Financial Statement Audit

What is the Financial Statement Audit?

Financial Statement audit is defined as an independent examination of the company’s financial statement and its disclosures by auditors and provides with a true and fair view of its financial performance.

Top Financial Statements to Audit

These financial statements are the ones often utilized for audit purposes. However, some adjustments might be made to the statements by the company after the finalization of the audit for a better representation of facts.

Financial-Statement-Audit

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If you want to learn more about Auditing, you may consider taking courses offered by Coursera

  1. Auditing I: Conceptual Foundations of Auditing
  2. Auditing II: The Practice of Auditing

Objectives of Financial Statement Audit

The objectives of a Financial Statement Audit-

Phases of an Auditing Financial Statements

Let’s discuss the following phases.

Auditing Financial Statements Phases

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#1 – Planning & Risk assessment

It is the initial stage, which involves putting together an audit team and laying down general guidelines for effectively carrying out an audit. The next step is to determine any risks that could lead to material errors in the statements. Identifying such risks requires the auditor to have a thorough knowledge of the industry and business environment in which the company operates.

#2 – Internal Controls Testing

This stage involves a critical analysis of internal controls adopted by a company and their level of efficacy in eliminating any possibility of material misstatements in financial statements. These internal controls could include automated systems and processes employed by a company to ensure higher operational efficiency, safeguarding of assets, and making sure that all transactions are accurately reported.

#3 – Substantive Testing

At this stage, the auditor looks for substantial evidence and cross-verification of facts and figures reported in the statements which might include the following:

  • Physical inspection of assets, if required.
  • Cross-checking recorded figures in statements against actual documents and records with the company;
  • Third-party or any external confirmations of financial transactions and their details reported by the company; This often includes an independent verification of such statements from the banks and any commercial entities a company is engaged in business with.

Responsibility for Financial Statements Audit

Below are the Responsibility for the financial statements-

  • The management is responsible for maintaining an up to date and proper accounting system and finally to prepare financial statements.
  • The auditor is responsible for forming and expressing an opinion on the financial statements.
  • The audit of the financial statement does not relieve the management of its responsibility.

Scope of a Financial Statement Audit

The auditor decides the scope of his audit having regards to;

  • The requirement of the relevant legislation
  • The pronouncements of the Institute
  • Terms of engagement

However, the terms of engagement cannot supersede the pronouncement of the institute or the provisions of relevant legislation.

Importance

Limitations

Due to aforesaid inherent limitations, there is an unavoidable risk that some material misstatements may remain undetected.

Basic Principles Governing a Financial Statement Audit

Below are some of the basic principles governing a financial statement audit.

This article has been a guide to the Financial Statement Audit. Here we discuss the meaning of Financial Statement Audit, its importance  Objectives, and Scope of the Audit and principles governing the Audit. You may learn more about basic accounting from the following articles –

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