Gone are the days when business owners are uninformed about building sustainable businesses. Business owners today are actively searching out relevant information on the seemingly technical aspects of their businesses and one of those 'aspects' is auditing.
In the past 12 months, Google trends show Nigerians search for audit information has been increasing rapidly (https://g.co/trends/UkYgL). This is a clear indication that people are beginning to realize the importance of auditing in business irrespective of business size.
Difference between Auditing and Accounting
Often times, auditing and accounting are thought to be the same and sometimes creates confusion. Auditing is the process of determining whether recorded information properly reflects the economic events (transactions) that occurred during an accounting period usually 12 calendar months. Accounting on the other hand is the recording, classifying and summarizing of economic events for the purpose of providing financial information in decision making - Fifteen Edition by Alvin .A. Avens and two others.
Types of Auditing
There are two major types of auditing namely:
1. External auditing.
2. Internal auditing.
External auditing is conducted only by a professional accountant called an auditor. It is statutory - meaning the law requires every company to do it in each accounting period. The auditor writes a report at the end of the audit based on the audited/checked records.
Internal auditing can be conducted by anybody as long as the person understands what to do. You can conduct it in your business too.
Things Needed to Conduct Internal Audit
1. General ledger
2. Copies of loans, lease and contract materials may include but not limited to long term agreement with suppliers, employment contracts, buy - sell agreement etc
3. List of all new assets purchased with receipts
4. Loan statements
5. Payroll reports, if any. Not all new businesses have employees but if you do, you need to get payroll reports for testing of wages and salaries expenses
6. Bank statement. Banks have simplified the process because they now provide online e-statements.
Simple Ways to Conduct Internal Auditing
- Audit planning: This involves activities needed for the audit: assistance if any, strategy, time it will take to complete the audit, budget for the audit etc.
- Vouching: This is done by verifying the transactions recorded in books of accounts with the relevant evidence like invoices, receipts etc. Also, confirming that the amount in the receipts or invoices and the person issuing the authority are the same with what is recorded in the account books.
- Interview the employees to know how effective they are.
- Use loan statements to confirm all debts with creditors.
In vouching every receipt or payment must have evidence otherwise it becomes an exception/issue to be raised in the report.
An exception is an indication that there is a problem in the internal control system â the operations. Review the efficiency and effectiveness of the business processes. This is the non-financial controls of an organisation but it is part of the things done during auditing.
If the business has a written policy, the auditor is to review compliance to the policy and should there be any policy of government in that line of business, the auditor will review that as well. Review of compliance is to make sure standards are maintained both internally and externally.
Note: The backbone of auditing is vouching. Do it with diligence.
Note: Evidence is any information used by the auditor to prove whether the information being audited is stated in accordance with the established standards.
Importance of Auditing
- Fraud or errors can easily be detected before untold damage is done to the business.
- Audited financial statement serves as a basis for measuring performance by the would-be or potential investors.
- The presence of the auditor will have a positive impact on the quality of work of the company employees.
- Audited financial statement can be used to negotiate bank loan.
- Audited account is one of the requirements of the Nigeria Stock Exchange for a business that is willing to be listed in the Nigerian stock market.
- Audited financial statement will be readily accepted by the Federal Inland Revenue (FIRS), for the purpose of taxation.