Financial Audit: Concepts and Types, Principles and Methods of Financial Audit Audit Report

Publication date/update: 23.01.2023

Any company, no matter how large it may be, must record every transaction it makes: every sale, every purchase of goods and materials or services, as well as record its cash flows. This is how the management reliably controls all financial and economic activities of the organization.

To ensure the credibility of the company's accounts and records, it is necessary to regularly conduct financial audits. In the event of a dispute, accounting records are first subject to verification. Thus, a financial audit is one of the most important types of audits we can meet.

A financial or accounting audit is a procedure that examines a company's accounting records for a given period and determines whether they comply with applicable accounting standards and regulations (Russian GAAP).

To conduct this kind of audit, a specialized accountant (auditor) must master the quality control standards of the country in which the organization operates (RAS for Russian organizations), as well as international auditing standards (ISA) which are a common "language" that provides confidence and trust between users and financial operators.

The goal of an audit of financial results is to have specialized, reliable, and timely information that helps make strategic business decisions.

An external audit is a financial statement audit carried out to form an unbiased opinion on an objective basis. The company's financial and economic audit includes the verification of accounting records, accounting, management, and tax reporting, which is carried out at the company's request. This procedure is intended to make sure that the company's property status and activities correspond to the official records. In these cases, an auditor is an independent person who has no connection with the company.

An internal audit is an independent function created in a company to review and evaluate its activities and carried out by the company's employees. The goal is almost always to review the processes taking place within the company and propose new solutions. An internal audit is voluntary or carried out at the request of the company's management.

An operational audit can be carried out by both an external and an internal agent. The goal is to review the procedures that are part of everyday life and improve productivity levels. An operational audit goes beyond the revision of financial statements. A good example is an audit the purpose of which is to determine whether a company complies with quality standards.

A public audit (tax audit) is carried out directly at the request of the state body. Its goal is to study the company's financial statements and identify and prevent any kind of violations, such as tax evasion, unjustified transactions, or non-compliance with labor laws.

IT audit: in this age of high technology, almost all companies rely on computer systems. Therefore, it is necessary to regularly check them and, if the case so requires, to update and adapt them to the requirements of the time.

It is worth mentioning that lately there have been new types of audits that are characteristic of the modern world in which we live. These are environmental audits, ethical audits, economic audits, social audits, and others.

There are six audit principles on which any financial audit is based according to ISO standards:

Ethical Conduct: Each audit must be based on professionalism.

Fair Presentation: Each audit is obliged to report truthfully and accurately.

Due Professional Care: Each audit must ensure the application of sound judgment and due diligence.

Confidentiality: Much of the information collected and shared during an audit is confidential. Therefore, the safety of the customer must be properly ensured.

Independence: An audit, whether internal or external, must be impartial. Auditors must maintain an objective state of mind to ensure that the audit findings and conclusions are uninfluenced by the company's management.

Evidence-Based Approach: Audit findings must be drawn rationally and represent a reliable outcome. The only way this can be achieved is through a systematic evidence-based audit.

Financial audit methods are rules, norms, and regulations which are used to study and verify the information on the actual state of the company's financial and economic activities, as well as determine the company's actual position concerning the planned one and assess the reliability of accounting and tax reporting. The obtained data form a conclusion, which can be used both for the company's internal purposes and for submission to the tax authorities to confirm the annual reporting.

There are the following financial audit methods:

Personal methods are formed historically under the influence of constantly changing audit needs and based on the achievements of other branches of science, such as accounting, statistics, economic analysis, computer technology, etc. When conducting a financial audit of a company, special tools are used to help obtain reliable information about the financial condition of the organization.

• Observation – control and analysis of actions of the company's financial employees. The process is aimed at determining the reliability of the information obtained. At this stage, they check accounting and tax registers, the correctness of the primary documentation and warehousing of goods and materials, and the availability of all the necessary reporting.

• Survey – oral and written information received from the company's employees, i.e. accountants, financial controllers or specialists of the planning and economic department, administrators, and managers. The reliability of the data obtained depends entirely on the competence and degree of openness of the company's personnel.

• Inventory – participation in the company's planned inventory or independent selective verification of the reliability of its results obtained without the participation of auditors.

• Assessment – it allows you to determine the effectiveness of the company, the actual state of its assets and funds, and the reliability of audit control objects, such as internal control and accounting systems.

• Confirmation – receiving answers from banks, debtors, creditors, lawyers, and other entities to preliminary requests made to confirm the information on the results of financial and economic activities of the audited organization, as well as annual turnovers, account balances, debts, and data on claims and obligations.

