An audit is a financial review to ensure accuracy and honesty. Internal audits are carried out by a company’s accounting staff, while independent audits are performed by a neutral third party. Inaccuracies must be addressed and repaired, and major errors can lead to bankruptcy proceedings.
An audit is an accounting procedure under which a company’s or individual’s financial records are closely inspected to ensure they are accurate. Many American taxpayers fear an audit by the Internal Revenue Service, while rogue companies fear independent audits of their business practices that could reveal embezzlement and other misuse of funds. This review keeps a company honest and also reassures employees and investors about the financial state of the organization. There are two main types: internal and independent audits.
Regardless of the type of audit, it should be assumed that the procedure will be performed without bias. In the case of an internal audit, this can be difficult, as it is carried out by the accounting staff of the company in question. In general, this type can only be done successfully by a large accounting department, because auditors can’t audit the records they contributed to. Large companies typically carry out internal audits to ensure their finances are in order, and if the company is public, shareholders can view the reports.
An independent or external audit is performed by a neutral third party, such as a professional accounting firm that specializes in the procedure. In both cases, all of a company’s financial records will be examined, including ledgers, bank statements, payslips, tax information, internal financial reports, published official reports, accounts payable, and accounts receivable. During the audit, these records are closely inspected for any discrepancies, and if an inaccuracy is discovered, it must be addressed and repaired.
Commonly, an audit will reveal a simple accounting error. In other cases, more sinister problems may arise. Businesses that are in financial difficulty may choose to make unsound financial decisions in an attempt to save the business, and these decisions will be revealed by a close audit. Sometimes the review will reveal that a company is on the verge of bankruptcy due to the misuse of funds by high-ranking personnel, as was the case with many American corporations in the early 21st century, such as Enron and WorldCom.
When an independent audit reveals an inaccuracy, the auditors address it in the final report to the company. In some cases, the review will be ordered by an outside organization, such as the Securities and Exchange Commission, which will also receive a copy of the report. The problem must be fixed by the company. Common examples of repairable errors are failure to pay employment taxes to the Internal Revenue Service or misuse of pension plans. If the errors cannot be fixed because the company does not have the funds to address them, the company may face bankruptcy proceedings, and major creditors will be repaid after the company’s assets are liquidated by an independent company.
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