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What is a Financial Audit and why is it wise to implement it?
Wikipedia offers a succint explanatory definition to the above question:
"A financial audit, or more accurately, an audit of financial statements, is the review of the financial statements of a company or any other legal entity (including governments), resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented. Financial audits are typically performed by firms of practicing accountants due to the specialist financial reporting knowledge they require. The financial audit is one of many assurance or attestation functions provided by accounting and auditing firms, whereby the firm provides an independent opinion on published information. Many organisations separately employ or hire internal auditors, who do not attest to financial reports but focus mainly on the internal controls of the organization. External auditors may choose to place limited reliance on the work of internal auditors."
The External auditors may be governmental or non-governmental. Certified public accountants (CPAs) are external, independent auditors who are licensed by CPA Australia to provide auditing services.
Taximise approach the audit process a little differently. While the financial statement audit is the cornerstone of the audit, our philosophy involves gaining a complete and intimate understanding of your business. By combining our knowledge of your business and our expertise we are able to tailor our audit process to the nuances of your business and to provide insightful advice to management in addition to fulfilling compliance requirements.
Our approach provides a framework for examining financial and non-financial information flows that impact the financial statements and enables us to work with you to identify opportunities for improving your financial performance. We provide a continuous audit process. Your auditor stays in touch with you year-round, keeping up-to-date with your business and changing market conditions, and providing you with ongoing feedback on how your business decisions could affect your financial results.
Types of Audits
The two primary types of audits are financial audits and compliance audits. In a financial audit the management of a business asserts that the financial statements are prepared in accordance with generally accepted accounting principles (GAAP), which are the applicable criteria. The financial statement auditor attests to the degree of correspondence between those financial statements and GAAP. Investopedia is a good resource for more information related to GAAP.
In a compliance audit, an individual or business asserts that it is complying with specific laws, regulations, policies or procedures. The compliance auditor provides assurance that the entity is, in fact, complying with those applicable criteria. In Australia, the Australian Accounting Standards Board (AASB) is responsible for developing, issuing and maintaining Australian accounting standards and related pronouncements, while ensuring close links to global financial reporting standards. AASB makes available for public access relevant accounting standards as well as their interpretation. Relevant links are provided in our Useful Links page, under the Tax Essentials for Businesses and Companies heading.
Typical Stages of an Audit
A financial audit is performed before the release of the financial statements (typically on an annual basis), and will overlap the year-end (the date which the financial statements relate to). The following are the typical stages of a financial audit:
Planning and risk assessment, to be performed before the year-end.
The purpose of this stage is to understand the business of the company and the environment in which it operate, and in particular:
- the relevant industry, regulatory, and other external factors including the applicable financial reporting framework
- the nature of the entity, and its objectives and the related major business risks that may result in material misstatement of financial reports
- the entity’s selection and application of accounting policies
- the measurement and review of the entity’s financial performance
- assessment of entity's internal financial control system, its strength and weaknesses*.
* Eg, ability to overstate revenue, given the right incentive and potentially uncontrolled ability to do that; an auditor would typically increase the rigour of the audit procedures for checking the revenue figures.
Internal controls testing, performed before and / or after the year-end
Its purpose is to assess the operating effectiveness of internal controls (e.g. authourisation of transactions, account reconciliations, segregation of duties) including IT General Controls. If internal controls are assessed as effective, this will reduce (but not entirely eliminate) the amount of 'substantive' work the auditor needs to do.
Substantive procedures, performed after year-end
The purpose of this stage is to collect audit evidence that the management assertions (actual figures and disclosures) made in the Financial Statements are reliable and in accordance with required standards and legislation.
One of two methods may be employed:
Substantive Analytical Procedures: where internal controls are assessed as strong, auditors can rely more on the existing internal controls. This method is based on the comparison of sets of financial information, and financial with non-financial information, to see if the numbers 'make sense' and that unexpected movements can be explained
Substantive Tests of Detail: typically employed where internal controls are deemed as not appropriate or weak, and is based on selecting a sample of items from the major account balances, and finding hard evidence, e.g. invoices, bank statements, for those items.
This phase is usually performed after financial year-end. However in practice some audits involve a 'hard close' or 'fast close' whereby certain substantive procedures can be performed before year-end. For example, if the year-end is 30th of June, the hard close may provide the auditors with figures as at 30th of May. The auditors would audit income/expense movements between 1st of July and 30th of May, so that after year end, it is only necessary for them to audit the June income/expense movements and the 30th of June balance sheet (these are known as 'rollforward' procedures).
Finalization (end of the audit)
The purpose of this closing phase is to evaluate and review the audit evidence obtained, ensuring sufficient appropriate evidence was obtained for every material assertion, and to consider the type of audit opinion that should be reported based on the audit evidence obtained. All these are part of the report compiled by the auditor to management, as well as highlights of any other important matters that came to the auditor's attention during performance of the audit.
Contact one of our CPA accountants to explore how your business may benefit of our services in this area. Your first half-hour consultation is at a discounted rate!
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