Types of Audit – Financial Statement Audit

Types of Audit – Financial Statement Audit

A financial statement audit is a review on the annual financial statements of an entity to allow independent auditors from audit firms in Johor Bahru to express audit opinion in a true and fair view. They should ensure that the entity has prepared and presented its financial statements against a particular accounting framework and standards.

The financial statements which the auditors will review include the income statement, cash flow statement, balance sheet, statement of change in equity, as well as the related notes to financial statements. They will examine whether the firm has prepared and presented its financial statements by adhering to the accounting standards such as local GAAP, US GAAP, and the IFRS.

Typically, the auditors will perform financial statement audits yearly. By doing so, the quality of the financial statements that the stakeholders are using may improve.

The Purpose of Financial Statement Audits

The requirement of the law

Typically, the companies have financial statement audits due to the requirement of law as well as other relevant authorities (Also see Types of Audit – Statutory Audit and Non-statutory Audit). As an instance, the law and central bank demand most of the financial institutions to have their financial statements audited by authorised audit firms. Besides, the corporations which are listed in the share market also need to have such an audit due to the requirement of most of the commission authorities and the securities.

The requirement of the board of directors or the shareholders

The law does not make it compulsory for some entities to have financial statement audits. However, it can be the requirement of the board of directors, shareholders or the owners to have one so that they can make sure that the management is submitting the properly prepared financial statements without material misstatements (Also see What is Audit Materiality?). Also, it improves the management’s integrity to the shareholders, particularly those minority shareholders who do not possess any important personal work in that firm.

Improve the credibility of the financial statements

If the entity has its financial statements audited, their credibility generally increases from the points of view of the creditors, suppliers, bankers, as well as other related parties. This is because they believe that the auditors act as an independent party to conduct a technical review on those statements on their behalf.

Four Crucial Stages in Financial Statement Audits


Before the auditors start performing their work, they need to reach an agreement with their customers about the essential terms and conditions. These include the audit objective (Also see What are the Audit Procedures and Its Objective?), audit scope, audit fee, reporting timeline, reporting requirement, as well as the respective responsibilities of the auditors and the entity itself.

At this stage, the auditors need to conduct a pre-analytical review to examine if they could manage the audit. This includes their existing technical expertise and resources. Also, they need to check the customer due diligence to assess whether their customer has involved in money laundering.


The auditors need to plan for an audit engagement. In this phase, auditors may consider the audit approach that they should use, the allocation of resources, as well as acquiring a better understanding of the internal controls and the environment of the customer’s business.

Also, the auditors should perform risks assessments (Also see Types of Audit Risks and Their Sources) in this phase so that they can identify the possible risks of material misstatements which may happen in the customer’s financial statements.

Furthermore, the auditors should set the materiality in the planning stage. However, if any new situation occurs, they could adjust the amount for the materiality they have fixed.


In this phase, the auditors would perform detail testing on those accounts, areas, events or transactions which are relevant to the financial statements.

As an instance, they will inspect the customer’s inventories that they store in their warehouse. They may also join the yearly inventories count and observe the counting process (Also see Procedures of Field Audit for Inventory Audit).

Typically, the auditors will use procedures like the analytical review, inspection, interview, observation, recalculation, reperformance, vouching, and so on.


This is the last step of the audit process. As soon as the auditors complete the detailed testing by following the requirements of the ISA, they will draw a conclusion based on the audit results before issuing audit opinion.

The audit opinion is crucial to the company as it is the determining factor of the credibility of its financial statements. For instance, if the auditors have issued an unqualified opinion, it indicates that the financial statements of the firm are true and fair. Conversely, if they have issued a qualified opinion, it shows that the firm did not prepare and present the financial statements correctly. On the other hand, having an adverse opinion means that there are some material misstatements which are pervasive in the financial statements of the firm.

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