There appeared to be a common theme amongst my Big 4 colleagues when I started as a grad – many of us didn’t actually know what audit was before we applied for the graduate scheme. So, what is audit?
As strange as this may sound on the face of it, most of us applied for the role with a vague idea that we wanted to work in financial services, but didn’t appreciate what this would entail on a day to day basis i.e. we somewhat fell into audit! I can also vouch that this was true for some of the audit partners that I know.
Why do companies need an audit?
A statutory audit is mandatory for UK businesses that are sufficiently large. The purpose of an audit is to verify the accuracy of a company’s annual (or interim) financial statements – the commonly quoted term for this is to ensure that a set of accounts are ‘true and fair’. An accurate set of financial statements is essential for all users (investors, lenders, customers…)
In the UK the standard deadline for statutory accounts filing is 9 months after the reporting date, meaning there is often a rush on 30 September each year (31 December year ends) to get the accounts signed and sent over to Companies House.
What happens during an audit?
There are generally three stages to any audit; Planning, Execution and Completion.
During planning the client provides a Trial Balance (TB) to the audit team. To put it simply, this is a list of all General Ledger accounts with final reporting period balance. This is the basis of all external audits as the numbers presented in the TB determine the materiality and therefore the level of work and risk associated with a certain client.
There is also significant work that goes on to understand the client’s business, such as financial controls and reporting period performance. This also plays a role in determining the areas of focus for the audit.
After the company specific risks have been identified and relevant TB balances have been assessed, the focus of the audit becomes to perform ‘testing’.
Essentially, testing is corroborating the clients account balances to corroborating evidence. For example, matching a selection of revenue transactions to sales invoices and to bank receipt.
This stage involves summarising and concluding on the outcomes of the execution stage of the audit. A summary of any audit misstatements is shared with the client and a ‘closing meeting’ is held, usually between the key client contacts (FD, FC) and the audit Partner and Manager.
There will also be an assessment as to ‘going concern’ which measures the company’s ability to continue to meet its creditors in the next 12 months – i.e. continue as a viable business.
So what do auditors actually do?
The role as an auditor will vary depending on how experienced an auditor is. In the first year or two (Audit Junior), an auditor will be mostly focused on the execution stage and, to put it bluntly, the role will mostly be focused on the ‘grunt work’ of substantively corroborating evidence to accounting transactions.
The Audit Senior will be more responsible for the Planning and Completion stage of the audit, in addition to reviewing the work of the Audit Juniors. The Senior would also be given the more complex (and usually more interesting) areas of an audit to work on.
It is then the responsibility of the more senior members of the audit team (Manager/Director/Partner) to review the work of the core audit team, and to ensure the identified risks have been addressed, in addition to ensuring the financial statements are prepared in accordance with the relevant accounting framework.