What Are The Stages Of The Auditing Process and Why It Is Important?

What Are The Stages Of The Auditing Process & Why It Is Important?
| Updated on: May 10, 2022

All businesses maintain a record of their financial transactions and generate periodic financial reports. These reports have to be examined by a qualified auditor to determine if they are a fair and accurate representation of its finances. The audit also determines if the company has followed GAAP norms for its accounting. Audits are performed by an external or an internal auditor who scrutinizes and investigates the financial records. An external auditor then issues an opinion on the financial accounting statements of the company. Audited reports are required to validate the company’s financial reports and statements. An audit builds confidence in the investors, owners, lenders, investors, and other stakeholders that the company maintains its financial records properly and has accurate reports. It also gives the company feedback on the efficiency and accuracy of its procedures, processes and controls.

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Auditing process

The auditing process is slightly different for each company and the auditor. However, there are some commonalities in how an audit is conducted. Most companies have a regular internal audit by an employee to ensure that the books of accounts are in order. But, an external audit by a qualified auditor is a must to ensure and certify the correctness of the accounts.

While an audit may make some people feel like they are being scrutinized, it is a necessary process. Audits ensure adherence to accounting standards and accuracy in the financial records. It is a preventive measure to uncover any fraud or financial mismanagement that is happening in the company. Audits also give the company an unbiased opinion on its accounting processes and systems. This can help accountants further improve and streamline their financial accounting.

You prepare your business for a smooth financial audit by first reviewing the finances internally. If you have a complete and clear understanding of all your accounts,  you will be able to answer any questions that the auditor has quickly. And if there is any simple error or lack of clarity in your accounts, you can set it right. Internal audits also help report on the company’s processes and revenues for management purposes. They give an overview of the company’s financial performance and position.

Think ahead and have a list of documents required prepared and accessible before the audit begins. This will prevent the hassle and time spent tracking down paperwork later. Ensuring that your business always follows correct accounting principles is essential to having transparent accounts and easy audits. Ensure that there is no time lag in recording any transaction so that your accounts are always up to date and complete.

The stages of the auditing process

The finer details of an audit process may vary by company and auditor. But, the general stages of the auditing process are as follows:

Planning: An audit should be planned so that all the people involved are prepared. The company will speak to, negotiate with and engage an auditor. The company and the auditor will have to agree on the level of engagement, process, and objectives of the auditing process. It can perform an internal audit in preparation for the external audit. Having all accounts in order and the paperwork accessible makes an auditor's job easier. An auditor also has to plan the audit to give the company an approximate timeline for the audit process. A planned audit also informs the stakeholders of when to expect to see the organization's audited financial statements.

Requesting financial documents: The auditor draws up a list of the required documents for scrutiny. This is a preliminary list, and the audit scope is not limited to these documents alone. The auditor may ask for the previous audited reports, bank statements, ledgers, receipts, board meeting minutes, organizational charts, etc. The auditor would plan the details of the audit process based on these documents. The audit plan is then drafted.

Open meeting: An auditor may sometimes call for an open meeting with the senior management and key administrative staff. During this meeting, the audit plan and scope may be discussed. Problem areas, if any, may be identified. The auditor and the management can determine an accurate time frame for the audit. If the auditor plans to interview any of the staff, he/she would inform and discuss it with the management.

On-site work: The auditor would examine data samples in the business records. These could be entries for any random date. The transaction records are examined for anomalies. The auditor may be satisfied with the results or decide to examine the records in more detail. If there are doubts, the auditors would question the people involved to answer satisfactorily. Transactions are verified, and the procedures followed by the company are examined for accuracy and adherence to accounting principles. The auditor will verify the presence of internal controls in the company and check how well these controls are working.

Draft report: The auditor will create a draft report based on the inspection and findings. If the auditor has found proof of fraud, financial mismanagement, corrected reports, wrong process or accounting policies, etc., they will be mentioned in this report. If the auditor has any suggestions or corrections on improving or correcting processes and procedures, they will be listed in the report. It is at the discretion of the management to implement these suggestions.

Additional requirements: If the auditor needs further information, a request for more materials and information can be made. If the additional requirements satisfy the auditor, changes to the draft report can be made. Once this step is completed, the auditor’s report cannot be changed or corrected.

Publishing report: In this step, the final auditor’s report is published to state the auditor's opinion. It is usually reviewed by the auditors, the management, and the people involved in the accounting process before publishing. The final report is published and presented to the investors and management. The investors are usually given a consolidated report rather than the detailed report.

The importance of the audit process

Auditing is essential for a company for the following reasons:

It validates the financial reports of the company. An auditor’s favorable opinion is important for the investors and stakeholders of the company to know that the financial records are being maintained accurately and properly. Banks and other financial institutions require audited reports for official purposes.

Regular audits are essential to catch any malpractices, financial mismanagement, or fraud early. Manual accounting and bookkeeping leave room for error and faulty accounting practices uncovered by regular auditing. Accounting software makes the records more transparent and mismatches easy to catch.

An auditor reviews the financial records and the processes of the company. Regular audits can give a company objective feedback on its procedures and processes and help them find areas for improvement.

Some companies may find that the audit is a painful and time-consuming process. Companies should keep their financial accounting process and records straight to avoid such issues. The use of business management software such as TallyPrime makes accounting effortless, making auditing easier for the company and the auditors. TallyPrime has an inbuilt audit trail feature that allows auditors to trace changes made to any transaction. Accounting software such as TallyPrime that follows GAAP automatically has internal controls that ensure that the financial records are transparent, easy to manage, and easy to audit.

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