Audit Definition, Functions, Stages, And Types

Understanding Audit, Functions, Stages, and Types –  In running a company or business, the more data you have, the better for the company. However, having low-accuracy data will only render it useless.

Misinformation in a data can cause new problems in a decision-making process. These mistakes can then have an impact on the business that is being run, such as the business becoming stagnant or not growing, and even resulting in losses on a large scale.

So that potential data and information errors do not occur, a company or business manager will do something that is better known as an audit. In short, this activity is intended to review all forms of data and information that will be managed by the company in order to avoid mistakes that may occur.

1. Definition of Audit

In a broad sense, an audit is an evaluation activity of an organization, from its systems, processes, to its products.

The audit is usually carried out by a competent, objective, and impartial auditor. In general, the purpose of the audit itself is to verify that the data evaluated by the audit is in accordance with applicable standards, regulations, and practices.

Meanwhile in the business world, audits are better known in their role as financial statements carried out by public accountants in assessing the appropriateness of a presentation of financial statements that have been made by the company with reference to legally applicable accounting principles.

Several experts have also expressed their opinions in reviewing the definition of audit in more depth.

1.1 Definition of Audit According to Experts:

  • Sukrisno Agoes (2004)

According to Sukrisno Agoes, an audit is an examination conducted by an independent party critically and systematically on the financial statements, financial records, and supporting evidence prepared by members of the company’s management in order to provide an opinion on the feasibility of a financial report.

  • Arens and Loebbecke (2003)

According to Arens and Loebbecke, audit activity is a process of collecting as well as evaluating the evidence of measurable information on an economic entity in a competent and independent manner in determining and reporting that the available information is in accordance with the established criteria.

  • Mulyadi (2002)

According to Mulyadi, audit is the process of obtaining and evaluating evidence objectively and systematically on allegations of economic activity in determining the level of conformity between existing reports and established criteria, which will then be conveyed the results to the users concerned.

2. Difference between Accounting and Audit

Auditing and accounting are terms that often appear in the study of the field of business science. Basically, the two terms have different purposes and methods. A accounting describes an activity to identify transactions and evidence that can affect a company or government.

In addition to identifying, this activity also includes measuring, recording, and classifying evidence and transactions for further summary/summary in accounting records. The result of this process is none other than the arrangement of financial statements in accordance with general accounting principles.

Furthermore, the ultimate goal of accounting is to communicate relevant and reliable data that can be useful in decision making. The parties involved in the accounting process include company employees and government employees. Meanwhile, the company’s management is in charge of the final financial report.

Meanwhile, the audit itself or in this case the auditing of financial statements includes activities in obtaining and assessing evidence relating to financial statements. This activity allows the auditor to examine the level of feasibility or fairness of a financial statement whether it has been fairly presented in accordance with Generally Accepted Accounting Principles (GAAP) or not.

3. Type of Audit

In its application in the business world, audits are divided into several types. The division of the types of audits is intended to determine the objectives or targets to be achieved by the auditor in more detail and in accordance with the objectives. There are several types of audits when viewed from different points of view. One of them is based on the auditor’s opinion contained in the form of a report. The following are some types of auditor’s opinion, especially the auditor’s opinion on financial audits.

3.1. Unqualified Opinion 

This type of opinion is given by the auditor without any objection to the financial summary presented by management. This report is made if there are circumstances, such as:

  • All required audit evidence has been collected and sufficient
  • Have followed the general standards that have been applied
  • The auditor has carried out his duties, making it possible to ensure that field performance has been running according to the provisions.
  • The financial statements are in accordance with generally accepted accounting principle and have been consistently stated in previous reports.
  • The absence of significant uncertainty ( no material uncertainties) about future developments that cannot be predicted in advance or resolved satisfactorily.

3.2. Opinion Rejection (Disclaimer Opinion) 

This type of opinion is a form of refusal to provide an opinion on the financial summary prepared by management. The trigger can be in the form of a limitation on the extent of the examination or the uncertainty about the quantity of an estimate.

3.3. Opinion Not Fair (Adverse Opinion) 

The opinion given by the auditor in expressing his disapproval of the financial summary by management can be classified as an adverse opinion. This may be due to the auditor’s belief that the existing financial summary is actually not feasible.

4. Purpose of Conducting an Audit

The main purpose of financial audit activities is to find out information about inventory, prices that have been set, and the number of company assets that are correct or in accordance with actual circumstances and events. In order to better understand the purpose of the audit, the following aspects are the objectives of the audit.

4.1. Completeness

Referred to as audit objectives, because completeness can be a factor to ensure that all transaction events have actually been recorded and have been entered in the journal actually.

4.2. Accuracy

Accuracy as an audit objective is to ensure that transactions and estimated balances have been recorded based on the calculation of the amount and proper classification.

4.3. Existence

Existence as an audit objective is to ensure that all recorded liabilities and assets have a certain time and date or are not fictitious.

4.4. Valuation

Assessment as an audit objective is to ensure that the principles applied are in accordance with generally accepted provisions.

4.5. Classification

Classification as an audit objective is to ensure that all transactions listed in the journal have been classified or grouped appropriately based on the appropriate account class.

4.6. Cut – off

This is called an audit objective, because cutoff ensures that transactions close to the balance sheet date are recorded in the correct period. This becomes quite important because it is not uncommon for errors to occur in recording transactions, especially those near the end of the accounting period.

4.7. Disclosure

Disclosure in this case is intended to ensure that account balances and all related disclosure requirements have been fairly presented and explained in the financial statements and the contents of the footnotes of the report.

