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Definition: auditing from QFinance: The Ultimate Resource

official examination of firm’s accounts the work of officially examining the books and accounts of a company to see that they follow generally accepted accounting practices

Summary Article: auditing
From The Columbia Encyclopedia

examination and statement of accounts and of other documents connected with accounts by persons who have had no part in their preparation. Systems of financial inspection have long been used, especially in connection with public accounts. In Italy the elaboration of commerce considerably increased the duties of an auditor in the late Middle Ages, but the auditing of business accounts did not become common until the 19th cent., when there were an increasing number of businesses continually growing in size and complexity. Corporate charters usually came to be granted only on condition that licensed experts conduct annual audits. Such audits are particularly useful to the owners (partners or stockholders); executives (managers, officers, and directors); creditors or prospective creditors (investors, note brokers, and commercial and investment bankers); and receivers, trustees, and creditors' committees of a business. Audits are also useful to the vendors of a firm's merchandise, the owners of patents and other recipients of profit shares or royalties, governmental regulatory bodies, and prospective donors to institutions. An audit settles certain categories of questions. It must determine whether all assets and liabilities shown are actual, and that they are properly incurred, valued, and recorded. A check must be made of the surplus, income, and capital-stock accounts, verified by the examination of the authorizations for stock issues and by comparing the amounts issued with the amounts authorized. Finally, auditing constitutes an independent check on the tendency to overstate assets and understate liabilities. The duties of auditors have even expanded into a comprehensive survey and analysis of the entire conduct of the financial and accounting branches of an enterprise. Thus the auditor needs, in addition to his knowledge of accounting, a broad understanding of business and finance. The accountant records the facts of a business; the auditor must determine whether or not such recording has been done accurately and honestly and then interpret and judge the facts, perhaps adding to his report recommendations for the future conduct of the business. In many countries, auditors are now established as a separate profession, requiring government licensing. In the United States, private audits are usually performed by certified public accountants; auditing of the federal government's accounts is conducted by Congress's Government Accountability Office (GAO). Formerly the General Accounting Office, it was established in 1921. The Internal Revenue Service periodically audits individual and corporate tax returns. The Public Company Accounting Oversight Board (established 2002) registers and regulates accountants and accounting firms that act as auditors.

  • See Stettler, H. F. , Auditing Principles (3d ed. 1970);.
  • Holmes, A. W. , Auditing (7th ed. 1971);.
  • Bavishi, V. B. , International Accounting and Auditing Trends (1989);.
  • Lee, T. A. , ed., The Evolution of Audit Thought and Practice (1989).
The Columbia Encyclopedia, © Columbia University Press 2018

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