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Financial Statement Audit

The primary objective of a financial statement audit is to obtain information as to whether business financial statements are free from material misstatement. All of the financial statements are thoroughly reviewed to determine if they are compliant with financial reporting guidelines as well as the accepted accounting principles.

Package inclusions:
  • Compliance with Regulations
  • Advice on Controls and Processing System Weaknesses
  • Confirmation of Accounting Treatments with Respect to Complex Transactions
  • Independent Review of Externally Reported Information
  • Accountants' Reports
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Financial Statement Audit Services

Financial statements indicate the financial performance and business activities of a company by way of written accounting reports. These are prepared by the management of the company for a specific time period, generally a financial year. Some of the examples of financial statements are:

  • Cash Flow Statement.
  • Income Statement.
  • Balance Sheet etc.

The main aim of the preparation of financial statements is to keep the management, owners, shareholders, Government and other interested parties informed about the actual financial standing of the company.

Financial statements are an integral part of any business as it reflects the performance of the organization. Any omission or mistake done in financial statements can mislead the management and also into taking wrong financial decisions for the organization. To check on this type of errors, organizations need to conduct Financial Statement Audit to review and clarify that there are no errors in the financial statement. Companies need to get their financial statements audited by an external auditor who has experience in doing financial statement auditing work. The main benefit of the financial statement audit is that it assures that management has presented a 'true and fair' view of a company's financial performance and position.

What is a Financial Statement Audit?

A Financial Statement Audit is the examination of your business financial statements that is accompanied by documentation and processes and is performed by an auditor who is independent of your organization. These can be said to be an annual event probe to determine your company’s financial position that is done every financial year.

The auditor will look at your financial records, accounts in accordance and internal control policies with industry-accepted accounting standards. The Financial Auditors use this process to assure your shareholders or any other interested person of your company's financial position. Another reason to conduct a financial statement audit is to verify that you comply with the regulatory agencies and also to protect your organization from the risk of fraudulent financial practices.

What is the Purpose of Reports of Financial Statement Audit?

The audit reports created in a financial statement audit is done for many purposes:

  • It is used as the integrated evidence to the owner and shareholders by the management. In case, the audit report expresses that the financial statements are accurate and fair, the shareholders and investors can imply that the administration has integrity towards them.
  • Since the financial statements are reliable, it is used to attract new investors. If the auditor in its report of financial statement audit mentions that the statements are not valid and fair, then new investors will not rely on those financial statements.
  • It is used to obtain a bank loan or extend a bank loan for some time. In case the entity requests a bank loan, the Bank would like to see the financial status of the company. The Bank will then demand the audit report of the financial statement audit to those financial statements. In some cases, the Bank requests the entities to submit their audit report of the financial statement instead of checking its previous year’s financial statement.
  • It can be used to obtain or extend a credit period. These happen when the entity deals with a large number of suppliers and demands an extension of time from the suppliers. In most of the cases, the suppliers require reports of financial statements that are necessary.
  • The audit report of the financial statement audit can be used for negotiation purposes while performing Mergers and Acquisitions.

What Documents are required for Financial Statement Audit?

The documents that must be presented to the auditor or the documents that will be verified by the financial auditor for the purpose of financial statement Audit are as follows:

  • Balance Sheet- To check the financial position of the company.
  • Income Statement- To see the financial performance of the company.
  • Cash Flow Statement.
  • Statement of Changes in Equity- To reflect the increase or decrease in assets.

Every organization is required to maintain these financial statements at the end of every financial year. They must get this audited from a financial auditor.

What is the Process to Conduct Financial Statement Audit?

The Financial statement Audit is conducted in five phases:

Financial Statement Audit

Planning

Initial planning activities include formal acceptance of the client by the auditing firm. It is done to:

  • Verify the compliance with the independent requirements;
  • Building an audit team; and
  • Performing other procedures to determine the timing, nature, and extent of methods that needs to be presented to conduct the audit efficiently.

Risk assessment

Auditors use their expertise and knowledge of the business in the industry. They look at the environment in which the company operates, to identify and assess the risks of the company. This type of risks involves a high degree of judgment and also requires a significant level of knowledge and experience by the auditor. It also means that the auditors must be well informed about the organization and the environment in which the company operates, concerning what its suppliers, regulators, and customers are doing.

Audit Strategy and Plan

After assessing the risks, the auditors develop an overall strategy with a detailed audit plan to address the risks related to the material misstatement in the financial statements. Amongst other things, this process for financial statement audit includes designing a testing approach to various financial statements, deciding on the authenticity of the company’s internal controls, developing a detailed time table, and allocating tasks to the auditing team.

Gathering Evidence

The audit strategy and plan is continuously checked throughout the audit and adjusted to respond to new information. The auditors during financial statement audit gather and evaluate the evidence by way of a combination of the company’s internal controls, tracing the disclosures and amounts included in the financial statements to the company’s supporting books and documents.

Finalization

Finally, the auditors form a conclusion by exercising their professional judgment during financial statement auditing. The outcome is the basis of the audit opinion. Auditors interact with the organization during all the phases of the audit process that has been explained above. There are continuous discussions and meetings with the management, both at senior and operational levels. Using their professional knowledge the auditors challenge the management’s assertions regarding the numbers and disclosures in the financial statements.

