Auditing Financial Statements: A Comprehensive Approach
Audit of Financial Statements
An audit of financial statements is a critical and constructive examination performed by a Certified Public Accountant (CPA). The CPA examines the financial statements, for which the information is the responsibility of the administration. The opinion will be conducted according to Generally Accepted Auditing Standards (NAGAs) and Generally Accepted Accounting Principles (GAAP). The financial information should be presented fairly, in accordance with International Financial Reporting Standards (NIFs).
Compliance with Auditing Standards
To conduct an audit, the accountant must comply with the NAGAs to support their opinion. The NAGAs are the basic requirements of quality.
Classification of Auditing Standards
- Personal Standards:
- Technological and professional training
- Professional care and diligence
- Independence
- Execution of Work Standards:
- Planning and supervision
- Study and assessment of internal control
- Obtaining sufficient and competent evidence
- Information Standards:
- Clarification of the relationship of the financial statements
- Expression of opinion
- Bases for opinions on financial statements
Planning
Auditing standards require us to plan and supervise an audit with the purpose of obtaining sufficient and competent evidence to minimize legal liability and maintain a good reputation. It is also important to maintain reasonable audit costs to remain competitive, avoid misunderstandings with the client, facilitate the development of work, and comply with requirements.
Objective
To conduct a comprehensive review of the structure, transactions, and performance of economic entities to contribute to risk prevention, productivity in the use of resources, and ongoing compliance monitoring mechanisms implemented by the administration.
Stages
Audits consist of preliminary stages (technical planning and management), middle (execution), and end (closure).
Preliminary Stage
This involves the first contact with the client to understand their needs, determine whether the firm has the infrastructure for the new client, ensure that the auditor understands the real need for an audit, confirm the ability of the parties to agree on a deal, and verify that the office infrastructure is adequate.
The auditor must take all possible data about the acceptability and reputation of their potential clients and annually assess their clients to see if they should continue to provide service.
In planning, a physical inspection is performed, as well as a thorough analysis and study of the entity. Accurate data is collected to understand the client’s operations, control systems, number of transactions, infrastructure, and accounting to understand the business.
Understanding the Business
This involves checking the internal and external environment (management and direction, objectives, and strategies) and business operations and processes (measurement and performance).
Internal and External Environment
Verify whether there are risks associated with the industry in which the client operates, if there are inherent risks that are common to all clients in certain industries, and ensure accounting requirements are understood by the auditor. Understand events that may affect the entity.
Business Operations and Processes
General studies of business operations and how they affect the accounting records, identification of related parties, the effect of Sarbanes-Oxley (SOX), compliance with the code of best corporate practices, and compliance with laws and regulations.
Directors and Management
Understanding of the structure, verification of the Constitution, statutes, and verification of the codified code of ethics.
Objectives and Strategies
The entity implements methods to achieve goals, such as the accuracy of financial information, effective operations, and compliance with laws.
Measurement and Performance
Performance indicators are used to measure progress in meeting objectives, including ratio analysis and benchmarking against key competitors.
Planning
- Compilation of Background and Overall Business Papers: Overall customer survey to determine areas of operation.
- Documentation Collected: Record of incorporation, property deeds, tax ID, agreements and contracts, licenses and patents, organizational structure, procedural manuals, policies, operations, and others.
- Interviews with Executives of the Entity: The aim is to gather information directly from hierarchical levels of the organization and view systems such as sales, accounts receivable, procurement, accounts payable, payroll, accounting, and taxes.
- Documentary Information: On the volume of resources and operations, banks, customers, warehouses, related parties, branches, foreign operations, commodities, fixed assets, checks, etc.
- Tour of the Entity: Familiarize yourself with production planning, accounting, human resources, storage, collections, etc.
- Purpose: Enrichment of the auditor, ascertain the organizational climate, distribution of logistics spaces, effective security mechanisms, and discipline in operation.
Technical Planning
- Study and assessment of internal control to determine the degree of confidence to rest their audit procedures.
- Interview with predecessor auditors to gather stronger evidence and information.
- Delivery of the letter of observations and suggestions derived from the preliminary study. These are suggestions to the entity to make necessary corrections.
- Determination of fee calculation.
- Presentation of the proposed fees.
- Signing the engagement letter.
Administrative Planning
- Assignment of personnel involved with the audit.
- Establishment of policies and utilization of working papers so that evidence can support the assertions of the auditor.
- Establishment of a catalog and index marks.
- Structure of the sets of auditing. The classification should be established according to the needs of the auditor.
- Working papers represent an aid in planning, implementation, and supervision necessary to support the auditor’s opinion.
- Use of internal control questionnaires.
- Professional conduct.
Audit Execution
Purpose: For the auditor to form a preliminary opinion on the fairness of the financial statements, considering the NIFs.
It begins during the ninth or tenth month and is characterized by the application of substantive evidence. Movements and balances are studied, and the scope, nature, and timing of audit evidence are given in confidence in internal control, establishing the importance of accounting.
At this stage, the objectives to be achieved are outlined (analysis of financial statements, analytical accounts, minutes of meetings, significant changes in financial statements, reconciliation of accounting/tax, provisions, reconciliation of balances, etc.).
Procedures
- Team presentation.
- Obtaining of statements and trial balance.
- Set to perform confirmations.
- Opening cards and reclassification adjustments.
- Opening of observation cards.
- Opening cards for outstanding issues.
- Obtaining of deeds and contracts.
- Obtaining of general corporate roles and structure.
- Determination of legal affairs of the company.
- System of accounting books and records.
- Tax matters.
- Personnel and payroll.
Review of Transaction Flow
- Asset accounts.
- Liabilities.
- Capital.
- Results.
Closure of Ballots and Audit Conclusion
Closure of Audit: The financial statements of the last few months are examined since not all transactions occur in the same period.