Financial audit facts for kids

A financial audit is like a super important check-up for a company's money records. It's done to see if the company's "financial statements" (which are like reports about their money) are correct and follow special rules. These rules are usually international accounting standards. Auditors gather proof to make sure the reports don't have big mistakes or wrong information.

What is a Financial Audit?

A financial audit gives a "reasonable assurance" that a company's money reports are fair and true. This means the auditors are pretty sure, but not 100% sure, everything is right. The main goal of an audit is to get an expert, independent look at these money reports. This makes the reports more trustworthy and helps people like investors feel more confident about putting their money into the company.

In the United States, auditors must give an official opinion about the company's financial statements in a special report. There are a few types of opinions they can give:

Different Audit Opinions

What is an Unqualified Opinion?

This is the best kind of opinion! An unqualified opinion means the auditors believe the company's financial reports are presented fairly and correctly. It's like getting a perfect score on a test.

What is a Qualified Opinion?

A qualified opinion means the reports are mostly fair, but there's one specific part that isn't quite right. This mistake isn't so big that it makes the whole report unreliable, but it's important enough to mention. Sometimes, a qualified opinion is given if the auditors couldn't check everything they needed to.

When Auditors Can't Give an Opinion

• A disclaimer means the auditors couldn't gather enough information to form an opinion. It's like saying, "We don't have enough facts to tell you if it's right or wrong." This can also happen if the auditors aren't truly independent from the company.
• An adverse opinion is the worst kind. It means the financial reports are not fair or correct because they don't follow the rules. The auditors must explain why the reports are wrong.

Who Does Financial Audits?

Financial audits are usually done by special companies called accounting firms. These firms have experts in financial reporting. Many companies also have their own "internal auditors." These internal auditors check the company's own systems, but they don't give the official opinion on the public financial reports. That's the job of "external auditors."

Around the world, most auditors follow rules called the International Standards on Auditing (ISA). These rules help make sure audits are done in a similar way everywhere. Audits help make sure companies are open and honest about their money. This can stop them from hiding bad dealings.

Audits are important because they help reduce the risk of big mistakes or even fraud in financial reports. A mistake could be an error, something left out, or using the wrong accounting rules. An error is "material" if it's big enough to change someone's decision about the company. Audits help people trust the information they get from companies.

The Big Four Audit Firms

You might hear about the Big Four accounting firms. These are the four largest international companies that offer audit services. They audit almost all the biggest publicly traded companies in the world. They are like a network of many smaller firms that work together under a common name and quality rules. The Big Four became what they are today after many mergers. They used to be known as the "Big Eight," then "Big Six," and "Big Five." The "Big Five" became the "Big Four" in 2002 after one firm, Arthur Andersen, closed down.

How Do Auditors Check Things?

Auditors use many ways to check a company's money records. They don't check every single transaction, but they use smart methods to get a good idea. Here are some things they do:

• Checking if numbers are added correctly.
• Looking at how the company controls its money.
• Counting physical items like inventory.
• Asking questions and getting confirmations from others.
• Watching how tasks are done.
• Looking at documents.
• Checking bank statements.
• Making sure assets (what the company owns) are real and liabilities (what the company owes) are correct.

What About Audit Costs?

The cost of an audit can change a lot. It depends on how big the company is, what kind of business it does, and how good its money records are. Companies and their auditors decide on the fees. The goal is to set a fee that is fair but also high enough so the audit quality isn't hurt. Sometimes, accounting firms use new tools like Artificial Intelligence (AI) to help them do audits more efficiently.

Becoming an Auditor

If you're interested in a career in financial auditing, there are several professional qualifications you can get. Some of these include:

• Certified Internal Auditor
• Certified General Accountant
• Chartered Certified Accountant
• Chartered Accountant
• Certified Public Accountant

See Also