What is 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.
Importance of Financial Statement Audit
- Enhances Qualify of Business Process – A rigorous audit process may also identify areas where management may improve their controls or processes, further adding value to the company by enhancing the quality of its business processes.
- Assurance to Investors – An audited financial statement provides a high, but the not absolute, level of assurance that the amounts included in the company’s financial statements and notes to accounts (disclosures) are free from any material misstatement.
- True and Fair View – An unqualified (“clean”) audit report provides the user with an audit opinion which states that financial statements are showing true and fair view in all material aspects and are in accordance with generally accepted accounting principles.
- Provides Consistency – Financial statements Audit provides a level of consistency in financial reporting that users of the financial statements can rely on when analyzing different companies and decision making.
Objectives of Financial Statement Audit
The objectives of a Financial Statement Audit-
- The objective of a financial statement audit is to enable the auditor to express an opinion on financial statements Audit prepared by the management of the entity.
- For this, it is essential that financial statements are prepared as per the recognized accounting policies and practice and relevant statutory requirements and they should disclose all material matters.
- However, his opinion does not constitute an assurance as to future viability of the enterprise or the efficiency or effectiveness with which its management has conducted the affairs of the enterprise.
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.
Inherent Limitations of a Financial Statement Audit
- The auditor cannot obtain absolute assurance.
- This is due to inherent limitations of an audit due to which auditor obtains persuasive evidence rather than conclusive.
- It arises from Nature of financial reporting, Nature of audit procedures and Limitations with respect to time and cost
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.
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#1 – Integrity, Objectivity, and Independence
Auditor should be straightforward, honest and sincere in his professional work. He should be fair and must not be biased.
#2 – Confidentiality
He should maintain the confidentiality of information acquired during his work and not disclose any such information to a third party.
#3 – Skill and Competence
He should perform work with due professional care. Audit should be performed by persons having adequate training, experience, and competence.
#4 – Work Performed by Others
The auditor can delegate work to assistants or use work performed by other auditors and experts. But he will continue to be responsible for his opinion on financial information.
#5 – Documentation
He should document matters relating to the audit.
#6 – Planning
He should plan his work to conduct an audit in an effective and timely manner. Plans should be based on knowledge of the clients business.
#7 – Audit Evidence
Auditor should obtain sufficient and appropriate audit evidence by performing compliance and substantive procedures. Evidence enables the auditor to draw reasonable conclusions.
#8 – Accounting System and Internal Control
Internal control system ensures that the accounting system is adequate and that all the accounting information has been duly recorded. The auditor should understand the accounting system and related internal controls adopted by the management.
#9 – Audit Conclusions and Reporting
The auditor should review and assess the conclusions drawn from the audit evidence obtained through the performance of procedures. The audit report should contain a clear written expression of opinion on the financial statements.
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