Accounting vs.

Auditing

Accounting involves tracking, reporting, and analyzing financial transactions. It covers everything from preparing individual tax
returns to preparing financial statements for multinational corporations, and is considered a fundamental discipline within the field
of accounting.

An audit is an independent examination of accounting and financial records and financial statements to determine if they conform
to the law and to generally accepted accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) and
the Governmental Accounting Standards Board (GASB) set and maintain these principals.

The Origins of Auditing

Although records exist of government auditing in 11th century BC China and 4th century BC Greece, the modern audit evolved in the
19th century when public activities involving the movement of large amounts of money around the world made an independent
and objective assessment of financial management a prudent idea. In Great Britain, the Office of Comptroller-General was created in
1857, and in 1921, the U.S. created the U.S. General Accounting Office (which became the Government Accountablility Office in
2004).

Auditing practices continue to evolve and have come under fire more than once, most recently after the collapse of Enron,
Worldcomm, and their auditing firm, Arthur Andersen, in the early 2000s, and again after the Wall Street financial meltdown of
2008.

Types of Audits

Financial audits determine if an organization's financial statements fairly represent the results of an organization’s financial
operations and the organization's financial position while conforming to generally accepted accounting principles.

Compliance audits determine if the organization has followed the laws and regulations that may materially affect the financial
statements. Financial and compliance audits are often combined.

Economy and efficiency audits determine if an organization is economically and efficiently managing and using resources, such as
personnel, space, and property; the causes of any problems in this area; and if the organization has followed laws and regulations
relating to this area.

A program results audit looks at a specific program to determine if the desired results or benefits are being achieved and if the
desired results can be achieved at a lower cost.

https://www.accountingedu.org/accounting-vs-auditing.html

Audit Scope Definition

Audit scope, defined as the amount of time and documents which are involved in an audit, is an important factor in all auditing. The
audit scope, ultimately, establishes how deeply an audit is performed. It can range from simple to complete, including all
company documents. Audit scope limitations can result from the different purposes listed below.

Audit Scope Meaning

Audit scope means the depth of an audit performed. Audits are performed for several purposes: regular “checkups” of
company records, to check for internal errors, for the purpose of finding fraud inside a company, for the purpose of finding fraud in
another company, or even for the purpose of finding tax income and other offenses against IRSlaw. Due to this fact, audit scope and
objectives have a different meaning depending on the person performing the audit as well as the reason behind the audit.

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If the audit is being performed for regular internal processing, then the audit will generally only have a scope which includes the
latest period which has passed. This occurs because the company has probably already audited the previous period.

If An Audit Reveals Fraud

If the audit is being performed to find fraud, however, it will generally have a deeper audit scope. It may include records from years
or even decades ago. This is due to the fact that, at the very least, a violation of company policy occurred. Dedicated auditors,
either company employees or hired auditors, spend their entire career in this. They often spend much more time and look far
deeper in this process.

IRS auditors may even look at documents which were created during the birth of a company. This is because they are trying to find
errors which result in increased incomefor the government as well as civil or criminal charges. A company will want to keep
pristine records to assure that the auditor does not look deeper than the audit scope documents which a company can support.

https://strategiccfo.com/audit-scope/

Replacement of the 10 Standards with Principles

To preserve the functions of the 10 standards, the ASB has developed the Principles Governing the Conduct of an Audit in
Accordance With Generally Accepted Auditing Standards (referred to as the principles).

The principles identified in the SAS have been drafted in the present tense, are not requirements, and do not carry any authority.
They are the fundamental principles that govern an audit and are supported by the objectives and requirements of the individual
SAS's.

Structure of the Principles

The purpose of an audit (purpose). To provide financial statement users with an opinion by the auditor on whether the statements
are presented fairly, in all material respects, in a manner that conforms to an applicable financial reporting framework.

Personal responsibilities of the auditor (responsibilities). These include competence and capabilities, compliance with appropriate
ethical standards, and approaching the work with appropriate professional skepticism and judgment.

Auditor actions in performing the audit (performance). Perform the work necessary to be reasonably, but not absolutely, sure that
the financial statements are free from material misstatement due to fraud or error.

Reporting (reporting). Based on the results of the performance of the audit, express an opinion or state that an opinion cannot be
expressed on the financial statements.

https://www.accountingweb.com/aa/standards/clarified-auditing-standards-principles-and-objectives-of-audits

According to International Standards on Auditing ISAs, auditor is required to obtain reasonable assurance whether financial
statements give true and fair view or in others words he must be reasonably sure that financial statements are free from material
misstatements.

