What is financial audit?

Posted on 19th Jul 2018

A financial audit is the investigation of your business financial statements, process and documentation performed by an auditor that will look after your accounting solvability, performance, policies and standards.
The auditor verifies that you are in correspondance with regulatory agencies, and to protect your company from the risk of fraudulent financial practices.

Audits assess financial risks and statements, consider your business growth, impact to the environment, employee culture, and reputation.

a. Audit Planning:  the auditor must plan a risk assessment that should focus on possible weaknesses in your company’s internal controls that can affect financial reporting.
Entity-level controls refer to the processes that help ensure that you carry out your company-wide management directives effectively.

b. Top-Down Approach: Auditors audit in a specific order, going from a review of overall risks to the controls over financial reporting.

c. Controls Testing: During an audit, your auditor tests the design of your controls as well as their operational effectiveness.

d. Reporting: Your auditor will form an opinion on whether your internal controls over your financial reporting are effective.

What Is the Purpose of an Audit? 

Your auditor aims to give you an objective appraisal of your company’s financial situation based upon its documentation.

Moreover, the audit is there to improve your processes by providing suggestions and pointing out any inconsistencies.

Investors came to rely on the financial reports that auditors produced as a part of an overall audit.

Why Is Auditing Necessary? 

Financial auditing concerns companies in the stock market, used as a mechanism for fraud detection and finance accountability.

Companies implemented significant changes in auditing procedures only after intensely adverse business events occurred.

Experts cite the possible need for changes to audit timing and frequency.

You need an audit if you are a publicly held company or see a public offering in your future.

You will need auditing documentation for the year that your company has its initial public offering (IPO) as well as for all subsequent years.

If you accept funding from the federal or state government, you may need an audit.

Some banks will also require an audit if they give you a particularly large loan or if they consider you high risk.

Finally, you may want an audit because it can mean the difference between being approved or rejected for a loan and getting a low or high interest rate.

How Is an Audit Done? 

Audits have three main phases: prep, fieldwork, and reporting.

I. Prep

There are eight main steps: 

1. Receipt of Assignment: This step tells your auditor if they have to perform an audit of your financial statements or if they must complete a performance audit or compliance audit.

2. Research the Audit Subject: The Statements on Auditing Standards (SAS) publications give guidance to external auditors.

3. Determine Audit Criteria: This is the benchmark for the audit. Auditors conduct financial audits and check them against the Generally Accepted Auditing Standards (GAAS).

4. Perform the Risk Assessment: There are two parts to a risk assessment: breaking the audit into chunks and assessing the risk of each chunk.

There is an audit risk calculation that the auditor then applies to each piece: 

Audit Risk = (Detection Risk) x (Inherent Risk) x (Control Risk).

The portion of this formula that the auditor can control is the "detection risk".

5. Confirm Audit Objectives: The auditor has assessed the risks and they can confirm what the audit objective(s) are.

6. Choose Audit Method: The auditor will link each objective to a methodology so that there is strong evidence to back up their findings.

7. Link the Method to Cost: The auditor will budget out the cost so that the business has an idea of the overall cost for the audit.

8. Confirm the Audit Plan: The auditor has to confirm their plan with your business.

II. Fieldwork

The second main phase of your audit is the fieldwork when your auditor is on-site at your office.

The following are examples of steps that your auditor may perform during your audit : 
. Review the information systems 
. Look at record-keeping policies 
. Review the accounting system 
. Review internal controls policies 
. Compare the internal records

Your auditor documents the results of each of these activities in their working papers.

III. Reporting

The last phase of reporting is when your auditor gets to write up their findings on your company.

This report gives you the conclusion on how your company adheres to accounting standards or the agreed-upon benchmarks.

What Is Their Report? 

They are required to perform the audit in accordance with standard auditing practices.

Financiana will bring this report after data entry or import values of your financial statements.