Audits are an internal or external review of a company’s financial operations. Companies use audits to ensure they are in compliance with national accounting standards and internal accounting policies. Publicly held companies typically face more audits based on requirements from government regulatory agencies and stock exchanges. These companies require more audits because investment firms and individual investors have a financial stake in the company’s financial returns. Audits typically involve a few universal principles for public companies.
Financial statements are usually the final output of a company’s accounting process and provide investors with key information on the company’s financial health. Auditors will review the statements to ensure they include accurate and valid financial information. The most common statements include the balance sheet, income and cash flow statement. Auditors will start with the financial statements and trace information back to the individual accounts and transaction that make up the information on the financial statement.
Auditors can also compare a company’s financial information and trend analysis to other companies in the business environment. This comparison process is possible because publicly held companies are required to file reports with the Securities and Exchange Commission (SEC) and they often have financial information reported on financial websites. Auditors who find questionable information in a company’s ledger or other accounting reports may focus on specific areas to review. While companies do not often mirror an industry’s or competitor’s information, a significant variance from the average can provide auditors with red flags relating to inappropriate accounting processes.
Publicly held company must implement internal controls to safeguard their financial processes and information. Internal control requirements became widespread from the Sarbanes-Oxley Act of 2002, which attempts to limit the fraud or abuse of a company’s financial information. Auditors will review internal controls to determine if they truly safeguard information as intended. Ineffective internal controls are worthless in the company’s accounting process and create more work for employees and provide little or no benefit to shareholders.