A financial statement audit is a necessary tool, but what exactly is it?

An independent auditor evaluates a company’s financial statements and associated disclosures to ensure that they are accurate and complete. In the end, the auditor’s report states that the financial statements and pertinent disclosures have been presented in a manner that is in accordance with accepted accounting principles. The auditor’s report must accompany the financial statements when they are transmitted to their designated recipients.

Regular audits of financial statements are necessary to provide confidence in the reported financial health and performance of a firm. The Securities and Exchange Commission mandates that all publicly listed companies submit annual audited financial reports to it. Lenders usually demand an audit of the financial records of any organization to which they lend credit. To ensure that a client is eligible for trade credit, suppliers may require that the customer’s financial statements be audited (though usually only when the amount of requested credit is substantial).

It has become more usual in recent years for audits to be performed due to the increasing complexity of the two key accounting systems (GAAP and IFRS), as well as the continual series of exposures of false reporting by prominent organizations.

company secretary

The following are the steps of an audit:

Following is a more detailed explanation of the audit’s main stages.

Organize a plan of action and undertake a risk analysis

What this stage is all about is learning about the company and the business environment in which it operates and using this information to assess whether there are any risks that might impact the Audited Financial Statement.

Evaluation and testing of internal controls

In this phase, the effectiveness of an organization’s controls is assessed, with a focus on concerns such as obtaining the necessary authorization, safeguarding assets, and clearly defining roles and duties. The effectiveness of the control system may be evaluated by performing a range of tests on a sample of transactions. The auditors are able to minimize the scope of some of their following audits because of their high degree of efficiency. It will cost more money for auditors to evaluate the financial accounts if the controls are weak (i.e., there is a considerable risk of material misstatement). Various risk assessment questionnaires may be employed to assist with internal controls testing.

Procedures that lead to a certain result

The following are only a few examples of the many procedures that take place during this phase:

Analysis

Using a ratio comparison with past, predicted, and industry results will help you spot any anomalies that may exist.

Cash

  • Counting cash on hand, reviewing bank balances’ limits, and issuing bank confirmations are all necessary activities.
  • Instruments for trading in financial assets Examine future trades and market value to verify securities.

When a corporation has unpaid invoices, they are referred to as accounts receivable. Account balances must be verified, collections must be reviewed, and the year-end sales and cutoff procedures must be tested.

Performing an audit of the company’s physical inventory, verifying inventories at other sites, validating shipping and receiving cutoff processes, reviewing paid supplier invoices, evaluating the method used to calculate allocated overhead, and tracing inventory expenses down to the general ledger.