What is Audit?
The company’s management, board of directors, and shareholders hire qualified, competent, and independent audit firms (usually called CPA firms) to conduct the audit of the financial statements of their company. The audit is usually for a specific period (usually from 1 Jan to 31 December) for certain purposes including the requirement of the company policies, a statutory requirement, or as required by their banker.
The appointed auditors conduct an audit to see whether the accounting and financial reporting prepared by the management is following the applicable financial reporting framework or not. It is also reviewing whether the applicable law is complying with by the company.
The completeness, accuracy, and existence of financial records are investigated and verified by the audit team and the entire procedure is known as a financial audit.
A financial audit is a type of audit that provides reasonable assurance, and not absolute assurance, to the shareholders of the company that the financial statements prepared by the management provide a true and fair view of the financial position of the company. It is the highest assurance of audit, yet the auditor could not provide 100% assurance or confidence that there is no material misstatement in the financial statements.
For example, an audit might not be able to detect the fraud that is committed by company staff or group of staff whether the result of fraud might materially impact the financial statements.
Generally, all the listed companies are required by law to publish their annual financial statements along with the auditor’s report to the public.
This allows all the stakeholders, including the public, to read and analyze the financial statements before making any stock investments.
Hence, Financial Audit is a process where the external auditors that are hired by the shareholders over the annual general meeting inspect, navigate and evaluate all the financial records of the company for the current year and issue an opinion based on their findings.
A clean auditor’s opinion means the financial statements prepared by the company’s management portray a true and fair view of the company’s financial statements and are as per the International Financial Reporting Standards (IFRS).
On the contrary, in case of a scope limitation or material misstatement due to fraud or error, the auditor issues an unclean opinion in their report.
Other than financial audit also known as statutory audit and external audit, the other type of audit services include:
- Tax Audit
- Compliance Audit
- Information Systems Audit
- Operational Audit
- Construction Audit
- Investigate Audit
What is the assurance?
Assurance is the process of analyzing the processes, controls, and operations of an organization and verifying its accuracy.
Assurance services provide a critical assessment of the procedures used in the preparation of accounting and financial records. Auditing is a type of assurance service towards the accuracy of financial statements.
As compared to a statutory audit which is compulsory for specific companies by law, the other companies that aren’t obliged to get an external audit use assurance services for their financial records.
Assurance services can be obtained for any regulation or compliance. It can be for internal controls, IT systems, financial forecasting, and other procedures or departments that are intact in the company.
Assurance services are independent services offered to provide confidence to the stakeholders that the organization is following the guidelines, rules, and policies accurately.
A report is provided after a thorough walk-through and analysis which focuses on how the procedures can be improved to ensure accurate financial information is produced by the company.
Audit and assurance work hand in hand if it is a statutory audit. A statutory audit is a type of assurance service regarding the accuracy of financial statements.
However, audit procedures such as risk assessment and analysis of internal controls of the company come under assurance services.