Audit & Assurance

Audit & Assurance: What is Audit?

In the purest sense, auditors assess a set of company accounts to determine if they are a true and fair representation of the company's affairs on the accounts date.

Any company that earns over £10.5million in revenue UK is required to complete an audit by law. The audit provides comfort ('assurance') to the users of the accounts that an independent third party (the auditor) has examined the accounts and agrees with them.

Each individual line in a set of published accounts needs to be tested. Auditors do not test every transaction that led to that figure. Rather they perform two kinds of testing:

  • Substantive testing
  • Control testing

Substantive Testing

In substantive testing, an auditor will select a sample of transactions that go to produce a certain figure. For example, if we are testing the sales figure, we might select a number of sales and ask to see evidence of these sales. This might be copies of cheques from customers, purchase orders from customers or correspondence or contracts with customers. Auditors will test enough of these until they feel comfortable that the sales figure is correct.

Controls Testing

A control is a process in a company which is designed to reduce the risk of error or fraud. A good example is each payment requires two signatories, one person fills in the cheque and the second person signs it.

In companies where good controls exist, auditors can test the control rather than a sample of transactions. If they are satisfied the control works effectively, they will be comfortable of the final figure. For example, if customers purchase through a website, then the sales figure may be generated by a computer, and the auditors may be comfortable with this.

Common Misunderstandings about Auditors

Auditors do not:

  • Look for fraud, although they keep a lookout for it.
  • Check every transaction - just the ones that are 'material'.

An audit report is provided with every set of published accounts, where the auditors state their opinion of the accounts, and highlight any issues they had with their audit, if any. Auditors do not work for the client company, they work on behalf of the company's shareholders. Shareholders decide who will be the auditor of the company.

What will I do in my first year as an auditor?

This is a very common interview question.

In your first year as an auditor, you are likely to spend most of your time doing 'ticking' and training. For example, you might have a list of invoices on a spreadsheet, and you will be asked to go and find the invoices in the filing cabinet and agree them to the spreadsheet, documenting any errors or missing invoices. This is 'ticking' and is considered to be quite mundane work.

The training you receive will take up the rest of your time, and you will be required to work in the evenings and weekends to keep up with the courses.

  • It is worth pointing out that ICAEW ACA and similar exams are substantially harder than university or A-level exams. On average 25% of candidates fail at each sitting.

    Considering that accounting firms usually recruit people with strong degrees and A-levels, this demonstrates the difficulty of these exams, and consequently the amount of work required to pass them. Generally speaking, you will have to put your social life on hold during training time.

You will spend almost 100% of your working time at client offices, and very little time at your firms office, and consequently you may have to travel with the UK a fair amount. You are reimbursed your expenses. If you work in financial services audit (audit of insurance, banks etc), this will likely include extended hotel stays as well.

Internal & External Audit

A company will hire internal auditors to audit itself. They do this to maintain a high standard of control inside the organisation, and to reduce the amount of work done by external auditors.

An external auditor is another independent firm that comes in and performs audit work on behalf of the company or its shareholders. Firms such as PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young are examples of external auditors.

What is Forensic Accounting?

Forensic accounting is a particular form of investigative accounting work which may arise from actual or anticipated litigation.

Forensic accounting departments are specialised and usually have a specialised division within a firm. Conversely, graduates wishing to work in forensic accounting should apply to do so at the application stage as it is unlikely they will be able to switch later on.

Forensic accountants often work in:

More information about forensic accounting can be found here.