What is an audit?

What is an audit?

• A. The independent review of internal controls by management
• B. The independent examination of, and the expression of opinion on the financial statements by an appointed auditor
• C. The preparation of annual tax returns by the company
• D. The internal verification of assets and liabilities

Answer: (B)

An audit is an external, independent check of a company’s financial statements, done by an auditor who is not part of the business. The main purpose is to gather evidence about the numbers and disclosures and to form an opinion on whether the financial statements present a true and fair view (or comply with the applicable accounting framework). The auditor’s independence is essential so that the opinion is credible to users such as investors and lenders. The correct description is the independent examination of the financial statements, with the auditor expressing an opinion on whether they show a true and fair view in accordance with the relevant framework, by someone appointed to do the job. The other options describe activities that do not meet this external, opinion-based standard: management reviewing internal controls is not independent and does not involve issuing an external opinion on the financial statements; preparing tax returns is a tax service, not an audit; and internal verification of assets and liabilities is an internal control activity, not an external examination with a formal opinion.

An audit is an external, independent check of a company’s financial statements, done by an auditor who is not part of the business. The main purpose is to gather evidence about the numbers and disclosures and to form an opinion on whether the financial statements present a true and fair view (or comply with the applicable accounting framework). The auditor’s independence is essential so that the opinion is credible to users such as investors and lenders.

The correct description is the independent examination of the financial statements, with the auditor expressing an opinion on whether they show a true and fair view in accordance with the relevant framework, by someone appointed to do the job.

The other options describe activities that do not meet this external, opinion-based standard: management reviewing internal controls is not independent and does not involve issuing an external opinion on the financial statements; preparing tax returns is a tax service, not an audit; and internal verification of assets and liabilities is an internal control activity, not an external examination with a formal opinion.