Definition of Audit, Functions, Stages, and Types – In running a company or business, the more data you have, the better for the company. However, having data with low accuracy will only make 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 developing, even resulting in large-scale losses.
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 any mistakes that can occur.
1. Definition of Audit
In a broad sense, an audit is an evaluation activity of an organization, starting 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 has complied with applicable standards, regulations and practices.
While in the business world, auditing is better known for its role as a financial statement carried out by a public accountant in assessing the appropriateness of a financial statement presentation that has been made by a company with reference to legally valid accounting principles. Learn how through the book Auditing Basic Theory and Practice of Examination of Public Accountants below.
Several experts have also issued their opinions in reviewing the definition of auditing in more depth.
1.1 Definition of Audit According to Experts:
- Sukrisno Agoes (2004)
According to Sukrisno Agoes, an audit is an examination carried out by an independent party critically and systematically on financial reports, 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)
An audit activity according to Arens and Loebbecke is a process of collecting as well as evaluating evidence of measurable information on an economic entity competently and independently in determining and reporting that the information available is in accordance with predetermined criteria.
- Mulyadi (2002)
According to Mulyadi, auditing is the process of obtaining and evaluating evidence objectively and systematically on allegations of economic activity in determining the degree of conformity between existing reports and predetermined criteria, which will then convey the results to the users concerned.
Based on the definition of audit above, it can be concluded that auditing is a systematic process for obtaining and evaluating evidence related to assertions about economic actions and events as discussed in the book Auditing: Basics of Accounting Examination.
2. The difference between Accounting and Auditing
Audit and accounting are terms that often appear in business studies. Basically, the two terms have different goals and methods. Accounting describes an activity of identifying transactions and evidence that could affect a company or government.
Apart from identifying, this activity also includes measuring, recording, and classifying evidence and transactions for further summary/overview 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 making decisions. The parties involved in the accounting process include company employees and government employees. While the company’s management is responsible for the final financial statements.
Meanwhile, the audit itself or in this case the auditing of financial statements includes activities in obtaining and assessing evidence related to financial statements. This activity allows the auditor to examine the level of adequacy or fairness of a financial report whether it has been presented fairly in accordance with Generally Accepted Accounting Principles (PABU) or not.
With so many important terms and concepts related to basic accounting and general knowledge in the field of auditing, the book Accounting and Auditing Terms is here to help Matobers understand them more easily.
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 on target. There are several types of audits when viewed from different perspectives. One of them is based on the auditor’s opinion contained in the report. The following are several 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
- Has followed the general standards that have been in force
- The auditor has carried out his duties, making it possible to be able to ensure field performance has been running according to regulations.
- The financial statements are in conformity with generally accepted accounting principles in Indonesia and are consistent with previous reports.
- There are no significant uncertainties ( no material uncertainties) about future developments that cannot be predicted in advance or resolved satisfactorily.
3.2. 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 a limitation on the area of inspection or an uncertainty about the quantity of an estimate.
3.3. Adverse Opinion
The opinion given by the auditor in expressing his disapproval of the financial summary by management can be classified into an adverse opinion. This can be caused by the auditor’s belief that the existing financial summary is actually not feasible.
4. Purpose of Conducting an Audit
The main objective of the financial audit activity is to find out that information about inventories, prices that have been set, and the amount of company assets is correct or in accordance with actual conditions and events. In order to better understand the purpose of the audit, the following are the aspects that are the goal.
4.1. Completeness _ _
It is referred to as an audit objective, because completeness can be a factor in ensuring that all transaction events have actually been recorded and have been entered in the actual journal.
4.2. Accuracy _ _
Accuracy as an audit objective is to ensure transactions and account balances have been recorded based on the calculation of the correct amount and classification.
4.3. Existence _ _
Existence as an audit objective is to ensure that all liabilities and assets recorded have a certain time and date or are not fictitious.
4.4. Valuation _ _
Assessment as the purpose of the audit is to ensure that the principles applied are in accordance with the provisions that apply in general.
4.5. Classification ( Classification )
Classification as an audit objective is to ensure that all transactions listed in the journal have been properly classified or grouped based on the appropriate account class.
4.6. Boundary ( Cut – off )
It is called an audit objective, because cutoff ensures that transactions close to the balance sheet date are recorded in the proper period. This is quite important because it is not uncommon for errors to occur in recording transactions, especially near the end of the accounting period.
4.7. Disclosure _ _
Disclosures in this case are intended to ensure that account balances and all related disclosure requirements have been presented and explained fairly in the financial statements and the contents of the footnotes to the report.
Learn about the purpose of an audit and responsibilities in an audit along with other systematic and comprehensive discussions summarized in 18 chapters in the book Auditing by Tmbooks.
5. The Importance of the Role of an Audit in a Company
Audit activities are important because they are needed to help a company survive or find out and prevent fraud that might occur so that it can be resolved immediately. In addition, audits are also used to evaluate and improve the effectiveness of a company’s performance. The following are some of the important benefits of the audit role for several parties in a company.
