Audit & Assurance

What is Audit?

In the purest sense, auditors assess a set of company accounts to determine if they are a true and fair representation of the company's affairs on the accounts date. The audit provides comfort ('assurance') to the users of the accounts that an independent third party has examined the accounts and agrees with them.Each individual line in a set of published accounts needs to be tested. Auditors do not test every transaction that led to that figure. Rather they perform two kinds of testing:

Substantive Testing

In substantive testing, an auditor will select a sample of transactions that go to produce a certain figure. For example, if we are testing the sales figure, we might select a number of sales and ask to see evidence of these sales. This might be copies of cheques from customers, purchase orders from customers or correspondence or contracts with customers. Auditors will test enough of these until they feel comfortable that the sales figure is correct.

Controls Testing

A control is a process in a company which is designed to reduce the risk of error or fraud. A good example is each payment requires two signatories, one person fills in the cheque and the second person signs it. In companies where good controls exist, auditors can test the control rather than a sample of transactions. If they are satisfied the control works effectively, they will be comfortable of the final figure. For example, if customers purchase through a website, then the sales figure may be generated by a computer, and the auditors may be comfortable with this.

Common Misunderstandings about Auditors

Auditors do not:

  • Look for fraud, although they keep a lookout for it.
  • Check every transaction - just the ones that are 'material'.
An audit report is provided with every set of published accounts, where the auditors state their opinion of the accounts, and highlight any issues they had with their audit, if any. Auditors do not work for the client company, they work on behalf of the company's shareholders. Shareholders decide who will be the auditor of the company.

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