The nucleus intent of an external audit is to provide top direction with trustiness of internal controls over fiscal coverage and to verify truth and seasonableness of dealing records, fiscal statements, and any regulative studies. An external audit nowadayss an indifferent position of a company ‘s fiscal systems. This information is priceless for top direction who are charged with pull offing a company ‘s fiscal policies. Therefore, a good organized external audit program provides acute information sing the effectivity of the fiscal control systems within a company.
Audit planning begins with finding the demands for the battle, including ( California State University, [ CSU ] , n.d. ) :
The fiscal statements to be audited
Any other demands ( e.g. , regulative filings )
The timing of the battle
During this phase hearers set up an understanding with their client as to:
The nature of services to be provided
The duties of each party
In add-on they develop:
an overall audit scheme
an audit program
an audit plan
While depicting the audit planning procedure as the first measure in an audit, it should be recognized that important parts or the planning procedure can non be completed until the hearers have a sufficient apprehension of:
Client
Client ‘s environment
Client ‘s internal control
It should besides be recognized that during audit planning hearers use a hazard based attack in which they are continually sing the possibility of material fiscal statement misstatement. As a consequence, the audit program may necessitate to be revised as a consequence of information on hazard every bit good as audit findings that are gathered throughout the audit. There are four stairss involved sing be aftering an audit, which are ( “ The External Auditing Process ” ) :
Understanding the client
The internal control processs which need to be reviewed
The substantial trials
The concluding coverage stairss
Measure I: Understanding the client
Hearers must obtain an apprehension of the client and its environment. It must garner sufficient background information to buttocks:
The hazards of material misstatement of the fiscal statements
To plan the nature, timing, and extent of farther audit processs
Risk appraisal processs are used to garner this information and include ( Cornell University Audit Office, 2007 ) :
Inquiries of direction
Analytic processs
Observation
Inspection and other processs
Hearers use their apprehension of the client and its environment to place history balances, minutess, and revelations that might be materially misstated. At the averment level the hearer considers ( “ Audited Fiscal Statements ” ) :
aˆ? What could travel incorrect?
aˆ? How likely is it that it will travel incorrect?
aˆ? What are the likely sums involved?
At this phase of the audit, the hearers are trying to obtain:
An overall apprehension of the client
Client ‘s environment
Client ‘s aim
Client ‘s schemes
Client ‘s related concern hazards
The mode in which direction steps and reviews fiscal public presentation
The client ‘s internal control
This apprehension helps the hearers identify:
Account balances
Minutess
Disclosures with a high hazard of stuff misstatement
Obtaining an apprehension of the nature of internal control
Obtaining an apprehension of the nature of internal control is an indispensable portion of this procedure because it allows hearers:
To place histories and categories of minutess that may be misstated
To orient audit processs to the bing internal control system
Measure II: The internal control processs which need to be reviewed
Internal control, which is a procedure, affected by the entity ‘s board of managers, direction, and other forces, designed to supply sensible confidence sing the accomplishment of aims in the undermentioned classs ( Committee of Sponsoring Organizations [ COSO ] , n.d. ) :
aˆ? Reliability of fiscal coverage
aˆ? Effectiveness and efficiency of operations
aˆ? Conformity with applicable Torahs and ordinances
Information on internal control comes from:
Interviewing client forces
Detecting the application of specific controls
Inspecting paperss and studies
Tracing minutess through the information system
Reviewing anterior old ages audit working documents
Areas of internal control include:
fiscal coverage
operations
conformity
In the three countries of internal control COSO states that a series or command aims and sub aims exists.
To exemplify this construct ; see internal control over fiscal coverage:
At the top degree, the overall aim is to fix and publish dependable fiscal information
At the really elaborate degree, as applied to histories receivable, COSO illustrates the following control aims ( sub aims ) :
All goods shipped are accurately billed in the proper period
Bills arc accurately recorded for all authorised cargos and merely for such cargos
Authorized and merely authorized gross revenues returns and allowances are accurately recorded
The continued completeness and truth of histories receivable is ensured
Histories receivable records are safeguarded
Controls over fiscal coverage are frequently classified as ( Committee of Sponsoring Organizations [ COSO ] , n.d. ) :
Preventive Controls
Detective Controls
Corrective Controls
Preventive controls are aimed at avoiding the happening of misstatements in the fiscal statements. Examples of preventative controls include segregation of responsibilities and necessitating blessing of period-ending journal entries.
Detective controls are designed to detect misstatements after they have occurred. A policy necessitating the readying of monthly bank rapprochements is an illustration of a control that could observe misstatements of hard currency grosss or expenses.
Corrective control is normally needed to rectify the state of affairs when investigator controls discover a misstatement. Keeping backup transcripts of cardinal dealing and maestro files to let the rectification of informations entry mistakes is a common illustration of a disciplinary control. It is of import to recognize that preventative controls operate at the single dealing degree, while detective controls may run at the dealing degree or at a higher degree.
