Auditing is the most popular and widely subscribed accounting service offered by professional accounting services firms such as Pwc, deloitte, Kpmg, Ernst and young (EY) to mention a few. This is because in most nations (if not all), companies listed on the stock exchange (ie public companies) are required by law to file an audited financial statement with the various regulatory bodies concerned.
For a financial statement to be audited, an auditor who in most cases is a chartered accountant must vet the financial statement and express his opinion on whether the financial statement represents a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the Financial Statements.The auditor obtains and evaluates evidence to support his opinion that assertions conform to established criteria.
Apart from the regulatory requirement of an audited financial statement, let us take a look at other reasons why an audit is necessary:
- Those who provide and those who use financial information view an independent auditor’s opinion as enhancing the reliability and credibility of the information.
- Independent and external perspective provided by the auditor help reduce information risk to the users of financial information.
Now that we have taken a look at why an audit is necessary, let us then proceed to the topic for today which is: Types of audit.
- Financial audit: In a financial audit, external auditors are engaged to obtain and evaluate evidence regarding assertions on financial statements about economic actions, to ascertain the degree of correspondence between those assertions and established criteria and also to communicate to the interested user whether the financial statements prepared by management are fairly presented in accordance with the generally accepted accounting principle. In financial audits, the auditor obtains the evidence on the degree of correspondence between assertions in the financial statement and GAAP and underlying accounts data. Financial audits are required by regulators such as the Nigerian stock exchange (NSE), and other governmental bodies for example the FIRS (Federal inland revenue services) uses a company’s financial statement to assess the company to tax
- Performance audit: Performance audit is not a regulatory requirement, unlike the financial audit. They are done on the discretion of the management and they are done to provide an overall evaluation on the performance of an activity. The performance evaluated can range from a general performance to a specific performance (i.e a phase in a process). Performance audits can also be called management audit, operations audit or comprehensive audit. Performance audit may be more demanding than other types of audit because the auditor needs to evaluate different scenarios as presented by the management, and they may need to perform highly technical analysis and develop their own benchmark for comparison as part of the audit. Due to the fact that a performance audit can be requested for by management in various areas like finance, technology, human resource and so on, a performance auditor need not be an accountant. They could be either internal workers or external experts with expertise in accounting, computer programming, engineering and so on.
- Compliance audits: Many organizations need to comply with various laws, rules, acts, procedures and so on. In my ppa for example (Crusader Sterling pensions), our operations need to comply with the pension reform act of 2014. If it doesn’t, the worst case scenario is that our license would be revoked. For this purpose the pension fund employed two compliance officers whose duty is to monitor the daily activities to ensure that operations are in compliance with the act. The compliance officers also send RMAS reports to the regulatory body in the pension industry (PENCOM). Then biannually, they employ the services of a compliance auditor who is to express an opinion as to whether actual activities or results are in compliance with the established standards.
Karla Johnstone., Audrey Gramling., Larry Rittenberg., Auditing: A Risk based approach to conducting a quality audit
Kenneth Merchant., Wim Van der Stede., Management Control Systems