Real Estate Accounting Made Easy, 2nd Edition

17AUDITS

As this book has shown, there are numerous participants in the real estate industry, and the stakes are almost always very high. Real estate requires relatively huge capital, and most of the time that capital comes from numerous sources. For capital to flow throughout the industry there has to be trust among the market participants and a system of checks and balances. Audits help provide this comfort and assurance.

In this chapter we discuss auditing: what it means, who performs audits, and how they are performed. In addition, we discuss the types of audits and their users.

“Auditing” has been defined by the American Accounting Association as “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.”¹ This definition has been the most widely used. It is the most comprehensive definition of auditing, regardless of the type and nature of audit.

AUDIT OVERVIEW

In performing an audit, the auditor tests management's assertions regarding the financial statements. According to the Statement of Auditing Standards (SAS) 31, Evidential Matter, these assertions are:

• Existence or occurrence
• Completeness
• Rights and obligations
• Valuation or allocation
• Presentation and disclosure

It is important to fully understand the meaning of these management assertions. In their book, ...