The shareholders of a company are the owners, and they’re entitled to receive the profits of the business entity. However, the shareholders are not actively managing the business operations. Business management is performed by other individuals who get paid for the job. CEO and Directors are the top management who are chosen by the shareholders to run the company.
The company’s management is bound to act in the best interest of the business owners(shareholders).
How does a shareholder know if the management is working in the best interest of the shareholders?
Are the financial statements enough to prove that the company’s management has been doing well to grow and expand the business?
The answer is NO.
A verification and examination procedure must be there to examine if the business transactions, recording, accounting, and financial analysis have been performed without any devious intentions. Therefore, an external or internal audit of the business corporation is performed to detect any embezzlements, frauds, and misrecording of information.
This article will go through the process of audit, its scope, audit trial, and its purpose.
What Is The Scope Of Audit?
The scope of an audit includes the following procedures and controls:
- Performance of procedures for obtaining the sufficient and appropriate audit evidence
- The auditor selects appropriate procedures to follow based on his own professional judgment. The selection of procedures comes from the planning stage. The auditor assesses the risks of material misstatement in the specific business entity.
- Internal control procedures of the business entity are examined and analyzed by the auditor. He prepares the procedural audit design for the appropriate circumstances of a business entity.
- Evaluation, testing, collecting reliable information, comparison, judgments are included in the scope of the auditor’s job.
- The audit must be based on reliable information and follows proper communication to the management.
Who Perform An Audit?
The auditor performs the audit of the company. For the external audit, the auditors from Certified Public Accounting(CPA) firms. However, an internal audit trained in professional aspects of auditing to provide a true and independent evaluation of the business’s financial and operational activities is hired for internal audit.
What Is Included In An Audit Report?
The key features of an audit report are as follow:
- The final audit report is independent and prepared by independent auditors who are separate from the directors and management involved in preparing financial statements.
- The audit report gives a true and fair view of the financial position and health of the business entity.
- The trueness and fairness of financial statements are verified in all material aspects. The materiality in all aspects means the transactions are analyzed for all the factors that can impact a stakeholder’s economic decision.
How Does Audit Process?
An audit is a systematic examination of the books of accounts and financial operations to make and report its independent judgment. The audit process can be categorized into three broader categories: planning, collection of physical evidence, preparing the opinion, and reporting the findings.
The planning stage starts when the auditor is hired by a business entity. He visits the company and takes an understanding of the business operations. Every business varies due to the type of industry, risks, internal environment, controls, SOPs, internal control, etc. The auditor also analyzes and assesses the previous audit reports and applicable policies.
Collection Of Physical Evidence
The second step is the collection of evidence for the audit. It involves the following activities:
The first meeting of the auditor’s team will be conducted with higher management and administrative managers of the business entity. The purpose of the opening meeting is to discuss the audit program’s objectives, scopes, and purpose.
The second step is to do the fieldwork. It includes conducting interviews with appropriate managers, bookkeepers, etc. Besides, it involves analyzing the company’s financial statement.
Collecting Physical Evidence
It involves the collection of the physical evidence for the reported financial statements. The collected evidence includes a test of details, bank transactions, business contracts, etc.
Verifying The Transactions
After collection, the transactions are verified with the help of physical vouchers and other physical proofs. It also includes verifying the physical inventory for any over-statement or undervaluation.
Reporting The Findings
After satisfaction and getting enough physical evidence, the auditor concludes their findings into an independent opinion that is reported in the audit report. The auditor conducts a closing meeting with the management to discuss the findings, feedback, and clarification before preparing the final report. The closing meeting aims to communicate the audit procedures that have not been followed for the audit process.
Afterward, the final report is prepared and distributed to the stakeholders like management, chief financial officer. The management is responsible for publishing the report to the shareholders and other stakeholders of the company.
What Is Audit Trail
When the auditors start the fieldwork in the audit, physical evidence is collected, and verifications are performed about the trueness of transactions. In this verification process, the audit trail helps the auditor to verify and check the records of financial transactions, operational transactions, etc.
Therefore, we can define audit trial as,
An audit trail is a documented or electronic record of the evidence behind any transaction; financial, operational, business, etc.
In business management, the audit trail is most commonly used during the audit when the auditor can trace the whereabouts of any transaction recorded in the books of accounts. The audit trail provides transparent visibility of any transaction and its process.
An audit trail is not specific to business companies or audits. Instead, many industries use audit trails to keep a record of their data and transactions. The most popular industries employing audit trail as a tool are
- IT and Computer
- Medical healthcare
- Content management
- Clinical research data
- Manufacturing design controls
- Ballot-keeping and voting records
- Legal and research investigations
- Educational institutes for student records
And many more.
Process Of Audit Trail
The audit trail is presented in chronological order, and it involves all the steps a specific transaction would have included. Depending on the type of industry, business size, transaction volume, and nature, the audit trail can be presented in a simple format or complex.
For instance, the audit trail for a sales invoice issued in a retail store will be very simple. Most typically, an audit trail consists of the following steps:
- When the transaction happens, the invoice is made -either for sale or purchase.
- The transaction might be cash-based or accrual-based. In the case of cash basis, the transaction will be recorded by crediting or debiting cash.
- In the accrual-based transaction, the account payable or account receivable account will be recorded.
- After payment, the receipt or payment of the transaction will be recorded.
The process can be extended to multiple steps depending on the nature of a transaction.
Purpose Of Audit Trail
An audit trail is a very useful tool that serves various purposes for business. Some of the primary purposes of an audit trail are as follow:
- Maintaining the activities, transactions, and system records of a business
- Audit trails help in tracing and identifying any errors and omissions during posting and casting.
- During the audit process, the audit will help the auditor to verify, validate, and analyze the documented evidence & accuracy of every transaction in the books of accounts.
- The public accountants can also hold the bookkeepers and corporations for the mismanagement of data with the help of audit trails.
- It is a very effective management tool for maintaining financial and accounting data. It serves as a very reliable method to know if the transaction recording in the company’s accounts has been in compliance with regulations.
- Data trail provides a base for correction and rectification for errors of omissions and errors of commission.
Benefits Of Audit Trail
An audit trail has many benefits for business corporations in every field. However, the following benefits are most common from the accounting and finance perspective:
The audit trails maintain the record in a documented form which helps in accountability in mismanagement or errors. Everyone knows that the data has been kept integral with source documents. Therefore, the accountability clause makes everyone responsible. Hence, fraud, unauthorized access to data and information can be avoided easily.
Correction And Rectification Of Transaction
In accounting and finance, there can be errors of omission or omission during the casting and posting process in the general ledger. If a proper audit trail is maintained, it is easy to locate the transaction and rectify it accordingly.
Detection Of Fraud
Any embezzlement of cash or inventory and frauds for misappropriation and misstatement in the company’s accounts can be detected. The audit trail helps to easily find the history of transactions, source documents, and whereabouts.
In A Nutshell,
An audit trail is a useful tool for data logging in various industries. However, we’ve focused on its implications in the businesses for accounting and subsequent auditing. In a general perspective, the audit trails help to detect and identify different problems with the help of real-time monitoring and logging of varying data.