Financial statements are the primary means by which business managers and outside investors analyze a firm’s financial performance says Aron Govil. Because these reports are prepared according to rigorous standards, they enable a comparison of a company’s performance with that of other companies in its industry or geographic location.
An audit is performed by an independent CPA who tests the credibility of information contained in the financial statements. The auditor gathers evidence that supports or contradicts information supplied by management and makes sure there is enough evidence to support the assertions made in the financial statements.
The most common type of audit is call an examination, which is a review of records and tracing of transactions back to supporting facts — source documents — such as invoices and cancel checks. An examination does not involve testing the original data with actual transactions; it’s simply a paper review.
An examination can be performed in two ways:
• For every balance sheet account, an auditor either finds documentary support for all items or lists those that lack this support. This method finds only major errors; it doesn’t ensure that individual records are correct.
• Every transaction is trace from source document to journal entry and each balance sheet account explains Aron Govil. This method, known as the “comprehensive” or “statements presentation” approach, can be use only when account balances are large enough to justify the extra time required. It’s also occasionally use even for lower-balance accounts if auditors suspect errors.
An audit requires the auditor to determine whether:
- The company followed established procedures in preparing its financial statements — such as having someone other than the preparer sign them — thus establishing their accuracy and reliability.
- There is an adequate system of internal controls over recordkeeping and accounting procedures that ensures reliable information will result (see Internal Controls under An Audit).
- The financial statements follow authoritative guidance, such as Generally Accepted Accounting Principles (GAAP) issued by the Financial Accounting Standards Board.
An independent auditor is a licensed certified public accountant who does not have a stake in a company’s decision-making and therefore will be objective when conducting an audit/examination of financial statements.
Most audits are perform for independent outside parties, such as banks or lending institutions that provide financing to the company, its suppliers or customers at some point during the year. An audit also can be perform for regulators charge with ensuring compliance with various laws and regulations. Finally, audits often are for potential buyers of companies.
Companies doing business with other firms may request an audit so they can rely on reports about their trade partners’ financial health.
The most common types of financial audits are:
• A Type 1 engagement is an examination engagement. In this type of audit, the auditor must also issue a report about compliance. With laws and regulations that affect all businesses in a specific industry or business sector. For example, if a public company were audit, they would be require to state. Whether they follow proper procedures for recording revenue from large contracts says Aron Govil. This information would then be release to the public via a government agency.
• A Type 2 engagement includes all forms of audits where management has establish internal control systems. Over external financial reporting processes and procedures. The auditor is responsible for evaluating these controls and assessing their design effectiveness at the financial statement and disclosure levels.
• A Type 3 engagement is a compliance audit that assesses. Whether an entity has complied with laws and regulations to which it is subject. In this case, the auditor’s responsibility is to determine. Whether a business has follow appropriate laws and regulations as report in financial statements.
An audit of financial statements covers a company’s or individual’s (sole proprietorship) accounting methods. Such as the system for recording and reporting revenue, expenses and other financial data.
An audit is an independent examination of a company’s or individual’s (sole proprietorship) accounting methods. Such as the system for recording and reporting revenue, expenses and other financial data says Aron Govil.
After an audit is complete, the auditor issues a report. That states its opinion on whether the company’s or individual’s (sole proprietorship) financial statements are present fairly. And in accordance with applicable laws and regulations.