What is Financial Auditing?
The purpose of an audit is to check the authenticity of books of accounts of companies. Financial auditing of books of accounts is a statutory requirement and must conduct as per the rules laid down by the government.
Auditing can be said to be a thorough examination of the financial auditing well-being of a company by someone independent of the company.
Auditing is a regular — and usually annual — affair. This objective examination and evaluation of a company’s financial statements ensure that the financial auditing records are a true and accurate representation of the financial health of the company.
Types of Audits:
Audits may be internal — conducted by employees of the company — or external — done by certified professionals. There can also be special audit conducted by Tax and regulatory authorities
Internal audits are mostly a management tool that helps improve the processes and internal controls within a company. These usually have little statutory value and hold low legal weight.
External audits — usually conducted by Certified Public Accounting (CPA) firms — lead to an auditor’s opinion, which is part of the audit report. Clean audit opinions mean that the auditor has found nothing like a ‘material misstatement’ in the process of reviewing the company’s financial auditing statements.
The most significant difference between external and internal auditors is that external auditors are independent and therefore the opinions the external auditors express can be frank and honest.
Understanding the Auditing Process:
During an annual audit of financial accounts, the following financial statements analyzed.
- Income statements
- Balance sheet
- Cash flow statement
- Statement of changes in equity
Since the audit is performed to ascertain the accuracy of information, auditing involves the examination of books of accounts as well as supporting vouchers and relevant documents.
The primary purpose and function of auditing are to prevent fraud as well as detect honest mistakes and genuine errors.
Companies undertake audits as part of regulatory or statutory requirements or as part of their debt agreements with lenders.
Auditors face the constraints of time. Hence, an auditor only provides reasonable assurance that the statements made to them are free from material error. As it pertains to financial audits, a set of financial statements become accurate and fair when they are free of material misstatements.
In most countries, audits adhere to generally accepted auditing standards laid down by governing bodies. Having a set of rules gives reasonable assurance to third parties and eternal users regarding the reliability of the auditor’s opinion on the accuracy of the financial statements or other matters which are within the purview of an auditor.
Audits of publicly-traded companies in the US governed by rules laid down by the Public Company Accounting Oversight Board (PCAOB). These statutory audits, known as integrated audits, require that the auditor express an opinion regarding the effectiveness of the company’s internal control over financial reporting.
What Auditors Don’t Do:
Auditors have a limited scope of work, and they don’t audit the directors’ report nor do they check every single figure in the financial auditing statement. Auditors don’t comment on a company’s business activities or strategies. Auditors also cannot predict the future nor be present there all the time.