• Internal Auditors

Conversely, internal auditing is "an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization." Internal auditors (who may also be CPAs but not independent contractors) are employees of the organizations whose activities they appraise. Measures can be taken, however, to give these auditors some independence. In many companies, for example, internal auditors report directly to the audit committee of the board of directors. Financial statement auditing is performed by independent CPAs who are classified as external auditors. But internal auditors perform both compliance and operational audits for their companies. Internal auditors measure the degree to which various functions of their organization adhere to stated managerial policies, laws, or regulations. They also perform operational auditing, such as appraisal of their organization's computerized accounting systems. Many large organizations-Motorola, Bank of America, and 3M among them-maintain a staff of internal auditors. These accountants evaluate the firm's own accounting and management systems. Their aim is to improve operating efficiency and to ensure that employees and departments follow management's procedures and plans.

• Government Auditors

Members of local, state, and federal government units audit various organizational functions for a variety of reasons, such as the following:

1. Local and state government units audit businesses to determine whether sales taxes have been collected and remitted according to stipulated laws or regulations (a type of compliance audit).

2. The Internal Revenue Service audits corporate and individual income tax returns to determine whether income taxes have been calculated according to the applicable laws or interpretations of these laws (another type of compliance audit).

3. The General Accounting Office (GAO), which reports to the U.S. Congress, audits various programs, functions, activities, and organizations of the federal executive branch. Such audits include:

a. Financial audits-examinations of financial transactions, accounts, and reports to determine fair presentation and compliance with applicable laws and regulations.

b. Performance audits (a type of operational audit)-reviews of efficiency and economy in the use of resources, such as government equipment.

The American Accounting Association has issued A Statement of Basic Auditing Concepts. There are four conditions that create a demand for auditing.

1. There is a potential conflict between those who prepare information (management) and those who use information (owners, investors, creditors, and regulators). This potential conflict can result in biased information. Information can have substantial economic consequences for a decision maker.

3. Expertise is often required for preparing and verifying information.

4. Users of information frequently are prevented from directly assessing the quality of information.

These four conditions essentially state that a conflict may arise between groups that use financial statements and company managers who prepare them: if so, these financial statements could be biased. Financial statement information is used to help make financial decisions, and the users of financial statements either lack the expertise or are prevented from directly verifying the quality of the financial statement information they use.