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What is Financial Auditing?

By Garry Crystal
Updated May 16, 2024
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Financial auditing is an accounting process used in business. It uses an independent body to examine a business' financial transactions and statements. The ultimate purpose of this form of auditing is to present an accurate account of a company's financial business transactions. The practice is used to make sure that the company is trading financially fairly, and also that the accounts it is presenting to the public or shareholders are accurate and justified.

The results of the audit procedure can be presented to shareholders, banks and anyone else with an interest in the company. One of the main reasons for a financial audit is to ensure that the trading company is not practicing any deception. This is why it is done by an independent third party.

Public records show that this process has been done since 1314, but before the 1930s, no corporations or businesses were legally required to do so. In 1934, the United States Securities Exchange Act made it a legal requirement for all public trading companies. The Securities and Exchange Commission (SEC) set up a department to deal specifically with this requirement, and it usually works with the accounting industry as to its standards.

The financial auditing process usually takes places once a year, most commonly at the end of the financial year. All financial aspects of the company are inspected, and a follow-up audit may also be undertaken after the year end in order to compare results. The auditor has the difficult task of maintaining objectivity while being paid by the company it is auditing.

Audits are usually a thorough process, but in some cases, failures occur. The 2001 Enron scandal was a case in point, in which a company hid important facts and figures from both stakeholders and the banks. Enron filed for bankruptcy, and one of the largest accounting firms in the world, Arthur Andersen, lost the right to audit.

Major incidents such as this have forced tighter and stricter regulations in the financial auditing process. Many innocent people lost huge amounts of money because unscrupulous companies hid their financial details. Sadly, many of these stricter auditing regulations have come too late for the people who lost their life savings.

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Discussion Comments
By NightChef — On Oct 07, 2010

There are many types of ways that a business owner can help with a financial internal audit.

One of these ways is to purchase some financial auditing software that guides novices in the field through the process and ensures that user will understand how to do a financial audit.

Many corporations that sell franchises will require the use of a compliance audit to ensure that the franchise owner is up to the same standards as the corporation requires. This software that is available on the market will ensure compliance and provide a great amount of assistance to anyone trying this complicated task.

By thumbtack — On Oct 07, 2010

My firm is a private financial audit management company that can take away the fears of internal and external auditing of your records.

We face many clients everyday that have major fears about the condition of their financial records and the issues that continue to arise in their everyday operations.

When we sit down with them we are able to reassure their minds that the auditing standards we are acceptable and the same types that are used by government regulatory bodies.

We describe in detail to them how to perform a financial audit and ensure that the process will create an understandable financial audit report.

By JoseJames — On Oct 07, 2010

@summertime, you have a much more positive outlook on financial auditing then I ever have. I don't think that it is a fear that I face or that I am trying to cover anything up but the intimidation of people pouring over personal financial documents in hopes of finding an error is quite daunting.

We do perform internal financial audits within our business to identify any potentially costly problems that are being overlooked. Even these internal audits can turn up my stomach a bit as I have just simple hopes that my staff is doing the job that I pay them to do.

While it is time intensive, we perform these internal financial audits quarterly although I am considering moving to a monthly schedule if the amount of business we are doing continues to increase at the rate that it is now.

By summertime — On Oct 07, 2010

Financial audits are something that most people will tremble in fear when they hear the words. For me, the opposite is the case.

As a legitimate business owner, there is nothing about the finances of my organization that would need to be hidden or disguised. This fear of someone or some organization doing a serious review of your records is usually only a problem when you actually have something to hide from authorities.

The way I look at it, the process of financial auditing is a great way to actually scrutinize the very fine monetary details of my business dealings. If there is an issue that I am unaware of I am more then happy to deal with it as to avoid further complications in the future and I think this is how every business owner should approach the subject.

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