The Role of Auditors in the Accounting Process

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  • 0:01 What Is an Auditor?
  • 0:49 What Do They Do?
  • 1:52 Audit Process
  • 5:30 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Auditors play a pivotal role in the accounting industry. In this lesson, you will learn what an auditor is, what they do, and the steps in the auditing process.

What Is an Auditor?

Audit. . . just the sound of the word makes many people cringe. The first thing that comes to mind when I heard the word is tax audits. I just can't picture an auditor coming to look through every nook and cranny that I have, looking for something that I failed to report on my taxes. The reality of that is that audits are actually a good thing, and auditors aren't crotchety old people that resemble Scrooge.

An auditor, for the purpose of accounting, is a person whose job it is to make sure that information reported on financial statements is true and accurate and that the financial statements are prepared according to GAAP principles. GAAP, which is short for generally accepted accounting principles, are the guidelines for financial reporting that accounting professionals must follow.

What Do They Do?

Hard to believe, but the most important thing that an auditor does is to form an opinion. Anybody can do that, right? Well, maybe so, but an auditor's opinion is not just any old opinion. His opinion makes or breaks the reliability of financial statement information. You see, GAAP protocol on financial reporting requires that an auditor's opinion be a part of notes to the financial statements. Notes to the financial statements are footnotes that appear at the bottom of the reports that give financial statement users added details about items that appear on the statements.

The general assumption for the purpose of financial statement auditing is that the auditor will form his own independent opinion based solely on the information collected in the audit. If the auditor's opinion doesn't appear on the financial statements, then they don't meet the set standards. Audited financial statements that contain the concise, written opinion of an independent auditor are deemed to be true, valid and reliable.

Audit Process

Now that you know what auditors are and what they do, let's talk about the audit process in accounting. This type of audit is called a financial audit. A financial audit is an audit that examines the financial records of a company. There are six basic steps that must be completed when performing a financial audit.

The first thing that an auditor would do is to look at the way that financial information is given to the accounting department from other departments. Auditors look for timeliness in getting documents, such as receipts, invoices, bank statements, and payment records, from each individual department to the accounting department. The time line of this activity can and will affect when revenue and expenses are recognized.

Meet Jessie. Jessie is an auditor and has been asked to audit Wasabi International. In order to begin the audit, he has to gather certain information. Jessie asks Emma, a clerk in the accounting department of Wasabi International, to show him the company's protocol for transferring financial data to the accounting department. Emma brings Jessie the policies and procedures manual for Wasabi International and shows him the section requiring that any receipts, invoices, bank statements, and payment activity information be handed directly to the accounting clerk by department heads.

The second thing that an auditor would do for a financial audit is to look at the company policy on record keeping. Does the company keep things like deposit slips, credit card receipts, sales invoices, and copies of bills for an appropriate time period? The recommendation is to keep all documents that are related to a specific accounting period for at least the duration of the period.

Jessie notes that the manual says that all accounting information will be kept for a minimum of one calendar year in the office of the company accountant and then transferred to the company warehouse to be kept for an additional 6-year period.

The third thing that would be done by an auditor would be to look at each component of the accounting system that the company uses. Specifically, the auditor is looking for the debits and credits to each account as transactions are entered during the accounting period. In other words, as Jessie will make sure that when a bill is paid by the company, the balance in the expense account increases and the balance in the cash account decreases.

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