An audit is
“The independent evaluation of the financial report of an organisation”.
The purpose of an audit is
“To enhance confidence for intended users in the financial report”.
These users might be shareholders, members, lenders, or other stakeholders. The financial report is presented by the Board and management and a view – called an opinion – is formed on whether the information presented in the financial report, reflects the actual financial position of the organisation at a given date. You might have heard expressions such as “true and fair” or “presents fairly” – these are key expressions an auditor might use in forming an opinion on a financial report by using a particular financial reporting framework.
Who can be the independent auditor of a financial report?
A registered company auditor with the Australian Investments and Securities Commission (ASIC) is appointed to audit the financial report of an organisation. This registration could be a person (i.e. a sole practitioner), or a person who is a partner of a firm or a director of an authorised audit company.
There are limited circumstances when a suitably qualified professional accountant can complete your audit. These audits are usually for small organisations or those without complex reporting requirements. Using a qualified auditor offers the benefits outlined in this article and ensures you have specialist expertise overseeing your organisation.
What do auditors do during the audit of a financial report?
Auditors complete their audit in accordance with Australian Auditing Standards, issued by the Auditing and Assurance Standards Board, which is a federal government body. Some of the key elements in completing an audit include:
Preparation: This includes setting a timeline with the auditor and the organisation’s key management and staff and requesting a detailed list of documents and information needed for the audit. For more information on this see our article on planning for your financial statement audit
Assess key risks: Auditors will use their expertise to identify and analyse key risks (you might have heard the expression “material risks”) that may be cause for concern in financial statements. Auditors utilise their experience and knowledge of the organisation, industry sector, and wider environment in making these risk assessments.
Strategise: Having identified and assessed material risks, the audit team will develop an audit strategy to address these risks and test various items within the financial statements. This includes gathering evidence needed to complete the audit, reviewing the organisation’s internal systems, underlying records and documentation, and other necessary information. This may also require the need to physically inspect the organisation’s assets, including inventory, property, plant and equipment.
Communicate: Auditors may also meet with the organisation’s directors, management, and staff throughout the process to assist discharge of their duties. This also includes discussing the resolution of key risks, identified errors, areas for improvement and other matters relevant to the completion of the audit. Once auditors have completed their work, an audit report is produced. This report explains what they have done and, based on their professional judgement, gives an opinion drawn from their work.
What auditors do not do during the audit of a financial report?
There are several common misunderstandings in what an auditor does during the audit of a financial report. Some of the common misunderstandings on the role of the auditor are:
- Auditors provide absolute assurance during the audit of a financial report. Auditors provide reasonable, rather than absolute, assurance. Reasonable assurance is a high level of assurance. Absolute assurance isn’t possible because there are inherent limitations in completing an audit of a financial report.
- The audit of other information provided to the members. Many organisations provide information other than the financial report to users. Auditors can’t audit every document distributed to users.
- The verification of every transaction executed by an organisation or assessing every figure in the financial report. The cost to do so would far outweigh the benefit. It’s also inefficient and near impossible for many organisations.
- The evaluation of an organisation’s business activities or strategies, or even decisions made by the directors.
- Testing the adequacy of EVERY internal control
- Critiquing the quality of directors and management, the organisation’s corporate governance or risk management procedures and controls.
What can’t auditors do in the audit of a financial report?
An audit relates to a specific past accounting period. Accordingly, the auditor cannot predict or judge what may happen in the future. The going concern assumption is used in the preparation of a financial report and means the organisation will continue its operations for the foreseeable future. This basis is used unless management either intends to liquidate the organisation or to cease operations or has no realistic alternative but to do so. Whilst an auditor considers the going concern assumption the auditor cannot provide a guarantee that the organisation will continue in business indefinitely.
An audit is carried out during a defined timeframe. Accordingly, the auditor is not at the organisation all the time. As noted earlier, the purpose of the audit is to form an opinion on the information in the financial report taken as a whole, and not to identify all potential irregularities. Although auditors are mindful and remain alert for the signs of potential material fraud, it’s not possible to be certain that all frauds will be identified.
What are the benefits in having an audit of a financial report?
Whilst many organisations are required to be audited under a particular law or regulation (e.g. Corporations Act 2001, Australian Tax Office (ATO) requirement, a company’s constitution etc.) other organisations may voluntarily choose to be audited. The benefits of having an audit of a financial report, whether mandatorily or voluntarily required, include:
- Enhanced credibility: An audit opinion attached to a financial report enhances credibility in the marketplace. This assists in applying for finance, tendering for contracts, acquisitions, and mergers. Audited accounts give stakeholders assurance that your financial report is free from material error. This bolsters your journey on the road to success.
- Improvement to internal controls: Auditors gain an understanding of your overall business; the systems being used and the internal control environment. This will enable the auditor to identify deficiencies in the systems or controls for which recommendations can be made, making your business more efficient and less prone to fraud or error.
- Instill confidence: Due to the increase in audit thresholds, more companies are falling outside of the mandatory audit requirement. An independent review of the financial statements can provide transparency to stakeholders, including shareholders, lenders, and customers. The audit of a financial report may also provide surety of compliance with prevailing laws and regulations. These elements are important in small proprietary companies with minority shareholders whereby the audit can highlight any issues that have occurred which may not have been brought to their attention.