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What is Financial Audit and Best Practices to follow in 2021

Financial Audit

Nov 28, 2021

A financial statement is the annual audit of an organization about its financial statements to ensure that all records in the organization are accurate and fair. The audited financial transaction of the company is reviewed yearly which includes cash flow statements, income statements, and balance sheets. The financial audit can include the organization's internal control over financial reporting. Internal auditing employees in every organization conduct internal financial audits in order to provide an assessment of the financial statements and internal control over financial reporting.

There are 2 types of financial audits:

• Internal financial audit
• External financial audit

The internal audit works can complement the work of external auditors based on pre-agreed plans and meetings. Internal audits can help an organization to improve its risk management and compliance issues by performing an assessment in order to identify any areas with deficiency and improvement with reporting. The reporting process helps the organization in this condition and gives an opportunity to remediate those issues prior to them becoming a material error. Omission and misstatements are considered as material if they could influence the judgment made by a reasonable user based on the financial statements under generally accepted auditing standards. The result of the internal audit along with improvement and recommendations from the audit is submitted to the organization’s management and board of directories.

The External financial audits are conducted by Independent Certified Public Accountant firm employees which include both internal controls and financial statements over financial reporting. External audits are used to evaluate financial statements and the effectiveness of internal control over financial reporting. An external auditor’s opinion is crucial and helps the investors and analysts gain comfort in the organizational financial performance and condition as managements statement.

1 : Financial Audit History

Financial audits are legal requirements for publically traded companies under the SOX Act (Sarbanes-Oxley) of 2002. Most companies have to undergo financial audits annually in order to satisfy the debt covenants to lenders. Sarbanes-Oxley act requires the companies internal audit and financial reporting for the effectiveness of the organization. Sarbanes-Oxley programs can vary accordingly since it was early required in early 2000. The organizations which are planning for an initial public offering show the willingness to perform the audit in order to ensure that they can meet SOX compliance.

2 : Procedures for Financial Audit

A substantive procedure is a procedure done to support the financial audit of an organization. completeness, accuracy, and valuation, and presentation and disclosure, rights and obligations, Assertions of existence are the different financial statement assertions attested to the companies. To get qualified in these substantive procedures another qualified auditor must be gone through the same procedures and documentations to came to the conclusion. At the account or asset level, there are five audit assertions build for a financial audit procedure. For a financial audit to get prepared we should get organized in a way before the auditor arrives, also need to coordinate and assist them, and need to provide them adequate space. We have to ensure compliance, set a timeline for the audit to when will the audit will start and end.
Establishing good communication with the auditor is critical to avoid surprises. The organizations have to save the time of the auditor of waiting for the response and request documentation. Request for account combinations and adjusted trial balance used in preparing the financial statement when the audit is finished. The External auditors will usually determine the level of dependency on the work of internal auditors. E external auditors will evaluate the reliability of the organization by the requirements set by the AICPA ( American Institute of Certified Public Accountants ).

3 : Review Checklists for Financial Statements

 

• Planning audit

The audit should be planned with scoping and risk assessment of the organization. Accounts should be identified individually over the benchmark. The teams should make sure that the not tested remaining account balances are below the materiality threshold determined by the team.

• Fieldwork

Fieldwork includes Reconciliation, where the sub-ledger balance to the general ledger balance is compared, sub-ledger analysis, and sampling of transactions. In the sampling of transactions the coverage obtained from controls and the potential decrease of testing procedures based on control activities that are performed. The final thing is the Performance of account-specific procedures to confirming completeness, accuracy, and validity. Confirm the transactions.

• Issue management and Followup

The errors should be identified in these steps and remediation should be developed
according to them.

• Always prepare for a Formal External audit.

Share the documentation and pieces of evidence collected from performed testing
procedures and hold a conversation with the External audit team.

• Leverage Technology to design the Process

Many of the complexities and steps can be reduced for a fully automated transaction type.

Financial audits are crucial for every organization. Optimizing the financial audits using technology can help us to not making the breakdowns over version control, team communication, and comparisons to the prior year.