What is the Financial Statement Audit?A financial statement audit is defined as an independent examination of the company’s financial statement and its disclosures by auditors. It provides a true and fair view of its financial performance.
Top Financial Statements to Audit - Income
Statement: This is the statement of a company’s financial performanceRatio analysis is the quantitative interpretation of the company's financial performance. It provides valuable information about the organization's profitability, solvency,
operational efficiency and liquidity positions as represented by the financial statements.read more over a specific accounting period. It shows revenue and expenses incurred through operating and non-operating activities and net profit or loss incurred during this period.
- Balance Sheet: This is a
statement of the company’s financial positionStatement of Financial Position represents the current financial status of an entity in terms of assets and liabilities. This statement is used by the
stakeholders and shareholders as it affects their investing decisions.read more at a specific point in time. It is done by detailing the assets, liabilities, and shareholders’ equity to give an idea of what the company owns along with the liabilities. The balance sheet is prepared based on the idea that
Assets = Liabilities + Shareholders’ Equity.
- Cash Flow Statement: This is a statement of the company’s cash and cash
equivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They
are normally found as a line item on the top of the balance sheet asset. read more during a specific accounting period.
These financial statements are the ones often utilized for audit
purposesThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has
reported.read more. However, some adjustments might be made to the statements by the company after the finalization of the audit for a better representation of facts. You are free to use this image on your website, templates, etc., Please provide us with an attribution linkArticle Link to be Hyperlinked For eg: Source: Financial Statement Audit (wallstreetmojo.com)
If you want to learn more about Auditing, you may consider taking courses offered by Coursera – - Auditing I: Conceptual Foundations of
Auditing
- Auditing II: The Practice of Auditing
Objectives of Financial Statement AuditThe objectives of a Financial Statement
Audit- - The objective of a financial statementThe main objective of the financial statement analysis for any company is to provide the necessary data required by
the financial statement users for the informative decision-making, assessing the company's current and past performance, predicting business success or failure, etc.read more audit is to enable the auditor to express an opinion on financial statements. The entity’s management prepares an audit.
- It is essential that financial statements are
prepared as per the recognized accounting policiesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices
determined at the corporate level.read more and practice and relevant statutory requirements, and they should disclose all material matters.
- However, his opinion does not constitute an assurance as to the future viability of the enterprise or the efficiency or effectiveness with which its management has conducted the enterprise’s affairs.
Phases of an Auditing Financial StatementsLet’s discuss the following phases. You are free to use this image on your
website, templates, etc., Please provide us with an attribution linkArticle Link to be Hyperlinked For eg: Source: Financial Statement Audit (wallstreetmojo.com) #1 – Planning & Risk assessmentThe initial stage involves putting together an audit team and laying down general guidelines for
effectively carrying out an audit. The next step is to determine any risks that could lead to material errors in the statements. Identifying such risks requires the auditor to have a thorough knowledge of the industry and business environment in which the company operates. #2 – Internal Controls TestingThis stage involves a critical analysis of internal
controlsInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the
company.read more adopted by a company and their level of efficacy in eliminating any possibility of material misstatements in financial statements. These internal controls could include automated systems and processes employed by a company to ensure higher operational efficiency, safeguard assets, and ensure that all transactions are accurately reported. #3 – Substantive TestingAt this stage, the auditor looks for substantial evidence and cross-verification of facts and figures reported in the statements, which might include the following: - Physical inspection of assets, if required.
- Cross-checking recorded figures in statements against actual documents and records with the company;
- Third-party or any external confirmations of financial transactions and their details reported by the
company; This often includes an independent verification of such statements from the banks and any commercial entities a company is engaged in business with.
Responsibility for Financial Statements AuditBelow is the responsibility for the financial statements- - The management is responsible for maintaining an up-to-date and proper accounting system and preparing financial statements.
- The auditor is
responsible for forming and expressing opinions on the financial statementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six
monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.
- The financial statement audit does not relieve the management of its responsibility.
Scope of a Financial Statement AuditThe auditor decides the scope of his audit having regard 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
Qualification 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 not absolute, 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 reportAn audit report is a document prepared by an external
auditor at the end of the auditing process that consolidates all of his findings and observations about a company's financial statements.read more provides the user with an audit opinion, stating that financial statements show a true and fair view in all material aspects and are by 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 analyzing different companies and decision-making.
Limitations- The auditor cannot obtain absolute assurance.
- It is due to the inherent limitations of an audit due to which the
auditorAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating
laws.read more obtains persuasive evidence rather than conclusive.
- It arises from the Nature of financial
reportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for
decision-making.read more, audit proceduresAudit Procedures are steps performed by auditors to get evidence regarding the
quality of the financial information provided by the management of a company. It enables them to form an opinion on financial statements and ensure whether they reflect the true and fair view or not. read more, and Limitations concerning time and cost.
Due to aforesaid inherent limitations, there is an unavoidable risk that some material misstatements may remain
undetected. Basic Principles Governing a Financial Statement AuditBelow 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 informationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth
prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more.
- #5 – Documentation – He should document matters relating to the audit.
- #6 – Planning – He should plan his work to conduct an audit
effectively and timely. Plans should be based on knowledge of the client’s business.
- #7 – Audit Evidence – The auditor should obtain sufficient and appropriate audit evidenceAudit evidence is information gathered by auditors
during the course of an audit, whether internal, statutory, or otherwise. These facts serve as the foundation for the opinion in the audit report.read more by performing compliance and substantive
proceduresSubstantive procedures are methods designed by an auditor to evaluate a company's financial statements, which require an auditor to create conclusive evidence for verifying the completeness, accuracy, existence, occurrence, measurement, and valuation of the business's financial
records.read more. 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
informationAn accounting information system (AIS) refers to the computer-based method used by the companies to collect, store, and process the accounting and the financial data that the company's internal users operate to report various information to the company's stakeholders such as creditors,
investors, and tax authorities, etc.read more has been duly recorded. The auditor should understand the management’s accounting
systemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the
firm.read more and related internal controls.
- #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.
Recommended ArticlesThis article has been a guide to the Financial Statement Audit. Here we discuss the meaning of a Financial Statement Audit, its importance, Objectives, Scope of the Audit, and principles governing the audit. You may learn more about basic accounting from the following articles – - Audit Report Format
- Examples of Audit Report
- Audit Report Contents | Example
- Accounting vs Auditing – Differences You Must Know!
What are the stages of financial statement audit?
A typical business financial audit has four main phases: planning, setting internal controls, testing, and reporting.
What are the 5 steps of an audit?
What happens during an audit? Internal audit conducts assurance audits through a five-phase process which includes selection, planning, conducting fieldwork, reporting results, and following up on corrective action plans.
What are the 7 steps in the audit process?
Audit Process. Step 1: Planning. The auditor will review prior audits in your area and professional literature. ... . Step 2: Notification. ... . Step 3: Opening Meeting. ... . Step 4: Fieldwork. ... . Step 5: Report Drafting. ... . Step 6: Management Response. ... . Step 7: Closing Meeting. ... . Step 8: Final Audit Report Distribution..
What is the 10 Step audit process?
10 Steps of the Audit Process. Notification. Audits begin with the issuance of some kind of notification to the company or organization being audited. ... . Planning Process. ... . Initial Meeting. ... . Fieldwork. ... . Communication. ... . Draft Audit. ... . Management Response. ... . Exit Meeting..
|