Financial Audit Cycle
Auditing is an independent professional assessment of an organization’s financial statements and companying disclosures.
Its purpose is to give the user of the financial statements confidence that the statements have been prepared in accordance with any accounting standards and provide a true and fair view.
An audit also includes an evaluation of the organization’s internal controls to ensure that they are adequate and operating effectively. The auditor expresses an opinion on whether the financial statements are presented fairly, in all material respects, and in compliance with GAAP or other standards. If the auditor has any doubt about the fairness of the financial statements or disclosures, they will be stated in the auditor’s report.
The auditor also expresses an opinion on whether the organization’s internal controls are adequate and effective. The auditor’s report is addressed to the organization’s board of directors and management regarding the internal control weakness. It is not addressed to users of the financial statements who are presumed to be reasonably familiar with business practices and accounting principles.
However, users of the audit report should be able to rely on it as evidence that the financial statements have been properly prepared in accordance with GAAP and that internal controls are adequate and effective.
In order to achieve the result, auditor needs to go through many stages which will be explained below.
Stage in Audit Cycle (Financial Audit Cycle)
Planning is the most important phase of the audit cycle as it establishes the overall goals and objectives of the audit. The auditor must first identify the risks and areas of potential non-compliance, and then determine what specific criteria will be used to assess these risks.
This process requires a thorough understanding of both the organization being audited and the applicable laws and regulations. Once the planning phase is complete, the auditor can move on to conducting fieldwork, testing, and reporting.
However, if the planning phase is not done properly, it can have a negative impact on the entire audit. Therefore, it is crucial that auditors take the time to plan their audits carefully.
- Understanding the client’s business
The auditor needs to obtain an understanding of the client’s internal control system in order to assess the risk of material misstatement in the financial statements.
The understanding starts from the control environment and deep dives into the control activities of each process. This can be done through interviews with key personnel and a review of policies and procedures.
The auditor also needs to understand the internal control over the financial report so that they could assess if the current control could have any negative impact on the financial statements to be audited or not.
By obtaining this understanding, the auditor would be able to design the testing procedure to detect any errors in the financial statement.
- Risk Assessment
Auditors play an important role in ensuring the accuracy of financial statements, however, it is very hard to check all the detail in all accounts of the report. It is more effective and efficient to access the risk of account and design the testing procedure accordingly.
In other words, they look for areas where there is a higher risk that something could go wrong. This helps them to assess the likelihood of material misstatement occurring in those areas.
Based on their assessment, they may choose to perform additional testing or make adjustments to the financial statements. Either way, their goal is to ensure that the financial statements are as accurate as possible.
- Test of Control
The auditor’s decision about the approach to take during an audit is based on many factors, but one of the most important is the test of controls.
This test is conducted before the substantive test, and its purpose is to evaluate the procedures that are used to post entries into the system. If the tests of controls are strong, then the auditor can rely on further processes to verify the accuracy of the information. Strong internal control can reduce the risk of martial misstatement in the account.
However, if the controls are weak, then the auditor may need to take a more hands-on approach in order to ensure that all information is accurate. Either way, the test of controls is an essential step in any audit.
- Substantive Test
The auditor’s substantive procedures are designed to check the financial assertion of the financial statement. This can be done by reviewing the supporting documentation of transactions that occur.
Once the auditor has verified that the balances have been correctly stated, they can then move on to testing the validity of the transactions. This can be done by comparing the supporting documentation to the actual transactions that took place. If there are any discrepancies, the auditor will need to investigate further. Ultimately, substantive procedures are essential in ensuring that the financial statements are accurate and reliable.
- Prepare working completion
Auditors have to compile the work performed during the fieldwork. They have to ensure that all financial line items are properly tested. And they are free from material misstatement.
Auditors have to compare the risk assessment during the planing stage and the actual work perform. They have to ensure that enough work is performed. It is enough to issue an opinion on the financial statement.
- Prepare Report
The auditor’s role is to create a draft report based on the findings as soon as the samples are collected and tested. The auditor needs to report any fraud or illegal acts or anything equivalent in this report. Audit adjustment, disagreements with the management about estimates and accounting policies, and any significant difficulties encountered should be reported in the report.
The auditor should also state whether, in his opinion, the financial statements show a true and fair view. Auditors prepare and issue the audit opinion on the financial statement, not the financial statement.