Whether you’re considering a career in accounting or seeking to understand this critical business function, auditing plays a fundamental role in ensuring financial transparency and effective business operations. This comprehensive guide explains what auditing means, explores different types of audits, and outlines the career opportunities available in this essential field.
Auditing is the systematic examination and verification of an organization’s financial records, transactions, and statements to ensure accuracy, compliance with regulations, and adherence to accounting standards. Professional auditors provide independent assessments that help maintain trust in financial reporting and business operations.
What is Auditing? Definition and Purpose
Financial auditing is the process of examining an organization’s (or individual’s) financial records to determine if they are accurate and in accordance with applicable rules, including accepted accounting standards, regulations, and laws. This critical process serves multiple stakeholders, including investors, lenders, regulatory agencies, and management teams.
The primary purpose of auditing is to provide an independent, objective assessment of financial information to enhance stakeholder confidence and ensure regulatory compliance.
Professional auditors examine various financial documents, including balance sheets, income statements, cash flow statements, and supporting documentation. They test internal controls, verify transactions, and assess whether financial statements present a fair and accurate picture of the organization’s financial position.
For those interested in pursuing this career path, understanding the fundamentals of auditing is essential. Becoming an accountant often involves developing auditing skills, whether you plan to work in public accounting, corporate finance, or government agencies.
Types of Financial Audits
Nearly all companies undergo audits of their annual financial statements, including cash flow statements, balance sheets, and income statements. Some businesses conduct audits to meet industry regulations or legal requirements, while stakeholders or potential investors may also require them. Understanding the different types of audits helps clarify their specific purposes and scope.
Internal Auditing
An internal audit is typically conducted in-house, focusing on process assessments, control evaluations, asset protection, and legal compliance. Internal auditors work as employees within an organization to examine records and help improve internal processes, including operations, internal controls, risk management, and governance.
The internal audit function is designed to add value to the company by identifying inefficiencies, recommending improvements, and ensuring compliance with policies and procedures. Business leaders initiate these audits, which are performed by dedicated audit teams. The audit committee or directors with equivalent authorization determine the scope of internal audits.
Internal audit reports are issued to management teams, and the results facilitate improvements in internal controls, potentially triggering organizational changes. Companies without in-house auditors often engage consultant auditors who conduct internal audits based on the company’s specific standards.
External Auditing
External audits are conducted by independent parties, such as certified public accounting firms, following standards that differ from the company’s internal procedures. Utilizing third-party auditors eliminates certain biases, providing an honest and candid assessment of the organization’s financial position without affecting internal relationships or the work environment.
Similar to internal audits, the main objective of an external audit is to verify the accuracy of accounting records. Lenders and investors typically require external audits to verify that the company’s financial data and information are accurate and fair. Securities and Exchange Commission (SEC) regulations require all public companies to have their financial statements audited by an external auditor.
IRS Audits
The Internal Revenue Service (IRS) performs routine audits to verify taxpayers’ specific transactions and returns. While getting audited by the IRS often carries negative implications and is viewed as evidence of wrongdoing, being selected doesn’t automatically mean you did something wrong.
The selection formula for IRS audits is based on statistical analysis that compares a taxpayer’s returns to those of similar taxpayers. Individuals may also be chosen if they’re associated with a company or person whose audit uncovered tax errors.
Forensic Auditing
A forensic audit assesses and evaluates a person’s or company’s financial information to gather facts that support legal cases. Forensic audits handle investigative work to gather evidence for the successful prosecution of various financial crimes. Forensic auditors can also serve as expert witnesses during trials.
Forensic audits necessitate meticulous planning, thorough evidence collection, and comprehensive reporting. Common scenarios include corruption cases, asset misappropriation, financial statement fraud, due diligence during mergers and acquisitions, and investigations into property theft.
Auditing Standards and Regulations
Professional auditing operates under strict standards to ensure consistency, reliability, and compliance across the industry. Understanding these standards is essential for anyone pursuing a CPA certification or a career in accounting.
PCAOB Standards
The Public Company Accounting Oversight Board (PCAOB) maintains external auditing standards for public companies (issuers) registered with the Securities and Exchange Commission (SEC). As of recent updates, the PCAOB has 15 permanent standards approved by the SEC and numerous interim standards that reflect generally accepted auditing standards.
AICPA Guidelines
The Auditing Standards Board (ASB), part of the American Institute of CPAs (AICPA), issues Statements on Auditing Standards (SASs) that apply to preparing and releasing audit reports for nonissuers (companies not required to register with the SEC). AICPA members who audit nonissuers must comply with these standards, as outlined in the AICPA Code of Professional Conduct.
Internal Auditing Framework
For internal auditing, the Institute of Internal Auditors provides a conceptual framework known as the International Professional Practices Framework (IPPF), which guides internal audits. Some guidance is mandatory, while other recommendations are strongly encouraged but not legally required.
