What is an 'Audit Department'

An audit department is a unit within a company or organization that is responsible for evaluating operational procedures, risk management, control functions and governance processes. Reporting internally to the audit committee of the Board of Directors and to senior management, the audit department is supposed to be completely objective and receive no influence or interference from the areas of the company or organization it examines.

BREAKING DOWN 'Audit Department'

The chief functions of an audit department are to:

  • determine compliance with policies and procedures
  • assess the quality of internal controls
  • evaluate the quality of risk management
  • evaluate compliance with rules and guidelines established by regulatory agencies (e.g., Securities and Exchange Commission)
  • assess compliance with accounting standards, whether issued by Financial Accounting Standards Board or Government Accounting Standards Board, or other
  • review effectiveness and security of information technology systems
  • review strength of the code of ethics and actions to handle violations
  • provide additional oversight to internal accounting practices that external auditors may not focus on
  • opine on the quality of work of external auditors
  • verify physical assets and inventory
  • investigate employee complaints and alleged fraudulent activities

The audit department delivers findings from its periodic reviews to management and the audit committee of the Board of Directors. Most are perfunctory with recommendations here or there to incrementally improve the business or organization. In some cases, the audit department's work is extremely important in getting to the roots of a problem that must be extirpated. Examples are investigating a sexual harassment claim and how customer accounts were hacked. There are cases, though, that make people wonder whether an audit department itself is doing an effective job. Internal auditors at Wells Fargo evidently overlooked the fraudulent sales practices in retail banking that took place from around 2011-2016, according to reports. Post 2016, more fraudulent activity was uncovered in other parts of Wells Fargo.

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