Audit

Audits provide assurance. Investors, lenders, regulators and others rely on financial statements, so they need confidence that the figures are reliable. An auditor examines the evidence behind the numbers and gives an opinion.

Auditors test transactions and balances, check that assets exist and are valued correctly, confirm balances with banks and customers, review estimates and judgments, assess internal controls and look for signs of error or fraud. They usually work on a sample basis rather than checking every transaction.

For example, an auditor might confirm a company's bank balances directly with its banks, attend the year-end inventory count and test a sample of sales invoices against delivery records.

There are different kinds of audit. An external audit is carried out by an independent firm and results in a public opinion on the financial statements. An internal audit is performed by a company's own staff or advisers to help management improve controls and processes.

Most countries require large companies and listed companies to have an annual external audit. An audit gives reasonable, not absolute, assurance: it cannot guarantee that the statements are free of all errors or fraud.