AUDIT OF FINANCIAL STATEMENTS: WHAT IT IS FOR AND STAGES - DUDAS - 2025

The audit of financial statements is the examination of the financial statements of an entity and their corresponding statements, performed by an independent auditor. The result of this examination is a report made by the auditor, certifying the impartiality in the presentation of the financial statements and related indicators.

The auditor's report should accompany the financial statements when they are issued to the intended recipients. The auditor is responsible for expressing an opinion indicating that there is reasonable assurance that the financial statements as a whole are free of material misstatement, whether due to fraud or error, and that they are presented fairly in accordance with the relevant accounting standards.

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An audit is the most expensive of all types of examination of financial statements. The least expensive is a build, followed by a review.

Due to its cost, many companies try to go down to just one review or compilation, although this is only an option if it is acceptable to the report's recipients.

What is it for (objectives)?

The fundamental purpose of a financial statement audit is to add credibility to the reported financial position and performance of a business.

It is to give an independent guarantee that management, in its financial statements, presents a true and fair view of the financial performance and position of a company. It is the basis of trust and administrative responsibility between those who run a company and those who are its owners.

Suppliers may require audited financial statements before they are ready to grant a commercial credit, although this generally happens only when the amount of credit requested is substantial.

An audit process will also identify areas where management can improve its controls or processes, adding additional value to the company by improving the quality of its business processes. Its main objectives are the following:

Ensure accountability

The more a business grows, the more important it is to keep track of who is responsible for what. This is especially true when shareholders are on board and accountability is a demand.

Managers should ensure that they are up-to-date with accurate reporting to the extent possible, but there is no substitute for an independent audit of financial statements to verify performance.

Provide reliability

The tax office, financial institutions, and management can all benefit from viewing audited financial statements.

With an independent financial audit, tax officials can rely on the accuracy of the information they provide for their own calculations and decisions.

Offer security

Although no audit can provide 100% accuracy and security, it can certainly go a long way.

A fairly reasonable level of assurance can be obtained from a well-conducted audit, which could save any subsequent recalculation or bug fixes. This provides a level of peace of mind that few controls or protocols can provide.

Provide a full report

Something very significant is that an audit of financial statements will provide a complete report on the way the company is doing.

The value to be appreciated here is that it is often what is not reported that makes the difference. Having complete records means that whatever happens, you will have complete and up-to-date information when needed.

Receive an opinion

If you are not aware of potential problems or glaring gaps, you do not have the power to fix them. This is the key to the value of an audit, and it could even make a vital difference between business success or failure.

Stages

The auditors have to interact with the company during all stages of the audit process. They hold ongoing meetings with management, both at the operational and senior management levels, as well as with corporate leadership.

Risk planning and assessment

It involves gaining an understanding of the business and the business environment in which it operates. This information is used to evaluate whether there are risks that could affect the financial statements.

Internal controls testing

It involves evaluating the effectiveness of the set of controls that an entity has, focusing on areas such as adequate authorization, protection of assets and separation of responsibilities.

This leads to performing a series of tests on a sample of transactions in order to determine the degree of effectiveness of the control. If there is a high level of effectiveness, it allows auditors to reduce some of the subsequent audit procedures.

If the controls are not effective, that is, if there is a high risk of material misstatement, then the auditors should use other procedures to examine the financial statements.

Substantive procedures

This implies a wide range of procedures to be carried out, of which a small sample are the following:

Analysis

A proportional comparison of the historical results, the predicted ones and those of the industry in general is carried out, in order to detect possible anomalies.

Cash

Bank reconciliations are reviewed, available cash is counted, restrictions on bank balances are confirmed, and bank confirmations are issued.

Negotiable values

Values ​​are confirmed, subsequent transactions are reviewed, and market value is verified.

Accounts receivable

Account balances are confirmed and subsequent charges are investigated. Year-end sales and cut-off procedures are also checked.

Inventories

Observe the physical inventory count and obtain confirmation of inventories held elsewhere. Likewise, shipping and receiving procedures are checked, invoices paid to suppliers are examined.

The allocated overhead calculation is also checked, current production costs are reviewed, and inventory costs posted to the general ledger are tracked.

Fixed assets

Assets are observed, purchase authorizations and their disposition are reviewed, lease documents are reviewed. Appraisal reports are also examined, and depreciation and amortization are recalculated.

Debts to pay

The accounts are confirmed, the end of the year cut is verified.

Debts

Confirmed with lenders and loan agreements reviewed. References in the minutes of the board of directors are reviewed.

Income

Documents supporting the sales are reviewed and subsequent transactions are reviewed. The history of returns and sales discounts is also reviewed.

Expenses

Documents supporting a selection of expenses are checked and subsequent transactions are reviewed. On the other hand, items that are unusual are confirmed with suppliers.

Ending

Finally, the auditors exercise their professional judgment and form their overall conclusion, based on the tests they have performed, the evidence they have obtained, and other work they have done. This conclusion is what forms the basis of the audit opinion.

References

1. Steven Bragg (2017). Financial statement audit. Accounting Tools. Taken from: accountingtools.com.
2. PWC (2018). Understanding a financial statement audit (PDF). Taken from: pwc.com.
3. PWC (2018). Financial statement audit. Taken from: pwc.com.
4. Clark Howes (2017). 6 Reasons Why You Should Audit Your Financial Statements. Taken from: clarkhowes.com.
5. Michael Marz (2018). What Is Included in Audited Financial Statements? Small Business - Chron. Taken from: smallbusiness.chron.com.