What is a Financial Audit?
Audit is an independent examination of the books of accounts undertaken by independent external auditors to check the accuracy, credibility,reliability of the financial statements.
A financial audit is undertaken to examine the true and fair position of the organization. it is undertaken with the view that whether the stated financial reports depict a true and fair position of the organisation.
PREPARATION FOR AN AUDIT?
- Planning is thinking well before commencing any activity. We all think before doing any important work. Audit of accounts being an important job the auditor things in advance before starting any audit and prepares a detailed plan of action.
Necessary steps:
Before the commensement of any new audit ,the auditor must take the following steps:
1. Ascertain the scope of duties: To start with, the auditor should assertain the exact nature and scope of his or her duties. This question does not arise in case of a statutory audit as his or her duties are enumerated in the concerned law only.For example; when an auditor is appointed to audit the accounts of a joint stock company, there are provisions in the Companies Act, about the duties, rights of an auditor. However, if a concern in which audit is not legally mandatory, auditor must communicate or discuss the scope of his or her duties with the management of the concern.
2. Acquisition of Appointment letter: Before the commencement of the audit work, the auditor must obtain his or her appointment letter from the client. Such letter should consist of his or her duties, remuneration, duration allowed to complete the job. Engagement letter leads to an audit contract.
3. Nature of the client’s business: Each and every business has its own special and unique features. Hence, business follows and accounting system that suits its needs. There is no one uniform accounting system that can be followed by every business organisation. So the auditor before commenting his auditing work should study the special problems of the business unit and the system of accounts prevalent in the organisation.
4. Obtain a list of accountable officers: The auditor should obtain a list of responsible and accountable officers, so that, while going through the audit procedure, if the auditor needs any information or clarification on any specific point, he can directly contact the concerned officer. Auditor should also obtaine information about the extent and scope of authority of each of them.
5. Knowledge of technical details: The auditor should also acquire some knowledge about the technical details of business. This will help him or her to understand and analyse the nature of the transactions while auditing them.
6. Inquiry into special circumstances, if any: Should enquire into special circumstances surrounding his appointment. In case he or she is appointed in place of another auditor it is his professional duty to communicate with him.
7. Instructions to the client:
- Accounts should be finalized and kept ready for audit.
- Necessary schedules be prepared and made available. For example: list of debtors and creditors, fixed assets, outstanding incomes, incomes received in advance, cost of acquisition and market price statement of deferred revenue expenditure etc. The auditor should also ask to produce the final accounts of last two three years with auditor’s report.
