A certified audit is an examination and verification of a company's financial and accounting records and supporting documents.
The primary goal of a certified audit is for the auditor to express an opinion. The audit opinion is intended to provide reasonable assurance that the financial statements are presented fairly, in all material respects, and/or give a true and fair view in accordance with the Generally Accepted Accounting Principles. The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
So, by this definition, the primary purpose of audited financial statements is for the benefit of outside users of the organization’s financial statements such as banks, government agencies, and investors. As a part of our audit, we are required to make an assessment of the risk of fraud and perform steps to detect the presence of fraud. However, the audit is not designed to find out how much has been taken. Also a part of our audit includes evaluating the accounting control system as a basis on which to plan and perform our audit.
The audit results in a report rendered by the CPA at the end of the investigation. The auditor reports on the nature of his or her work and on the degree of responsibility assumed. In the audit opinion, the auditor states that he or she has examined the client's financial statements for the year then ended in accordance with Generally Accepted Auditing Standards (GAAS) including tests of the accounting records and other necessary auditing procedures. The auditor then indicates whether in his or her opinion the client's financial statements present fairly the financial position, results of operations, and changes in financial position for the year-ended in conformity with Generally Accepted Accounting Principles (GAAP) applied on a consistent basis.
These are some of the benefits of an audit that we point out to our clients. First, an audit gives a measure of comfort to the investors when they realize that the manager is willing to let outsiders come in and inspect the books and records. In other words, an audit adds another layer of accountability to the manager’s system of controls.
An audit performed by a firm that is familiar with the industry will help the manager stay up-to-date on tax, accounting and legal issues. It is important to surround yourself with professionals who stay current on the issues that affect your situation.
If fraud is detected the appropriate personnel are notified. As mentioned earlier, the primary goal of an audit is related to financial statement presentation, not fraud detection. But, in response to recent events, CPAs perform extensive tests to determine the potential for, or the actual occurrence of fraud. Any occurrences will be reported to the responsible individual.
An annual audit will also produce a management letter. Earlier I mentioned that part of an audit includes a study and evaluation of the accounting system. This study is conducted by interviews, questionnaires and testing of transactions. The findings are compiled in a letter in which the weaknesses and suggestions for improvements are detailed. Most of our clients find the management letter as beneficial as the audited financial statements themselves.
The following are the stages of a typical audit and need to be extensively documented:
Planning and risk assessment
Timing: before year-end
- To understand the business of the company and the environment in which it operates.
- What should auditors understand?
- The relevant industry, regulatory, and other external factors including the applicable financial reporting framework
- The nature of the entity
- The entity’s selection and application of accounting policies
- The entity’s objectives and strategies, and the related business risks that may result in material misstatement of the financial statements
- The measurement and review of the entity’s financial performance
- Internal control relevant to the audit
- To determine the major audit risks (i.e. the chance that the auditor will issue the wrong opinion). For example, if sales representatives stand to gain bonuses based on their sales, and they account for the sales they generate, they have both the incentive and the ability to overstate their sales figures, thus leading to overstated revenue. In response, the auditor would typically plan to increase their procedures for checking the sales figures.
Internal controls testing
Timing: before and/or after year-end
- To assess the operating effectiveness of internal controls (e.g. authorization of transactions, account reconciliations, segregation of duties) including IT General Controls. If internal controls are assessed as effective, this will reduce (but not entirely eliminate) the amount of 'substantive' work the auditor needs to do (see below).
- This test determines the amount of work to be performed i.e. substantive testing or test of details
Timing: after year-end (see note regarding hard/fast close below)
- to collect audit evidence that the management assertions (actual figures and disclosures) made in the Financial Statements are reliable and in accordance with required standards and legislation.
- where internal controls are strong, auditors typically rely more on Substantive Analytical Procedures (the comparison of sets of financial information, and financial with non-financial information, to see if the numbers 'make sense' and that unexpected movements can be explained) where internal controls are weak, auditors typically rely more on Substantive Tests of Detail (selecting a sample of items from the major account balances, and finding hard evidence (e.g. invoices, bank statements) for those items)
- Certain substantive procedures can be performed before year-end. For example, if the year-end is December 31, the company may provide the auditors with figures as at November 30. The auditors would audit income/expense movements between January 1 and November 30, so that after year end, it is only necessary for us to audit the December income/expense movements and the December 31st balance sheet. These are known as 'rollforward' procedures.
Timing: at the end of the audit
- To compile a report to management regarding any important matters that came to the auditor's attention during performance of the audit,
- To evaluate and review the audit evidence obtained, ensuring sufficient appropriate evidence was obtained for every material assertion and
- To consider the type of audit opinion that should be reported based on the audit evidence obtained.
Financial Statement Preparation
- Preparation of the financial statements including full disclosure of all footnotes required by Generally Accepted Accounting Principles is the responsibility of management. We will greatly assist management in the preparation of the financial statements.
Many companies rely on auditor reports to certify their financial information in order to attract investors, obtain loans, and improve public appearance.