An Investigation Of An Audit

1561 Words Jan 14th, 2016 7 Pages
An audit can be described as an official inspection of an organization 's accounts and is typically conducted by an independent body. Companies often hire external auditors in addition to auditing themselves. External auditors are accountants who work independently of a particular company. They examine company records and operations to ensure financial statements are accurate. External auditors are important to establishing your small business ' credibility and to ensuring compliance with tax laws. There are many reasons for an external audit to take place, such as that information becomes more reliable and useful as a result of the audit. This is known as an information hypothesis. Another justification for an audit is insurance hypothesis. This is when audit services are demanded to reduce the information risk to users of financial statements. Information risk is the risk that user decisions may be based on incorrect information. Therefore, auditors are demanded to reduce losses due to faulty decisions resulting from errors or irregularities in the financial statements. Agency theory is also a very important justification to perform an audit. It involves the problem of directors controlling a company whilst shareholders own the company. In the past, a problem was identified whereby the directors might not act in the shareholders (or other stakeholders) best interests. Agents recognise the need for the reports to be verified by a party…

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