What is a financial Statement Audit?Audit simply refers to examine and give comments on the items verified. Financial audit implies examination of the books of accounts and other relevant records. This will provide the auditor necessary information to give his opinion whether the accounts are properly maintained and complied with necessary statutory, accounting for financial reporting and auditing standards.
A financial statement audit is an independent appraisal of the financial statements prepared by the organization. The basic objective of a financial statement audit is to provide an independent or third-party assurance that the management has, in its financial statements, presented a “true and fair” view of a company’s financial performance.
The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. The auditor’s report must accompany the financial statements when they are issued to the intended recipients or stake holders.
What is the importance of Audit of books of accounts and records?Importance of Audit is increasing with the passage of time – as there is always more and more things to review and whistle, when things are deviating. The businesses become more complex and the management of the companies are playing different methods to beat the market. When the countries or societies are progressing at greater speed with technological developments, new ways of doing things are arising. In order to cover such activities accounting and auditing has to cop up with the market movements and ensure that stake holders’ interests are well protected. There have been an ongoing series of disclosures of fraudulent reporting by major companies, this will also point out the need for an effective audit.
What is the purpose of conducting a financial statement audit?Having an expert opinion independently from the management of the company is highly essential to ensure that what is reflected through balance sheet / statement of financial position or Profit or Loss Account is reliable or not. The purpose of a financial statement audit is to add credibility to the reported financial position and performance of a business. Tax authority need the confirmation of sales and income, Lenders typically require an audit of the financial statements of any entity to which they lend funds. Suppliers may also require audited financial statements before they will be willing to extend trade credit.
What are the audit procedures?A well-planned verification is necessary to cover all financial items with audit materiality. Audit involves collection and evaluation of evidence in support of conclusions arrived. The procedures which will assist the auditor in this direction are.
- Planning and risk assessment - Involves gaining an understanding of the business and the business environment in which it operates, and using this information to assess whether there may be risks that could impact the financial statements.
- Internal controls testing - Involves the assessment of the effectiveness of an entity’s suite of controls, concentrating on such areas as proper authorization, the safeguarding of assets, and the segregation of duties.
- Substantive procedures - Involves a broad array of procedures, of which a small sampling.
What are the different levels of assurances from auditors’ point of view?Depending upon the nature of engagement and the purpose it demands the level of assurance provided by the auditor varies from Audit to Compilation.
An audit provides high level of assurance. But a review engagement gives a reasonably lesser degree of assurance than audit. As in a review, the auditor does not carry out all those procedures that are carried out in an audit. Publicly held entities must have their quarterly financial statements reviewed, in addition to the annual audit.
Sometimes the requirement is only to report on individual items of financial data or on a set of financial statements to report on the factual findings, say to certify only the turnover of the company. The level of assurance in such agreed upon procedures is again lower than a review engagement.
In the case of a compilation engagement, the auditor is called upon to prepare the financial statements – where his expertise in collecting, classifying and summarizing the financial information only demanded and not designed to give any assurance on the financial statements.
What is the Audit Period?Normally the external audit is conducted annually. In the case of new entities, the audit period can be extended to 18 months from the date of incorporation. At the same time, it may not be less than 6 months as well. Subsequent audit period will be for a period of 12 months and this period can be extended up to 15 months in case of certain Free Zones. In case where management of the companies need special purpose audits it can be carried out for a different period or even number of years.
Qualification and Appointment of an AuditorThe manner of appointment, the qualifications and the format of reporting by an external auditor is defined by statute which varies according to jurisdiction of different countries.
The auditors must be a member of one of the recognized professional accountancy bodies. The auditors normally address their reports to the shareholders of a corporation or to the owners of the business entity. The auditors are subjected to strict rules to uphold their integrity and to establish independence.