Again, I must emphasize he needs to be reasonably sure and NOT absolutely sure. There is a big difference if you are absolutely sure
about something or reasonably sure.

Making the two level of assurances easy to understand in context of financial statements and audit engagements or other assurance
engagements, absolute assurance means that there is absolutely no misstatement in the financial statement and thus financial
statements are absolutely reliable and relevant for the user of financial statements. On the other hand reasonable assurance is also
a high level of assurance but it means that auditor has conducted the engagement in a way that he is reasonably i.e. to the best
possible extent provided the situation circumstances he is reasonable sure that financial statements are free from material
misstatement but there might be some misstatements that go undetected.
The reason why auditor is unable to obtain absolute assurance is not because auditor’s do not conduct audit engagements with
enough care rather there are limitations and these limitations restricts the auditor to obtain only reasonable assurance and even
with such limitations and restrictions auditor tries his best to provide some level of assurance to the users to reinforce their
confidence in the financial statements.

Such limitations that restricts the auditor to gain absolute assurance are known as Inherent limitations of an Audit.

Inherent Limitations of an audit

Inherent limitations of an audit arise due to the following reasons:

 Persuasive evidence instead of conclusive evidence

 Inherent limitations of an accounting system:
o Use of judgement in establishing estimates for reporting purposes
o Human error
o Absence of clear instructions on accounting treatment
o Room for more then one possible interpretations of the requirements
o Degree of uncertainty and complexity of the transactions involved
o Negative effects of subjective decisions or bias on part of the management or employee of the entity
o Existence of fraud committed by entity’s management or employees and thus concealing important financial
information leading towards fraud
 Use of sampling techniques by the auditor in conducting different audit procedures. In sampling auditor applies audit
procedures only to a small portion of the whole population instead of checking each and every element of the population.
 Practical and/or legal limitations to obtain sufficient appropriate audit evidence
 Limitations applied or forced by the management
 Limitations as agreed upon in engagement letter
 Auditor does not have investigative rights and cannot demand certain information or evidence from management if refused
by the management
 Existence of situations at present or in future that may cause an entity to stop being a going concern
 Cost-benefit limitations i.e. conducting audit engagement requires resources which auditor might not have or in auditor’s
judgment cost of gaining additional assurance will be higher than the benefit gained and thus not obtained.

https://pakaccountants.com/why-not-absolute-assurance-in-audit/

Audit Process

Although every audit project is unique, the audit process is similar for most engagements and normally consists of four stages:
Planning (sometimes called Survey or Preliminary Review), Fieldwork, Audit Report, and Follow-up Review. Client involvement is
critical at each stage of the audit process. As in any special project, an audit results in a certain amount of time being diverted from
your department's usual routine. One of the key objectives is to minimize this time and avoid disrupting ongoing activities. Following
is a sample flowchart of the process from an organization that you may find helpful:

University of Illinois Audit Process Flowchart

Planning

During the planning portion of the audit, the auditor notifies the client of the audit, discusses the scope and objectives of the
examination in a formal meeting with organization management, gathers information on important processes, evaluates existing
controls, and plans the remaining audit steps.

Announcement Letter
The client is informed of the audit through an announcement or engagement letter from the Internal Audit Director. This letter
communicates the scope and objectives of the audit, the auditors assigned to the project and other relevant information.

Initial Meeting
During this opening conference meeting, the client describes the unit or system to be reviewed, the organization, available
resources (personnel, facilities, equipment, funds), and other relevant information. The internal auditor meets with the senior
officer directly responsible for the unit under review and any staff members s/he wishes to include. It is important that the client
identify issues or areas of special concern that should be addressed.

Preliminary Survey
In this phase the auditor gathers relevant information about the unit in order to obtain a general overview of operations. S/He talks
with key personnel and reviews reports, files, and other sources of information.

Internal Control Review

The auditor will review the unit's internal control structure, a process which is usually time-consuming. In doing this, the auditor
uses a variety of tools and techniques to gather and analyze information about the operation. The review of internal controls helps
the auditor determine the areas of highest risk and design tests to be performed in the fieldwork section. Click here for an annual
internal control review plan.

Audit Program
Preparation of the audit program concludes the preliminary review phase. This program outlines the fieldwork necessary to achieve
the audit objectives.

Fieldwork
The fieldwork concentrates on transaction testing and informal communications. It is during this phase that the auditor determines
whether the controls identified during the preliminary review are operating properly and in the manner described by the client. The
fieldwork stage concludes with a list of significant findings from which the auditor will prepare a draft of the audit report.

