Companies are of two types public listed companies and private companies. Public listed companies means companies owned by government and private companies are those that are owned by individual or group of people, family or related people. Sole trader, partnership and limited liability companies (Ltd) are types of private (pvt) business/companies. Audit necessity, importance and meaning can be understood by looking at the structure of the companies. Companies are financed by financiers (shareholders) but are run by directors/management meaning director and shareholder has a relationship due to which directors are able to use the wealth of shareholders and to act on their behalf this relationship is known as agency (i.e directors acts as agents of shareholder). As the wealth of shareholders is now control and authorised to used by directors of the company therefore they (directors) also play the role of steward, who has the responsibility to protect and safeguard the wealth of shareholders as well, this concept is known own as stewardship. Because, the company is run by directors/management other than shareholders and directors (i.e agents & stewards) are given complete autonomy (authority) so, it is highly unlike that they will trust the financial statements prepared by agents and stewards (It is like asking the performer, how you performed or asking the caretaker, were you successful in taking care of the possessions). So, in order to verify they will appoint an independent, honest and recognised person having a command on subject matter (financial statements) to give them assurance that the financial statements prepared are not false. The person who will be appointed to perform the above mention task and to give assurance to shareholders (stakeholders in broad) is known as auditor and the task is called as audit.
Audit can be define as,
Audit is an independent examination (not preparation) of financial statement which enables auditor to express an opinion (only assurance and not a guarantee) on whether the financial statements are prepared in all material respects, in accordance with an applicable financial reporting framework and whether they presents true and fair view.
Talal Hassan 