An audit is a methodical examination or review of a condition or situation. It is meant to evaluate a person, organization, system, process, or product. In finance terms, an audit usually refers specifically to the audit of financial statements.
A regular audit of financial statements is important for any company or legal entity because it not only ensures the accuracy of information entered into the financial ledgers thus preventing possible losses due to simple mistakes. At the end of every financial audit a detailed report is submitted by the auditor(s) containing not just the figures taken straight out of the financial ledgers but also any other relevant findings, including any recommendations, depending on the purpose of the audit. These reports are made available to a company’s partners and stockholders.
There are two kinds of audits: internal audits and external audits. Internal audits are conducted by an in-house accounting department of an institution, usually for the purpose of catching mistakes in their financial ledgers. A neutral third-party accounting firm conducts external audits. The purpose of external audits is not just to ensure the accuracy of financial ledgers but also to certify that there is no internal rigging (i.e. corruption) happening within the institution being audited.
Some of the other reasons for financial audits, aside from oversight functions, include assessment of a person or business’ capability to pay a loan (can result in approval/disapproval), business mergers and buyouts, and taxation.