Accounting For Dummies®, 4th Edition

15.1. Exploring the Need for Audits

One reason for audits — especially for smaller private companies that do not employ professionally qualified accountants — is to have a second set of eyes look over the business's accounting methods and financial reports. The investors and lenders of a business are more comfortable having an audit. Indeed, they may demand an annual audit as a condition of putting their money in the business. After all, there's the possibility that not everything is on the up-and-up in the business and in its financial report.

I hope I'm not the first person to point this out to you, but the business world is not like Sunday school. Not everything is pure and straight. A business could deliberately deceive its investors and lenders with false or misleading numbers in its financial report. That's where audits come in. Audits are one means of keeping misleading financial reporting to a minimum.

In a sense, CPA auditors are like highway patrol officers who enforce traffic laws and issue tickets to keep speeding to a minimum. Or, if you prefer another analogy, a business having an independent accounting professional come in once a year to check up on its accounting is like a person getting a physical exam once a year. The audit exam may uncover problems that the business was not aware of, and knowing that the auditors come in once a year to take a close look at things keeps the business on its toes.

After completing an audit examination, the CPA prepares a short ...