Auditee

Auditee refers to the entity or organization that undergoes an audit process. It is commonly used in financial auditing, where the auditee represents the company, government agency, non-profit organization, or any other entity subject to an audit conducted by an external auditor.

During the audit process, the auditee is expected to cooperate fully with the auditor, granting access to pertinent information and addressing any queries or concerns that may arise. Additionally, the auditee may be required to implement suggested recommendations or corrective actions based on the auditor's findings to enhance financial reporting, internal controls, and regulatory compliance.

An auditee is a business entity, non-profit organization, government agency, or any other organization on whom an external auditor performs the audit. Auditing involves systematically examining and evaluating the auditee's financial records (income statement, balance sheet, cash flow, operational procedures, internal controls, and compliance with relevant laws and regulations).

Auditees are chosen based on various criteria, such as their size, industry, level of risk, or legal requirements. Once selected, they are informed about the upcoming audit, including the audit objectives, scope, expected timeline, and the specific areas to be examined. An auditee is expected to be prepared for the audit process with all the relevant material and proofs, such as documents, financial records, policies, procedures, and any other information required for the audit. The auditor then examines and evaluates these records to determine their accuracy, completeness, and compliance with applicable laws and regulations. The primary objective of the audit is to provide an impartial and objective opinion regarding the auditee's financial statements and overall financial well-being.

Although the specific procedures and requirements of an audit can differ depending on the audit type being conducted (e.g., financial audit, compliance audit, operational audit) and the applicable industry or regulatory standards, the auditors generally discuss the audit objectives, scope, and any specific concerns or expectations with the auditee before the audit starts. Moreover, the auditee is expected to cooperate with the auditors during the fieldwork when the latter reviews documents, interviews staff, observes processes, and tests controls to gather evidence to support their findings and opinions. After the auditors prepare the audit report, the auditee can ask questions or state their concerns regarding the issues, deficiencies, or risks mentioned by the auditors. Also, the auditee's management should take appropriate steps to rectify and solve the identified problems or dangers.

The auditee, or the entity undergoing an audit, carries specific roles and responsibilities throughout the audit process. These responsibilities may vary depending on the type of audit and the applicable regulations or standards.

Here are some typical roles and responsibilities of auditees:

1. Informing Staff: The auditee must explain the need, objective, scope, and process of the audit to the relevant employees to ensure their cooperation and that they keep everything to the mark.
2. Appointing management representative: The organization needs to appoint a representative who can attend meetings (entrance and exit conferences) with the auditors to discuss the findings, issues, and their rectification.
3. Providing access to resources: The organization is responsible for furnishing the necessary financial records, documents, and other pertinent information to the auditor. It includes financial statements, accounting records, contracts, policies, and any other data required for the audit.
4. Cooperating with the auditor: The auditee is expected to cooperate fully with the auditor throughout the audit process. It entails timely responses to auditor inquiries, clarifying information as needed, and addressing any concerns the auditor raises.
5. Ensuring accuracy and completeness of the information: The auditee must ensure that the information provided to the auditor is accurate and complete. It involves maintaining proper accounting records, reconciling financial statements, and disclosing any relevant information that may impact the audit.
6. Implementing internal controls: The organization should establish and maintain effective internal control systems to protect assets, ensure accurate financial reporting, and comply with applicable laws and regulations. It includes developing policies, procedures, and monitoring mechanisms to mitigate risks and detect and prevent fraud or errors.
7. Developing a corrective mechanism: If the auditor identifies any deficiencies, weaknesses, or non-compliance during the audit, the auditee is responsible for addressing these findings. It may involve implementing recommended corrective actions, enhancing internal controls, or modifying accounting practices to rectify identified issues.

Let's understand the concept with the help of real-world and hypothetical examples.

Example #1

Suppose the management of the ABC company arranges for an internal audit of its financial records from auditor R for a given fiscal year. In such a case, ABC company is both the auditee and the audit client. In another case, the Income Tax Department demands an external audit of the ABC company from auditor P. Then ABC company remains the auditee. Still, the audit client is the Income Tax Department.

Example #2

After the annual audit of the auditee village of Columbus for the fiscal year ending in June 2022, out of the 28 findings, eight raised concerns about material weaknesses related to the misstatements of the financial statements which indicates a possibility of fraud, waste, or abuse in multiple areas. Moreover, some of these vulnerabilities may result in huge fines while restricting the village from freely availing of federal and state funds. The independent auditor, De'Aun Willoughby, CPA, conducted the audit.

The terms "auditee" and "auditor" are integral to the auditing process but have distinct roles and responsibilities. Both parties must work in coordination and harmony to represent the actual financial position of the organization. However, the following are the various dissimilarities between them: