Financial statement auditing

Financial statement auditing

Financial audits involve focusing on financial controls because they relate to reporting. They mainly focus on accounting controls found in the general ledger or sub-ledger systems. It would thus be said that financial statement auditing focuses on external auditors. Internal auditors only complement the work done only on an agreed plan. The purpose of financial statement auditing is to increase credibility to the reported financial position and performance of a business.

The Securities and Exchange Commission requires that all companies that are public institutions must file audited annual reports.

Financial Auditing takes 6 phases which include; engagement acceptance, planning, audit tests, account analysis, reporting and summation.

Engagement acceptance: the American Institute of CPAs endorses that an auditor evaluates the risks related to each engagement. Thus, a CPA should find out about any special situations, the integrity of management and any pending lawsuits before conducting an audit.

Planning: the standards in auditing require that an auditor prepares adequately before planning for engagement. The amount of preparation needed is directly proportional to the size and complexity of the organization. Audit planning involves; acquiring an understanding of the organization’s business, performing trend and ratio analysis, documenting the entity’s internal control process and also evaluating the possibility of a misstatement in the company’s financial statements.

Audit tests: while in the fieldwork process, which is the company’s offices, the auditor performs tests of financial data. Depending on the auditor’s planning process, he or she conducts various checks on financial statement accounts.

Account analysis: in this stage, the auditor ensures that the financial statement account balances rhyme with the underlying documentation and analysis.

Reporting: the auditors then provide a report on whether all financial statements are present as stated in the accounting principles that are accepted generally

in the U.S. Moreover, the auditor may also write down the basic financial statements and the supplementary notes for the organization’s management.

Summation: at this point, the auditor keeps the appropriate documentation regarding the audit and acquires signatures from management concerning the responsibility of the administration for the information found in the financial statements. The CPA then reserves the data in case a lawsuit occurs regarding reported amounts and also for a future account analysis.

Operational Auditing

Operational audits focus on reviewing and assessing a business process. Sometimes the events in a business process may produce either a direct or indirect impact to an organization, for instance, the collection of student fees or account balances of patients. These audits work hand in hand with internal auditing. Internal auditors perform operational auditing as it is part of their job to assess the efficiency and effectiveness of internal audit and operations.

Operational auditing follows a particular procedure which includes four steps that are; planning, execution, reporting and follow up.

Planning: the auditor usually has to obtain background information of the company then makes an assessment of which aspects he or she will target during the auditing process.

Execution: this includes obtaining the essential documents, observing their performance and examining certain materials such as sales invoices and delivery notes for goods.

Reporting: After examining the necessary documents, the report is prepared and submitted to the audit committee.

Follow up: the auditors need to make sure that the management of the company implements any suggestions made.

Compliance auditing

Compliance audits evaluate the level of compliance with internal policies or external regulatory requirements. What is examined individually in a compliance audit differs depending on whether an organization is public or private, the types of data it handles and also if it transmits or stores financial data that is sensitive.

Compliance auditors follow specific procedures which include;

It begins by the organization contacting the auditor. It is here that they decide on whether the auditor’s expertise is good enough.

Secondly, the auditing firm sends a proposal to either the company or the attorney in case of instances where compliance audits would summon client-attorney privilege.

Thirdly, at an introductory meeting, the auditor describes the guidelines for the audit and what may be required. He or she may provide auditing checklists so that the client can prepare on the same.

If the organization is small, the auditor may work through a phone. In this case, the organization fills in audit questionnaires and supplies the auditor with the necessary documents. The auditor at this juncture may be present to interview employees, study the infrastructure and walk through the workspace.

Last but not least, the report is delivered at a relatively short time. In the last meeting, the auditor then presents and discusses the report as well as gives recommendations to address the areas of risk. Whether working under a deadline or not, organizations are expected to take the liberty of providing a solution to their issues within 120 days. However, some auditing firms customarily offer to follow up programs to help organizations remedy any risks. Auditors then make verification that the measures are met.

Differences between Financial and Operational Auditing

Financial Auditing incorporates the expression of opinions regarding equality, uniformity and conformity of financial information with the commonly accepted principles. In contrast, operational auditing involves the assessment of risks and evaluation of internal controls of operational systems for departments. They thus have a direct relationship to the departmental operations and activities.

Additionally, financial auditing is done to acquire an independent opinion of whether indeed the financial statements of a client are accurate, true and fair. In contrast, operational auditing is done to check if the organizational operations are being conducted effectively and efficiently.