Transaction Testing
After completing the preliminary review, the auditor performs the procedures in the audit program. These procedures usually test
the major internal controls and the accuracy and propriety of the transactions. Various techniques including sampling are used
during the fieldwork phase.

Advice & Informal Communications

As the fieldwork progresses, the auditor discusses any significant findings with the client. Hopefully, the client can offer insights and
work with the auditor to determine the best method of resolving the finding. Usually these communications are oral. However, in
more complex situations, memos and/or e-mails are written in order to ensure full understanding by the client and the auditor. Our
goal: No surprises.

Audit Summary
Upon completion of the fieldwork, the auditor summarizes the audit findings, conclusions, and recommendations necessary for the
audit report discussion draft.

Working Papers
Working papers are a vital tool of the audit profession. They are the support of the audit opinion. They connect the client’s
accounting records and financials to the auditor’s opinion. They are comprehensive and serve many functions.

Working Paper Documentation

Audit Report
Our principal product is the final report in which we express our opinions, present the audit findings, and discuss recommendations
for improvements. To facilitate communication and ensure that the recommendations presented in the final report are practical,
Internal Audit discusses the rough draft with the client prior to issuing the final report. For an audit report template including an
executive summary click here.
Discussion Draft
At the conclusion of fieldwork, the auditor drafts the report. Audit management thoroughly reviews the audit working papers and
the discussion draft before it is presented to the client for comment. This discussion draft is prepared for the unit's operating
management and is submitted for the client's review before the exit conference.

Exit Conference
When audit management has approved the discussion draft, Internal Audit meets with the unit's management team to discuss the
findings, recommendations, and text of the draft. At this meeting, the client comments on the draft and the group works to reach an
agreement on the audit findings.

Formal Draft
The auditor then prepares a formal draft, taking into account any revisions resulting from the exit conference and other discussions.
When the changes have been reviewed by audit management and the client, the final report is issued.

Final Report
Internal Audit prints and distributes the final report to the unit's operating management, the unit's reporting supervisor, the Vice
President for Administration, the University Chief Accountant, and other appropriate members of senior University management.
This report is primarily for internal University management use. The approval of the Internal Audit Director is required for release of
the report outside of the University.

Client Response
The client has the opportunity to respond to the audit findings prior to issuance of the final report which can be included or attached
to our final report. However, if the client decides to respond after we issue the report, the first page of the final report is a letter
requesting the client's written response to the report recommendations.

In the response, the client should explain how report findings will be resolved and include an implementation timetable. In some
cases, managers may choose to respond with a decision not to implement an audit recommendation and to accept the risks
associated with an audit finding. The client should copy the response to all recipients of the final report if s/he decides not to have
their response included/attached to Internal Audit's final report.

Client Comments
Finally, as part of Internal Audit's self-evaluation program, we ask clients to comment on Internal Audit's performance. This feedback
has proven to be very beneficial to us, and we have made changes in our procedures as a result of clients' suggestions.

Audit Follow-Up

Within approximately one year of the final report, Internal Audit will perform a follow-up review to verify the resolution of the
report findings.

Follow-up Review
The client response letter is reviewed and the actions taken to resolve the audit report findings may be tested to ensure that the
desired results were achieved. All unresolved findings will be discussed in the follow-up report.

Follow-up Report

The review will conclude with a follow-up report which lists the actions taken by the client to resolve the original report findings.
Unresolved findings will also appear in the follow-up report and will include a brief description of the finding, the original audit
recommendation, the client response, the current condition, and the continued exposure to Indiana University. A discussion draft of
each report with unresolved findings is circulated to the client before the report is issued. The follow-up review results will be
circulated to the original report recipients and other University officials as deemed appropriate.

Internal Audit Annual Report to the Board

In addition to the distribution discussed earlier, the contents of the audit report, client response, and follow-up report may also
communicated to the Audit Committee of the Board as part of the Internal Audit Annual Report.
The Process: A Collaborative Effort
As pointed out, during each stage in the audit process--preliminary review, field work, audit reports, and follow-up--clients have the
opportunity to participate. There is no doubt that the process works best when client management and Internal Audit have a solid
working relationship based on clear and continuing communication.
Many clients extend this working relationship beyond the particular audit. Once the audit department has worked with management
on a project, we have an understanding of the unique characteristics of your unit's operations. As a result, we can help evaluate the
feasibility of making further changes or modifications in your operations.

https://www.auditnet.org/audit-library/the-internal-audit-process-from-a-to-z-how-it-works