Managers new to auditing may be wondering what it means to audit a financial statement. Auditing a financial statement is a process that ensures that a company’s financial statements and records are a true and complete record of its finances. An audit independently verifies that financial statements are accurate, unbiased, and fair.
Financial audits can uncover human error, systems error, or fraud. They can also ascertain whether a company’s existing financial controls are sufficient for its business, its size, and its governance.
This is very important for all companies, as a financial audit is a universally accepted procedure to ensure accuracy and broad trust in the financial records of a firm. It is particularly crucial if a company plans to expand, seek funding from outside entities such as banks, or discuss acquisitions or potential sales with investors.
While an audit of financial statements involves qualified people assessing and reviewing financial statements, the entire procedure is broader. It involves the following steps.
1. A Risk Assessment
As a first step, auditors will determine if there are any risks that might cause a material misrepresentation in the financial statements. They assess the risks if they find there are any.
Risks could arise from the business conditions the company operates in, geopolitical conditions, changes in the regulatory environment, and more. Auditors need to be familiar with those business conditions, with competitors, and with any element in the business climate that may lead to risk of the financial statements not being correct.
2. An Audit Strategy
If the risk assessment uncovers any risk of financial misstatement, the auditors will devise a strategy for dealing with the risk. Their audit plan will incorporate the strategy as the audit itself begins.
Auditors will gather evidence that financial statements are true and correct throughout the company. This involves examining financial records for mathematical accuracy, of course, but will likely also involve independent verification of assets and liabilities, the condition of property, plants, and equipment, the amount and extent of inventory, and communicating with clients, banks, and vendors about their financial transactions.
4. Performing Tests
Auditors perform tests to ensure the accuracy of financial data. They may contact choose a number of past disbursements at random, for example, to verify that the vendor exists and that the amounts were paid when and at the amount specified on the disbursement.
5. Discussions With Management
After the evidence-gathering and testing, auditors will hold discussions with management about the findings. They may include responses to the evidence-gathering and testing in these communications.
6. Finalizing an Audit Opinion
After the evidence-gathering and calculations, the auditors will finalize an audit opinion. They will talk to the senior management of the company about the findings of the audit. It is not uncommon for an audit of financial statements to lead to revisions or to information that can affect the existing system of internal controls.
The final opinion is compiled into a report which is given to upper management.