auditing examination and statement of accounts and of other documents connected with accounts by persons who have had no part in their preparation. Systems of financial inspection have long been used, especially in connection with public accounts. In Italy the elaboration of commerce considerably increased the duties of an auditor in the late Middle Ages, but the auditing of business accounts did not become common until the 19th cent., when there were an increasing number of businesses continually growing in size and complexity. Corporate charters usually came to be granted only on condition that licensed experts conduct annual audits. Such audits are particularly useful to the owners (partners or stockholders); executives (managers, officers, and directors); creditors or prospective creditors (investors, note brokers, and commercial and investment bankers); and receivers, trustees, and creditors' committees of a business. Audits are also useful to the vendors of a firm's merchandise, the owners of patents and other recipients of profit shares or royalties, governmental regulatory bodies, and prospective donors to institutions. An audit settles certain categories of questions. It must determine whether all assets and liabilities shown are actual, and that they are properly incurred, valued, and recorded. A check must be made of the surplus, income, and capital-stock accounts, verified by the examination of the authorizations for stock issues and by comparing the amounts issued with the amounts authorized. Finally, auditing constitutes an independent check on the tendency to overstate assets and understate liabilities. The duties of auditors have even expanded into a comprehensive survey and analysis of the entire conduct of the financial and accounting branches of an enterprise. Thus the auditor needs, in addition to his knowledge of accounting , a broad understanding of business and finance. The accountant records the facts of a business; the auditor must determine whether or not such recording has been done accurately and honestly and then interpret and judge the facts, perhaps adding to his report recommendations for the future conduct of the business. In many countries, auditors are now established as a separate profession, requiring government licensing. In the United States, private audits are usually performed by certified public accountants; auditing of the federal government's accounts is conducted by Congress's Government Accountability Office (GAO). Formerly the General Accounting Office, it was established in 1921. The Internal Revenue Service periodically audits individual and corporate tax returns. The Public Company Accounting Oversight Board (established 2002) registers and regulates accountants and accounting firms that act as auditors.

Bibliography: See H. F. Stettler, Auditing Principles (3d ed. 1970); A. W. Holmes, Auditing (7th ed. 1971); V. B. Bavishi, International Accounting and Auditing Trends (1989); T. A. Lee, ed., The Evolution of Audit Thought and Practice (1989).

AUDIT

A systematic examination of financial or accounting records by a specialized inspector, called an auditor, to verify their accuracy and truthfulness. A hearing during which financial data are investigated for purposes of authentication.

The internal revenue service (IRS) conducts two types of audits, called examination of taxpayer returns, and they are typically conducted using one of two types of procedures. The most common auditing procedure involves correspondence between the service and the taxpayer or interviews with the taxpayer in a local IRS office. A less common method involves field audits whereby IRS officials conduct the audit at the taxpayer's home or place of business. Treas. Reg. § 601.105(b)(1). The service determines which audit procedure should be followed in a particular case. During an audit, an IRS official may question the taxpayer about a particular transaction or transactions that appear on the taxpayer's return or may conduct a thorough investigation of the taxpayer's entire tax return.

Although many people fear audits by the IRS, the percentage of returns examined by the IRS is relatively low. For example, of 108,034,700 returns filed by taxpayers in 1997, the IRS examined 1,662,641, or about 1.5 percent of the total number of returns. Despite this low number, several stories surfaced in the 1980s and 1990s regarding abuses by IRS officials, many of which occurred during the audit process. Congress responded by enacting two "Taxpayer Bill of Rights," first in 1989 and again in 1996. The second act, the taxpayer bill of rights 2, Pub. L. No. 104-168, 110 Stat. 1452, established and delegated authority to the Office of Taxpayer Advocate. This office is responsible for assisting taxpayers in resolving problems with the IRS, identifying areas where taxpayers have had problems with the service, and identifying potential legislative and regulatory changes that could mitigate problems between the IRS and taxpayers.

further readings

Baran, Daniel J. et al. 1997. IRS Audit Protection and Survival Guide. New York: Wiley.

cross-references

Internal Revenue Service.

au·dit / ˈôdit/ • n. an official inspection of an individual's or organization's accounts, typically by an independent body. ∎  a systematic review or assessment of something: a complete audit of flora and fauna at the site. • v. (-dit·ed , -dit·ing ) [tr.] 1. conduct an official financial examination of (an individual's or organization's accounts): companies must have their accounts audited. ∎  conduct a systematic review of: auditing obstetrical care. 2. attend (a class) informally, not for academic credit.

audit trail (paper trail) The sequence of documents, computer files, and other records examined during an audit, showing how a transaction has been dealt with by an organization from start to finish. Documents will require cross-referencing so the trail is not broken. For example, a sales transaction can be traced from the item of stock sold, to the invoice, through the sales day book, to the sales account, and finally to the bank account. See also computer-assisted audit techniques.

audit trail
1. A record showing the occurrence of specified events relevant to the security of a computer system. For example, an entry might be made in the audit trail whenever a user logs in or accesses a file. Examination of the audit trail may detect attempts at violating the security of the system and help to identify the violator.

2. The external file that contains the sequential flow of information between the application and a graphics system.

audit trail The data which can be extracted from a SYSTEM LOG or an AUDIT FILE and which can provide information about potential security violations. Most NETWORK OPERATING SYSTEMS enable the contents of an audit trail to be varied dynamically: one day it may be configured to contain data about attempted log-ins on the system, while on other days it may contain the locations of CLIENTS which call on the service provided by a SERVER.

audit (aw-dit) n. see clinical audit, nursing audit.

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