What is Financial Audit?
Financial Audit is independent examination of the financial statements of entity (profit-oriented or not) irrespective of the size of entity by auditors or audit firm to provide opinion regarding the true and fair view of the facts & figures mentioned in the financial statements of the entity and to obtain reasonable assurance regarding whether the financial statement is free from any material misstatement.
The management of the entity draws up the financial statements of the entity for a period. This kind of such financial statements through statutory auditors is obligatory in nature for the management. As the auditors try to obtain reasonable assurance regarding that the financial statement of the entity has been prepared through specified criteria (i.e., international accounting standards, accounting principles, going concern, etc.) and financial statements are free from any material misstatement. The auditors provide reasonable assurance, which cannot be considered as absolute assurance, but the financial audit adds credibility to the financial reporting done by the management.
- It is always conducted by a competent auditor or group of auditors who are independent of the entity so that the observation and opinion provided by the auditors will remain unbiased and provide true opinion towards the practices and procedures adopted by the management.
- The audit consists of checking of Books of Accounts of the entity and making sure that the accounts have been drawn up as per the entries done in the books of accounts.
- It relates to the audit of the Financial statement of the entity by examining all books of accounts and financial information of the entity. Basically, all the Final Accounts of the entity being audited and verified, i.e., Statement of Profit & Loss for the period and Balance Sheet as on the closing date of the period;
- During this, the auditors try to obtain sufficient and appropriate audit evidence for providing his opinion for the financial statements.
Procedures for Financial Audit
Step #1 – Planning and Designing of Audit Procedure
Before performing this audit, it is fundamental for the auditors to create an audit plan for effectively covering various areas of an audit by acquiring knowledge of the client’s business, policies, accounting systems & internal control procedures.
Step #2 – Examine Test of Controls (Internal Controls) and Transactions
To reduce the control risks, the auditor performs a test of controls to check the effectiveness of applied controls over the organization and concerned area of data flow. Auditors also verify the number of transactions entered in the books of accounts by using the substantive test of transactions technique and checking the completeness of the transactions entered.
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Step #3 – Testing of Financial Procedures and Performance of Analytical Procedures
In both the cases when auditor founds about the weakness or strength of test of controls over the entity, they tend towards the analytical procedures and substantive test of detail method to overview the material financials transactions.
Step #4 – Drafting and Issuing an Audit Report
After the completion of the audit step to be done by auditors for gathering sufficient audit evidence, the auditor provides his opinion regarding the financial statement and internal control of the entity in his audit report and consolidates his audit evidence for safekeeping.
How to Conduct a Financial Audit?
- Several Procedures could be adopted for conducting financial audits depending upon the nature of audit procedures to be followed for the class of transactions. Some of the procedures are as follows:
- Checking and verifying the timely and whole submission of data and financial transaction documents to the accounts team for proper verification, authorization, and timely recording of the data.
- Ensuring the proper recording of transactions in the books of accounts. In simpler terms checking the records of Bookkeeping & adequate maintenance of the books as per the required legislative obligations governing the records of bookkeeping.
- Review of internal controls and accounting systems adopted by the management in the entity.
- It provides safeguards to the interest of persons who are not directly associated with the entity or management of the entity by giving the opinion of an independent party who has examined financial statements and have gathered sufficient & appropriate audit evidence for providing his opinion on the true & fairness of the financial statement.
- This comprises checking of internal control and system controls, which provide a check on the employees and creates morale by reducing the chances of embezzlement.
- It reviews the existing control and operation of the business and helps in identifying the weakness and inadequacies in the operations and monitoring.
- Audited Final Accounts helps the management to settle various claims, disputes as well as in sanction of loans and helps in getting a license from the government as per the government requirements.
- It does not provide absolute proof that the final accounts are free of any material misstatement because of the inherent audit limitations that provide satisfactory and reasonable assurance regarding the information mentioned in the financial statements.
- It costs a substantial amount to the concerned entity.
- The audit procedure also results in a disruption in the productivity of employees due to the involvement of the company’s employees with the audit team for resolving queries and discussions. Sometimes it also results in a disruption in productivity of business during the Inventory audit.
- This is the independent audit & verification of the final accounts of the entity prepared by the management. It provides satisfaction to the users of the financial statements like investors, bankers, stakeholders, etc. by clarification of the information provided in the financial statement by an independent auditor.
- This charges a significant amount of fees for their services. Hence all small parties or companies (who do not require their books to be audited as per law) cannot afford audits of their books of accounts voluntarily. But the disadvantages are less significant comparing to the advantages of a financial audit. This overall helps in increasing the effectiveness of business processes and global reporting.
This has been a guide to What is Financial Audit & Meaning. Here we dis discuss how to conduct financial audits and procedures along with features, advantages, and disadvantages. You can learn more about from the following articles –