What is an audit?

An audit is an accounting procedure whereby the financial records of a company or individual are closely inspected to ensure they are accurate. Many US taxpayers fear an Internal Revenue Service audit, while dishonest companies fear independent audits of their business practices that could reveal embezzlement and other misuse of funds. This review maintains an honest company and also reassures employees and investors about the organization's financial situation. There are two main types: internal and independent audits.

Regardless of the type of audit, it should be assumed that the procedure will be conducted without bias. In the case of an internal audit, this can be difficult as it is performed by the accounting team of the company in question. In general, this type can only be done successfully by a large accounting department, as auditors cannot audit the records they contributed to. Large companies typically conduct internal audits to ensure their finances are in order, and if the company goes public, the reports are available for inspection by shareholders.

An independent or external audit is performed by a neutral third party, such as a professional accounting firm that specializes in the procedure. In either case, all of a company's financial records will be examined, including books, bank statements, payroll, 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 corrected and corrected.

Typically, an audit will reveal a simple accounting error. In other cases, more sinister problems can arise. Companies that are in financial difficulties may choose to make the wrong financial decisions in an attempt to save the business, and those decisions will be revealed by a rigorous audit. Sometimes the review will reveal that a company is on the verge of bankruptcy due to the misuse of funds by high-ranking officials, 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 requested by an outside organization, such as the Securities and Exchange Commission, which will also receive a copy of the report. The problem must be repaired by the company. Common examples of correctable errors are failure to pay payroll taxes to the IRS or misuse of pension plans. If the errors cannot be corrected because the company does not have the funds to resolve them, the company may face bankruptcy proceedings and major creditors will be reimbursed after liquidation of the company's assets by an independent company.