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Every business needs to perform a financial audit regularly. But what are the vital elements of this kind of audit? If you own a business, you need to know. Here is a look at five critical components every financial audit should contain.
What Is a Financial Audit?
A financial audit usually occurs annually. It probes your company’s financial position by investigating your business’s financial statements and processes. Additionally, auditors examine accompanying documentation.
The audit can include looking at your accounting records and your internal control policies. Additionally, auditors check that your accounts are following industry standards.
With a financial audit, your stakeholders and others associated with your business can view your company’s financial position. This gives them reassurance. Additionally, it ensures that your company complies with regulatory practices and has protection from fraudulent activities.
To ensure your audit has professional scrutiny at every level, you need a certified accountant or auditor to look over your books. Certified public accountants have passed the demanding CPA exam. Therefore, you can be sure they have the necessary skills and experience required for conducting a financial audit.
However, the examination is no easy test to pass. For example, only 46.37% of people pass the Auditing and Attestation section of the exam.
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Component #1: Preparation for
a Financial Audit
The first critical component of a financial audit is the preparation you'll need to do.
First, you need to tell your auditor whether he or she needs to perform an audit of only your financial statements. Alternatively, your business might require a more comprehensive audit that includes performance and compliance.
If you’re unsure about that, discuss with your auditor about which type of financial audit is best for your company. This is because professional auditors follow guidelines set out in the AICPA’s Statements on Auditing Standards. Also, they follow other industry-standard rules. In this way, they ensure they ask the right questions before conducting an audit.
Component #2: Methodology
Choosing the audit method is critical for any financial audit. Based upon the preparation work your auditor has done, he or she will be able to determine the best approach. Your auditor will link every objective to methodologies such as observations, sampling, interviews, and fluctuation analyses.
Component #3: Risk Assessment
Once the audit criteria are in place, your auditor will perform a risk assessment. This is a critical component of any financial audit.
By using an audit risk calculation, your auditor can determine the likelihood of inaccurate findings and undetected material misstatements. Your auditor is then in a position to select the exact objectives of the audit. For example, he or she may wish to review cash receipts.
Component #4: Fieldwork
Fieldwork for a financial audit involves your auditor formalizing the audit program throughout your company. For example, he or she will lay out plans and gather information about processes and documentation from employees. The following vital components of an audit can then occur:
- Looking over your company’s accounting system
- Reviewing your company’s information systems
- Reviewing your company’s internal controls policies
- Looking at your company’s record-keeping policies
- Comparing the internal records
- Reviewing your company’s tax returns
- Performing tests of controls
- Performing substantive tests
Your auditor documents the results of each of these components in his or her working papers. Then, once all of the reviews and tests are complete, the auditor will conduct a comprehensive review of his or her working papers.
Component #5: Reporting
Findings of the Financial Audit
The final component of a financial audit is reporting the auditor's findings. In other words, the auditor will write up his or her conclusions and results on your company’s financial status.
The report allows you to see how your company adheres to accounting guidelines and relevant benchmarks. Only by having a detailed report about your business’s finances can you take the appropriate steps to maintain or alter your business practices accordingly.