What are the Responsibilities of the Auditor for Financial Statement Audit?

We at Enterslice exercise professional judgment and maintain professional skepticism throughout while conducting financial statement audit:

  • Identify and assess the risks concerned with a material misstatement of the financial statements, whether due to fraud or design error. We perform audit procedures as a response to those risks and also obtain audit evidence that is adequate and appropriate to provide a basis for our opinion.
  • Obtain a clear understanding of the internal control that is relevant to the audit in order to decide the audit procedures that is appropriate in the given circumstances. As per section 143(3) (i) of the Companies Act, 2013- The auditors while conducting financial statement audits are also responsible for expressing our opinion regarding the company’s adequate internal financial control system in place and also the operating effectiveness of such controls.
  • Evaluating whether the accounting policy used is appropriate or not and also the reasonableness of accounting. We will also check whether the disclosures made by the management are accurate.
  • Conclude that no material uncertainty exists, and also check on the related disclosures made in the financial statements. Our conclusions are wholly based on the audit evidence that is obtained up to the date of the auditor's report.
  • Evaluate the complete presentation structure and also the contents of the financial statements. The materials would include the disclosures and also check whether the financial statements represent the mentioned transactions and events in a specific manner that achieves fair presentation.
  • We will communicate in matters related to governance and also plan the scope and timing of the audit. Any significant audit findings, including the deficiencies in internal control that we identify during our audit, will be communicated to you.
  • We determine those matters that are most significant in financial statement audit in the current period and hence are critical audit matters. We mention these matters in our report unless the law or regulation prevents public disclosure about the matter.

How to Prepare for a Financial Statement Audit?

To ensure that the audit work is completed in time before the financial statement audit, you need to plan ahead of time to assure that your auditor’s findings are helpful. To save time and money, there are certain steps you can take:

Implement Good Practices Year Round

If you apply the proper process, you can save both time and money. Gather all your information on a monthly or quarterly basis so that there are fewer chances of any type of error. Document your expenses regularly and designate a particular place to store them so that you do not have to struggle to find things.

Review Your Financial Information

As per experts, you should review your own financial information. This is difficult if your company is large.  If there is an error in your financial statement your auditors will take more time to understand and then complete their investigation. Further, if you are aware of your situation, you will be able to explain it to your auditor.

Get Your Paperwork Together

The auditor at the preparation phase of the audit will request a list of documents and schedules. The accountant must generate or gather this documentation. Before sending the information to your auditor, ask them what type of file they would like to work with the auditor.

How to Read and Understand a Financial Statement Audit Report?

A financial statement audit report gives an independent opinion of the company's financial statements and can help you in making economic decisions. There are four types of finding in a financial statement audit report:

  • Unqualified Approval: This is a clearance in the financial statement audit with regard to the better health of the company, primarily a clean bill of health for a company. It means that no internal control breakdowns were detected by the auditor.
  • Qualified Approval: In qualified approval, it is up to the reader of the audit report to decide if the identified problem in any way affects the worth of the financial statements provided.
  • Disclaimer of Opinion: This type of audit report is created when your auditor does not provide any sort of suggestion with regard to the financial position of the company. Your auditor will state that they cannot give audit-related advice or statement because of the limited examinations that were conducted.
  • Adverse Finding: An auditor issues this opinion in a financial statement audit when they conclude that the company’s financial statements are materially misstated, they cannot rely on it, and do not follow the proper accounting standards. Such type of finding is a red flag for investors, and it can bring a negative impact on business stock prices.

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Frequently Asked Questions

Financial statement audit is conducted in the following ways:

• Plan Ahead.

• Stay up-to-date on accounting standards.

• Assess the change in activities.

• Learn from previous experience.

• Develop a timeline and assess responsibility.

• Organize data.

• Ask questions.

• Perform a self-review.

• Be available during fieldwork.

• Evaluate Results.

For many audit engagements, the auditors prepare statements. Preparation of financial statements by the management does not change the fact that the management of an organization is responsible for those financial statements.

Any small company that has remained dormant throughout the accounting period is exempt from getting the financial statement audited.

The Auditors obtains evidence by way of an investigation by way of inquiries, third-party confirmation, observation, testing of selected transactions and other procedures.

Audited Accounts are prepared by an accountant and are then audited, which is a compulsory process. The auditor here checks the number of transactions that have been processed accurately.

The accountants also prepare unaudited accounts, but they do not go through the process of auditing. Instead, it is assumed that all the transactions are correct.

The profit and loss statement shows the company’s general sales, manage the expenses, and also create profits.

Audited financial statements are relevant because they provide an overall picture of the accounting operations and a complete outlook on the financial health of the company.

The auditor's report to the company's shareholders. They provide an opinion regarding the truth of the company’s financial statements and perform work on a test basis to monitor systems in place.

A company is required to prepare its financial statements within six months after the end of its financial year, or shorter period as it may find appropriate to provide the required notice of its annual general meeting.

The benefit of auditing the financial statements is that it assures that the management has presented an accurate and fair view of the company's financial performance and position.

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