iSixSigma

Audit

Definition of Audit:

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The word “audit” is not one most people want to hear, especially if it has to do with their most recent tax filing. However, this kind of comprehensive, detail-oriented inspection actually is a powerful tool in business management. There are a lot of different kinds of audits and many different ways to put their findings to practical use.

Overview: What is an audit?

Audits compare what is on the surface with what is underneath. The technical definition of the word changes with the context, but this is the general idea. Audits are procedural inspections that operate within the scope of a specific framework. They can be internal or external, formal or informal. Whether an audit is good news or bad news depends on the situation.

3 benefits of audits

There are plenty of ways for companies to benefit from auditing practices. As long as leaders are willing to receive honest information and feedback, then they can be a great opportunity for positive change.

1. Objective perspective

Even though there are important differences between a voluntary internal audit and a mandated external one, good auditing is done with objectivity. That’s why individual auditors should avoid conflicts of interest or personal bias toward the people or systems they are analyzing. Objective insight is often more well-rounded and able to identity difficult issues, which makes it a powerful asset in business management.

2. Detailed data

Audits look for detail-driven data that goes beyond surface impressions and basic reports. Leaving no stone unturned can be a little intimidating for the department in question, but it also yields real, relevant and current data.

3. System-wide scaling

Auditing practices can be scaled up or down an organization depending on the demands of the situation. This means they can help companies identify problems that span multiple areas or time frames to start defining and addressing long-term issues.

Why are audits important to understand?

Business leaders need to understand auditing because they are going to encounter them in one form or another. Corporate offices audit their branches. Regulatory agencies audit members of their industry. Businesses audit their own departments. It’s just a fact of life.

1. Getting real answers

No matter what form an audit takes, its purpose is to get answers to specific questions. Leaders need to remember what questions they are asking so they can shape their auditing strategy around them.

2. Establishing credibility

When used appropriately, audits can provide credibility to your claims. This can be a big deal when attempting to persuade investors or convince stakeholders.

3. Integrity matters

Integrity matters with audits, even informal and internal ones. The people conducting the audit should be diplomatic, thorough and professional. Avoid anything that even hints at leniency, bias or compromise in the results.

An industry example of an audit

A manufacturing company makes and ships various equipment, machinery and parts for construction work. Over the last year, the manufacturer has been receiving an increasing number of reports from distributors about broken or faulty products being delivered at their locations.

The manufacturer sets up an internal audit with a group of people from within the company to find out the source. They spend time observing activity and inspecting each department directly to identify if the problem is in manufacturing, packing or delivery. Then they go through each process within that department to determine where the problem is and how it might be mitigated.

3 best practices when thinking about audits

Audits are only as effective as their design and execution. It’s not a perfect process, but it’s still a useful one if you follow a few basic best practices.

1. Audit in anticipation

Any company that faces the possibility of an external audit, particularly those in industries that face high regulatory responsibility, should conduct their own in anticipation. Formal internal audits should mimic the kind of inspection that the organization could or will face from the relevant authorities.

2. Stay in the open

Auditing should be done in the open. Hiding information or attempting to deceive employees involved can seriously damage morale. Instead, keep workers informed as much as appropriate and field questions willingly.

3. Encourage cooperation

Internal audits should be done with full cooperation of workers. If the goal is to find areas of improvement, bringing employees on board as part of the solution can make them feel like less of a target.

Frequently Asked Questions (FAQ) about audits

1. What are the types of financial audits?

Auditing is a common practice in the financial world, so it’s something every accountant must be ready to face. For businesses, financial audits are either internal, external or federal. In the US, federal tax audits are conducted by the Internal Revenue Service (IRS).

2. What is the purpose of audits?

The purpose of an audit is to find out the truth about a report or situation. Audits can reveal anything from the truth about a company’s financial activity to the efficacy of workplace safety preventative action practices.

3. What is audit risk?

Audit risks are the known and inherent factors that create a possibility of error in the final results. This includes things like personal error on the part of auditors, like overlooking a detail or making a minor mistake, or a problem with the inspection’s practices or scope.

Getting to the bottom

Sometimes businesses need to dig to the bottom before they can start growing upwards again. Every leader should understand basic auditing practices and be willing to use them when necessary. They can be painful and challenging, but it’s always better to address the truth about your company’s operation than dream in ignorance.

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