Audit of Financial Statements also referred as statutory audit/financial audit, is one of the primary types of audit which are to be done as per the statutes applicable to the entity and its primary purpose is to assemble all appropriate pieces of evidence, information and assessment so that auditor can express his true and fair view of the company’s financial position as on the balance sheet date.
Which businesses are legally required to conduct it?
Businesses are incumbent to perform an audit of financial statements in UAE when required by statutory bodies. The term statutory represents that the audit is mandatory by statute. A statute is a regulation or law enacted by the jurisdictive division of the organization’s associated government. Statutes are often ratified at multiple levels, including federal, state, or municipal. In business, a statute also refers to any rule set by the corporation’s leadership team or board of directors.
What do auditors do?
A qualified Chartered Accountant can only perform the audit function as per the regulations. So, a qualified professional CA with a “certificate of practice” can only be entitled to do the audit function.
Auditing of Financial Statements is a process of examining all the financial reports and, therefore, the statements that are used in the determination of the financial position of the company in a true and fair view. Auditors determine whether a corporation is providing a reasonable and accurate representation of its financial position by examining information like bank balances, bookkeeping records, and financial transactions.
Duties of statutory auditor:
- The audit of the financial statement is that an independent body conducts the official inspection of a company/’s account.
- More elaborately put, it’s the audit of books of accounts of a corporation, according to the obligation of a statute, to certify fair and accurate representation of its financial records.
What is the purpose of the Audit of Financial Statement?
The purpose of the Audit of Financial Statements is to enable the auditor to include his view in audit reports independently without being influenced in any manner. He will check the financial records and can give his opinion thereon within the audit report. It helps the stakeholders to depend upon financial statements. Stakeholders, apart from shareholders also get benefited from this audit as they’ll take their call based on the accounts as they’re audited and authentic.
A statutory/audit of financial statements is an examination of records held by a corporation, business, government entity, or individual. This generally involves the analysis of varied financial records or other areas. During an audit of financial statements, an organization’s records regarding income or profit, investment returns, expenses, and other items are also included as a part of the audit process. Several of those items are used when calculating a combined ratio or conducting ratio analysis.
The purpose of the audit of financial statements is usually to ensure if funds were handled properly and for that, all required records and filings are accurate. At the commencement of an audit, the auditing entity makes known what records are going to be required as a part of the examination. The evidence and knowledge are assembled, gathered, and supplied as requested, allowing the auditors to accomplish their analysis. If imprecisions are found, appropriate consequences should be conducted by the auditor.
An Audit of Financial Statements isn’t an inherent sign of wrongdoing. Instead, it’s often a formality designed to assist in preventing activities like the misappropriation of funds by ensuring regular examination of various records by a competent third party.
What is involved?
Auditors only have a limited time within which to finish their work, so that they focus on testing the validity of a sample of transactions and results instead of vigorously examination everything.
Although an auditor’s independence must be observed and valued at all times, they’re nonetheless providing a service for a fee that will be value for money.
The audit should be a helpful practice and not one to be feared; it’s a chance to receive feedback on strengths and weaknesses in systems. Use your auditor to review ways of improving your accounting systems and procedures and always encourage the submission of a Management Letter, which summarizes findings, highlights weaknesses, and makes recommendations for improvements.
Why Audit of Financial Statements is important
- Increases the transparency, authenticity, and reliability of financial statements because of independent verification.
- It helps to ensure that management has taken care while delivering their responsibilities.
- Ensures compliance with the non-statutory requirements like corporate governance etc.
- Determine if funds were handled properly.
- It highlights the strength of the system of internal control and internal checks within the organization.
- It helps the corporate to mitigate the imperil and leads to improvement of the performance of the corporate.
What is Audit of Financial Statements Requirements?
A firm must have the subsequent documents before getting an Audit of Financial Statements started:
- Details of fixed assets
- Bank statements with details of transactions therein and therefore the details of money receipts & payments
- Information on secured and unsecured loans and advances
- Trade payables & receivables
- Local purchases & import purchases
- Local sales and export sales information
- Details of inventory
- Administration and selling expenses
- Details of forex and interchange earnings & expenditures
- Statutory dues & other levies
The Audit Report
An audit leads to a report which supplies an ‘audit opinion’ about whether the financial statements provide a ‘true and fair’ view of the state of affairs of the organization and operations for the period.
- ‘True’ implies that the transaction did happen and that an asset exists.
- ‘Fair’ implies that a transaction is fairly valued and that assets and liabilities are fairly stated.
If the auditors don’t agree that the accounts provide a true and fair view, they will provide a variety of other opinions.
AUDITOR OPINION |
COMMENT |
|
| 1 | Unqualified The accounts provide a true and fair view. | The opinion everyone wants to determine. |
| 2 | Qualified – disagreement Except for the consequences of …., the accounts provide a true and fair view. | There are specific misstatements, like an incorrect accounting policy, an undisclosed fraud, debtors that don’t seem to be recoverable, or interparty loan. |
| 3 | Qualified – limited scope Except for the possible effects of …., the accounts provide a true and fair view | There are specific issues that are uncertain, like particular documents not being available for review, an enclosed control flaw that might end in income not being recorded. |
| 4 | Adverse These accounts do not provide a true and fair view. | There is such a large amount of misstatements within the accounts that they’re overall wrong. |
| 5 | Disclaimer We don’t seem to be ready to express an opinion. | There is such a large amount of missing documents or explanations that we don’t have enough information to make an opinion. |
The auditor may handiest sign his report after the Board has signed and affirmed the financial statements.
Advantages of Audit of Financial Statement
- It increases the authenticity and credibility of statements because the audit of financial statements of the corporate is being verified by an independent party, i.e., the auditor.
- This confirms that management has taken care of while delivering their responsibilities.
- It also states regarding compliance with the non-statutory requirements like corporate –governance, etc.
- The auditor also commentaries upon the strength of the system of internal control within the organization together with internal checks among the departments or segments. He also suggests the realm where control is weak and susceptible to risk. It helps the corporate to mitigate the hazard and results in the enhancement of the performance of the corporate.
- The statement of the small company for whom audit won’t be applicable get more values if it’s audited one because with the assistance of the audited financial statements it becomes easier for the businesses to induce banking loan and other types of facilities on producing of final statements which are audited by an independent auditor because the audited statements are more reliable and authentic.
Disadvantages of Audit of Financial Statement
- The cost related to an audit is very high. But if any audit firm is already betrothed for taking care of the day to day work, including accounts preparation, then it’ll charge relatively very less amount to conduct the audit as compared with the firm which isn’t engaged for doing the identical.
- The staff might get disrupted for performing their normal work to answer the day to day query of auditor or while providing the auditor any reports or data required to them. This might lead to stretching the work of the staff beyond office hours and should sometimes cause distress among the staff.
- The financial statements include judgmental, additionally as subjective matter. Judgmental issues may vary with persons.
- There are inherent limitations of audits that prefer it must be completed in due time, control within the organization, limited power of auditor, etc. One must understand that auditors are watchdogs and not the bloodhounds. There reporting is predicated on the sample data and not the whole data. Furthermore, as frauds are the intentional one so it’ll be harder to search out the identical.
- There are many areas during which auditors are left with no other option than to require representation from management. This can be a danger if management itself is involved in frauds as therein case they’ll give the manipulated representation.
- The auditor doesn’t assess and review the one hundred pc transactions.
- Auditors can’t give total assurance at any point They simply express his opinion on the financial statements and data provided to him.
- An auditor statement upon the going concern of the organization, but nowhere guarantees for its future possibility. Stakeholders mustn’t vest their money, only seeing that the organization’s data are being audited.