Business, Legal & Accounting Glossary
The most general definition of an audit is an evaluation of a person, 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. The goal of an audit is to express an opinion on the person/organization/system etc. under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements – a concept influenced by both quantitative and qualitative factors.
Traditionally audits were mainly associated with gaining information about financial systems and the financial records of a 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 an Auditor’s 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.
In the US, audits of publicly-listed companies are governed by rules laid down by the Public Company Accounting Oversight Board (PCAOB). Such an audit is called an Integrated Audit, and auditors have the additional responsibilities of expressing opinions on management’s assessment of the firm’s internal control, and on the effectiveness of internal control over financial reporting based on their (the auditors’) own assessment. These requirements are consistent with Section 404 of the 2002 Sarbanes-Oxley Act.
There are two types of auditors:
The four largest accounting firms in the world are collectively referred to as the Big Four. They are as follows:
There are many other audit firms competing with the big four for major audit engagements. Competition has intensified in response to independence issues and other legislative requirements introduced as a consequence of the Arthur Andersen Scandal. In the US and Australia, these firms are referred to as “mid-tier”. Some of these include McGladrey & Pullen, PKF, Pitcher Partners, Johnson Lambert & Co. LLP, Beard Miller Company LLP (BMC), BDO Seidman, and UHY firm.
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.
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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This glossary post was last updated: 18th April, 2020 | 5 Views.