An audit is performed on the primary financial statements of a company. Here is everything you need to know about the auditing of financial statements.
What Are the Statements Typically Audited?
Generally, the auditor wants a detailed review of your company. It is achieved by exploring three out of the five main financial statements. These are:
● Statement of Financial Position (SOFP)
● Statement of Cash Flow (SOCF)
Also known as the income statement, this statement covers a company’s financial performance. We are talking about the revenue, cost of goods, gross profit, net profit, and a company’s taxes. These statements are made every year. A profit and loss statement can be complicated or straightforward, depending on the nature of your business.
Also, there is a difference between your revenue and the cost of goods — don’t be confused.
You can also recognize this one with the word ‘balance sheet.’ Instead of the performance, this financial statement discusses where your business stands at the end of each year. A statement of financial position is created with a simple format:
Assets = Capital + Liabilities
● Assets are the things you own. They are divided into current and noncurrent assets.
● Capitals are your available funds in the form of working capital, equity, debts, and trading capital.
● Liabilities are things you owe or have to pay for, For instance, land on lease, creditors, and tax liabilities.
The statement of cash flow talks about all the transactions conducted daily. SOCF also determines the liquidity of your company. It is mandatory to follow the structure of the cash flow statement to get an accurate reading.
What Are the Main Phases of Auditing Financial Statements?
Going through the process, an auditor will work on the three main phases:
Planning and Risk Assessment
The first plan for any successful venture is planning. This stage includes getting a team together and understanding the client’s requirements to perform an audit effectively.
With the plan laid out, you will start by taking an appropriate audit sample. Determine your data to check for material misstatements. Auditors gain knowledge and experience with these risk assessment protocols.
Test Internal Controls
Internal controls are implemented in any company to increase efficiency in the system and keep things efficient for the business. These controls also ensure accuracy in the records, making them readily available for the auditor. Test the internal controls to ensure that everything is working accurately.
The auditor verifies and cross-checks the information and the client’s records. As mentioned, you can physically check the assets and ensure they are available. (Some people overstate their assets to make the balance sheet look positive, keep an eye on that). Contact any third-party person to verify any sample. You can also verify it by cross-checking.
What Are the Principles Governing Auditing of Financial Systems?
These are the basic principles to consider when auditing financial statements:
● Integrity, Objectivity, and Independence mean that an auditor should be independent of any pressure and personal interest. Be transparent and create a report based on evidence without being biased. (This is one of the main reasons why an auditor should not have any link with the company).
● Confidentiality means the users must not disclose the company information to anyone else.
● Competence ensures that the auditor is capable enough to perform different tasks without facing any problems.
● Delegate the work to other people in the team. Make sure they are not compromised in any way. Also, you need to verify the process.
● Document the records related to the audit and make sure to pick an appropriate sample.
● Plan the work effectively to confirm that it is delivered on time and does not affect the company’s work.
● Evidence should be collected through substantive testing to confirm statements’ authenticity and draw a conclusion.
● Internal Controls and Systems should be thoroughly evaluated and understood. This checks the company’s efficiency.
● Report and draw conclusions after thorough evaluation and assessment. Submit reports with a clear and unbiased review. Maintain your auditing work papers as well for other members of the team to understand and compare your work. Make sure that everything is maintained adequately.
Reasons for Auditing Financial Statements
Auditing financial statements hold immense importance. This is why this process is effortless:
Enhances Business Efficiency
A detailed audit of financial statements increases the areas that need improvement in a company. This adds value to the feedback and ensures the company takes it seriously. The quality of your audit can also directly encourage management to elevate the quality of internal controls.
The stakeholders of any audit report are directly affected by the information you publish. Delivering an unbiased and transparent opinion on their work gives reasonable assurance to the company’s stakeholders. Remember, there is a difference between absolute assurance and reasonable assurance. An auditor should report material misstatements rather than focusing on something that doesn’t make a huge difference.
Gives True and Fair View
A true and fair view means that auditing financial statements must cover material differences and report them without errors. A true and fair view is directly linked to the consistency and reliability of a company’s financial statements. This helps the stakeholders in making vital and effective decisions.
Are There Any Limitations of Auditing Financial Statements?
Indeed, there are certain limitations and setbacks when auditing financial statements. First of all, it is impossible to obtain absolute assurance. As humans, we cannot bring an ideal state but we try to stay as vigilant as possible.
Auditors also might have an issue with understanding the nature of a business. There are also some issues related to time and cost. There is a bit of a risk with experience and comfort as well. When choosing audit as a career, prepare yourself for any unexpected balls thrown in the court.
Who can perform a financial statements audit?
Only an approved accountant can audit financial statements. Because of the sensitivity and responsibility that auditing involves, the profession is regulated.
In the United States, only those who are Certified Public Accountants (CPA) are legally allowed to audit financial statements and give their opinion. In the UK, only auditors who are registered with the following professional bodies are allowed to audit financial statements:
- Association of Authorised Public Accountants (AAPA)
- Association of Chartered Certified Accountants (ACCA)
- Institute of Chartered Accountants in England and Wales (ICAEW)
- Institute of Chartered Accountants of Scotland (ICAS)
Similarly, in Canada, only Chartered Accountants could perform audits until recently but certain states have passed newer legislations that have allowed Certified General Accountants and Certified Management Accountants also to perform public auditing if they are properly qualified.
Almost every country regulates auditors and only those accountants who register with the professional bodies that have been recognized for registration of public/chartered accountants are allowed to audit financial statements.
When should financial statements be audited?
Usually, an independent certified public accountant must audit the financial statements annually. For public companies, this is a mandatory requirement from the Securities and Exchange Commission that accounts be audited annually.
In the case of internal audits, the frequency and timing of audits depend on the complexity and size of the business, the nature of the business, and the control environment in place.
Audit of financial statements is an essential process that elevates the credibility of your business. You must go through the details and avoid any material misstatements.
We hope this guide to auditing financial statements comes in handy and you can establish grounds.