Financial audits review a company’s financial statements and data for accuracy and validity. Auditors use analytical procedures, substantive tests of details, and internal control tests to discover irregularities. These tests involve comparisons, financial ratios, review of source information, and collection of information from suppliers and customers. The last set of audit tests is a review of internal controls.
A financial audit is a review of a company’s financial statements and other data to ensure their accuracy and validity. Auditors use different audit tests to analyze and test their clients’ financial information. Two types of general tests include analytical procedures and substantive tests of details. Another audit test focuses on internal controls, which are the procedures a company uses to protect its information from fraud and abuse. Each group of audit tests involves a specific set of tasks or activities intended to discover irregularities.
Analytical procedures include comparisons, financial ratios, and review of source information. The comparisons take two sets of information, one from the current period and one from a prior period, and determine whether the current information is significantly different from the other period. Auditors can also view budgets, forecasts, or other predictive information to determine if they were materially different from prior periods. Review of source documents allows the auditor to review paperwork for different transactions from many different clients. Audit tests that include heavy use of substantive procedures are often more subjective as the tests are based on the auditor’s interpretation.
Audit tests also include substantive tests of details. These procedures are mathematical in nature and attempt to remove subjectivity from the audit process. Auditors typically select a batch of different accounting information sample transactions. The use of ratios and recalculations allows auditors to determine whether the company is operating close to other companies in the industry. Significant operational differences found in these audit tests may indicate the need for further review.
Substantive audit tests of details may also involve the collection of information from a client’s suppliers and customers. The auditors ask these groups to declare the money owed by the company or the company, respectively. The purpose of this test is to document whether or not the company maintains accurate accounting records. Defects in this test require a second sample so auditors can determine how pervasive the problem is in the business. The documentation related to these errors eliminates the subjectivity of the auditor, since the information proves accounting errors.
The test of internal controls is usually the last set of audit tests performed by the auditors. A review of internal controls begins with interviewing a company’s management team and employees. Audit tests require a review of internal control procedures to determine whether the statements made are consistent with established policy. Auditors then test internal controls by reviewing the information prepared directly below them. Observing employees working under controls may also be part of these tests.
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