An audit is the examination of the financial statements of an organization – as presented in the annual report – by someone independent of that organization. The financial report includes a statement of financial position, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
The purpose of an audit is to form an opinion on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organization at a given date.
When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work. Generally, all listed companies and limited liability companies are subject to an audit each year. Other organizations may require or request an audit depending on their structure and ownership.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of materials misstatement of the financial statements, whether due to fraud or error.