The Importance of Audit in Financial Reporting

The Importance of Audit of Books of Accounts and Records

The importance of audit is increasing with the passage of time – as there are always two sides of things to review and validate when things are correct (reliable/valid) in what numbers and when compliance with the management of the companies are playing different strategies to boost the market, attracting huge investors and to convince the market about their growth and development.

In order to serve such activities, accounting and auditing teams keep up with market movements and ensure that stakeholders’ interests are well protected. There has been a growing check of ‘Assurance’ reports by major companies. UAE will also point out the need for effective Internal Auditors and Controllers in large organizations.

The Purpose of Conducting a Financial Statement Audit

Having an expert opinion independently from the management of the company is highly essential to ensure that what is reflected through the balance sheet/Income Statement/Financial position of the company would be presented honestly and truthfully. This is where the concept of credibility/faith in the system and the implementation of a business lies. The confidence/trust ensures the continuation of trade and success.

Consider publicly traded and well-known companies – it would be damaging if there was any mismatch of reporting (financials) against the projected figures; the same could happen within the working to ensure fraud prevention.

The External Audit Procedures

A well-planned verification is necessary to cover all financial items with valid materiality. An audit involves the collection and evaluation of evidence to establish the completeness and accuracy of information, including:

• Planning and risk assessment – focusing upon an understanding of the business and the business environment in which it operates, and using analytical procedures and determining how far to rely on internal control
• Actual samples testing – including gathering evidence about the effectiveness of the entity’s suite of controls, vouching/tracing on such areas as per guided practice such as a collection of management information
• Substantive procedures – involves a broad array of procedures, of which sampling is a key component

The Different Level of Assurances from Auditor’s Point of View

An audit provides a high level of assurance, but not absolute assurance as it gives a reasonable degree of confidence. In a review, the substantive testing follows a lesser procedure than audit testing, and the overall extent of the procedures must have their opinions on financial statements clearly mentioned, in addition to the actual audit.

Sometimes the requirement is only to report on individual items of financial data or on a set of financial statements to report specific facts, such as an analysis by an entity to certify only the turnover of the company. The level of assurance in such opinion-spot procedures is again lower than a review engagement.

In the case of a compilation engagement, the auditor is called upon to prepare the financial statements – where their expertise is in collecting, classifying and including:

• Revenue
• Procurement of insider facilities
• Legality
• Logistics
• Information Technology infrastructure
• Budgets
• Governance
• Statutory Compliance
• Admin & general operations, etc.

1. Evaluation of the Approved Internal Audit Plan

An overall view of the audit plan is followed by performing a walk-through, enquiry, questionnaires, etc. Clients are kept informed of the audit during the different phases of the audit process.

2. Submission of Draft/Final Report to Highlight Issues with Risk Rating

Once the compilation/draft is completed, draft observations are collated in a report. A risk rating is attached to all observations with the responsibility assigned to the concerned function. This report is discussed with the Management or Authorized personnel to highlight the issues, concerns, and risks.

3. Follow-up and Action Taken Report

Periodic follow-up of audits or reviews are conducted to check remedial actions taken to resolve the issues raised. This is done for communicating to the management on the status of observations and their closure status. Any long-pending observations critical to the business will be brought to the notice of the management to set a further course of action.

Assessment/review and updating of the organization’s financial and relevant operational activities will be done when the internal auditor is not part of the organization being audited.