The assorted controls designed to accomplish a control nonsubjective frequently overlap. That is the controls are complementary in that they function together to accomplish the same control aim. To exemplify, see the control that requires all hard currency expenses to be authorized and the complementary control of necessitating rapprochements of bank statements. These controls work together to assist guarantee that unauthorised minutess arc prevented or detected. Controls are referred to as redundant if they address the same fiscal statement averment or control nonsubjective. Finally, a counterbalancing control reduces the hazard that an bing or possible control failing will ensue in a misstatement.
While there are many different types of control activities performed in an organisation, merely the undermentioned types are by and large relevant to an audit of the organisation ‘s fiscal statements ( By and large Accepted Accounting Principles [ GAAP ] , n.d. ) :
aˆ? Performance reappraisal
aˆ? Information processing controls
aˆ? Physical controls
aˆ? Segregation of responsibilities
Performance reappraisals: These controls include reappraisals of existent public presentation as compared to budgets, prognosiss and anterior period public presentation ; associating different sets or informations to one another ; and executing overall reappraisals or public presentation. Performance reviews supply direction with an overall indicant of whether forces at assorted degrees are efficaciously prosecuting the aims of the organisation, by look intoing the grounds for unexpected public presentation, direction may do timely alterations in schemes and programs or take other appropriate disciplinary action.
Information processing controls: A assortment of control activities arc performed to look into the truth, completeness, and mandate of minutess. The two wide classs of information processing controls include general control activities which apply to all information processing processs, and application control activities which apply merely to one peculiar activity. Examples of general control activities would include those that help guarantee the dependability or all information processing activities. To understand the nature of application control activities, see the controls over paysheet that aid to guarantee that:
( I ) merely authorized paysheet minutess are processed
( 2 ) authorized paysheet minutess are processed wholly and accurately
These application control activities would merely impact the dependability of paysheet processing.
Physical controls: These controls include those that provide physical security over both records and other assets. Activities that safeguard records may include keeping control at all times over unissued pre numbered paperss every bit good as other diaries and legers, and curtailing entree to computing machine plans and informations file. Merely authorised persons should be allowed entree to the company ‘s valuable assets. Direct physical entree to assets may be controlled through the usage of safes, locks, fencings and guards. Improper indirect entree to assets, by and large accomplished by distorting fiscal records, must besides be prevented. This may be accomplished by safeguarding the fiscal record.
Segregation of responsibilities: A cardinal construct of internal control is that no one section or individual should manage all facets of a dealing from get downing to stop. No one person should execute more than one of the maps of:
Authorizing minutess
Recording minutess
Keeping detention over assets
Besides to the extent possible, single put to deathing the specific dealing should be segregated from these maps. The end is to non let an person to hold incompatible responsibilities that would let him or her to both perpetrate and conceal mistake or fraud in the normal class of his or her responsibilities.
A recognition gross revenues dealing may be used to exemplify appropriate mandate and segregation processs ( Whittington & A ; Pany, 2010 ) :
Top direction may hold by and large authorized the sale of ware at specified recognition footings to clients who meet certain demands
The recognition section may O.K. the gross revenues minutess by determining that the extension or recognition and the footings or sale are in conformity with company policies
Once the sale is approved, the transportation section executes the dealing by obtaining detention of the ware from the stock list shops section and transporting it to the client
The accounting section uses transcripts of the certification created by the gross revenues, recognition, and transporting sections as a footing ( or entering the dealing and charging the client.
With this segregation of responsibilities no one section or single can originate and put to death an unauthorised action.
Measure III: The substantial trials
An hearer must follow substantial process to execute its audit. The hearer is required to be after the substantial process to be adopted ( American Institute of CPA ‘s [ AICPA ] , 2002 ) :
Establish the being of assets
Establish that the company has rights to the assets
Establish completeness of recorded assets
Verify the cutoff of minutess
Determine the appropriate rating of the assets
Determine the appropriate fiscal statement presentation and revelation of the assets
It should fix an audit checklist to obtain its object of audit so as to find the hazard involved in transporting out such processs. An exemplifying e.g. on substantial process on histories receivable is given as ( Whittington & A ; Pany, 2010 ) :
Control
Objective Hazards
Controls
1. Ensure that all goods shipped are accurately billed in the proper period.
Missing paperss or wrong information.
Improper cutoff of cargo at the terminal of a period.
aˆ? Use criterion transportation or contract footings.
aˆ? Communicate nonstandard transportation or contract footings to histories receivable section.
aˆ? Identify cargos as being before or after period terminal by agencies of a transportation log and pre numbered transportation paperss.