Financial Auditing comes as a requirement for every registered company. External auditors should do it, whereas operational auditing is done by a firm when need be or in other words when a firm wants to evaluate their actions and results.

Besides, a financial audit report bears a standard format, while an operational audit report does not have a standard format.

Moreover, financial audits must be published for the public, but operational audit reports do not need to be public.

Financial Auditing is usually either full or limited in scope depending on the laid objectives. Financial Auditing, which is limited in scope, is customarily performed by the office of internal audits. These audits may include a transaction cycle of administrative systems such as payrolls, payables or even an independent analysis of the financial activities of a particular department. On the other hand, operational auditing is always conducted in full scope as it covers areas such as the structure of an organization, management of assets, security, recruitment and company’s productivity.

Financial Auditing is carried out by external auditors while internal auditors conduct operational auditing.

Financial statement auditing is done after every fiscal year while operational verification is done when the need arises that is in the assessment of a department’s activities.

Finally, the report acquired from financial statement auditing is addressed to shareholders while the release of operational auditing is discussed only to the client.

Professionals who perform financial auditing are external auditors who are not ideally controlled by the management. In contrast, operational verification is performed by employees of the company and hence are controlled by the administration.

Differences between operational and compliance auditing

Operational auditing determines the efficiency of a company or organization. It may either assess a whole organization or single out one operation unit in the organization, for example, a shipping department. On the other hand, compliance auditing is conducted to determine if a company has complied with the different laws and regulations required in the industry. The Securities and Exchange Commission controls the activities.

In the aspect of ethics, operational auditing makes sure that the workforce is used to the maximum to gain profits and be efficient but in consideration of the state laws. When it comes to compliance auditing, there is an innate ethical aspect that is intended to ensure that all the company’s operations are in the best interest of the public.

Compliance auditing can be done by an independent third party, for example, when one is conducted to ensure that the company is adhering to its financial agreements towards a specific bank. In contrast, operational auditing is done by internal auditors working in that particular company to ensure that employees are following the company’s policies and directives.

Operational auditing is done to measure the overall risks that may hinder compliance and security. Thus, for a company to pass a compliance test, it needs to carry out comprehensive operational auditing first.

An auditor’s report may be used by supervisors to assess possible fines for non-compliance or by the c-suite in proving regulatory compliance. It means that an external auditor may, at times use a company’s internal audits to evaluate its compliance and regulatory risk management efforts.

Compliance auditing can either be conducted internally or externally while operational auditing can only be done privately.

Compliance auditing provides a summary of internal business processes that can be improved or changed as regulations and requirements. It merely means that compliance auditing can act at times act as a guideline for operational auditing as the auditors now know where to look keenly for improvements and executions of company policies.

Differences between Financial and compliance auditing

Compliance auditing is a function that sees to it that a company adheres to guidelines such as governing, departmental rules and other compliance policies while financial auditing is taken as more of a position and focus evaluation of a company’s financial statement strength.

Based on the scope, financial auditing would be related to issues of payable accounts and receivables of a report in an organization. However, compliance auditing checks if policies and techniques were followed or not. It may include all functions policies and procedures or just a portion of a particular function. It all depends on the scope.

Compliance auditing cross-checks if the policies, rules and procedures are followed or not while financial auditing cross-checks authorities to sign, due diligence, the correctness of amounts paid and much more.

Furthermore, financial statement auditing is carried out by external auditors while internal auditors do compliance auditing.

Advantages of Auditing

They provide a more detailed overview of the organization, such as where your company is more stable. It also offers a good picture of how your business is being run, for example, by correcting small unavoidable mistakes.

They also help the organization in acquiring a new perspective. Only happens if the auditing was done by a good auditor who is honest and gives both positive and negative remarks and most importantly if the company is demonstrating full compliance or not.

Proper auditing improves the credit rating of an organization. Regular auditing makes the company more trustworthy to its creditors as it is seen as transparent. Thus places the organization in the low-risk category according to the bank.

Additionally, regular auditing makes the company more reliable in that it is seen that everything in the business is going as initially planned. It should be noted that even small enterprises benefit from this reliability as tax officials end up relying on your audited financial statements and are thus able to calculate your level of taxation.

Lastly, auditing also shows clearly where your company is going. A properly conducted financial audit shows both the strengths and weaknesses of a business. The areas that usually seem troublesome, however, demand more attention.

Conclusion

Having regular audits of your company’s financial statements is essential to portray trustworthiness. Reviews help the management to track and solve any in-house issues as well as express more reliability to investors, shareholders, banks and tax officials.