How to Conduct an Audit of Financial Statements?And Important to Its Users.
Financial statement examines the entity of the company which is an audit and who examine the statement is called auditor. The auditor examines whole reports and attaching the discloser for handed over company’s responsible persons. An audit report like as assessment for the small business and completed business status. This document includes assets, liabilities and the retained earnings statements also which is reflected the statements.
Purpose Of Financial Audit:
The actual purpose of the financial statement audit is creating credibility with the audited reports and expose the company’s performance as well as the positions. This report requires using competitors for analyses their position and the other body that is security exchange commission who is exposing this report publicly with full results of an annual audited statement. On the other hand, lenders of the company’s require an audited report of the entity for looking forward to future solvency of the firm, because they lend to the money of companies. Similarly, suppliers are also interested to look forward annual audit report of companies, because they want to know the company’s position to make the future decision for trading credit. The government agencies and the law firm is also interest for an audited report for their interest.
How to Conduct an Audit Step by Step:
A statement of financial audit procedure is the qualified report and it is well accepted for all but when it was unqualified or unaudited then it was not accepted by all. The business owners always want to good at his business but the real scenario will reveal when he maintains actual accounts or hire an accountant for accounts task on behalf of his business. An accountant maintains accounts and does an internal audit at the end of the year, half year or quarterly and try to figure out fraud and theft in the invoice, voucher, and billing system. But sometimes this is not enough to find fraudulent and not enough credibility for the future investor, suppliers and the rest of the agencies or public whose has interest to companies. That is the reason why, external audit is mandatory for increase credibility to the public and the interested persons like as investor, suppliers, lenders, Government agencies and so.
The external audit system is maintained standard the rules of Generally Accepted Accounting Principle (GAAP) and International Financial Reporting Standards (IFRS) which is increasing commonly in audit framework. In this rules and regulations, an accounting system goes to step by step like as accounting cycle. The audit work stages are given below;
Risk management and planning:
Profit of the business indicates the environment of the business and understanding of involves of the business to operates whether it risky or not and similarly, it could be affected or risky to the financial statement or not. That is deemed to be an auditor and analyses risky factors of the business.
Testing of internal control:
The assessment of effectiveness and involves of entity suite control and the area of proper authorizations, the security system of the assets, duties and the responsibilities. These are the measurement elements of the internal control testing. The higher authority allows the auditor to check the internal control reports if the internal control report seems problem then the higher authority make their decision to previous audited report and the other sources open for the auditor. The auditor looks every signal documents and internal control report for testing the internal documents for the various high risks to assist internal control testing.
Procedures of substances:
There has broad procedure for external audits which is followings bellows;
- Income: An income is related to sales, sales allowance, discount rate. The auditor check supporting papers, recalculating vouchers and invoices with historical sales return and allowance along with subsequent documents.
- Expenses: An expense is to be operated in an accounting period of time. The auditor reviews the supporting documents of company’s expenses and stuff salary sheet as well as usual supplies.
- Outstanding Expenses: Recalculating accrued and examines subsequent transactions in the accounting year.
- Debt: Reviews board director’s minutes, lease management and other subsequent documents of lenders.
- Cash: Calculate cash in hand, confirm bank balance and recheck bank reconciliations.
- Accounts Receivable: To confirm sales subsequent documents, income from sales and procedure of yearend sales.
- Accounts payable: confirming purchases subsequent papers along with purchase allowance and returns.
- The market value of security: Check the documents of the marketable security, an assessment of the value of security and subsequent transactions.
- Inventory: confirm the physical inventory count match with the ledger books, shipping inventory, check the suppliers invoice payment and current production cost.
- Fixed assets: observing assets purchase document with examining and recalculate depreciation on assets as well as other assets appraisal value.
An external audit is more effective and costly for the company’s point of view but the external audit is more reliable for the outer world whose interest to the particulars company. The auditor strictly maintains their accounting audit firm rules and regulations an entity audit and he gives the company and persons who involve with this company errorless results.