Understanding Audits

Common Perception of Audits

• Often associated with IRS agents checking tax documents unannounced.
• Not the only type of audit; many audits are routine and planned.

Types of Audits

• Publicly Traded Companies: Required by the Securities and Exchange Commission (SEC) to validate financial positions through audits.
• Privately Held Companies: Often perform audits at the request of banks, investors, and stakeholders to ensure financial accuracy.

Purpose of Audits

• To assure investors and stakeholders that cash flows, balance sheets, and profit and loss statements are accurate.
• Independent reviews by firms like KPMG provide insights into business operations.

What is an Audit Engagement?

• The term "audit" means to evaluate, focusing on the flow of money within an organization.
• Evaluating accounts receivables, vendors, acquisitions, and operating expenses.
• Dynamic careers in audit due to the complexity of organizations in a global economy.

Structure of an Audit Team

• Typical team for a multi-billion dollar company may include:
  • Multiple partners and managers in various global locations.
  • Senior associates and associates working simultaneously.
  • Specialists from tax or advisory practices contributing expertise.
• Senior members lead while promoting autonomy among team members.

Skills Required for Auditors

• Essential skills include:
  • Strong communication.
  • Critical thinking to understand business motivations behind transactions.
  • Professional skepticism to verify accuracy in financial statements.

Duration of an Audit Engagement

• Audit engagements can last from a few months to a year depending on client size and project complexity.
• Most audit clients are annuity clients, working with them year after year.

Audit Process

• Auditors often set up permanent workstations at client sites.
• Review day-to-day operational documents against recorded financial statements.
  • Example: Comparing receivables with actual customer orders.
  • Contacting vendors for accuracy of purchase orders.
• Information compared to SEC required reports to state the accuracy of financial statements.

Challenges in Auditing

• Auditing can be hectic due to the dynamic business environment.
• Changes like contracts or acquisitions can significantly impact ongoing audits.
• Auditors gain intimate knowledge of business operations and decision-making processes.

Importance of Audit Findings

• Companies utilize audit findings to inform strategic planning.
• Auditors play a crucial role in verifying that companies meet their obligations to stakeholders.