Who Gets Audited and Why

By Maire Loughran from Auditing For Dummies

The types of auditing clients you may encounter and the reasons they require audits are, of course, expansive. As a new auditor, you may not be qualified to conduct some of these audits discussed here, because they require specific skills. Here is a short list of clients and types of audits you may be called on to perform:

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.

Also, should a company receive a governmental grant, the business needs to prove through an audit that the company has used the money as defined by the grant’s terms and conditions. For example, the audit may need to show that the grant money was paid out during the specific period of time allowed for in the grant.
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.

The primary objective of federal, state, and local government and tax-exempt entity audits is to ensure that their funding is being spent efficiently and effectively. 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.

Tax-exempt entities receive funds from private donations and government grants. Each year, the U.S. government awards billions of dollars in grants to tax-exempt organizations. Every recipient of government grants is subject to audit by an independent certified public accountant. This requirement shows that the tax-exempt entity took no actions to jeopardize its tax-exempt status (for example, substantial lobbying activity) and that it used award dollars according to the award’s terms.