Financial Audit of a Company - GUIA 2022

What is a financial audit?

Carlos A. Slosse, in his book "Auditing", defines financial or accounting auditing as follows: "Auditing, in its broadest sense, could be defined as a critical investigation to reach certain conclusions about the accounting of the economic and financial aspects of the operations of an entity. A critical inquiry involves the accumulation of evidence. The conclusions of that investigation must be certain and represent the interpretation of the evidence accumulated by a competent auditor and must be presented, for their best use, through a written report".

The financial audit, in general, is an investigation procedure carried out by a specialized auditor on the company's financial information. In this procedure, the audit evidence, which is obtained through various procedures to gather valid and sufficient elements of judgment, is compared with the applicable accounting standards (sensors) to determine whether or not the assertions contained in the financial statements (existence, truthfulness, completeness, valuation and disclosure of the information contained in the financial statements) have been complied with. 

The result of the financial audit procedures concludes with a report prepared by the auditor and addressed to the company's governing body and senior management. 

Objectives of performing a financial audit

The objective of a financial audit is to verify the reliability of the information contained in the financial statements, in order for the governing body, senior management and third parties related to the company to make reliable decisions. 

The reliability of the information contained in the financial statements is represented by the fulfillment of five assertions, which can be defined as follows:

- Existence: the existence of the assets declared in the balance sheet can be verified; debts with third parties also exist. Sales, purchases, income and expenses have been incurred and correspond to the company.

- Truthfulness: documentation can be verified that the declared assets and liabilities belong to the company. The sale, purchase, income and expense transactions are real and the documentation can be verified.

- Completeness: all existing assets and liabilities have been declared. Sales, purchases, income and expenses have been declared in their entirety. 

- Valuation: Assets and liabilities have been measured in accordance with the applicable accounting standards in force. Sales, purchases, income and expenses have been recorded at their correct value.

- Exposure: Assets and liabilities have been stated in accordance with the applicable accounting standards in force. Sales, purchases, revenues and expenses have been appropriately presented in the income statement.

The detection of fraud and errors during the financial audit procedure is not the very objective of the auditor's work, but if such situations arise, they should be analyzed and reported urgently, due to the high risk they represent for the company and its third parties.

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Why is it important to perform financial audits in companies?

Markets in the 21st century operate in globalized and, for the most part, virtual environments. In this context, economic and financial decisions are made using financial information that cannot be compared with reality. For this reason, financial information must be reliable. The reliability of financial information can be provided, within a framework of reasonable assurance, by the financial auditor, through the reports he issues.

Each stakeholder, or third party, is interested in using financial information to make informed decisions, according to their needs, for example:

- Suppliers and financial institutions: they need to know whether the company has the liquidity and solvency required to meet its obligations.

- Customers: they need to know whether the company has the installed capacity to meet customer orders for goods and services over time.

- Employees: they need to know if the company has liquidity to meet labor liabilities, for example: salaries, social security contributions, employer's contributions, insurance, personal protection items, severance payments, etc.

- Business partners: they need to know if the company is profitable, in order to acquire it totally or partially, or if it is convenient to generate new business with the company, through joint ventures, for example.

- Collecting agencies: they need to know the financial statements of the company to know if the taxes declared and paid are sufficient and correct.

When to perform financial audits?

Financial audits, traditionally speaking, were carried out only once a year, at the close of the business year, and covered the four months after the close, to perform year-end control tasks and to check the financial information against the corresponding accounting standards.

Currently, the financial audit is a continuous process, which aims to know the company and its operations, not only to finally make the audit report once a year, but also to accompany the areas of internal control, compliance and internal audit in their daily work, from an external view of the controls.

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How to perform a financial audit?

Financial auditing procedures are used to obtain audit evidence to compare the financial information with the applicable accounting standards.

Financial audit procedures

There are three types of financial audit procedures:

- Substantive procedures: these are the procedures that verify the reliability of the financial information, and comprise 70% of the auditor's work. They include:

* Controls compliance testing: through the review of the company's procedure manuals, key controls are detected, and sample transaction analysis is performed to verify whether the key controls of the operations are complied with. If they are complied with, the company's information and control systems can be reasonably relied upon. If they are not in compliance, it is necessary to analyze the operations in detail.

* Detailed tests of transactions and balances: operations are reviewed in detail, when they have not passed the tests of compliance with controls, to verify each of the assertions in the financial statements. Detailed tests that must be performed at the close of the fiscal year are also performed in all cases: cash and valuables search, bank reconciliation, circularization of accounts receivable and accounts payable, inventory of stock, ocular inspection of accounting books, among others.

- General Procedures or Global Reasonableness Tests: These include the analysis of horizontal and vertical ratios, the application of specific audit KPI's, global tests that simulate controls of tax agencies, among others.

Resulting reports

Financial audit reports have the widest possible scope within the audit reports issued in companies, since they cover all the operations carried out in the accounting period.

These reports contain at least: title of the report, addressee, introduction with the purpose of the work and the reason for the engagement, description of responsibilities, description of the work performed, opinion, additional elements for better understanding, place and date of issue, identification and signature of the auditor.

Auditors issue audit reports to the company's governing body and senior management, and may issue the following types of reports, varying in name in the countries where they are issued:

- Report with favorable opinion: when there is reasonable assurance as to the correctness and completeness of the financial information.

- Report with a favorable opinion with qualifications: partially incorrect information or partially inaccessible information.

- Adverse report: when the incorrectness is severe.

- Report with abstention of opinion: when it is not possible to access most or all of the information.

Conclusions

The monitoring of our company through the implementation of a Financial and Accounting Audit is an indispensable requirement for the good performance of the company .

And in this process, technology will make our process more effective and efficient, so that we can have a dynamic snapshot of each of the processes and actors that can seriously damage our reputation. 

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