I. Reading: What Is an Audit?                     *Teacher’s Copy*

 An audit is the examination of the financial report of an organization - as presented in the annual report - by someone independent of that organization. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.

The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organization at a given date, for example:

• Are details of what is owned and what the organization owes properly recorded in the balance sheet?

• Are profits or losses properly assessed?

When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work. With some exceptions, all organizations subject to the Corporations Act must have an audit each year. Other organizations may require or request an audit depending on their structure and ownership or for a special purpose.

Who Gets Audited and Why

The types of auditing clients and the reasons they require audits are, of course, expansive. Here is a short list of clients and types of audits:

• Publicly run companies: Public companies sell their shares of stock to investors and must be audited by independent auditors. The main reasons for the audit are to provide reasonable assurance that the financial statements are free from material misstatements and errors and to ensure that all events that can adversely affect the company have been disclosed.
• Companies with state or federal contracts: U.S. companies doing business with the government are also frequently subject to audit. These audits ensure that the companies have been complying with the terms and conditions of the contracts.
• Companies requiring bonding: Bonding companies all have different rates, requirements, and standards. Some companies are very liberal about whom they approve, while others approve only those clients with great credit ratings. With these differences come different premium rates, and some companies even require cash collateral. The purpose of an audit is to make sure that the facts the business provides to the bonding company are accurate so that the bonding company can evaluate risk and charge the customer an appropriate rate.
• Governmental and tax-exempt entities: Government audits include those for federal, state, and local governments and Indian tribal governments. For example, financial statement audits are conducted for American Indian tribes that operate casinos to make sure they comply with state gaming requirements. In the case of governmental agencies, these funds come from tax dollars. Your audit reports on how well government programs and policies are meeting their objectives.

II. Vocabulary & Definitions

1. examination
   the act of looking at something closely (as for mistakes)
   EXAMPLE SENTENCE:

   An audit is the examination of the financial report of an organization - as presented in the annual report - by someone independent of that organization.
2. equity
   the difference between the market value of a property and the claims held against it
   EXAMPLE SENTENCE:

   You can drive sales for awhile, but building lasting equity value is more challenging.
3. summary
   briefly giving the gist of something
   EXAMPLE SENTENCE:

   The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
4. examine
   observe, check out, and look over carefully or inspect
   EXAMPLE SENTENCE:

   When examining the financial report, auditors must follow auditing standards which are set by a government body.
5. exception
   an instance that does not conform to a rule or generalization
   EXAMPLE SENTENCE:

   With some exceptions, all organizations subject to the Corporations Act must have an audit each year.
6. structure
   a thing constructed; a complex entity constructed of many parts
   EXAMPLE SENTENCE:

   Other organizations may require or request an audit depending on their structure and ownership or for a special purpose.
7. assurance
   a binding commitment to do or give or refrain from something
   EXAMPLE SENTENCE:

   The main reasons for the audit are to provide reasonable assurance that the financial statements are free from material misstatements and errors and to ensure that all events that can adversely affect the company have been disclosed.
8. error
   a wrong action attributable to bad judgment or ignorance or inattention
   EXAMPLE SENTENCE:

   The audit discovered many accounting errors.
9. comply
   act in accordance with rules, commands, or wishes
   EXAMPLE SENTENCE:

   These audits ensure that the companies have been complying with the terms and conditions of the contracts.
10. requirement
    something wanted or needed: necessity       EXAMPLE SENTENCE:                                                                                                                                                                                              Bonding companies all have different rates, requirements, and standards.
11. approve
    judge to be right or commendable; think well of
    EXAMPLE SENTENCE:

    Some companies are very liberal about whom they approve, while others approve only those clients with great credit ratings.
12. collateral

    a security pledged for the repayment of a loan

    EXAMPLE SENTENCE:

    With these differences come different premium rates, and some companies even require cash collateral.
13. accurate

    (of ideas, images, representations, expressions) characterized by perfect conformity to fact or truth ; strictly correct

    EXAMPLE SENTENCE:

    The audit showed that the corporation had been very accurate in its financial reporting.
14. evaluate

    evaluate or estimate the nature, quality, ability, extent, or significance of

    EXAMPLE SENTENCE:

    The purpose of an audit is to make sure that the facts the business provides to the bonding company are accurate so that the bonding company can evaluate risk and charge the customer an appropriate rate.
15. risk

    a source of danger; a possibility of incurring loss or misfortune

    EXAMPLE SENTENCE:

    The accountants calculated the risk that each investment held.
16. exempt

    (of persons) freed from or not subject to an obligation or liability (as e.g. taxes) to which others or other things are subject

    EXAMPLE SENTENCE:

    The government refused to accept that the company was exempt from paying taxes.
17. entity

    that which is perceived or known or inferred to have its own distinct existence (living or nonliving)

    EXAMPLE SENTENCE:

    These governmental and tax-exempt entities are audited on a case-by-case basis.
18. conduct

    (behavioral attributes) the way a person behaves toward other people

    EXAMPLE SENTENCE:

    For example, financial statement audits are conducted for American Indian tribes that operate casinos to make sure they comply with state gaming requirements.
19. funds

    assets in the form of money

    EXAMPLE SENTENCE:

    In the case of governmental agencies, these funds come from tax dollars.
20. program
    a system of projects or services intended to meet a public need
    EXAMPLE SENTENCE:

    All government programs are audited annually.