Effectiveness of the Audit Process

Audits provide companies with an external review of their accounting functions and policies. While publicly held companies are required to have up to four audits per year, private companies can choose their own audit schedule.

Facts

Auditors select a sample of financial transactions from each major accounting process and test them for accuracy and validity. Failures in the initial audit sample may require auditors to select and additional set of transactions for testing.

Features

Financial audits will discover errors between the company's accounting policies and Generally Accepted Accounting Principles (GAAP), the highest accounting standards in the United States. These errors must be corrected and a remedial audit will test the corrections made to the accounting policies.

Significance

Audits provide outside stakeholders with a third-party opinion of the company's financial health. Companies with effective audits usually require few changes to their accounting policies and no remedial audits.

Benefits

Outside stakeholders and banks will consider investing in companies that have a history of effective audits. Lenders and investors prefer companies with strong accounting systems, since they provide a better return on invested money.

Expert Insight

Companies that want to improve the effectiveness of audits should review the American Institute of Certified Public Accountants website. This website lists a number of procedures used by auditors, which will educate accounting management on the audit process.

References

• BNET: Internal Auditor - How Do You Measure Success?
• American Institute of Certified Public Accountants: Audit and Attest Standards