference between accounting and auditing. Accounting is a process that generates information in the form of financial statements and other financial data. The accounting function is the responsibility of the company's management. Auditing is a process that evaluates this information and produces conclusions with respect to this information according to the criterion used to make the evaluation.

Auditing in a narrower sense may be defined by classifying it according to the objective of the auditing function performed. They are:

• Financial Statement Audit

A financial statement audit is the gathering of evidence on the financial statement assertions of an entity and using such evidence to ascertain adherence of the assertion to generally accepted accounting principles or another comprehensive basis of accounting. This is the type of audit is called attestation. As used in financial statement auditing, attestation refers to an independent and competent person communicating an opinion or judgment as to whether an entity's financial statement assertions correspond in all significant respects with the established criterion (usually generally accepted accounting principles). The opinion or judgment should be based on sufficient competent evidence.

● Compliance Audit

The purpose of a compliance audit is to determine whether a person or entity has adhered to laws and regulations. The criteria against which the person's or entity's actions are compared could be a law prohibiting bribes or a code and accompanying set of regulations (such as the Internal Revenue code and regulations). In fact, the audit of an income tax return is a prime example of a compliance audit in which the IRS is determining a person's or an entity's adherence to tax regulations.

• Operational Audit

Operational auditing falls within the broad definition of an audit. The American Institute of Certified Public Accountants (AICPA) Special Committee on Operational and Management Auditing describes operational auditing as "a systematic review of an organization's activities (or a stipulated segment of them) in relation to specified objectives for the purposes of assessing performance, identifying opportunities for improvement, and developing recommendations for improvement or further action." A review of a company's computerized accounting system, assessment of its efficiency and reliability, and recommendations for improving the system would constitute an operational audit.

Auditing can also be classified according to the affiliation of the individual or group that performs the audit. They are:

• External Auditors

External audits are performed by certified public accountants (CPAs) who are independent of the organizations whose assertions or representations are being audited. These independent CPAs offer their audit services on a contractual basis. The majority of audits performed by external auditors are financial statement audits, although this group may perform all audits.