Financial statements auditing is normally performed by independence and qualified audit firm or company. Audit firm normally leads by audit partners who are the certified public accountant. Financial statements normally required to be audited annually and report to the board of directors and other related users.

The entity prepare its financial statements by complying with financial reporting standards or financial reporting frameworks. Two importance financial reporting standards are US GAAP and IFRS. Some entities might follow local accounting standard or frameworks.

To audit the entity’s financial statements, auditors use auditing standards such as ISA (International Standard on Auditing) or other local auditing standards.

The processes in performing financial statements auditing are varied from firms to firms based on their own internal process flow and policies. It is also depending on the policies that they are using.

In this article, we will talk about the key importance processes in an audit of financial statements. Those process including pre-audit activities, Audit Plan, Internal Control of Financial Reporting Assessment, Substantive Procedures, and Reporting.

The following is the flowchart to help you have a better picture of the audit process.


Pre-audit activities:

This is the first processes that normally perform by auditors. At this stage, audit engagement is prepared and agreed between auditors and clients. Key things that should be included in the engagement are audit scope, objective, reporting time-frame, audit fee, and as well as responsibilities.

Auditors should perform Know Your Client procedures to see if client key management and client’s business involved with money laundering or terrorist. If that is the case, the auditor should not accept the engagement.

Understanding client nature of the business to see if the audit team have enough competence and expertise to perform audit works that related to client industry. The auditor might reject the engagement on the ground that they don’t have enough resources or competency to do the works.

Responsibility should also need to clarify before performing audit works. These include auditor’s responsibility to the financial statements and the entity’s responsibility to financial statements.

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Obviously, the auditor is responsible for auditing an entity’s financial statements and express the opinion of the financial statements preparation and present based on the applicable standard and guideline.

The entity is responsible for setting proper internal control over financial reporting to make sure that financial statements are preparing in accordance with the standards, risks of errors and fraud are minimized, and the statements are prepared and delivered on time.

Audit fee and logistic timeline is also the importance and should be clarified before performing audit works. Audit fee should be based on audit works and timeline should be enough for auditor deliver quality auditors results.

Auditor plan:

Audit planning is one of the most important audit processes. Right audit plan leading to deliver right audit report. That mean auditor has enough resources and time to execute audit strategy and audit procedures.

There are numbers of things auditors perform during the audit planning process:

  • Resources allocation: Once auditor agrees to perform an audit on client financial statements, the audit planning process will consider starting based on available timeline and resources. Auditor allocates the right audit team to conduct audit tasks. That means they should have enough team member should perform auditor works so that they could have enough time to execute audit procedures, review audit workings papers and prepare the reports. A team member should competency enough to handle audit works. For example, if the engagement is with Construction Company then audit team should contain the member that have experiences in auditing the construction company. Deadline and sections allocation should confirm with all team members.
  • Understanding key internal control: Auditor may assess the client’s internal control over financial reporting to see if the control could detect or prevent risks errors or fraud that could materially affect the financial statements. To assess this, auditors need to obtain an understanding of the client control environment and control activities. Result of assessing could affect the way or method of audit samplings.
  • Risks assessment: Auditors need to perform risks assessment on financial statements to see if there any fraud or error could possibly happen. The auditor will need to look detail in the high risks areas and might be less focus on the low risks areas.
  • Materiality assessment: Planning materiality and performance materiality are normally set in the planning process.
  • Conflict of interest between the audit firm and client, and between the audit team and client management team need should confirm in this stage. If there is a conflict of interest, then there should be the proper guideline to reduce the risks. If the conflict could not minimize, then the auditor should not accept the engagement.
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Review internal control over financial reporting:

In this process, auditors review the client’s internal control over financial reporting. The review normally uses COSO frameworks for assessment. For example, auditors use five components of COSO frameworks such as Control environment, Risk Assessment, Control Activities, Information and Communication, and monitoring to documents and assess the entity’s internal control.

There are many documents that auditors might need in these processes. For example, the company’s org chart, policies and procedures, chart of accounts, financial statements, management accounts, and other related documents for their documentations.

Auditors might also interview and inquire about the client’s personnel to obtain information for their documentation and assessment.

The strength and weakness of control over financial reporting are significantly affecting substantive audit procedures. Normally, if the auditor concludes that the control over financial reporting sounds strong then auditors might put some rely on the controls. In other words, they might perform their works less in substantive procedures.

Auditors might perform a large volume of sampling to the financial data if they conclude that internal control over financial reporting could not be relying on.

Substantive review on financial data:

It does not matter how strong internal control over financial reporting is, the auditor could not rely a hundred percent on it. And do not perform substantive testing. Detail review of financial data still needs to be done.

Common audit procedure that auditor uses in this audit processes are Analytical review, inquiry, observation, inspection, recalculation, confirmation and so on. Audit sampling is also important to help auditors perform their works effectively.

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Common documents that auditors normally need are financial statements, management accounts, and supporting documents. Original supporting documents are normally including contracts, invoices, receipts, bank statements, and other related documents.

Reporting the result:

Once auditors complete their testing, auditors will issue the audit reports based on the result of their testing. This is the importance of audit processes. The Audit Report includes the importance of information such as audit scope, auditors’ right and responsibilities, management’s responsibilities, key accounting policies, audited financial statements, and audit opinion.

Auditors normally express one of the four audit opinions. Such as unqualified opinion, qualified opinion, disclaimer opinion, and an adverse opinion.

An unqualified opinion is good for the client. That mean financial statements are true and fair view.  Yet, unqualified opinion is not so good for management. That means part of financial statements is not present true and fair view. Adverse opinion, on the other hand, is not good. It means financial statements are not true and fair view. It is not recommended to use these financial statements for decision making.

The auditor may express the disclaimer opinion when they could not be able to obtain enough evidence to assure that financial statements are true and fair.