Essential Processes in the Audit of Financial Statements
Typically, the qualified and independent audit firm in Johor Bahru will perform the audits of financial statements. The audit partners who are certified public accountants will lead the audit firm.
A company should audit its financial statements yearly and send the reports to the board of directors as well as other relevant users. The procedures financial statement auditing for every company vary as this depends on their policies and the flow of internal processes.
In this article, we will focus on the essential processes in financial statements auditing.
Usually, the auditors will perform this process first before they proceed to other procedures. At this stage, the auditors will prepare an audit engagement letter, and both the auditors and their customer must agree with it. Some crucial points that both parties must include in the engagement letter include the audit objective, scope of audit, audit fee, responsibilities and the reporting time frame.
Apart from that, the auditors should conduct Know Your Customer procedures so that they can determine if the business or its management are involved in corruption or money laundering. If there is any, the auditors should never accept that engagement.
The auditors should also understand the nature of the customer’s business to identify whether the audit team possesses adequate expertise and competence to conduct the audit activities which are associated with the customer’s industry. The auditors may turn down the engagement if they do not possess sufficient capability or resources to accomplish the tasks.
Another point is that both the auditors and their client should clarify their respective responsibilities before they started the audit (Also see Audit Procedures That Helps in Detecting Fraud). This includes their responsibilities in the financial statements.
Audit planning is vital in the audit of financial statements. A well-planned audit plan leads to the right way of delivering an audit report. This indicates that the auditors have adequate time and resources to carry out audit procedures and audit strategy.
The auditors will perform a few things in the process of audit planning.
As soon as the auditors agree to perform financial statements auditing, they will consider starting the process of audit planning according to the available resources and timeline. Auditors should allocate a suitable audit team to perform financial statements auditing. This means that they need to have sufficient staff to do their job, and this allows them to have adequate time to carry out audit procedures, examine the audit documentation, as well as prepare the reports. The staff should be competent enough to manage the audit tasks.
Understand key internal control
The auditors should examine the internal control over financial statements of their customer so that they can identify the ability of the controls in detecting and preventing errors, fraud or risks which may have a material impact on the financial statements. They have to understand the controls and the control environment of their customer to examine this. The results of the assessment may influence the way the auditors would use in audit samplings.
The auditors are required to conduct this on the financial statements so that they could see whether there is any possibility for the error or fraud to occur. They should pay more attention to the areas with high risks, and they may focus less on the low-risk areas.
Usually, the auditors will set the performance materiality and the planning materiality in the process of audit planning.
Presence of conflict of interest
At this stage, the auditors should confirm whether there is any conflict of interest between the customer and the audit firm, or between the management of the customer and the audit team. If it is present, both parties will need a reliable guideline on how they can minimise the audit risks. If they are unable to reduce the conflict, the auditors cannot accept that engagement.
Internal control over financial reporting assessment
At this stage, the auditors would assess the internal control over financial reporting of the customer. Typically, they will implement the COSO frameworks when they review this.
In these processes, the auditors may require a lot of documents for documentation, for example, the organisational chart of the firm, its chart of accounts, management accounts, financial statements, procedures and policies, as well as other relevant documents. Also, they may interview the personnel of their customer’s company to acquire information for assessments and documentation.
The strength of internal control over financial reporting has a substantial impact on the substantive audit procedures. Typically, the auditors may rely on the internal control over financial reporting partially if they conclude that the control is strong. This implies that they can do less work in the substantive audit procedures. In contrast, if that control is not reliable, the auditors may require a large amount of sampling on the financial data of their customer.
Substantive review on the financial data:
Regardless of the strength of internal control over financial reporting, the auditors cannot depend on it entirely without performing substantive testing. They still need to review the financial data in detail.
Apart from implementing some common audit procedures, the auditors will also use audit sampling as it helps them to perform their job efficiently.
Typically, the documents that the auditors need include management accounts, financial statements, as well as the relevant supporting documents. The examples of original supporting documents include receipts, invoices, bank statements, contracts and others.
Reporting the result:
As soon as the auditors have finished performing the testing, they will issue audit reports according to the results of their testing in the final audit (Also see What are the Interim Audit and Final Audit?). These reports include some vital information like the audit opinion, audit scope, audited financial statements, responsibilities of the management, the rights and responsibilities of the auditors, as well as the key accounting policies.
There are four types of audit opinions, which are the unmodified opinion, modified opinion, adverse opinion and disclaimer opinion. Usually, the auditors will express one of these opinions.