Financial Statement Audit

Enhance confidence in financial statements

Financial statement audit performed by independent auditors can give confidence to shareholders, banks and other stakeholders that financial statements present fairly, in all material respects.

Hence it can help the company seeking more funds from shareholders or banks and keeping good business relationships with other stakeholders.

Improve internal control

Understand the client’s business and control environment is the process auditors need to perform in financial statement audit, hence auditors might find some areas of control that need improvement.

In this case, auditors usually are required to communicate control deficiencies to the client’s management.

Comply with laws and regulation

Usually, the listed companies and other public interest entities, such as banks and insurance companies, are required by laws to have their financial statements audited by independent auditors.

In this case, financial statement audit is usually performed by external auditors whose qualification is recognized by the regulatory body and government.

Planning

The first stage is planning of the audit in which there are three phases including as below:

• Initial planning activities: The activities include accepting the client by signing the engagement letter, forming an audit team that usually consists of different levels of experiences and determining the nature, timing, and extent of the audit.

• Risk assessment: Auditors need to assess the risks of material misstatements in financial statements that could occur due to the business and control environment of the client.

• Audit strategy: After assessing the risks of material misstatements, auditors need to develop an overall audit strategy to address those risks. Audit strategy includes designing an overall audit plan and procedures and properly allocating tasks to audit team members based on their experiences.

Evidence gathering

In this stage, auditors usually perform two types of audit tests, including test of controls and substantive tests of transactions and balances.

Test of controls: Auditors perform test of controls to ensure whether the client’s controls work effectively, in preventing or detecting material misstatement, so that they can place reliance on the controls to reduce some substantive works.

Substantive tests: Auditors still need to perform substantive tests in addition to test of controls in order to gather sufficient and appropriate audit evidence to form an opinion on financial statements.

Substantive tests may include examining supporting documents on transactions and balances, physical inspection on fixed assets, and recalculation on the work done by the client, etc.

Auditors need to make sure that they gather and obtain sufficient and appropriate audit evidence so that they can form the basis of opinion in order to issue the audit report.

Completion and reporting

This is the final stage of the audit, where auditors form their conclusion on financial statements based on the work they have done and the evidence they have gathered. In this stage, auditors issue audit reports expressing their opinion on financial statements whether they present fairly in all material respects.

Most of the time, auditors issue unqualified audit report expressing the unqualified opinion on financial statements. This means that financial statements give a true and fair view or present fairly. This happens most of the time because when there is any issue regarding financial statements, auditors usually communicate with the client’s management to solve the problem on a timely basis.

However, sometimes auditors may issue other type of report which could be qualified audit report, adverse audit report, or disclaimer of opinion report. This could be due to there is a material misstatement in financial statements but the client’s management refuses to make the adjustment, or auditors could not obtain sufficient and appropriate audit evidence to form an opinion.