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Financial Statement Audit

 

Definition:

Financial statements auditing is the review of an entity’s annual financial statement for the purpose of allowing an independent auditor to express their opinion over the true and fair view in preparing and presenting financial statement again the specific accounting standard and framework.

The financial statement that auditors will review are balance sheet, income statement, statement of change in equity, statement of cash flow, and related noted to financial statements.

That means the auditor will assess the preparation and presentation of financial statements again the accounting standards like IFRS, US GAAP as well as local GAAP.

Audit scope, fees, and other important information are normally including in the audit engagement letter.

 

Financial statements auditing normally perform annually and it could help to improve the quality of financial information that uses by key stakeholders.

CPA firm is the one that offers and performs these financial statements auditing.

 

Purpose:

Required by Law: Audit of financial statements is normally performed as the requirement of law and other related authority. For example, the most financial institution is required by law and central bank to have their financial statements audited by an authorized CPA firm. You may also note that most of the security and commission authorities also required the corporation listed in the stock exchange to have their financial statements audited.

  • Required by Shareholders or Board of Directors: Some entity is not enforced by law to have their financial statements audited, but it is the requirement of its shareholders, owners, and board of directors. This is to ensure that the financial statements that submit to them correctly prepare and no material misstatements. It also improves the integrity of management to the shareholders especially the minority shareholders that do not have their own key personal work in the entity.

  • Improve Financial Statements Credibility: The credibility of financial statements is generally crease from bankers, suppliers, creditors, and other related parties’ points of view. Because they believe that these financial statements have an independent party perform a technical review on their behalf.

 

Responsibility for Financial Statements Audit

 

Below are the Responsibility for the financial statements-

  • The management is responsible for maintaining an up to date and proper accounting system and finally to prepare financial statements.

  • The auditor is responsible for forming and expressing an opinion on the financial statement.

  • The audit of the financial statement does not relieve the management of its responsibility.

Scope of a Financial Statement Audit

The auditor decides the scope of his audit having regards to;

  • The requirement of the relevant legislation

  • The pronouncements of the Institute

  • Terms of engagement

However, the terms of engagement cannot supersede the pronouncement of the institute or the provisions of relevant legislation.

Importance

  • Enhances Qualify of Business Process – A rigorous audit process may also identify areas where management may improve their controls or processes, further adding value to the company by enhancing the quality of its business processes.

  • Assurance to Investors – An audited financial statement provides a high, but the not absolute, level of assurance that the amounts included in the company’s financial statements and notes to accounts (disclosures) are free from any material misstatement.

  • True and Fair View – An unqualified (“clean”) audit report provides the user with an audit opinion, which states that financial statements are showing a true and fair view in all material aspects and are in accordance with generally accepted accounting principles.

  • Provides Consistency – Financial statements Audit provides a level of consistency in financial reporting that users of the financial statements can rely on when analysing different companies and decision making.

 

Basic Principles Governing a Financial Statement Audit

Below are some of the basic principles governing a financial statement audit.

1 – Integrity, Objectivity, and Independence – The auditor should be straightforward, honest, and sincere in his professional work. He should be fair and must not be biased.

2 – Confidentiality – He should maintain the confidentiality of information acquired during his work and not disclose any such information to a third party.

3 – Skill and Competence – He should perform work with due professional care. The audit should be performed by persons having adequate training, experience, and competence.

4 –Work Performed by Others – The auditor can delegate work to assistants or use work performed by other auditors and experts. But he will continue to be responsible for his opinion on financial information.

5 – Documentation – He should document matters relating to the audit.

6 – Planning – He should plan his work to conduct an audit in an effective and timely manner. Plans should be based on knowledge of the client’s business.

7 – Audit Evidence – The auditor should obtain sufficient and appropriate audit evidence by performing compliance and Substantive procedure. Evidence enables the auditor to draw reasonable conclusions.

8 – Accounting System and Internal Control – Internal control system ensures that the accounting system is adequate and that all the accounting information has been duly recorded. The auditor should understand the accounting system and related internal controls adopted by the management.

9 – Audit Conclusions and Reporting – The auditor should review and assess the conclusions drawn from the audit evidence obtained through the performance of procedures. The audit report should contain a clear written expression of opinion on the financial statements.

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What are the Primary Stages of an Audit?

There are several basic steps required for a financial statement audit to take place. Here we will outline the process.

Step 1: Planning and Risk Assessment

This step involves gaining an understanding of your business and the environment in which your business operates. From there, the auditor will use this information to assess whether there may be risks that could impact your financial statements or the validity of your reporting.

Step 2: Understanding Internal Controls

Next, your auditor will perform walkthroughs to gain an understanding of your internal controls, concentrating on key factors such as personnel involved, proper authorization, safeguarding assets, and segregation of duties. Authorization refers to when a person of authority gives permission for an action to take place and segregation of duties is the assigning of different steps in a process.

By gaining an understanding of the internal controls of your business, the auditor can tailor the audit procedures to be most effective.

Step 3: Substantive Procedures

The fieldwork step involves examining many different procedures and financial components, typically at the client location. Your auditor will create an in-depth report of important considerations, such as:

  • Cash: Auditor will issue a bank confirmation and verify outstanding items on your bank reconciliation.

  • Marketable Securities: Auditors will confirm tradable financial assets, review transactions, and verify the market value of your business.

  • Accounts Receivable: When auditing your accounts receivable, account balances will be confirmed while year-end sales and cutoff procedures are being tested.

  • Inventory: In addition to observing the physical inventory count, an auditor will confirm other location’s inventories, test shipping and receiving cutoff procedures, examine paid supplier invoices, test the computation of overhead, review current production costs, and more.

  • Fixed Assets: Observe assets, review purchase and disposal authorizations, review lease documents, examine appraisal reports, recalculate depreciation, and amortization.

  • Accounts Payable: Your auditor will perform a search for unrecorded liabilities.

  • Accrued expenses: By examining payments and recomputing accruals, your auditor will compare the current balances to prior years.

  • Debt: The auditor will confirm your debt with lenders, review leasing agreements if any exist, and review any references found within your board of directors meeting minutes.

  • Revenue: Revenue is determined by looking through sales documents and reviewing transactions, history of sales returns, and allowances.

  • Expenses: Finally, your auditor will examine your documentation of expenses, review transactions, and confirm any potentially unusual expenses with your suppliers.

 Step 4: Financial Statement Deliverable

The final step involves drafting financial statements, including all required footnote disclosures. Financial statements typically include the balance sheet, income statement, changes in shareholder’s equity, and cash flows. Accompanying the financial statements will be footnote disclosures that discuss accounting policies and summarizes major company activities including but not limited to, information on how revenue is recognized.

 

 

DISCLAIMER- These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.

It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information

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