Page 65 - Encyclopedia of Business and Finance

eobf_A 7/5/06 2:54 PM Page 42

Auditing

The Business Roundtable (2002). Principles of Corporate Gover- evaluating relevant and reliable evidence, the compliance
nance. Washington, DC: Author. auditor then attests to the degree of correspondence
Director & Boards. http://www.directorsandboards.com between the subject matter identified and the specific law
Levitt, Arthur (2001, January 5). Letter to audit committees and/or regulation. As such, the compliance auditor pro-
chairman of the top 5000 public companies. Washington, vides assurance that the organization or the individual is
DC: Security and Exchange Commission. complying with the applicable laws and/or regulations.
National Association of Corporate Directors. Audits of governmental agencies are typically both
http://www.nacdonline.org
financial and compliance audits. Standards to be used
Sarbanes-Oxley Act of 2002, H.R. Rep. No. 107-610, July 25, when auditing federal government agencies and recipients
2002. Title 1 of Public Law No. 107-204.
of federal funds are found in Government Auditing Stan-
U.S. Securities and Exchange Commission. http://www.sec.gov dards, issued by the comptroller general of the United
States. This publication, which is referred to as the Yellow
Book, specifies that the auditor must evaluate compliance
Louis Braiotta, Jr.
with laws and regulations when completing a governmen-
tal audit.

AUDITING TYPES OF AUDITORS
The objective of an audit is to provide reasonable assur- The three broad groups of auditors are external, internal,
ance that an assertion corresponds with a set of specified and governmental. External auditors are certified public
and established criteria. An audit involves gathering and accountants (CPAs) licensed by their states to provide
evaluating sufficient evidence to determine whether the auditing services. The CPA profession has played an active
assertion does correspond with the criteria. The auditors role in developing and providing attestation, assurance,
then prepare a communication indicating the work they and auditing services. The American Institute of Certified
have performed and their opinion regarding the degree of Public Accountants (AICPA), a voluntary national profes-
correspondence between the assertions and the established sional organization, represents the accounting profession
criteria. in the United States, in general, and the public account-
ing profession, in particular. The AICPA publishes books,
journals, and other materials, manages a Web site
TYPES OF AUDITS
(http://www.aicpa.org), lobbies legislators, and sets pro-
The three primary types of audits are financial, opera- fessional standards in a number of areas. State professional
tional, and compliance audits. In a financial audit, the societies (e.g., the New York State Society of CPAs) pro-
management of an organization asserts that the financial vide a range of professional support at the state level.
statements are prepared in accordance with generally The AICPA Code of Professional Conduct guides the
accepted accounting principles (GAAP), the applicable CPA in the performance of professional services, includ-
criteria. After gathering and evaluating relevant and reli- ing audits. The code consists of principles, rules, interpre-
able evidence, the financial statement auditor then attests tations, and rulings, going from the very broad to the very
to the degree of correspondence between the audited specific. There are six ethical principles of professional
financial statements and GAAP. conduct (e.g., integrity) that provide the basis for the rest
In an operational audit, the management of an organ- of the code. The rules address more specific ethical con-
ization asserts that the operations of the organization are cerns (e.g., independence). The interpretations provide
being conducted in accordance with management’s estab- more details regarding the rules (e.g., conflicts of interest).
lished policies and procedures. Typically, the policies and Rulings are answers to specific questions (e.g., may a CPA
procedures of the organization are designed by manage- accept a gift from a client?). In addition, the AICPA has
ment to ensure effective and/or efficient operations. After an elaborate enforcement mechanism in place to ensure
gathering and evaluating relevant and reliable evidence, compliance with the Code of Professional Conduct.
the operational auditor then attests to the degree of corre- One of the most important provisions of the code is
spondence between the actual operations and the specified that external auditors must be independent of their clients
policies and procedures of the organization. Operational when performing financial audits. According to Article IV
audits can result in recommended changes to increase the of the AICPA’s Code of Professional Conduct, “a member
effectiveness and/or efficiency of operations. in public practice should be independent in fact and
In a compliance audit, an organization’s management appearance when providing auditing and other attestation
asserts that the organization or individual is complying services” (http://www.aicpa.org). To be independent in
with specific laws and/or regulations. After gathering and fact, an auditor must have integrity; a character of

42 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION