Audit is an important term used in accounting that describes the examination and verification of a company’s financial records. It is to ensure that transactions are represented fairly and accurately. Further, audits are performed to ensure that financial statements are prepared in accordance with the relevant accounting standards. The three primary financial statements are:
- Income statement
- Statement of Financial Position
- Statement of Cash Flows
Financial statements are prepared internally following the relevant accounting standards and are developed to provide useful information to the following users/ stakeholders:
- Shareholders
- Creditors
- Government entities
- Customers
- Suppliers
- Partners
Financial statements capture the operating, investing and financing activities of a company through various transactions that are recorded. Because the financial statements are prepared internally, there is a high chance of fraudulent behavior by the preparers of the statements. Without proper regulations and standards in place, preparers can easily misrepresent their financial positioning to make the company appear more profitable or successful than they actually are. Auditing is crucial to ensure that companies represent their financial positioning fairly and accurately, and in accordance with accounting standards.