What is an auditor?

1 min readLast updated February 27, 2024by Rachel Carey

It’s a familiar title, but what exactly is an auditor, and what do they do?

Auditors are financial professionals tasked with reviewing financial statements, processes, and records. They aim to assess accuracy and completeness. They can be employed by the company they’re assessing or by accounting firms. As all public companies in the US must conduct periodic audits by law, auditors are in constant demand.

So, what does an auditor do? 

Essentially an auditor looks at business processes and determines the accuracy of business transaction records. They must expertly assess a company’s financial statements, systems, and internal controls. Key responsibilities include: 

  • Analyzing financial records. 

  • Reviewing accounting systems. 

  • Pinpointing fraudulent information and areas where fraud may occur. 

  • Inspecting tax documentation. 

  • Recommending improvements to all these processes where needed. 

Auditors often have a Certified Public Accountant (CPA) license, which ensures companies adhere to Generally Accepted Accounting Principles (GAAP). This is vital for public companies in the US because the Securities and Exchange Commission (SEC) requires them to follow GAAP and undergo regular audits. 

What’s the difference between internal and external auditors? 

The task of an auditor is essentially the same wherever they work, but there are distinct types, with internal and external auditors being the main two. 

An internal auditor is employed by a company to perform audits solely for them. The internal audit focuses on efficiency—assessing whether all internal systems are working and if there is room for improvement. Another essential facet of the internal auditor’s work is examining accuracy, compliance, and risk. They need to ensure their company conforms to regulatory requirements and that information is always accurately reported. 

The main benefit of having an internal auditor or team is that it enhances communication. They can help highlight or discuss serious issues with a colleague, resolving problems before an external audit happens. 

By contrast, external auditors work for accounting firms, such as Deloitte, and are independent of the businesses they audit. They tend to be hired when it’s time for an audit according to SEC regulations or at shareholders’ request. By definition, they don’t have any bias towards the client company.  

Much like the internal auditor, the external auditor will review financial statements, processes, and reporting systems to ensure accuracy and identify areas of risk. It’s all about making sure records are correct and recommending ways to fix them if not. 

A key difference is that external auditors always have a CPA license, whereas internal auditors don’t need this.     

What about other types of auditors? 

All auditors spend their time investigating and assessing, which is relevant to all industries, businesses, and authorities.  

So, there are auditors with a slightly different remit than those described above. For example, governmental auditors specialize in reviewing government agency records and ensuring that companies comply with government regulations.  

An IT auditor reviews a company’s computer and technology systems to identify risks. They also look at internal control systems to identify any inefficient practices or potential security problems. 

Another variation is the forensic auditor, who reviews financial records to highlight illegal activity. Sometimes known as forensic accounting, the auditors involved in this specialist area are often called to testify during court proceedings. 

What is a tax audit?  

A tax audit is an examination of your tax return — its purpose is to ensure that all the information it contains is correct. They are carried out by auditors from the IRS, State Department of Taxation, or in some cases, other government agencies. 

If you receive notice of a tax audit — either from the IRS or another taxing authority—it can feel daunting. But it needn’t be as bad as you think; it certainly helps to understand what’s involved. 

Not all audits are the same, and they can range from a basic request for more information to a detailed investigation of all your records. It’s important to remember that just because a tax audit has been requested doesn’t mean that the IRS believes something is incorrect. It could easily be a simple matter of addressing a few questions.  

Complex, time-consuming tax reviews are usually connected to high-income taxpayers or people with unusual or inconsistent returns

So, the chances of undergoing a tax audit are pretty slim for most households making less than $400,000, but what might increase those chances? There are triggers, and the IRS uses a computer-based scoring system to analyze tax deductions and data to identify them. Some common triggers include: 

  • Income is not being fully reported. 

  • Unusual business operating losses. 

  • Excessive use of business expenses as tax deductions—on meals and entertaining, for example. 

  • A sudden drop in reported income from one year to the next. 

  • Unusually high charitable deductions. 

  • High income—most audits happen to taxpayers earning over $500,000 annually. 

  • Cash-intensive businesses such as restaurants. 

  • Foreign bank accounts. 

The bottom line 

When considering what an auditor does, the key takeaway is to remember that they are well-qualified professionals tasked with reviewing and investigating financial statements, processes, and records. They’re not trying to catch out taxpayers or businesses. Instead, they ensure financial systems work as they should and within the regulations.  

It’s always a good idea to seek expert help if you have any questions or concerns about your finances, and you can find a financial advisor for managing your investment portfolio here. 

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.