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 entityFinancial Statements Of The EntityFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. 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 principlesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts., 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 reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. done by the management.
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- 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 informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. 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 evidenceAudit EvidenceAudit evidence is information gathered by auditors during the course of an audit, whether internal, statutory, or otherwise. These facts serve as the foundation for the opinion in the audit report. for providing his opinion for the financial statements.
Procedures for Financial Audit
Below is the procedure to follow for financial audit.
- 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.
- 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. AuditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws. 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.
- 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.
- 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 BookkeepingBookkeepingBookkeeping is the day to day recording of financial transactions such as purchases, sales, receipts, and payments, and it is the first step in the accounting process. It can be prepared in two ways: single-entry and double-entry; however, the double-entry approach is more widely used and recognized in most countries. & adequate maintenance of the books as per the required legislative obligations governing the records of bookkeeping.
- Review of internal controls and accounting systemsAccounting SystemsAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm. 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 controlInternal ControlInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company. 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 auditInventory AuditInventory audit is a process of checking the inventory methods used by the company to record the inventory using various analytical processes. It ensures that the proper record of the inventory is maintained in the company's book of accounts and that it matches to the physical inventory count..
- 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 statementsUsers Of The Financial StatementsFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers. 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 –