Understanding The Basics of Auditing

To put our early discussion into proper perspective, we cant excape from starting with theories. However, I promise you, I will try to make it concise. I will intersperse more of layman's interpretations to make it easier to understand.

General definition ( according to Merriam-Webster dictionary)

Audit - Formal examination of an organization's or individual's accounts or financial situation; the final report of an audit ; a methodical examination and review.

According to audit textbooks,

Audit - Examination of the records and reports of an enterprise by accounting specialists other than those responsible for their preparation.


In practice, audit or auditing is often used to mean review, inspection or examination. Hence you would normally hear different types of audits once an antecedent subject is connected to it. The most common examples of these are: financial audit, operations audit, management audit, IT audit. In some inventive journalism among audit practioners, anything that they do in which they could attach the word " audit" can be labeled as audit. Examples are : inventory audit, payroll audit, fixed asset audit, systems and procedures audit, and so forth. They are all valid and you can come up with your own type of audit and you will get understood. No doubt about it. These type of audits are obviously indicative of what is the object of the audit, or the areas that will be examined.

Another type of audit is according to what general groupings of auditors who perform the audit. Here, you would normally hear about External Auditors and Internal Auditors.
It is very tempting for people even audit professionals to readily offer a distinctive definition as to who these auditors are, and what audits do they perform.

Believe me, in quite a number of pre-employment interviews I did with audit applicants who are mostly CAs and CPAs, when I ask them to distinguish what is Internal Auditing and External Auditing, you know what most of them said? Internal Auditing are audits done by people (employees) inside the company while External Auditing are audits done by people (consultants or auditors from accounting firms) who are outside the company. Perfect isnt it? who can argue with that? well for us in the audit profession, thats a "no brainer" distinction.

In some schools of thoughts, internal and external auditing are considered to be generally the same in scope, afterall they are both auditing. They only differ in terms of who conduct or perform the audit. For people who does not have enough understanding about auditing, that may be fine but for us auditors and accountants, thats a BIG NO.

Internal Auditing and External Auditing have entirely different objectives, and these objectives also require different scope, timing, techniques, strategies and even the skills required of the auditors.


As defined,

Internal Auditing is an independent appraisal activity within an organization to check the accuracy and reliability of records and reports, promote operational efficiency, encourage adherence to prescribed policies, procedures, laws ands regulations, and to safegurad the organization's assets.

External Auditing is an independent examination of the organizations records and reports for the primary purpose of expression of an opinion on the fairness and accuracy of presenttaion of the organizations financial condition and results of operation for the period under review., in accordiance with Generally Accepted Accounting Principles (GAAP). While to a certain extent, external auditing may cover some areas normally covered by the internal auditors, their work on such areas are only those that may be incidental to their principal audit work, and often they are not as extensive and thorough.




Copyright 2008 Armando De Forres. All rights reserved.