1

audit

noun au·dit \ ˈȯ-dət \
Updated on: 19 Nov 2017

Definition of audit

1 a :a formal examination of an organization's or individual's accounts or financial situation
  • The audit showed that the company had misled investors.
b :the final report of an audit
2 :a methodical examination and review
  • an energy audit of the house

Examples of audit in a Sentence

  1. The Internal Revenue Service selected us for an audit.

  2. You will need all your records if you are selected for audit by the IRS.

Recent Examples of audit from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'audit.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of audit

Middle English, from Latin auditus act of hearing, from audire — see 1audible


2

audit

verb

Definition of audit

transitive verb
1 :to perform an audit of or for
  • audit the books
  • audit the company
2 :to attend (a course) without working for or expecting to receive formal credit
  • audited a foreign language course

auditability

play \ˌȯ-də-tə-ˈbi-lə-tē\ noun

auditable

play \-ˌȯ-di-tə-bəl\ adjective

auditee

play \ˌȯ-də-ˈtē\ noun

Examples of audit in a Sentence

  1. They audit the company books every year.

  2. The Internal Revenue Service audited him twice in 10 years.

  3. I audited an English literature class last semester.

Recent Examples of audit from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'audit.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

Origin and Etymology of audit

see 1audit


Financial Definition of AUDIT

audit

What It Is

In the tax world, an audit refers to the review of a taxpayer's tax return for accuracy.

In the accounting world, an audit is the examination and verification of a company's financial statements and records, and in the United States, examination for their compliance with Generally Accepted Accounting Principles (GAAP).

How It Works

Accounting professionals, usually Certified Public Accountants (CPAs), perform audits. These auditors must be independent, unbiased, and qualified to provide an auditor's report (also called an opinion).

There are four major steps in the audit process:

-- Defining the terms of the engagement between the auditor and the client
Planning the scope and conduct of the audit
Compiling the audited information
Reporting the results of the index audit

The terms of an engagement are usually set forth in an engagement letter that is written by the auditor and signed by the client. The letter documents the auditor's role and addresses any specific issues. The audit plan defines the scope of the audit and key deadlines. Quite often the company's audit committee (primarily composed of board members) reviews and approves the audit plan.

One of the goals of a financial audit is to find and correct any material misstatements, which are statements that are wrong, missing, or incomplete whether made deliberately or accidentally. This is why auditors must be able to drill down to the source of each piece of data (this is called the audit trail). To compile the information necessary to do this, an auditor does many things. For example, the auditor tests the transactions and account balances that make up the financial statements as well as the design and operation of the systems that generated those statements.

Auditors also employ sampling techniques, whereby they evaluate less than 100% of the items within an account or class of transactions as a way to understand the nature of the entire account or class of transactions. For example, an auditor will usually not check every expense report in a large company to make sure each has receipts attached. Instead, the auditor will pull a random sample of the reports, examine those, and draw conclusions about the quality of the information and controls related to expense reports. Auditors also analyze significant trends or ratios and question changes or variances from predicted amounts. Further, they investigate the reasonableness of management's accounting estimates of uncertain events or events that are likely to occur (such as the outcome of litigation).

Auditors perform their audit procedures in accordance with the International Auditing and Assurance Standards Board (IAASB), which is a committee of the International Federation of Accountants (IFAC). The IAASB develops standards and guidance that are considered best practices for auditors. The IFAC also sets ethical and independence standards for auditors and in particular emphasizes that auditors should be, and be seen to be, free from any influence that might jeopardize their independence. The SEC and other regulatory bodies determine which types of entities are subject to audit as well as the kind of information on which the auditor should report.

Audits can take a few days or several months, depending on the complexity of the financial statements and the degree to which the auditor inspects the company's financial statements and controls. When the audit is complete, the auditor publishes the audit findings in the auditor's report, which prefaces the financial statements in the company's public reports and filings. This report is usually the only public document available about the audit process, but the auditor often issues private reports to the company's management or audit committee as well as to regulatory authorities. The index auditor keeps extensive written records, called working papers, that provide the basis and support for each of its opinions.

When an auditor feels that a company's financial statements are fair and accurate, it issues an unqualified opinion and does so using a standard reporting template (this is why many opinions read the same way). An audit report also includes a statement that the international audit was conducted in accordance with GAAP. When the auditor cannot give an unqualified opinion, it issues a qualified opinion, which lists the reasons for the auditor's concern about the company's financial statements and controls and the possible effects on the financial statements. The auditor is not responsible for auditing transactions that occur after the date of the audit report.

Why It Matters

An audit's objective is to help the auditor form an opinion of the trueness and fairness of a company's financial statements. This is done for the sake of the shareholders, regulatory authorities, lenders, and other people with an interest in the health of the company.

There is always a chance that an auditor gives an unqualified opinion when in fact the financial statements are materially misstated. This is called audit risk, and the auditor must use his or her judgment about how much is acceptable and what errors are material enough to warrant the restatement of the financials. In these situations, the definition of the word material becomes especially important, because shareholders, lenders, and other interested parties make crucial decisions based on the quality of the information in a company's financial statements.

It is very important to understand that auditors are not responsible for detecting all instances of fraud or financial misrepresentation. This is the responsibility of the management of the company. However, the auditor should conduct the audit in a manner that would reasonably detect at least some material misstatements caused by fraud or error. In those cases, the auditor should probe the issue and pursue the audit trail for questionable transactions. To mitigate these errors and problems, companies often have employees known as internal auditors who perform ongoing audit functions. These internal auditors review not only the company's financial statements but also the company's control practices and other critical operations and systems. Internal auditors are often, but not always, accountants.


AUDIT Defined for English Language Learners

audit

noun

Definition of audit for English Language Learners

  • : a complete and careful examination of the financial records of a business or person

  • : a careful check or review of something


audit

verb

Definition of audit for English Language Learners

  • : to check the financial records of (a business or person) : to perform an audit on (a business or person)

  • : to attend a course at a college or university without having to do any of the course work and without receiving credit


AUDIT Defined for Kids

1

audit

noun au·dit \ ˈȯ-dət \

Definition of audit for Students

:a thorough check of business accounts

2

audit

verb

Definition of audit for Students

audited; auditing
:to thoroughly check the business records of

Law Dictionary

audit

noun au·dit \ ˈȯ-dət \

legal Definition of audit

:a formal examination of financial records often to uncover fraud or inaccurate tax returns; also :the final report of such an examination

audit

verb


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