There are many types of ‘audit’ in the world of finance. In this context, we are talking about external audit as required by statutory law on entities, both private and public, to ensure their financial statements present a true and fair view of financial performance and position. There are 3 key stages of any audit which are discussed further below.
For some smaller entities, audits are not legally required but are often still performed. This is to provide stakeholders (such as investors and banks) confidence in the company’s financial statements. Auditors will asses each financial statement such as the P&L, statement of cash flows, and balance sheet.
An audit gives stakeholders and regulators information on how the business operates, their financial obligations and their annual cash flows.
Depending on the business size, an audit can last months or even the full year. The auditors give a professional opinion on the accuracy of the financial statements presented, ensuring they are compliant with the applicable generally accepted accounting principles (GAAP).
Stages of an Audit
The specific details as to performing an audit depend on the business in question. In general, audit approaches are different depending on entity size and complexity of their financial reporting. That said, there are three main stages to any audit
1) Planning stage of an audit
First is the planning stage of an audit. At this point, auditors understand the business operations and assess the appropriate risks. The auditors will also ask for a listing of account balances (known as the trial balance) to determine the scope of the audit. The auditors will then request evidence to support each of the material balances provided.
2) Execution (or testing) stage of an audit
Next is the execution (or testing) stage of an audit. Here, auditors analyse the evidence provided in support of the balances selection in the planning stage. Auditors use a variety of different tests. Testing is based on the applicable audit assertion. This ranges from checking individual transactions, re-performing calculations, and physically verifying certain assets.
3) Completion stage of an audit
The final stage is the completion stage of an audit. When all tests are completed and auditors are comfortable with the evidence provided to them, the audit firm issues an audit report which includes an opinion as to the appropriateness of an entity’s financial statements.
Who performs each stage?
Usually the more junior auditors perform most of the execution stage of an audit. This is because the bulk of the testing performed is not very technically demanding, usually matching evidence to an accounting transaction. The review of this work is performed by the audit senior and also the audit manager, to ensure testing is accurate and has covered the related audit assertions.
The audit senior will perform both the planning stage and the completion stage. These stages requires some technical expertise and understanding of auditing methodology. Typically this stage is performed by the senior and then reviewed by a manager and signed off by the partner ultimately responsible for the engagement.
The audit partner, who signs the audited financial statements, will issue the audit report on behalf of the audit firm. This will be included in the complete set of accounts filed by a company.