5.1 For the audited party
One of the roles of the audit is to assist the company as the party being audited in increasing the credibility of its financial reporting so that the report can be trusted by the interests of outsiders, such as shareholders, creditors, the government, and so on. Audits can also prevent fraud and provide a more credible basis for the preparation of tax returns to be submitted to the Government. In addition, this can open the door for the entry of outside 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 like creditors or employees at 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 stewardship.
As a basis for trade unions and audited parties to resolve disputes regarding wages and benefits objectively. As a basis for determining the terms of sale, purchase or merging of independent companies to buyers and sellers, as well as a better basis for customers or clients to convince them in assessing the company’s profitability, management, and operational efficiency.
5.3 For government agencies or other parties engaged in the legal field
The role of an audit for the government is to provide additional independent assurance regarding the accuracy of financial reporting as a basis for tax imposition. Other benefits are as an independent basis for other parties in the field of law to resolve problems in bankruptcy, manage inheritance and entrusted assets, and determine the implementation of partnership agreements in the proper manner.
6. Type of Audit According to Examination
Audits are divided into several types based on the point of view of each. Some of them, namely based on the field and area of examination. Because audit activities can also be interpreted more briefly as an evaluation or inspection process, the following are several types of audits based on the scope of the audit field.
6.1. Financial Statement Audit ( Financial Statement Audit)
Audit of financial statements relates to the activity of collecting and evaluating evidence regarding the reports of an entity with the aim of providing an opinion or opinion about whether the report is in accordance with generally accepted criteria and accounting principles or not.
6.2. Operational Audit (Management Audit)
This type of audit includes examination of a company’s operational activities, such as accounting policies and management operational policies with the aim of ensuring that operational activities are carried out effectively and efficiently.
6.3. Compliance Audit
As the name implies, a compliance audit aims to ascertain whether the company has complied with applicable regulations and policies, both policies set by internal and external parties of the entity or company. This audit plays a role in determining the extent to which the company complies with applicable regulations, policies, and government regulations that must be complied with by the entity being audited.
6.4. Performance Audits
Performance audit serves to test the level of economy, efficiency, and effectiveness of the use of resources in achieving goals. This type of audit is qualitative and analytical using indicators, standards and performance targets. Performance audit is intended to consider cost benefit analysis while improving the optimal allocation of resources. The other benefits are:
- Increase revenue
- Reduce costs or shopping
- Improve efficiency and productivity
- Improve the quality of services provided
- Increase awareness of transparency and accountability in management for a more efficient use of public resources
An audit process that occurs in a company itself can be called an internal audit which is carried out by an internal auditor who, apart from being capable and possessing audit techniques, must also understand risk management, governance processes, and the characteristics of business units which can be studied in the Modern Internal Auditing book. .
7. Types of Audit According to Examination Area
Meanwhile, based on the extent or scope of the audit, the audit itself consists of 2 types, namely general inspection audit and special inspection audit.
7.1. General Examination (General Audit)
The general inspection audit includes financial reports carried out by an independent Public Accounting Firm (KAP) in an effort to assess and provide an opinion regarding the fairness and feasibility of financial reports.
7.2. Special Examination (Special Audit)
Meanwhile, a special inspection audit is the opposite of a general inspection audit, where the examination of the financial statements depends on the company. This type of audit only covers audit requests made by a Public Accounting Firm (KAP).
8. Auditing Standards
Every audit carried out by a company or auditor, of course, adheres to the existing standards and conditions. There are at least 10 standards which then form a Statement of Auditing Standards (PSA) which is discussed in Accounting Examination 1 (Auditing 1).
These standards exist 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:
- Something 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 consistent in the application
- The contents of the report must be seen as covering all matters and adequate
- Expression of opinion or appropriate opinion
9. Common Standards
Because auditing is one of the important activities and needs to be carried out by business or company managers, then everything regarding its implementation naturally has its own basis and standards. There are several basic references for financial auditing that have been established and approved by the Indonesian Institute of Public Accountants (IAPI). The standards consist of general standards, field work, and also interpretation reporting. The general standards in conducting audit activities include:
- Auditor or audit executor is a person or more with adequate technical expertise and training experience as an auditor.
- As an auditor, maintaining the mentality of all matters related to the engagement and independence must be maintained.
- The auditor must utilize his professional expertise in the process of carrying out audits to reporting activities carefully and thoroughly.
10. Field Standards
In addition to general standards, other standards that can be used as a reference in conducting audits are also known as field work standards. This standard is more specific in nature which covers matters regarding audit performance in the field. The standards are:
- Field performance can basically depend on the planning that is done. Therefore, as professionals, all work must be well planned and mature, using assistants who have been supervised properly if necessary.
- Adequate understanding of internal control
- Audit evidence obtained through inspection inspections must be of a competent nature