What’s the Purpose of a Financial Report Audit?

The financial report of an organization is audited by a registered business auditor with the Australian Investments and Securities Commission (ASIC). This registration could be for an individual (such as sole practitioner), a firm partner, or a director of an accredited audit company.

Only in rare cases can your audit be completed by a suitably certified professional accountant. These audits are typically performed on small businesses or those that do not have a lot of reporting requirements. Using a trained auditor provides the advantages highlighted in this article, as well as ensuring that your organization is overseen by experts.

Auditors follow Australian Auditing Standards, which are produced by the Auditing and Assurance Standards Board, a federal government entity. The following are some of the most important aspects of performing an audit:

Setting a timeframe with the auditor and the organization’s top management and personnel, as well as obtaining a complete list of documents and information needed for the audit, are all part of the preparation process. See our post on how to prepare for your financial statement audit for more details.

Assess significant risks: Auditors will use their skills to identify and analyze key risks (you may have heard the term “material risks”) in financial statements that may be cause for worry. Auditors make these risk evaluations based on their experience and knowledge of the organization, industry sector, and wider environment.

Develop an audit strategy to handle these risks and test various items within the financial statements after the audit team has identified and assessed material risks. This includes acquiring evidence for the audit, as well as analyzing the organization’s internal systems, underlying records and documents, and other pertinent data. This may necessitate a physical inspection of the company’s assets, such as inventory, property, plant, and equipment.

Auditors may meet with the organization’s directors, managers, and personnel at any time during the process to help them in carrying out their responsibilities. This involves outlining the resolution of important risks, discovered errors, opportunities for improvement, and other issues related to the audit’s completion. An audit report is generated once the auditors have concluded their work. This report explains what they did and offers an opinion based on their work, based on their professional judgment.

There are some frequent misconceptions about what an auditor does during a financial report audit. The following are some of the most typical misunderstandings about the auditor’s role:

• During the audit of a financial report, auditors provide perfect certainty. Auditors provide assurance that is reasonable rather than absolute. A high level of certainty is reasonable assurance. Because there are inherent limits in completing an audit of a financial report, absolute certainty is not achievable.
•  Other information provided to members is being audited. Many organizations provide information to users in addition to financial reports. Auditors are unable to inspect every document that is sent to users.
• Every transaction carried out by an organization is verified, and every statistic in a financial report is evaluated. The cost of doing so would be significantly more than the benefit. For many organizations, it’s also inefficient and nearly impossible.
• The review of a company’s business actions or strategy, or even the directors’ decisions.
• EVERY internal control is put to the test.
• Critiquing the organization’s corporate governance or risk management systems and controls, as well as the quality of its directors and management.

An audit is a review of a previous accounting quarter. As a result, the auditor is unable to forecast or determine what may occur in the future. When preparing a financial report, the going concern assumption is that the company will continue to operate for the foreseeable future. Unless management plans to dissolve the organization or halt operations, or has no practical alternative, this basis is applied. While an auditor examines the going concern assumption, he or she cannot ensure that the company will continue to operate indefinitely.

An audit takes place over a set period of time. As a result, the auditor is not always present at the company. As previously stated, the audit’s goal is to make an opinion on the financial report’s information as a whole, not to find all potential anomalies. Although auditors are aware of the symptoms of potential material fraud and keep vigilant, it is impossible to guarantee that all frauds will be detected.

While many organizations are compelled to be audited by law or regulation (e.g. Corporations Act 2001, Australian Taxation Office (ATO) mandate, a company’s constitution, etc.), others may opt to be audited voluntarily. The following are some of the advantages of having a financial report audited, whether it is compulsory or voluntary:

• Increased market credibility: An audit opinion linked to a financial report boosts market credibility. This aids in the application for financing, contract tendering, acquisitions, and mergers. Audited financial statements provide assurance to stakeholders that your financial report is free of material errors. This will help you along your path to success.
• Internal controls are improved: Auditors obtain a better grasp of your company’s overall operations, including the systems in use and the internal control environment. This will allow the auditor to spot flaws in the systems or controls and provide recommendations to improve your company’s efficiency and reduce the risk of fraud or error.
• Instill confidence: As audit thresholds rise, more businesses are opting out of the mandatory audit process. Stakeholders, such as shareholders, lenders, and customers, can benefit from an independent assessment of financial accounts. An audit of a financial report can also ensure that it complies with all applicable rules and regulations. These factors are critical in small proprietary companies with minority shareholders, as the audit can reveal any flaws that may not have been brought to their attention.