What is an audit?
People and organisations that are accountable to others can be required (or can choose) to have an auditor. The auditor provides an independent perspective on the person's or organisation's representations or actions.
The auditor provides this independent perspective by:
- examining the representation or action and comparing it with a recognised framework or set of pre-determined criteria;
- gathering evidence to support the examination and comparison;
- forming a conclusion based on that evidence; and
- reporting that conclusion and any other relevant comment.
For example, the managers of most public entities must publish an annual financial report. The auditor examines the financial report, compares its representations with the recognised framework, gathers appropriate evidence, and forms and expresses an opinion on whether the report:
- complies with the recognised framework of generally accepted accounting practice (known as “GAAP”); and
- fairly reflects the entity’s financial performance and financial position.
The entity publishes the auditor’s opinion with the financial report, so that readers of the financial report have the benefit of knowing the auditor’s independent perspective.
Local authorities: See our leaflet on Public funding and auditing in the land transport sector.
Other key features of an audit
The other key features of all audits are that the auditor:
- plans the audit to enable the auditor to form and report their conclusion;
- maintains an attitude of professional scepticism;
- in addition to gathering evidence, makes a record of other considerations that need to be taken into account when forming the audit conclusion;
- forms the audit conclusion on the basis of the assessments drawn from the evidence, taking account of the other considerations; and
- expresses the conclusion clearly and comprehensively.
What assurance does an audit aim to provide?
An audit aims to provide a high, but not absolute, level of assurance.
In a financial report audit, evidence is gathered on a “test” basis because of the large volume of transactions and other events being reported on. The auditor uses professional judgement to assess the impact of the evidence gathered on the formation of the audit opinion.
The concept of materiality is implicit in a financial report audit. Auditors only report “material” errors or omissions – that is, those errors or omissions that are of a magnitude or nature that would affect a third party’s conclusion about the matter.
The auditor does not:
- examine every transaction – this would be prohibitively expensive and time-consuming; or
- guarantee the absolute accuracy of a financial report – although the audit opinion does imply that no material errors exist; or
- discover or prevent all frauds (the entity’s management is responsible for ensuring that internal control is adequate to minimise risks from fraud).
In other types of audit (such as a performance audit), the auditor can provide assurance that, for example, the entity’s systems and procedures are effective and efficient, or that the entity has acted in a particular matter with due probity. However, the auditor might also find that only qualified (or even no) assurance can be given. In any event, the findings from the audit will be reported by the auditor.
What is auditor independence?
The independence rules
The auditor must be independent – both in fact and appearance. This means that the auditor must avoid situations that would:
- impair the auditor’s objectivity; or
- create personal bias that could influence (or could be perceived by a third party as likely to influence) the auditor’s judgement.
Relationships that could have an effect on the auditor’s independence include:
- personal relationships (such as between family members);
- financial involvement with the entity (such as by way of investment);
- provision of other services to the entity (such as undertaking valuations); and
- dependence on fees from one source.
The roles of auditor and management
Another aspect of auditor independence is the separation of the role of the auditor from that of the entity’s management. Again, the context of a financial report audit provides a useful illustration.
Management is responsible for:
- maintaining adequate accounting records;
- maintaining internal control to prevent or detect errors or irregularities, including fraud; and
- preparing the financial report in accordance with statutory requirements (normally requiring compliance with GAAP) so that the report fairly reflects the entity’s financial performance and financial position.
The auditor is responsible for providing an opinion on whether (or the extent to which) the financial report fairly reflects the financial performance and financial position of the entity.
Page last updated: 4 February 2013page top