audit
An independent examination and verification of a company's financial statements, records, and internal controls by a certified public accountant.
Example
“The public company's annual audit by KPMG confirmed its financial statements fairly represented its financial position.”
Memory Tip
AUDIT = an independent HEARING of your financial records. From Latin 'audire' (to hear).
Why It Matters
Understanding audits helps you trust the financial information companies share with investors and the public. When you invest in stocks or consider doing business with a company, knowing that an independent auditor has verified their financial statements gives you confidence that the numbers are accurate and reliable.
Common Misconception
Many people believe that audits are designed to catch fraud or find all errors in a company's accounting. In reality, audits focus on whether financial statements are presented fairly and follow accounting standards, and auditors are not required to discover every single mistake or intentional wrongdoing.
In Practice
A mid-sized manufacturing company with 500 employees hires an external auditor to examine their 2023 financial records. The auditor reviews bank statements, inventory records, and expense documentation across the year, testing transactions and internal controls. After several weeks of work, the auditor issues a report confirming the company's reported revenue of 50 million dollars and expenses of 38 million dollars are fairly presented, allowing the company to confidently present these numbers to their bank for a loan application.
Etymology
From Latin 'audire' (to hear) — originally, accounts were HEARD (read aloud) before an official.
Common Misspellings
Small business accounting made simple
Related Terms
More in accounting
Other accounting terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.