Financial Statement Audit
Financial statement audit or financial audit is the process of objective examination of the client’s financial statements by independent auditors. In this case, auditors perform the evaluation on the subject matters, including balance sheet, income statement, and statement of cash flows as well as statement of changes in equity, so that they can form an opinion.
The client has the responsibility to prepare financial statements in accordance with acceptable accounting standards, such as IFRS, US GAAP, or local GAAP. Then independent auditors will evaluate whether financial statements present fairly, by following auditing standards, such as Internal Standards on Auditing.
Benefits of Financial Statement Audit
The benefits are included in the table below:
|Benefits of 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.
3 Stages of Financial Statement Audit
Three stages include planning stage, evidence gathering stage, and completion and reporting stage.
|Stages of Financial Statement Audit
The first stage is planning of the audit in which there are three phases including as below:
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.