Lessons · Accounting · what an audit is actually for
What an audit is actually for
An audit exists because somebody outside a company has to act on figures the company itself prepared. The auditor is not there to find fraud, prepare the accounts, or approve the business. They are there to say whether the statements, taken as a whole, are free of material misstatement.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
Almost every misunderstanding about auditing comes from getting this wrong. A lender who thinks the opinion certifies the company is healthy, a board that thinks it guarantees no fraud, a candidate who thinks the job is detective work: all three are expecting something the report does not say and never claimed to.
How to think about it
Read any audit question by asking who is relying on the figures and what they are relying on them for. The answer is always somebody outside, acting on numbers the company wrote about itself.
Worked example
A bank deciding whether to lendOutside the company, acting on its figures.
An investor deciding what to paySame position, same problem.
The opinion says the statements are free of material misstatementThat, and not more.
It does not say the business is well run or will surviveThose are different questions with different answers.
Your turn
Name who an audit is performed for.
An audit exists for the party the company who must act on its figures
Solve one, graded on the server
The trap
Believing an unmodified opinion means the company is in good shape. A business can receive a clean opinion and fail within the year, and nothing about the opinion was wrong: it addressed whether the statements described the position fairly, and the position was bad.