Career Opportunities and Education in Auditing
Auditing offers diverse career paths with strong earning potential and job security. Whether you’re interested in working for a large accounting firm, a corporation, or a government agency, understanding the educational requirements and career progression is essential for success.
Education Requirements
Most auditing positions require a bachelor’s degree in accounting, finance, or a related field of study. Many employers prefer candidates with additional qualifications, such as:
- CPA certification (required for signing audit opinions)
- Master’s degree in accounting or business administration
- Specialized certifications (CIA for internal auditors, CFE for fraud examination)
- 150 credit hours of education (required for CPA licensure)
Students interested in auditing careers should focus on coursework in financial accounting, auditing principles, business law, and information systems. Accounting education programs vary by state, with each having specific requirements for obtaining a CPA license.
Auditor Salary and Career Progression
Auditing professionals enjoy competitive salaries that increase with experience and specialization. The following table shows typical salary ranges based on experience level and position:
Geographic location significantly impacts earning potential. The top-paying states for accountants and auditors include:
These figures represent May 2024 data from the Bureau of Labor Statistics, showing strong earning potential nationwide. Career advancement often involves transitioning from staff auditor to senior positions, with many professionals eventually becoming partners in accounting firms or CFOs in corporations.
Audit Planning and Process
Successful auditing requires careful planning and systematic execution. Understanding the audit process helps both auditors and organizations prepare for effective engagements.
Planning Phase
Audit planning involves determining the overall audit strategy and developing a comprehensive audit plan. Auditing Standard No. 9 from the PCAOB outlines the responsibilities and requirements of external auditors in planning audits.
According to professional standards, an audit plan should describe:
- Planned the nature, extent, and timing of risk assessment procedures
- Tests to be performed on controls and substantive procedures
- Other audit procedures are planned to ensure compliance with professional standards
- Resource allocation and timeline considerations
Internal Audit Planning
For internal auditing, planning starts with determining the scope and objectives of the audit. Internal auditors must understand the business, operations, and unique characteristics of the department or unit being audited. They develop audit plans defining the procedures needed for efficient and effective audits.
This planning phase is crucial for audit success and typically involves risk assessment, resource planning, and stakeholder communication to ensure all parties understand the audit objectives and process.
Why Auditing Matters for Businesses and Society
Regular audits help businesses understand their operations better and maintain stakeholder confidence. This function is essential for organizations of all sizes and should be conducted by qualified and objective experts.
Auditing serves several critical functions in the modern economy:
- Investor Protection: Provides assurance that financial statements fairly represent company performance
- Fraud Detection: Identifies irregularities and potential fraudulent activities
- Regulatory Compliance: Ensures adherence to laws and industry regulations
- Operational Improvement: Identifies inefficiencies and recommends improvements
- Risk Management: Assesses and helps mitigate business risks
The accounting profession continues to evolve in response to technological advancements and shifting business needs. Understanding the differences between accounting and auditing helps professionals choose their career paths and specializations.
Frequently Asked Questions
What’s the difference between internal and external auditing?
Internal auditing is performed by employees within the organization to improve operations and ensure compliance with internal policies. External auditing is conducted by independent third parties to provide unbiased assessments of financial statements for stakeholders and regulatory compliance.
What education is required to become an auditor?
Most auditing positions require a bachelor’s degree in accounting, finance, or a related field of study. Many employers prefer candidates with a CPA certification, which requires 150 credit hours of education and passing the CPA exam. Some positions may require additional certifications, such as CIA (Certified Internal Auditor) or CFE (Certified Fraud Examiner).
How much do auditors earn?
Auditor salaries vary by experience level, location, and specialization. Entry-level staff auditors typically earn between $55,000 and $70,000 annually, while experienced audit managers can earn between $90,000 and $120,000. Senior partners and directors in major accounting firms often earn $200,000 or more annually.
Is auditing a good career choice?
Auditing offers strong career prospects with job security, competitive salaries, and opportunities for advancement. The profession provides transferable skills that are valuable in many industries, including financial analysis, risk assessment, and business consulting. Many auditors eventually transition to executive roles in corporations or start their own practices.
What skills are important for auditors?
Successful auditors need strong analytical skills, attention to detail, and excellent communication abilities. Technical skills include understanding accounting principles, proficiency in audit software, and knowledge of relevant regulations. Soft skills, such as professional skepticism, integrity, and the ability to work independently, are equally important.
How long does an audit typically take?
The audit duration varies based on the company’s size, complexity, and scope of the audit. Small company audits typically take 2-4 weeks, while audits for large corporations can require several months. Internal audits generally are shorter and more focused, often completed within one to two weeks for specific departments or processes.
What’s the difference between auditing and accounting?
Accounting involves recording, summarizing, and reporting financial transactions, while auditing involves examining and verifying the accuracy of these financial records. Accountants create financial statements, while auditors review and provide opinions on their accuracy and compliance with established standards.
May 2024 Bureau of Labor Statistics salary data for Accountants and Auditors reflect state and national data, not school-specific information. Conditions in your area may vary. Data accessed June 2025.