• Study of documentation – analysis of financial and economic transactions and assessment of the reliability of the reflected information.

• Analytical review – determining the actual state of the company, studying its development trends based on the data provided by management, accounting, and financial statements, as well as comparing the data obtained with the official financial statements of other companies operating in the same economic segment.

• Generalization – systematization of the audit study conducted at various stages of the verification procedure, assessment of the discrepancy between the declared result and the actual result (if any), drawing up an audit report, and issuing recommendations.

General scientific methods are based on the laws of logic, as well as the unity and struggle of opposites. The main distinguishing feature of this method is the possibility of its application at any stage of the audit.

Empirical methods are based on observation and experiment.

The empirical methods for conducting a financial audit include the following:

Grouping – identification of groups based on certain characteristic features, the formation of a set of tables to visualize and facilitate understanding of the phenomenon under study.

Summary – identifying the common among individual factors that affect the overall result.

Time series present information in the context of time indicators. The analysis uses such indicators as absolute growth rate and increase.

Elimination – the exclusion of an action or a set of factors and the selection of one that can provide information on an existing request.

Indexes – a selection of relative comparison indicators that do not need to be summarized. This is how a comparative analysis of two or more reporting periods is carried out.

The balance method is based on the principle of equality, involving sources and means, as well as income and deductions.

The main function of a financial audit is to verify the accounting procedures established in a company, namely to check and confirm that the company's transactions, records, and financial statements for a certain period have been carried out following established legal provisions and policies.

In addition to the main one, financial audit performs many functions, which can be conditionally divided into three groups:

Planning is the first step in the audit of financial information. Planning determines the path through all stages of the financial audit and the scope of the tasks and responsibilities of the parties involved.

Preparation – it includes getting to know the customer and obtaining the most complete and correct data on the company's financial situation. These data are the basis for assessing the scope of work during the financial audit, setting deadlines, and determining the price. At this stage, the auditor generates initial information about the organization. Thus, the auditor:

• Determines the specifics of the company's activities and applicable tax regimes;

• Makes a preliminary assessment of the financial condition;

• Determines the specifics of the company's production processes;

• Makes preliminary judgments about the competence of the company's employees;

• Assesses the degree of accounting automation;

• Studies the system of internal control;

• Studies data on the number of receivables and payables;

• Requests data on lawsuits in which the customer is involved.

After that, a contract providing financial audit services is concluded.

Planning is one of the most important audit stages, which determines the results of the upcoming audit.

• Development of a preliminary audit plan;

• Coordination of the audit plan with the customer;

• Development of an audit program.

It is important to take into account the specifics of the work of the audited organization, its type of activity, and its state of financial and tax accounting. These factors determine the timing of the financial audit. The audit schedule must be agreed upon with the customer. In the process of work, the program may be subject to adjustment.

Examination – it is the stage in which auditors use the methods provided by the financial audit standards described in this article above (see financial audit methods) and identify incorrect or unreliable information to correct the mistakes made.

The preparation of an audit report is the final stage of the company's financial audit.

An audit report is a report made by an external auditor to provide an independent opinion on the reliability of the data reflected in the company's accounts and financial statements for the reporting period. The audit report is issued in writing and includes an exhaustive list of errors and shortcomings found during the audit, as well as recommendations and explanations necessary to eliminate the identified violations.

Additionally, the report may include the auditor's vision regarding the financial and economic condition of the enterprise, as well as recommendations on optimizing accounting processes and improving the existing financial flow management system.

The audit report is a strictly confidential document intended exclusively for the company's head, financial manager, and chief accountant.

An independent audit ensures the auditor's impartiality, honesty, objectivity, and professional competence.

Based on the data obtained during the audit of financial results and financial statements, the following types of audit reports can be formed:

Clean Report or Unqualified Opinion: Audited annual reports reflect the truth about the company's financial activities as provided by the regulatory framework.

Qualified Report or Qualified Opinion: The annual financial statements have minor deviations from the regulatory framework, but except for this clause, the financial statements represent a correct assessment of the company's financial condition.

Adverse Audit Report or Adverse Opinion: The financial statements have significant deviations from the regulatory framework.

Disclaimer Report or Disclaimer of Opinion: This opinion is given when there is a limitation on the auditor's work, which means the company prevents the auditor from obtaining sufficient information to decide whether the annual accounts reflect the true state of the company. This is the worst decision for the company.

Thus, conducting a financial audit of the company's activities allows you to give an objective assessment of the overall financial performance of the business, determine a clear cash flow structure, optimize the organization's internal processes and procedures, assess the competence of the company's employees, and also eliminate shortcomings in accounting and reporting.