2. Accurately record bills for all authorised cargos and merely for such cargos.
Missing paperss or wrong information.
aˆ? Prenumber and history for transporting paperss and gross revenues bills.
aˆ? Match orders, transportation paperss, bills, and client information, and follow through on losing or inconsistent information.
aˆ? Mail client statements sporadically and look into and decide differences or enquiries by persons independent of the invoicing map.
aˆ? Monitor figure of client ailments sing improper bills or statements.
3. Accurately record all authorized gross revenues returns and allowances and merely such returns and allowances.
Missing paperss or wrong information.
Inaccurate input of informations.
aˆ? Authorization of recognition memos by persons independent of histories receivable map.
aˆ? Pre-number and history for recognition memos and having paperss.
aˆ? Match recognition memos and having paperss and decide odd points by persons independent of the histories receivable map.
aˆ? Mail client statements sporadically and look into and decide differences or enquiries by persons independent of the invoicing map.
4. Ensure continued completeness and truth of histories receivable.
Unauthorized input for nonexistent returns, allowances, and write offs.
aˆ? Review correspondence authorising returns and allowances.
aˆ? Reconcile histories receivable subordinate leger with gross revenues and hard currency grosss minutess.
aˆ? Resolve differences between the histories receivable subordinate leger and the histories receivable control history.
5. Safeguard accounts receivable records.
Unauthorized entree to histories receivable records and stored informations.
aˆ? Restrict entree to histories receivable files
Measure IV: The concluding coverage stairss:
Audited account studies are a critical map in maintaining a company honest with their fiscal information. A fiscal audit study is written of a company ‘s fiscal statement truth. These audits have several guidelines published by organisations such as:
GAAP – By and large Accepted Accounting Principles
GAAS – By and large Accepted Auditing Standards
Writing the Audit Report includes:
Introduction
Duties of Directors and Hearers
Footing of Opinion and the Opinion
Report will look as a concern missive
Be clear, concise and utilize proper professional footings
Get down study with a rubric and heading that reads: “ Independent Auditor ‘s Report. ” This besides includes:
Auditing house ‘s name
Writer ‘s name and concern reference
Address the study to the Board of Directors and stockholders of the company
The above is prescribed by GAAP. One must understand that this study will be published for public examination by the SEC ( Securities and Exchange Commission ) .
The debut of the scrutinizing study includes ( American Institute of CPA ‘s [ AICPA ] , 2002 ) :
The name of the company being audited
Business twelvemonth that the audit examines
The following subdivision includes:
Description of the party ‘s duties
Audit house duty to publish an sentiment
Management ‘s duty to make the fiscal statement that the audit was based from
Write the footing of sentiment:
Descriptive and concise
Declare the audit was conducted in conformity with GAAS
Disclose all of types of informations that was examined
Describe basic model of the audit
Auditing steadfast provinces sentiment which is written in the first sentence of the paragraph. It should be stated obviously and clearly. Opinions include ( Whittington & A ; Pany, 2010 ) :
Qualified sentiment
Unqualified sentiment
Adverse sentiment
Qualified sentiment: an hearer will publish if during the audit, it finds a divergence from GAAP, or if the audit could non be completed for some ground. A qualified sentiment issued by an hearer points out reserves that concern the hearer sing the truth of the fiscal records examined. Situations motivating qualified sentiments involve a limited range of the audit, or losing or misstated information. An hearer can besides compose a qualified sentiment if he/she discovers unusual accounting patterns that do non follow with GAAP.
Unqualified sentiment: signifies that the fiscal statements conform to GAAP. It is besides referred to a complete audit, an unqualified audit is an audit that uses all possible informational resources to measure a set of accounting records, and finds that those books are in harmoniousness with those resources. In order to carry through this undertaking, the hearer non merely evaluates the information found in the books themselves, but besides looks closely at the system of cheques and balances used by the company to guarantee that the accounting records are accurate. An unqualified audit is the end for companies, since the result indicates that the books are accurate and true, at least every bit far as the hearer can find based on the certification provided and the strength of those internal systems.
Adverse sentiment: will be issued if the hearer finds a material misstatement, or if processs do non follow GAAP criterions. It consequences when there is refering fiscal statements that the statements as a whole bash non present consequences reasonably and truthfully. Besides an inauspicious sentiment can incorporate significant exclusions or warnings.
In decision, the audit processs contained in an audit plan are designed to be antiphonal to possible stuff misstatements of the fiscal statements. To do certain that the plan addresses all possible misstatements, hearers develop audit aims for each important history balance and category of minutess. These aims follow straight from direction averments that are contained in the client ‘s fiscal statements. From these averments general aims may be developed for each major type of balance sheet history including assets, liabilities, and proprietors equity and the related income statement histories. Therefore, a good organized external audit program provides acute information sing the effectivity of the fiscal control systems within a company.
