Auditing

An audit is an investigation of activities. It is usually associated with the verification of financial records and practices. But the term may also refer to a verification of non-financial aspects of an organization. Audits are conducted periodically. Internal and external audit deals with financial data, while management audits deal with management practices.

Internal Audits

The purpose of internal audits is to examine financial reports in order to determine if they accurately and honestly reflect the financial condition of the firm. They are conducted by an organizations personnel.The major advantage of internal audit is that the people making the verification already have knowledge of the inner workings of the firm. Expenses for outside experts are not normally incurred.A problem with internal audits is that the individuals doing the auditing may lack the knowledge and skill to make the evaluation. They may also lack objectivity.

External Audits

External audits are conducted by persons outside the firm. The main advantage of such audits is objectivity. Public accounting firms are independent firms and are required by professional accounting standards to report financial conditions and practices as they actually exist. Another benefit is that professional accountants are more knowledgeable and skilled than internal auditors.

Management Audits

Sometimes called an organizational audit, this involves an evaluation of the overall operation of an organization—its mission, objectives, strategies, and other plans; the competency of its key personnel; its profitability; its resources, and its future direction.
Management audit may be conducted by personnel within the organization, or may be performed by public accounting firms or management consultants.Management audits force managers to look at both the specific aspects of the organizational activities and the organization as a whole. They also may reveal numerous opportunities to improve performance.