What Is An Audit?

Audit is an independent examination of financial statements of an entity that enables an auditor to express an opinion whether the financial statements are prepared (in all material respects) in accordance with an identified and acceptable financial reporting framework (e.g. international or local accounting standards and national legislations). This view of audit is presented by ISA 200 Objective and General Principles Governing an Audit of Financial Statements.
The phrases used; “to express the auditor’s opinion” means that the financial statements give a true and fair view or have been presented fairly in all material respects. True and fair presentation means that the financial statement are prepared and presented in accordance with the requirements of the applicable International Financial Reporting Standards (IFRS) and local pronouncements/legislations. What we can understand as the essential features of an audit from the above definition and explanation are as under:
• An auditor involves in examination of financial statements, the auditor is not responsible for the preparation of the financial statements.
• The end result of an audit is an opinion to assist the user of the financial statements. Auditing therefore relies heavily on professional judgment, not merely on the facts.
• The auditor’s opinion makes reference to “true and fair” or “fair presentations” but “true and fair” is again a matter of judgment. It is not precisely defined for the auditor.
• In order to make the user of the auditor’s report able to feel confident in relying on such report, the auditor should be independent of the entity. Independent essentially means that the auditor has no significant personal interest in the entity. This allows an objective, professional view to be taken. You will note that this is a wide concept of an audit which can be applied to any entity, not just to limited companies. However, in this course, we are concerned primarily with audits of limited companies (often known as statutory or external audits). Any other audit applications will be clearly indicated for you in the text.