A Financial Audit is an inspection of financial statements of your business by proper documentation & process done by someone who is independent of your organization. They check your accounting records, internal control policies & systems on which people are performing for the process of accounting. Financial auditing provides the assurance to your books that they are going well & legally, auditors use this process to assure your stakeholders(outsider investors & third parties) for stability & credibility of your business. A one more secondary reason for financial audit is to assure that your business is in compliance & regulatory agencies & protect from the risk of fraudulent financial practices, It provides a fair view of its financial performance.
Top financial statements which needs to be audit
Income Statement/Profit & loss account:This is a statement of profit & loss over a specific period of time. It shows all the income & losses during a specific period & records all the operating & non operating activities as well. This statement is used for analysing profit or loss of the company.
Balance Sheet:Balance sheet shows the financial position of a company at a particular time. It includes the all assets, liabilities & shareholder equity of the company. It gives the whole detailing that what company owns like assets along with the liabilities. If we talk about the equation of the balance sheet then it can be shown as below:
Assets = Liabilities + Shareholder’s Equity
Cash Flow Statement:This is the statement of cash flow like what company has received (cash & cash equivalents) & what company has been released in a particular & specific accounting period. Cash flow statement includes the three activities are as below:
- Operating Activities
- Investing Activities
- Financing Activities
Objectives of financial statements audit
- Main objective of the financial statements audit is to enable the auditor to express his financial opinion on financial statements which have been already prepared by the accounts department of the company in the eye of management.
- By the process of financial audit, investors & bank institutions can rely on the financial position of the company because they can be assured by the certification & report of the auditors. Auditor report plays a very good role for the future growth of the company.
Phases & process of financial audit
- Planning: This is the first stage in which the audit team comes together with general specified guidelines for performing the process audit of statements. This auditor requires thorough knowledge in respect of that industry & business environment in which the company operates.
- Internal control checking: In this stage the auditor checks all the internal control policies which should be performed well according to the general guidelines & policies. Auditor assures that anything should not be eliminated & misstatement of financial statements.
- Absolute checking: In this checking auditor may check the physical assets inspection if required & also cross verifying the financial statements value with their relative departments like warehousing, stock room etc. to check the absolute value of statements. Auditors can check the in-out register of sale & purchase for cross verifying the trade accounts. This can be the final check of auditing in which the auditor assures for everything.
Responsibility regard to the financial statements & its audit
- Financial statements & the data of the company should be appropriate for use & should be up to date.
- An auditor is responsible for giving information & his opinion to the financial statement.
- Audit of the financial statement does not relieve the responsibility of fairness from management of the company.
Importance of financial audit for a company
- Audit process also identifies the areas in which companies improve their weak areas in which improvement is required.
- An audit financial statements provides the assurance
Limitations of financial audit
- Auditors cannot give absolute assurance to the management & in report because the auditor also believes in the financial statements that no misreporting reported to him by the management.
- Auditors can’t check each & every data line due to the time & cost limits, so there may be an unavoidable risk which can arise by misstatements may remain undetected.
Principles of governing a Financial Audit
- Integrity & Independence: Auditor should be independent & professional in his work. He should be fair & not biased.\
- He should maintain the confidentiality of the company on which he is performing audit.
- Auditor should perform his duty professionally with due diligence & proper training.
- Auditor can delegate his work to his assistants but he will definitely be responsible for all the reports.
- Auditor needs to complete the documents related to the audit.
- Evidence of Audit should be maintained properly.
- Auditor reports should be very clear with written expressions on financial statements.
Examples of Audit Report
- Auditor gives a clean opinion if he gets satisfied with all the financial statements presented by the management.
- Auditor can give the qualified opinion if the auditor has faced any limitations during the process & checking.
- If the Auditor finds that statements are not correct or misstated then he can give the Adverse opinion.
Contents & checklist of the Financial Audit
- Revenue & sales checking: Auditors need to check the sale & revenue register entries in ledger & also subsequent register. Also, needs to check the in-out register for assurance of physical stock.
- Approval of expense: In this regard, the auditor checks all the expenses approvals whether it is paid by cash or cheque. Auditor assures that all the expenses should be approved by an authorized authority & should be double checked. Payroll expenses should also be released with approval.
- Accrual Accounts: According to the principles, accruals should be booked to establish a balance sheet. Like payroll processing, bonus & all the things which are due & going to be paid. Accruals give a fair view of financial statements.
- Trial Balance: Auditors check all the balances specially in terms of reconciliation, also in accounts payable & receivable there should be supporting in each & every entry which relates to monetary terms. Usually inventory & fixed assets should be confirmed by quantity and actual value. Cash & bank balances can be checked through reconciliation & bank statements.
Types of Financial Auditing
- Internal Audit: Internal audit is used to assure that organisation is following all the policies & procedures. It can be done by internal employees of the company (It can also be outsourced). Also, companies can check that no risk should be involved in their financial statements etc.
- External Audit: External audit is a statutory requirement which needs to be followed according to the various acts of the country. After external audit financial statements of a company can be more reliable & fair to banking institutions & third parties. In some matters like bankruptcy & fraud, external audits can be mandatory for the companies.
Contents of Financial audit report
- Title: Financial audit report starts with the title “Independent Auditor’s Report”.
- Addressee: Auditor report addressee are those groups or persons who have appointed the auditors for auditing. Generally addressee should be shareholders of the company as auditors appointed by the shareholders.
- Auditor’s & Management responsibility: This statement shows the responsibility of the auditor that he has audited the financial statements properly unbiased with their fair view on the report.
- Audit Scope: This defines that auditing has been done by the auditors as per the generally accepted principles of auditing in the country. Auditor assures that financial reports are audited completely with no material misstatements. If any limitations are found by the auditor during the process of financial audit then he can be mentioned in this section of the Auditor’s report.
- Opinion of the Auditor: This paragraph keeps a very important role in auditing, in this auditors give their opinion on the financial statements. Below are the opinions of the auditor:
- Unqualified opinion: An unqualified opinion is a clean opinion which is given by the auditor in case when the auditor finds no misrepresentation or material misstatements. Auditor gives a clean chit that all the financial statements are prepared & followed by the Generally accepted accounting principles. This statement is the best opinion of the auditor.
- Qualified opinion: Qualified opinion conduct when auditor finds that GAAP has not been followed in financial statements. This statement is also given in the case when adequate disclosure is not made to the financial statements.
- Adverse Opinion: Adverse opinion of the auditor shows that the financial report is not adequate & also not followed by the GAAP procedures, it can refer to fraudulent behaviour of the company also. In this case the company needs to correct its statements to get error free reports. The company has to re-audit the financial statements & make it error free as shareholders & lenders etc need the error free financial statements of the company.
- Disclaimer of Opinion: This statement refers to that company has not provided the required details of the company & it will give a disclaimer of Opinion. Thus the financial status of the company cannot be determined due to lack of complete information.
- Basis of Opinion: This paragraph gives the basis on which report based on. It should mention the facts of the basis in the report.
- Signature of Auditor: Auditor & its partners should sign the auditor report content in the end.
- Place of Signature: This contains the city in which the financial auditor report has been signed.
- Date of the Financial audit report : This contains the date of financial audit report in which it has prepared & finalized.
A financial audit report is issued by the auditors of the company after completion of financial audit of the same. This report shows the financial status of the company & also shares the misrepresentation or areas of improvements (if any) or required. It also highlights the independent view of the auditor which helps in maintaining & making it strong the reputation of the company. Financial audit plays a very important role in the reputation of a company because third parties & vendors can rely on the position of the company.