A Look At A Financial Audit
How To Do An Effective And Efficient Financial Audit
Every business organization needs financial audit, and this is true across borders. The financial audit may be a statutory requirement of a particular state or simply a compliance imposed by management of a company or conglomerate. Normally, the financial audit could be performed only by professional accountants and qualified auditors, and that the auditors express opinion as to the fairness of the preparation and presentation of the financial statements. It may sound with less difficulty but nevertheless, financial audit entails a lot of things to consider.
How to Do a Financial Audit?
First and foremost, it is crucial for all auditors to understand the business or organization they are going to audit. Of course, how can an auditor examine the financial reports of a particular company without even understanding its business, operations, processes and the like? Moreover, every organization is unique, thus, every business has different processes and operations that every auditor must take into account. With this, the auditors need to come up with audit programs and approaches that are fitting and appropriate with the line of business under financial scrutiny.
There are about 4 phases in a financial audit namely, planning, strategy and risk assessment, execution of substantive procedures and finally, conclusion and reporting. The planning stage includes the determination of audit scope, understanding service requirements and establishment of team members who shall conduct the audit. It is important to note that the auditors must be independent in mind and appearance at all times, and that they should not have any financial or nonfinancial interest with the company under audit. Needless to emphasize, the auditors must be independent with the companies being audited and examined. In addition to that, the auditors need to understand the entity-level controls of a company. The controls are defined as the means or methods implemented by the management to prevent employee fraud and the equivalent. The auditors need to assess the effectiveness of the controls in place and whether they are functioning effectively as intended by the management. If the controls are deemed ineffective, then the auditors should not rely on the controls, which means that extensive substantive procedures must be carried out. These are the basic steps to be followed in the planning stage.
Under strategy and risk assessment phase, the auditors are expected to perform understanding and walkthroughs of significant processes and classes of transactions such as purchasing, cash receipts and disbursements, sales and/or revenue and many more. The purpose of the walkthrough is to assess and confirm the auditors’ understanding of the business and processes and whether the established processes and policies are being accordingly followed by the employees and process owners. The most crucial part of this phase is to use a robust audit tool to ascertain whether the procedures and transactions (purchases, sales, cash receipts and disbursements) are properly accounted for, as the recording of these transactions are critical in arriving with a fairly presented financial statements.
The execution phase is the most imperative part of the financial audit, as the auditors shall perform various examinations and checking of different accounts and balances in the financial reports/statements and normally, it is in this phase that the fairness of the financial information is assessed. The examination would entail checking supports and evidences such as inspecting bank accounts of the company, bank reconciliations, performing cash counts, sending confirmations to the company’s suppliers and customers whether payable and receivable balances are properly reflected in the financial statements. Furthermore, the auditor would perform inventory count and other testing approaches including financial analyses through the use of ratios and the like. Actually, there are a lot of things to perform under execution phase, nevertheless regardless of the approach, the execution phase is all about examining corroborating evidences that would support the transactions reflected in the financial reports of a company.
Finally, after performing the execution phase, the auditor would summarize the findings and if any, the material financial misstatements that should warrant adjustments in the company’s financial statements to achieve a fair presentation of the aforementioned report. After which, the auditor would opine on the fairness of the financial statements and consider providing suggestions for recommendations to the management on how to better perform the accounting of its transactions.
See also - http://en.wikipedia.org/wiki/Financial_audit