What is involved in an Audit?

The audit process begins with the preparation of the financial report by the organisation’s management.  Management is responsible for ensuring the financial report complies with legal and financial reporting standards. Once prepared, the report is approved by the organisation’s directors.

Auditors start by understanding the organisation's activities. They also examine economic and industry factors that could have impacted its operations in the reporting period. They assess risks for each important activity in the financial report that might impact the organisation's finances. They also examine the internal controls put in place to minimize those risks.

After gaining a comprehensive understanding of the organisation, auditors proceed with their audit procedures. This involves gathering evidence to support the balances and disclosures in the financial report. 

The auditors may conduct interviews with key personnel, review transaction records, and perform analytical procedures to identify any discrepancies or unusual patterns.  This helps them see if the financial statements accurately show the organisation's financial situation. If any issues or concerns arise during this phase, auditors will discuss them with management to seek clarification or additional information.

The audit process not only provides assurance to stakeholders about the accuracy of the financial statements but also offers valuable insights for the organisation. By identifying areas of risk and suggesting improvements, auditors can help organisations enhance their financial practices and overall governance.

Finally, the auditors compile an audit report that details their opinion, which is then shared with the organisation's shareholders or members.
 

• Auditors do not verify every figure in the financial report, as audits are based on selective testing rather than exhaustive checks.
• They do not audit every piece of information provided to the organisation’s members, such as the directors' report.
• Auditors do not scrutinise every transaction carried out by the organisation.
• They do not evaluate the appropriateness of the organisation’s business activities, strategies, or decisions made by its directors.
• Auditors do not test all internal controls within the organisation.
• They do not comment on the quality of the directors, management, corporate governance, or the organisation’s risk management procedures.

• Auditors cannot predict the future. Auditors must highlight within their report when they believe there is significant doubt about whether a business will survive for at least one year.  However, an audit cannot be seen as a guarantee against a business failing.
• They cannot be present within the organisation continuously. The audit is conducted over a specific period, and while auditors are vigilant for signs of potential material fraud, it is impossible to guarantee that all fraudulent activities will be detected.

Auditors determine the scope of their work in consultation with the organisation. Management or directors may request additional procedures, but auditors maintain their independence to ensure objectivity in their tests and judgments. The specific audit procedures they carry out depend on the risks and controls identified and can include:

• Asking questions, both formal and informal, to various individuals within the organisation.
• Reviewing financial and accounting records, documents, and physical assets like equipment.
• Evaluating significant estimates or assumptions made by management during the preparation of the financial report.
• Obtaining written confirmations on specific matters, such as verifying the amount of cash held at a bank.
• Testing some of the organisation’s internal controls.
• Observing certain processes or procedures as they are being performed.

An income statement is a financial report that details a company’s revenue, expenses, gains, and losses over a specific accounting period. It offers key insights into the business’s financial performance, including its profitability and earnings per share.

• What it tracks: Revenue, expenses, gains, and losses.
• What it tells you: How much profit or loss the business made during the period and its earnings per share.

Why income statements matter:
An income statement helps measure the company’s overall financial health, showing how effectively it generates profit. It’s also crucial for identifying trends in performance and attracting investors by demonstrating earnings potential.

A balance sheet is a financial statement that offers a snapshot of a company’s assets, liabilities, and shareholders' equity at a specific point in time. It shows what the business owns, what it owes, and the amount invested by shareholders.

• What it tracks: Assets, liabilities, and shareholders' equity.
• What it tells you: The company’s financial position, including its ability to meet obligations and the value of shareholders' investments.

Why balance sheets matter:
A balance sheet is essential for conducting fundamental analysis and calculating financial ratios. It helps assess the company’s financial health, liquidity, and long-term sustainability when combined with other key financial statements.

A cash flow statement, also referred to as a statement of cash flows (CFS), is a financial report detailing the movement of money in and out of a business. 

It highlights which areas of the business are generating cash and which are using it over a specific period. This report helps assess whether a business can cover its expenses and avoid cash flow issues.

• What it tracks: The inflow and outflow of cash within the business.
• What it reveals: Whether the business is spending more cash than it earns and its ability to meet financial obligations.

Importance of cash flow statements: 

A cash flow statement provides insight into how effectively a business manages its expenses, such as bills and wages, and indicates reliance on external funding. It is valuable for setting budgets, identifying cash flow challenges, and attracting potential investors by demonstrating the company’s ability to generate cash.

The statement of changes in equity is a crucial financial statement that tracks the changes in a company’s equity over time. It provides a clear view of financial events that impact the company’s net worth.

• What it tracks: Movements in shareholders' equity, including profits, dividends, and capital contributions.
• What it tells you: How the company's equity has changed during a specific period, revealing the financial activities that affect its overall net worth.

Why the statement of changes in equity matters:
This statement helps investors and stakeholders understand the key factors that influence a company’s equity, such as retained earnings, dividends paid, and additional share issuances, providing transparency into its financial health.