What goes on behind the scenes when your Auditors are carrying out their work? It can take anything from a week to a couple of months of them scrutinising the figures within your Company’s Statement of Comprehensive Income (Profit & Loss) and Statement of Financial Position (Balance Sheet). Auditors often seem to be working very hard; be it staring intently at their screen – bordering the point of discomfort – or rushing around questioning your staff and checking physical things like your stock and security of your office. For those who don’t know, I’ll explain what goes on in 4 stages.
I normally try and keep my articles fairly simple and easy to digest. However, given the subject matter here, it’ll have to be more detailed and techie…
1. Audit planning and risk assessment – ensuring the audit is run efficiently and effectively.
You won’t be surprised to hear that Statutory Audit work is fairly risky (for the Auditors) and therefore highly regulated (see my article ‘What is a Statutory Audit’). As such, a lot of work goes into planning an audit to eliminate the risk of your Auditor erroneously signing-off on a ‘clean’ audit.
When planning, some of the key areas Auditors would consider are:
• Ensuring that their ethical requirements are met.
o Ultimately meaning that they have no conflicted interests in engaging your Company, and that they are truly independent, so that their ‘audit opinion’ at the end will be reliable.
• Your industry, legal jurisdiction, the political and economic environment in which you operate, and any related significant changes.
o This will help them decide whether any specific staff or experts are needed on their team, as well as to ensure appropriate laws / regulations are applied, and help them ensure any impact of relevant changes are fairly reflected.
• The availability, format, and quality of your financial data, as well as ease of access to your staff.
o This will inform their assessment of the time and resources they need to dedicate to you.
• Identifying key internal and external stakeholders.
o So that they know who governs your Company and who it depends on externally.
• Identifying key risk areas that may result in an incorrect audit opinion.
o Auditors take a risk-based approach to auditing, so that time and resources are focused proportionately to areas which carry a greater risk of them missing something.
• Assessing the risk of fraud and areas in which the risk is heightened.
o It is very important to note that, whilst Auditors may detect and report on fraud in the course of their work, the actual responsibility for detection and prevention of fraud lies with a Company’s Management (those responsible for the Company’s governance). The Auditors’ job is to obtain reasonable assurance that there has not been any fraud.
• The results of previous audits.
o Which would feed into their risk assessment.
• Determining ‘materiality’.
o Auditors use their professional experience and judgement to determine what factors are of such significance that their omission or misstatement would reasonably influence economic decisions which would be based on the Financial Statements being audited. [I have tried to make this a simple and non-wordy as possible!]
o There is normally a monetary threshold set at this point, at or above which things are deemed to be ‘material’ (whether it be things on their own, or a group of things adding up to the threshold). This threshold should not be communicated to you as the client to help with the Auditors’ independence.
2. Internal control – how (and how well) do you make sure the numbers are right?
Auditors assess the internal controls of a Company so they may direct their attention to areas which impact the reliability of the financial statements. The better your internal controls are, the better your Company’s assets are protected, the easier and sooner fraud will be detected, and as a result, your Shareholders’ investment is better protected.
Your Auditors would assess things like the following (a non-exhaustive list):
• Segregation of duties / control of internal and external access to key systems, locations, and stakeholders.
• Security of IT and other business-critical systems, as well as their robustness and reliability.
• Your expenditure authorisation processes.
• How your internal controls are monitored.
• The internal culture and communications which either indirectly or directly impact the reliability of the financial statements.
Much of their assessment would be done by interviewing staff and/or management, asking for appropriate questionnaires to be completed, as well as creating their own flow charts of the controls they have witnessed. This all forms their documentation of your internal controls, which is reviewed in each year’s audit.
If your Auditors find any shortcomings in your controls, this would be communicated to Management both verbally and in writing, and suggestions for improvements may be made where possible. Any significant shortcomings may mean that your Auditors decide they cannot rely on certain systems, and therefore have to come up with another way to get assurance on the areas of your financial statements which are affected.
3. Audit evidence – more talking to your finance team and other staff or management.
So far, your Auditors will have spent time on minimising the risks of them giving an inaccurate audit report, ensuring the audit is efficient, and checking that they can rely on your systems and organisation for the information they need. Now is where the majority of the number crunching is done by the audit team. Much of this is typically done by junior members of the team, under supervision of a qualified senior.
All your key numbers will be checked for accuracy, completeness, correct classification, and compliance with accounting standards, Company law, and tax laws.
The key areas include:
• Non-current assets (fixed assets).
• Inventory (stock).
• receivables (debtors).
• Cash in the bank.
• Payables (creditors).
• Other liabilities (loans, accruals, taxes, and provisions for potential liabilities).
• Transactions within the Shareholders’ funds accounts.
• Transactions between the Company and its Directors.
The procedures used by the audit team to check these things include (again, not an exhaustive list):
• Tracing various samples of transactions from your accounting records, back to your bank statement and/or commercial contracts.
• Approaching randomly selected customers and suppliers to confirm account balances and checking related documents.
• Confirming bank balances with your bank in writing.
• Reviewing minutes of Board meetings.
• Inspecting your legal costs records.
• Reviewing your numbers in light of political, economic, or industrial changes (as noted at the planning stage).
• Reviewing your numbers against prior years, as well as against expected industry norms.
• Witnessing (or ‘vouching’) communication chains, such as e-mails.
• Obtaining written representations of things from management and/or staff.
Of course, every single item from within (as well as outside) your accounting records cannot be checked. Therefore, Auditors have ways of selecting ranges or samples of things they want to test. This can be either just at random, or linked to specific materiality thresholds, or linked to overall materiality, or by the nature of the transactions within a sample.
4. The final review and audit report
After all of this exhausting work is done by your Auditors (and no doubt also by your finance team), they would at this stage make some final checks to ensure they haven’t missed anything, and prepare their report.
The final checks include looking at ‘subsequent events’, as well as an overall assessment of your Company’s status as a ‘going concern’. This would involve reviewing banking transactions, notes from interviews / questionnaires, and Board minutes for signs of issues after the year-end which may need to be accounted for.
Then, finally, they can write and present their Audit report. The final report is most commonly that of a ‘clean audit’. It would start with a lot of explanation of the responsibilities of the Company’s management and that of the Auditors – essentially managing expectations within professional boundaries, and somewhat of a disclaimer. It would then go on to the essential part giving the Auditors’ opinion. That involves a statement to the effect that, in their opinion, the financial statements give a true and fair view of the financial position and performance of your Company for the year.
This is known as an ‘unmodified’ opinion. As you might expect, there are ‘modified’ opinions, ‘adverse’ opinions, and a few things in between – but I might explain these in another article, at another time, because I can sense you need a tea / coffee break now!
_________________________
At DSV Accounting, we fully understand the audit process from the client’s point of view. We use our skills and experience in managing audits to help you reduce the amount of time, effort, and money that you ultimately put into an audit. If this post has inspired you to approach us for help with your audit, do get in touch and let us ease the pressure and cost.
Are you about to have a Statutory Audit (or even a non-statutory one for that matter)? Is it your first one, and you need help preparing for it, and getting through it? Have you been through audits before, but just don’t have the time this year? If so, and if you book us in early enough, DSV Accounting can help you get through your audit.
Fill in this form and we’ll review your case and get back to you.
Related articles: