What is an audit and why is it required?

Millions of people around the nation are filled with fear every April as we approach the last month of the tax season. It's do or die time, or it's more about doing or being punished in this situation and probably sent to prison time. But just because you end up paying your taxes, it doesn't mean that you're exempt from some kind of consequences automatically. Even after taxes are submitted, millions of people are still waiting with bated breath to see whether they will end up being audited or not. But in the first place, what exactly is an audit?

And what's an audit?

Audits are not simply an excuse for the Internal Revenue Service (IRS) to find people to give fines to and prosecute, despite what many people believe. They are essentially an objective review of the accounting records of an individual or group in order to ensure that the records are an accurate reflection of the financial position of the person or business.

It is possible to do these audits internally or externally. Although the IRS carries out a lot of audits every year, private third-party companies carry out most of the country's audits. Getting an external audit conducted at least once a year is part of the legal duty of a publicly traded company.

Reasons why an audit has been completed

It will help to put the minds of shareholders at ease when a company's financial statements are checked over by someone outside the company. Other businesses are taking this a step further by carrying out monthly audits during the year to ensure that their records are consistently correct.

In order to ensure that they have the right amount of money on hand, businesses that deal largely with cash will also complete regular audits. It would be difficult to say whether or not any of the money is where it is supposed to be without these daily audits.

The IRS will perform audits to minimize the "tax gap" when it comes to an individual's own personal taxes. This is simply the difference between what is owed to the IRS and what is actually earned by them. IRS audits may come at random or may pick those taxpayers on the basis of any questionable behavior in the past.

The Types of Audits

Audits may be conducted either internally or externally, as previously stated. Subcategories of audits are under each of these groups, which decide precisely what the auditing process would look like.

The auditor may either be a statutory auditor or an external cost auditor for external audits. The financial statement is checked by statutory auditors and they aim to find any anomalies or errors. To assess whether or not there are any irregularities reported on them, external cost auditors are charged with looking at cost statements and sheets. Regardless of the type of auditor employed to do the job, external auditors adopt their own set of guidelines that are entirely independent of what the standards of the organization are.

There is technically only one group for internal auditors. However, as another potential form of internal auditor, consultant auditors can be used. Internal auditors are directly employed and operate within their guidelines by the organization that they are charged with auditing. They transmit any data that they find to the managers, board members, and stakeholders of the organization.

Consultant auditors do not necessarily do their work internally, but they do use the collection of guidelines of the organization when doing their job. When they feel that they do not have the time or money to audit some aspects of their business, an organization will normally employ a consultant auditor.

Forms of Standards for Audits

So far, there has been a lot of reference to standards, but no clarification of where these norms come from. Here is where we will break down the governing bodies responsible for setting these criteria.

Internal audits, as previously stated, meet the criteria set by the organizations themselves. Unless the company is, of course, public. In which case, the Public Company Accounting Control Board sets and enforces the requirements.

Standards may come from two separate locations for external audits. Either the American Institute of Certified Public Accountants (AICPA) or the International Board of Audit and Assurance will determine them (IAAB). National audits are carried out using the Widely Agreed Auditing Standards set out by the AICPA, while the International Auditing Standards set out by the IAAB are used for international audits.

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