The Audit Report as an External Assessment of Financial Performance
The aim of an audit is to assess the qualities, usability, or performance of a company, person, product, project, or process. This is a fair and unbiased evaluation of the transactions or financial statements of a company, conducted by an external auditor or a company employee. An audit is a form of internal control and aims to identify whether there are material misstatements.
Accounting and Audits
An independent company or professional examines the financial transactions of a business. The goal is to review and produce a report of the company’s financial transactions. The results are presented to third parties, banks, shareholders, and company owners. Other interested parties include customers, suppliers, business partners, investors, and other stakeholders. The number of stakeholders varies depending on the size of the company. The number of associations, agencies, companies, and other stakeholders is larger for large private and public companies.
There are different procedures such as compliance audits and audits of internal control and financial statements. The requirements vary from one country to another while financial statements are prepared in compliance with GAAP.
Purpose and Benefits of the Report
One of the main goals is to assess the performance and financial position of a business. The assessment is done to identify areas in which CEOs and managers may improve internal control and coordination. Thus, an external assessment can help enhance the efficiency of companies and ultimately – their profitability. The auditor analyzes the financial records and accounts of the company and assesses potential risks, including quality, financial, economic, and others. He also evaluates new equipment and technologies and looks for illegal and fraudulent practices. One of the benefits is that reduced risk has a positive impact on the cost of capital.
Inherent risk is one of the major factors to consider. The aim is to improve the efficiency and adequacy of the internal control systems. Mismanagement and inefficiency are often due to the lack of experience and integrity, poor coordination, negligence, and other factors. The main problem is that the internal control systems are designed and implemented by the management. The role of the auditor is to identify whether there is a material degree of uncertainty and to communicate issues and facts that have come to his attention. Of course, there are limitations and the reason is that the financial statements contain estimates.
The Process in Stages and Steps
There are four stages – initial planning, assessment of risk factors, developing a plan and strategy, evaluating evidence, and conclusion. The first stage involves procedures that aim to determine the scope, timing, and nature of the assessment to be made. The second stage is designed to evaluate risk based on factors such as the environment in which the business operates, the suppliers, customer base, industry, competitors, and others. During the fourth stage, the auditor develops a plan and strategy, along with a timetable and testing approach. The next step is to evaluate evidence based on the financial records and books of the company, as well as information from third parties. Different procedures and methods are used to gather evidence. The expert examines statements that include information about financial transactions and balances and inspects equipment, plants, inventory, and other assets. He may request documents from other parties, for example, financial institutions, customers, and suppliers. The auditor also looks at the financial statements and components such as valuations and pricing. The final step is to prepare a report based on the evidence gathered. The report is called audit opinion.
It is usually qualified accountants that carry out assessments. They have extensive experience and knowledge in areas such as business management, law, finance, accounting, and other spheres.
Information Included in the Report
There are different types of audits, and the nature and scope determines the components. Some reports include a schedule of finding, financial trends, analysis of organizational structure, discussion, budgetary comparison data, and other components. The report may be divided into supplementary and required information, introductory and financial section, findings and recommendations, etc. Other reports contain a scope and introductory paragraph, and explanatory and opinion paragraphs.
Accounting Standards Help Assess Financial Performance
Accounting is a term that encompasses different methods and techniques for the recording of financial transactions. Accountants analyze, report, and record transactions of companies and look at their revenues, losses, and profits.Generally Accepted Accounting PrinciplesGAAP refers to procedures,...