An Overview of the Financial Statement Audit Process
January 10, 2017
As a key decision maker within your organization, whether it is a for-profit, not-for-profit, public service, or perhaps a government entity, there is a significant chance that you work or oversee the work of those who produce financial statements – tools responsible for lending a perspective to the organization’s financial position.
Depending of the nature of your organization’s activities and revenues, you may also be required to provide audited financial statements at the request of a variety of stakeholders (government, banks, shareholders, funding agencies, or investors). But what does it really mean to have your financial statements marked as “audited”?
Well, a financial audit involves the careful and meticulous analysis of an organization’s financial records, internal controls, accounting procedures, and even its record keeping processes. The objective of an independent auditor is to obtain assurance regarding the fair presentation of financial information to stakeholders and other parties – ensuring that the financial statements are free of material misstatements.
At the end of the day, a financial statement audit is all about confidence. Its purpose is to instill both internal and external readers of financial information, the confidence to make informed decisions, as expressed through the credibility and integrity of a professional, third party opinion.
While this explanation is drastically simplified and applies only to the audit of financial statements, it is important to understand that a proper audit is rigorous and includes an exhaustive number of procedures and processes which are summarised below to form what is known as an audit opinion.
ROLE OF AUDIT
The demand for a financial statement audit is typically inspired by the need of an objective opinion. This need can be required internally by management who is looking to improve control processes, but is typically requested externally by financing or regulatory bodies who seek confirmation that financial information is being presented fairly in all material respects.
To improve the credibility of the organization’s financial statements, Independent Auditors provide confidence to the interested parties that the statements fairly reflect the performance of the organization in accordance with relevant accounting standards and generally accepted auditing standards.
The audit process involves five major processes:
- Risk assessment
- Audit strategy
- Collection of evidence
The audit begins in the planning stage. This stage involves the evaluation of whether the auditor should accept or retain the client organization. The auditor will; verify that there is no potential conflict of interest between the auditor and the client, establish the terms of the engagement, and determinethe requirements for the audit team.
In order to make the above planning decisions, the independent auditor will gather information to inform themselves of the nature of the organization’s operations, its industry, commercial environment, and management teams aiming to identify the risks that might lead to material misstatements in the financial statements.
In addition, the audit team is likely to request preliminary financial reports to determine the amount, depth, and breadth of work required for the audit, while identifying higher risk areas that require more of the Independent Auditor’s attention during the course of the audit field work.
Audit Strategy Formation
After the major risk areas have been identified, the auditor will develop an overall audit strategy, including a detailed audit plan in response to the risks discovered in the assessment. The strategy includes the timing and nature of testing procedures, degree of reliance on the organization’s internal controls, and assignment of tasks to members of the audit team.
Collection of Evidence
The next stage of the audit is typically completed at the office of the client, and is usually referred to as “fieldwork”. During this stage, the auditor will gather evidence to assess whether financial processes are functioning as expected and also to verify the validity of transactions in the organization’s accounting system.
This audit evidence is collected by the independent auditor through two means of audit testing;
- Substansive 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
- Controls testing – which generally includes the review of systems of internal control that aid in the efficient monitoring of such processes as the authorisation of transactions, division of managerial and administrative responsibilities, and account reconciliation.
Once the auditor has gathered sufficient evidence to reach a conclusion on the fairness of the financial statements, an audit report is drafted with the corresponding audit opinion.
It is important to realize that an audit is not simply about verifying figures on the financial statements; it involves a continuous interaction between the client organization and the independent auditor before, during, and after the process of completing a financial statement audit.
The result provides value-added insight to the organization through the provision of professional advice to decision makers in areas where management can improve internal processes or controls. This, along with satisfying their stakeholders’ need for reliable, comparable and timely information helps make the organization more efficient in their operations and accurate in their reporting.