Financial Statement Audit Process

Overview of Financial Statement

As a key decision maker in an enterprise, whether it is a for-profit, non-profit, public service, or perhaps a government entity, there is a substantial possibility that you will work or oversee the work of those creating financial statement responsible for providing a perspective to the financial position of the organization.

You may also be needed to provide audited financial statements, at the request of the government, bank shareholders, funding agencies, or creditors, depending on the nature of the organization and revenues of your enterprise.

 What does it really mean to have your financial statement marked as “audited”?

The financial Statement requires a meticulous and detailed analysis of the financial records, internal controls, accounting procedures and even record-keeping processes of an organization if it has to be marked as audited. An independent auditor’s objective is to provide assurance that financial data is presented equally to stakeholders and other parties – ensuring that the financial statements are free of material misstatements.

At the end of the day, an analysis of the financial statements is all about confidence. The aim is to instill financial information to both internal and external readers the confidence to make informed decisions, as conveyed through the integrity and credibility of a professional third party opinion.

While this description is significantly simplistic and relates only to auditing the financial statements, it is important to understand that a proper audit is rigorous and includes an exhaustive number of procedures and processes that are summarized below to form what is known as an audit opinion.

Audit Role

Auditing the financial statements is typically inspired by an objective opinion. This need can be internally required by management who are looking to improve control systems, However, financing or regulatory bodies who seek confirmation that financial information is presented equally in all material respects are usually requested externally.

To improve the credibility of the financial statements of the organization Independent Auditors offer stakeholder confidence that the statements fairly reflect the organization’s performance in accordance with relevant accounting standards and generally accepted auditing standards.

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The audit process involves five major processes:

  1. Planning
  2. Risk assessment
  3. Audit strategy
  4. Collection of evidence
  5. Completion

Planning

The audit begins in the planning stage. This stage involves evaluating whether the auditor should accept the client organization. The auditor will; verify that there is no potential conflict of interest between the auditor and the client, determine the terms of the commitment and determine the audit team’s requirements.

Risk Assessment

To make the above planning decisions, the independent auditor must collect information to inform themselves about the nature of the operations of the organization the industry business environment, and management teams with the aim of determining the risks that could lead to significant errors in the financial statements.

Moreover, the audit team is likely to request preliminary financial reports to determine the amount, scope, and degree of work required for the audit, thus identifying higher risk areas that require more consideration from the Independent Auditor during the audit fieldwork.

Audit Strategy Formation

The auditor must create an overall audit strategy after identifying the major risk areas, including a detailed audit plan in response to the risks identified in the assessment. The strategy includes the timing and nature of testing procedures, degree of dependency on the internal controls of the organization and assigning duties to the audit team members.

Collection of Evidence

Usually, the audit is completed at the client’s office and is usually referred to as “fieldwork.” The auditor should gather evidence during this stage to assess if financial processes are functioning as expected and also to verify the validity of transactions in the accounting system of the organization.

Audit evidence is collected by the independent auditor through two means of audit testing

1. Substantive testing – which generally includes a combination of;

  • physically observing inventories
  • verifying records that support balances
  • interviewing third parties and confirming transactions
  • verifying calculations of financial statement figures

2. Controls testing – This generally includes the analysis of internal control structures this assist in the successful management of such processes as the authorization of transactions, the separation of managerial and administrative responsibilities and the reconciliation of accounts.

Completion

Once the auditor has collected sufficient evidence to arrive at a conclusion on the accuracy of the financial statements, an audit report with the correct audit opinion is drafted. It is important to realize that an audit is not simply about checking the figures of the financial statements; it requires continuous interaction between the client organization and the independent auditor before, during and after the completion of a financial statements audit process.

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Frequency Asked Questions

1. What is the audit of financial statements?

A financial statement audit is the examination of an entity’s financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures.

2. How do you conduct a financial audit?

  1. Accept Client and Perform Initial Planning.
  2. Understand the Client’s Business and Industry. …
  3. Assess Client’s Business Risk.
  4. Set Materiality and Assess Accepted Audit Risk (AAR) and Inherent Risk (IR).
  5. Understand Internal Control and Assess Control Risk (CR).
  6. Develop Overall Audit Plan and Audit Program.

3. What are the stages of an audit?

  • Selection Phase
  • Planning Phase
  • Execution Phase
  • Reporting Phase
  • Follow-Up

4. What is an audit in the context of financial accounting?

Audits are carried out to verify the reliability of any given information and provide an evaluation of the internal control of the system. In the context of financial accounting, audits represent assessments of objectivity, by which the management of a company presents its financial statements.

5. Why is it important to audit financial statements?

Audit financial statements are important because they provide an outside look at accounting operations and the overall fiscal health of a publicly held company.

 

An audit is the most expensive of all Financial Statements examination types. The least expensive is a compilation and a review. Because of its cost, several companies are trying to downgrade to a review or compilation although this is only an option if it is appropriate to the receivers of the data. Apart from the periodic report, publicly held companies must also have their quarterly financial statements reviewed.

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