What is Auditing?

What is Auditing?

Definition 1

Audit is an independent examination (1) defined as the systematic process (2) of objectively obtaining and evaluating evidence regarding assertions about economic actions & events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results (3) to interested users.

Definition 2

Auditing as defined by the American Accounting Association Committee on Basic Auditing Concepts:

‘A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.’

Definition 3

Auditing is the accumulation and evaluation of evidence about information to determine and

report on the degree of correspondence between the information and established criteria.

Auditing should be done by a competent, independent person.

1. Auditing = Checking financial records carefully to see if they are true and fair.
2. Auditor writes a report to show opinion if the financial statements follow laws & standards.

(1) Independent examination

An independent examination is a neutral, objective appraisal of financial information (often the financial statements) by someone free from bias, conflicts, and undue influence from management or owners.

Why “independent” matters:

It preserves objectivity and credibility—so users can trust the conclusions. Independence has two dimensions:

In mind

actual unbiased judgement.

In appearance

no relationships that look compromising (e.g., financial interests, close family ties).

What it involves:

A systematic process of obtaining and evaluating evidence against established criteria (e.g., MFRS/IFRS, laws, policies), then communicating results (usually an auditor’s report with an opinion).

Who can do it:

A suitably qualified practitioner (external auditor) who meets ethical and independence requirements (e.g., professional code, firm safeguards, partner rotation where applicable).

Outputs:

• Audit opinion (unmodified/qualified/adverse/disclaimer) and required report sections.
• Communications to Those Charged with Governance and management (e.g., control deficiencies).

Not to confuse:

• Review engagement = limited assurance (primarily inquiry/analytics).
• Compilation = no assurance.

An audit (independent examination) provides reasonable assurance, higher than a review.

(2) The systematic process 

Meaning:

·   Audit is not random checking.

·   It follows a structured, professional methodology guided by auditing standards (e.g. ISA).

Typical stages in that process:

1.      Planning & risk assessment

o    Understand the business, industry, internal controls, fraud risk.

o    Identify areas most likely to be misstated.

2.      Designing audit procedures

o    Decide what evidence is needed, how to gather it (tests of controls, substantive tests, confirmations, inspection, recalculation, analytical procedures).

3.      Obtaining and evaluating evidence

o    Perform the tests, document results, evaluate whether evidence is sufficient and appropriate.

4.      Forming a conclusion

o    Judge whether the financial statements are fairly presented.

5.      Communicating the result

o    Issue a written audit report to shareholders and other users.

Why it matters:

·         Because it’s systematic, two different competent auditors applying the same standards should reach broadly similar conclusions.

·         It also supports audit quality, accountability, and the ability to defend the opinion in court/regulation.

In simple terms:
“Systematic process” means audit is done using a planned, step-by-step professional approach and not guesswork in order to gather reliable evidence and reach a defendable opinion.

(3) Communicating the results

“Communicating the results” means how the auditor formally tells users what was found and the opinion reached.

In practice:

Primary vehicle: the Independent Auditor’s Report to shareholders (or those charged with governance).

What it contains (ISA 700/705/706/701):

• Opinion (unmodified / qualified / adverse / disclaimer).
• Basis for Opinion (key reasons, independence & ethics statement).
• Key Audit Matters (KAMs) for listed entities (what was most significant and how it was addressed).
• Going Concern conclusions (and any material uncertainty).
• Other information section (e.g., annual report consistency).
• Responsibilities of management and the auditor.
• Report date, auditor’s name, firm, location.

• Other communications (not the opinion itself, but part of “results”):

  • Report to Those Charged with Governance (ISA 260): significant findings, scope, audit strategy, independence.
  • Management letter: control deficiencies and recommendations.
  • Regulatory communications where required.

In simple terms:

It’s the auditor’s formal reporting of conclusions and significant findings—primarily via the audit opinion and related required communications—to the users who rely on the financial statements.