A financial audit is an important accounting process within the world of finance. It is a process that allows organizations and institutions to evaluate their financial standing from within or through other external agents. As a result, many institutions have systems that support continuous financial audits from within. Likewise, some have systems that allow for financial audits through the use of external entities. In some cases, regulatory bodies may be required by law to conduct such types of financial audits. Within the United States, the IRS and other state financial bodies are directly or indirectly involved in financial audits.
Definition of a Financial Audit and its Importance
In simple terms, a financial audit is an investigation of the financial process, statements, and documentation of a business. It is usually carried out by an auditor, or an auditing company. In most cases, financial audits are carried out by external individuals or organizations that are not related to the company under investigation. Nonetheless, many businesses have internal audit personnel, units, or departments that provide financial control from within. This type of audit is referred to as integrated audit. The integrated audit is a requirement within the United States. The management of a business is required by law to oversee this type of audit so as to prevent fraud.
An audit helps a business to have an objective look at its financial standing based on its financial standing and documentation. Conducting a regular financial audit helps to keep a business on track and reassure all the stakeholders that all is well with a company. It also helps to protect the reputation of a company and minimize the likelihood of fraud from within.
Performing a Financial Audit in 2022
The process of carrying an audit in 2022 will be similar to what had always been done in the past. However, the big difference will be the increased use of technology within the entire process. Therefore, the entire audit process will likely be conducted in a faster and more coordinated fashion. Additionally, several technologies will likely be used as many activities are now conducted remotely.
Nonetheless, a financial audit has three main stages, which are preparation, research and data collection, and reporting. Each of these stages is going to be discussed below.
Preparation is the first stage of a financial audit. It sets the tone for the entire auditing process. The preparations stage is divided into several steps as seen below.
- The first step of the preparation stage is when an audit company receives an assignment to audit a company. This request can come from the company or a regulatory agency. Once the audit assignment is received, the audit agency must gauge the work and determine the supplies and the number of human resources required to successfully complete such an audit. Through this process, the audit company is able to determine the depth of audit required. Ultimately, the auditors are able to generate a set of objectives that will help them complete the audit.
- Next, the selected team of auditors must do thorough research regarding the type of business that requires an audit. Usually, there are auditing standards that define how each type of business can be investigated, which are created by regulators within each industry. Likewise, the government also creates auditing standards for its agencies.
- After the research, the auditing team should create an auditing standard against which financial processes and documentation will be compared with. Such standards are usually created by a recognized association of accountants. Nonetheless, a company that employs an audit company can create a set of standards to be used during a financial investigation.
- Afterward, the audit company will perform a risk assessment of the different sections of the financial records to be investigated based on the determined criteria. Risk assessment helps the team of auditors to estimate the accuracy of the findings they are going to make.
- Soon after the conclusion of the risk assessment, the objectives that are earlier stated are reevaluated, confirmed, and changed where needed. In some cases, a single objective can be broken down into several smaller objectives.
- The newly formulated objectives from above can be utilized to determine the audit method to be used. Therefore, each objective will be linked to a process or method to allow for the systematic interpretation of findings in a coordinated manner.
- The step from above gives the team of auditors a clear picture of how to proceed. This so-called road map can then be used to determine the cost of the entire audit. Once the cost implication of the audit is communicated to the client, the audit team can proceed to the next step.
- This step is the final stage of the preparation process. Here, the audit plan is presented to the client for confirmation. This step is important so as to prevent the likelihood of misunderstandings when the audit report is submitted.
Research and Data Collection
The research and data collection stage is the second stage of an audit. In this stage, the agreed audit plan is put to use. Usually, the team of auditors is given access to all the financial files, documentations, and processes of the company under audit. In most cases, the auditors are given space within the walls of an institution. Auditors are expected to perform the following.
- Assess the company’s filing a record-keeping system.
- Analyze the accounting process.
- Assess all financial accounts using financial statements.
- Assess the internal audit process.
- Analyze and compare records.
- Assess tax processes.
- Evaluate the entire financial system of the business.
After the completion of all the steps in the second stage, the auditors will now report their findings based on the standards that were generated at the beginning of the audit. The final report gives a complete financial evaluation of a business based on certain criteria that the client and the audit company had earlier agreed upon. In some cases, two reports are made, which are a summary and a detailed report depending on the needs of the client.