Question

• What are the goals of conducting an audit of financial statements and internal controls? Who typically conducts such audits, how often, and for whom?

Answer 1

Financial Statements Audit

A financial statement audit is the examination of an entity's financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures.

Goals of Conducting Audit of Financial Statements:-

The objective of audit of financial statements is for the auditor to express an opinion on the truth and fairness of financial statements. The other goals are:-

1. Accountability:- The main necessity for conducing the audit of financial statements from the fact that person responsible for the preparation of financial statements are often different from the owners of large corporations. Financial statements are the main source of accountability of management performance by shareholders. However, as the management is responsible for the preparation of financial statements, shareholders have to rely on external verification by auditors in order to gain reasonable assurance that the accounts are free from material misstatements and can therefore be relied upon to be presenting true and fair view of the affairs of the company.
2. Reliability:- Apart from the needs of owners, other users of financial statements may need to place reliance on the financial statements. External audit is a means of providing a reasonable basis for the users to place reliance on financial statements. Example of stakeholders (other than shareholders) that rely on audited financial statements include the following:-

• Tax Authorities rely on financial statements to determine the accuracy of tax returns filed by the company.
• Financial Institutions require audited financial accounts of prospective borrowers for assessing the credit risk by analyzing their liquidity and financial statements.
• Management uses the audit exercise to re-evaluate the company's risk management processes and internal control system by considering the feedback given by external auditors during the course of the audit in this regard.

    3. Scope:- Financial audit is intended to provide a 'reasonable' assurance over the accuracy of financial statements. It therefore does not provide absolute assurance that the financial statements are free from all misstatements. The purpose of audit is confined to provide reasonable assurance in order to avoid excessive time and cost in the performance of the audit that may outweigh any benefit that may be derived from the enhanced assurance. Absolute assurance is also impossible to guarantee in most cases due to the inherent limitations of audit.

Internal Controls Audit

Internal controls is the process, effected by an entity's Board of Trustees, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:-

(a) Reliability of Financial Reporting

(b) Effectiveness and efficiency of operations,

(c) Compliance with applicable laws and regulators

Goals of Conducting Audit of Internal Controls-

The list of internal control audit objectives/goals are:-

1. Authorization:- which ensures that all transactions are authorized and approved by a responsible associate before that transaction is recorded.
2. Completeness:- which ensures that records are not containing any missing entries.
3. Accuracy:- which ensures that transactions have been entered correctly and in timely manner.
4. Validity:- which ensures that transactions are lawful in nature and do not contain any misrepresentations.
5. Physical Safeguards & Securities:- which ensure that physical assets are safely guarded and only authorized personnel may access them.
6. Error Handling:- which ensures that when errors are discovered management is notified and the errors are corrected in a timely manner; and
7. Seggregation of Duties:- which ensures that no one individual is reporting, collecting, and processing a single transaction.

Internal Audits are carried out by internal auditors who are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of company they are auditing as opposed to a separate set of standards. Every organization establish the frequency that is appropriate for the business. Organizations can perform audits monthly, quaterly, twice a year or once a year.

The Internal Control Audit is mainly used by the entity itself. Management of entity or employees of entity use the internal audit report to analyse discrepencies in internal controls and to find any solution to these discrepencies.

Financial Audit is conducted to provide an opinion on financial statements as stated in accordance with specified criteria. Normally, the criteria are international accounting standards, although independent auditors may conduct audits of financial statements prepared using cash system or other basis of accounting appropriate for the organisation. This audit occurs once a year and focuses on company's performance and compliance.

The financial audits are used by various users, which can be external or internal. The most common users to financial statements are:-

• Management of Company
• Investors
• Customers
• Competitors
• Government & Government Agencies
• Investment Analysis
• Employees
• Lenders
• Investment Analysts
• Suppliers