5. The Importance of the Role of Audit in a Company

Audit activities are important because they are needed to help a company stay afloat or find out and prevent fraud that might occur so that it can be addressed immediately. In addition, audits are also used to evaluate and improve the effectiveness of a company’s performance. The following are some of the benefits of the important role of audit for several parties in a company.

5.1 For audited parties

One of the roles of the audit is to assist the company as the audited party in increasing the credibility of its financial reporting so that the report can be trusted by the interests of parties outside the entity, such as shareholders, creditors, the government, and so on. Audits can also prevent fraud and provide a more reliable basis for the preparation of tax returns to be submitted to the Government. In addition, this can open the door for the entry of external sources of financing for the audited company as well as reveal errors and irregularities in the financial records that have occurred.

5.2 For other members in the business world

Other members referred to in this case are creditors or employees of the company itself. The role of the audit for them is to provide a more convincing basis for making credit decisions.

Another benefit is that it can provide a more convincing basis for insurance companies to settle claims for insured losses. As a basis for investors and potential investors to assess investment performance and management management.

As a basis for trade unions and audited parties to objectively resolve disputes regarding wages and benefits. As a basis for determining the terms of sale, purchase or incorporation of independent companies to buyers and sellers, as well as a better basis for customers or clients to convince them to assess the profitability, management, and operational efficiency of the company.

5.3 For Government agencies or other parties engaged in the legal field

The role of audit for the government is to provide additional independent assurance regarding the accuracy of financial reporting as a basis for taxation. Other benefits are as an independent basis for other parties in the field of law to resolve problems in bankruptcy, manage inheritance and deposit assets, and determine the implementation of partnership agreements in a proper manner.

6. Type of Audit by Examination

Audits are divided into several types based on the angle of their respective studies. Some of them are based on the field and area of ​​examination. Since audit activities can also be defined more briefly as an evaluation or examination process, the following are several types of audits based on the scope of the audit field.

6.1. Financial Statement Audit

The audit of financial statements relates to the activities of collecting and evaluating evidence regarding the reports of an entity with a view to providing an opinion or opinion about the report whether it is in accordance with generally accepted accounting criteria and principles or not.

6.2. Operational Audit (Management Audit)

This type of audit includes an examination of the operational activities of a company, such as accounting policies and management operational policies with the aim of ensuring that the operations carried out run effectively and efficiently.

6.3. Obedience Audit (Compliance Audit)

As the name implies, the compliance audit aims to ensure that the company has complied with the applicable regulations and policies, both policies set by internal parties and external parties from the entity or company. This audit plays a role in determining the extent to which the company complies with applicable government regulations, policies and regulations and which the audited entity must comply with.

6.4. Performance Audit

Performance audit serves to test the level of economy, efficiency, and the effectiveness of the use of resources in achieving goals. This type of audit is qualitative and analytical in nature using indicators, standards, and performance targets. The performance audit is intended to consider the cost benefit analysis while at the same time improving the optimal allocation of resources. The other benefits are:

  • Increase income
  • Reduce costs or spend
  • Improve efficiency and productivity
  • Improving the quality of services provided
  • Raise awareness of transparency and accountability in management for a more efficient use of public resources

7. Types of Audits by Area of ​​Examination

Meanwhile, based on the extent or scope of the audit, the audit itself consists of 2 types, namely general audit audits and special audit audits.

7.1. General Examination (General Audit)

The general audit audit includes financial statements conducted by an independent Public Accounting Firm (KAP) in an effort to assess as well as provide an opinion regarding the fairness and feasibility of the financial statements.

7.2. Special Investigation (Special Audit)

Meanwhile, special audit audits are the opposite of general audit audits, where the audit of financial statements depends on the company. This type of audit only covers audit requests made by the Public Accounting Firm (KAP).

8. Auditing Standards

Every audit carried out by the company or auditor of course adheres to the existing standards and provisions. There are at least 10 standards which then form a Statement of Auditing Standards (PSA). These standards are present in an effort so that the results of the audit really have an impact on the benefits for the company. Some of these standards include:

  • A thing that requires expertise or competence
  • Not affected or independent
  • Professional level or due professional care
  • Adequate planning and proper supervision
  • Adequate understanding of the internal control structure
  • Competent audit evidence
  • Must be in accordance with accounting principles or financial statements presented in accordance
  • Must be consistent or consistency in the application
  • The content of the report must be considered all-encompassing and adequate
  • Expression of opinion or the appropriate opinion

9. General Standard

Because the audit is one of the important activities and needs to be carried out by business or company managers, then everything regarding its implementation of course has its own basis and standards. There are several basic references of financial auditing that have been established and ratified by the Institute of Certified Public Accountants your country. These standards consist of general standards, fieldwork, and interpretation reporting. The general standards in conducting audit activities include:

  • An auditor or audit executive is a person or more with adequate technical expertise and training experience as an auditor.
  • As an auditor, mental defense of all matters relating to engagement and independence must be maintained.
  • Auditors are required to utilize their professional expertise in the process of carrying out audits to reporting activities carefully and thoroughly.

10. Field Standard

In addition to general standards, other standards that can be used as a reference in conducting audits are also known as fieldwork standards. This standard is more specific in nature which covers matters concerning audit performance in the field. These standards are:

  • Field performance can basically depend on the planning carried out. Therefore, as professionals, all work must be planned properly and carefully, if necessary using assistants who have been previously supervised in a proper manner.
  • Adequate understanding of internal control
  • Audit evidence obtained through observational inspections must be competent

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