What is An Interim Audit?
Interim audit is the part of the auditor testing procedure that conduct before the financial year-end of the client. Usually, the auditor fieldwork will separate into the interim and final audits. The interim audit will perform before year-end while the final audit will be performed after the year-end.
Not all audit engagement requires to have an interim audit, it depends on the auditor and size of client. The interim audit may not necessary when the client is small, and they can finish the work within one or two weeks after year-end. For the small clients, auditor may not place reliance on internal control and decide to go straight to the substantive testing. So they will not require to have an interim audit.
Benefits of Interim Audit:
- Reduce the work done at the final audit: Auditors can reduce significant work at the year-end by conducting an interim audit. We can perform some tasks such as understand client businesses, evaluate internal control, access risk and perform substantive tests. The substantive test mostly focuses on the income statement accounts.
- Understand client business: It is a good time to understand the client business in order to design proper testing to detect audit risk. As we have to do substantive tests at year-end, we have to make a proper plan in the interim.
- Understand Internal control and Detect Weakness: Auditors will rely on internal control in order to reduce audit risk. Interim audits will allow auditors to spend more time on internal control and detect its weakness.
- To balance auditor’s time: Most auditors will be under pressure during the year-end closing as the clients will have the same reporting date. By doing the interim, it will help allow auditors to complete the work as much as possible rather than waiting for the year-end.
Interim Audit Procedure
- Understand client: It is a good time to understand the client business, structure, process and so on. We have more time to complete such kind of job in the interim. It will be very tough if we do in the year-end.
- Evaluate internal control: Internal control will help to reduce audit risk if they are properly set and perform. Before placing any reliance on them, we need to evaluate the internal control.
- Detect high-risk areas: During understand process, the auditor should identify the high-risk area which can impact the whole financial statement. The audit can decide to outscore the low-risk area and focus on the high-risk account. It also the time to make practical testing procedures during the year-end.
- Substantive test on Income and Expense: Beside the control testing, auditors can perform testing on accounts line items in the income statement. It will help to reduce the testing at year-end. For example, we can test the 9th-month income statement during the interim. At year-end, we only test the remaining 3 months balance.
- Substantive test on Balance sheet items: Auditors normally only test the internal control on balance sheet items as the interim balance will be different from year-end. However, they can perform substantive on low-risk accounts that have strong internal control. Then they can make the conclusion on the balance at the year-end base on interim testing. Moreover, if the interim close to year-end, the auditor can test the interim balance and roll forward to the year-end.
Interim Audit Vs Final Audit
The final audit is the part of audit testing conduct at or after year-end. Auditor will perform final testing after client has prepared the financial statement. The big company needs to spend a few weeks to finalize the report while a small company can prepare financial statement right after year-end closing. It will depend on the complexity, human resources of the company.
The auditor may not require to have interim audit, but they must conduct the final audit otherwise they will not be able to audit the financial statement. The final audit focus on substantive testing in order to conclude on the financial statement. However, they also need to take a look at the internal control as well. We need to know that the control work in a whole year.
Some parts of income statement may be tested in the interim so the auditor just performs the additional test of the remaining months. The income statement covers the whole year, so we need to test only a few months that are not under interim audit.
Most auditors will leave all accounts on balance sheet to test in the final audit. As we know that, balance sheet reports on a specific date. So testing in interim seems not necessary unless we plan not to test at year-end.
Final audit is very important as we do after receiving the full financial statements. It allows us to see the full picture which may be different from the interim testing. Moreover, final audit is very tough as we need to issue an audit opinion right after completing the work. The issued date will depend on the agreement between the client and audit team.