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Audit: Definition, Functions, and 5 Types

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In terms of finance and accounting, there are many things that need to be considered when monitoring financial statement records. Starting from the entry and exit of the money, so a system is needed that aims to double-check every financial record either incoming or outgoing reports.

Therefore, an audit system is required at every final stage of recording financial statements before they are submitted to the board of directors. Audit is very important because audit consists of various special stages to check and inspect each report.

In this article, we will explain the meaning and concept of auditing along with the types of audits and also the function of auditing as a series of checks on a report, especially on financial statements. 

Definition of Audit

An audit is a process of inspection and investigation that reveals the ins and outs of a report on an organization or company. Behind a pile of documents and financial data lies the story of how the organization manages its resources.

Audits are designed to trace the trail of obscurity, ensuring that the reports in an organization have carried out their duties with full accountability and in accordance with applicable rules.

More than just a financial check, audit has become the gatekeeper of integrity. Auditor, they are reliable investigators, diving into a sea of numbers and data, looking for any irregularities that may lurk. Their analytical acumen dissects every transaction, ensuring that every dollar spent has been properly accounted for.

Audits not only focus on the past, but also reach into the future. By identifying weaknesses and inefficiencies, audits pave the way for improvement and progress. Auditor recommendations are like a roadmap that leads the organization to better governance and a brighter future.

Audits in financial reports serve to monitor and re-scan whether there are input and writing errors in each financial report both on income and expenses. So that the financial statements match the conditions in the field.

Audit Function

Audit as an effective financial watchdog plays an important role in ensuring the financial and operational health of an organization. Its function goes beyond just checking numbers and records, but has a far-reaching impact on the sustainability and trustworthiness of the organization.

Here are the 3 main functions of an audit.

1. Ensure the fairness of the presentation of financial statements

The primary function of an audit is to ensure the fairness of the presentation of financial statements. Auditors, like financial detectives, scrutinize financial statements to ensure their accuracy and compliance with applicable accounting standards. 

This process aims to uncover potential recording errors, financial fraud, or data manipulation, so that users of financial statements, such as investors and creditors, can make informed decisions based on reliable information.

2. Internal control instruments

In addition, audits serve as an internal control tool. By examining an organization's compliance with established regulations and procedures, an audit can identify potential irregularities or inefficiencies in business processes. 

Auditors are like observant advisors, providing recommendations for improvement to close the gap of weaknesses and optimize the operation of the organization. This has an impact on increasing the effectiveness and efficiency of the use of organizational resources, so that it can better achieve its goals.

3. Increase credibility and trust

It also increases credibility and trust in the organization. Audit report which states that the examination results are reasonable and in accordance with the standards, is a positive signal for stakeholders. 

This can increase investor confidence to invest, attract creditors to provide loans, and build a positive image in the eyes of the public. Thus, audits play an important role in strengthening an organization's position and competitiveness in a competitive business environment.

Types of Audits

The world of auditing is vast with different types and focuses, each having an important role in ensuring the smooth running and accountability of various organizations. Hence, audits are divided into different types based on several related elements. Here are some common types of audits:

1. Based on Auditor's Opinion

  • A Reasonable Without Modification (WTM) Audit: In the highest opinion of an auditor, that is if the auditor states that the financial statements have been presented fairly in accordance with Financial Accounting Standards (SAK).
  • Fair Audit with Limited Modification (WMTD): In this case, the auditor will opine if there is some impropriety in the financial statements, but it does not have a significant impact on the overall report.
  • Unfair Audit (TW): The auditor is of the opinion that there are material irregularities or sources included in the financial statements that have a significant impact on the overall report.
  • Statement of Refusal to Accept Opinion (PPMO): The auditor is unable to provide an opinion due to limitations in the scope of the audit or insufficient information. For example, the sources used are limited. So the report must be redrafted.

2. Based on the Scope of the Audit Object

  • Financial Statement Audit:  This type focuses on examining and checking the fairness of the presentation of financial statements in accordance with SAK.
  • Compliance Audit: Ensuring organizational compliance with applicable regulations, laws, or contracts. Generally carried out by an independent person who is not included in the scope of the organization or company such as the Director General of Taxes, and so on.
  • Operational Audit: Evaluate the effectiveness and efficiency of an organization's operations in achieving its goals. In this type of audit, the effectiveness of the work and operations of an organization or company will be examined.
  • Investigative Audit: Examine allegations of fraud or violations that occur in the organization.

3. Based on the Party Conducting the Audit

  • Internal Audit: Conducted by internal auditors who are part of the organization itself.
  • External Audit: Performed by an external auditor who is independent of the organization being audited.
  • Government Audits: Performed by the Supreme Audit Agency (BPK) or other government auditor agencies.

4. Based on Audit Objective

  • Financial Audit: Focuses on the fairness of financial statement presentation and compliance with accounting regulations.
  • Performance Audit: Evaluate the effectiveness and efficiency of the organization in achieving its goals.
  • Audit Management System: Ensure the security, reliability and availability of information systems.
  • Compliance Audit: Ensure organizational compliance with applicable laws, regulations, or contracts.

5. By Audit Subject

  • Business Entity Audit: Conducting audits of companies, cooperatives, or other business entities.
  • Auditing Nonprofit Organizations: Conduct audits of non-profit organizations such as foundations, non-governmental organizations (NGOs), and other social organizations.
  • Audit of Public Entities: Conducting audits of government agencies, SOEs, and other public organizations.

The following types of audits reflect the diverse focus and objectives of the audits performed. Understanding these types of audits is important to determine the right type of audit to achieve the desired objectives.

This is the explanation of this article regarding the meaning of audits, starting from the definition, the function of audits for organizations and companies in monitoring and checking financial statements and performance, as well as the types based on the preferences and needs of companies and organizations.

Audit becomes a trusted financial watchdog, ensuring organizations and companies operate within the rules and manage resources well. 

Through various types of examinations, audits ensure the accuracy of financial statements, identify inefficiencies, and build organizational credibility. This provides a solid foundation for the organization to achieve long-term success.

The audit concept can be applied in a more practical and detailed application. Audithink can assist you in developing audit software for companies and organizations in the audit process. Start trying out Audithink's exciting features by starting with request demo now.