If you work in the accountancy department in any business, you will surely have heard of the terms: financial auditing and auditing procedures.
Furthermore, if you are a student working towards a public accountant qualification then this subject will no doubt have cropped up during the course of your accounting course curriculum.
If you have a fair idea of what an audit is, then you can probably hazard a guess at what compliance auditing as a process means. However, as an accountant, accuracy is absolutely key so let us educate you on exactly what a financial audit entails and its purpose.
Defining A Financial Audit
Accounting professionals would advise that a financial audit is an independent and objective evaluation of a company's finances and reporting processes. Its main purpose is to provide assurance to managers, directors, investors and regulators that the financial processes are accurate and in accordance with regulations.
Financial auditing is a term that is heard primarily in the business world and is usually conducted by an individual body.
Why Is Financial Auditing Necessary?
Financial audits were introduced to detect fraud and to implement finance accountability. However, at one time, it was internal managers who used to produce audit reports, which is not very ethical.
Over time, physical inspections of inventory became mandatory to minimise illegal operations, and it became a regulation that companies appointed an external company to audit their finances.
As this area has developed over the years, experts in the field expect it to continue to grow and to implement more sophisticated methods of keeping on top of financial accuracy. More regulatory control will come into place thanks to the advancement of technology (particularly automation and outsourcing), and foresee the regularity of audit timing to increase.
It is believed that auditors may need to be better educated on technology and analytical methods if these changes are to take place.
As the rule goes, you need an audit if you are a publicly held company or intend to be in the future. You will need auditing documentation for the first year that your business has its initial public offering (IPO) as well as for all subsequent years thereafter.
In addition, if you accept funding from banks or investors in the way of repayable or non-repayable loans, you have a duty to have an audit and allow them access to the reports. Some banks will require an audit if they consider you high risk. Finally, you may want a voluntary audit because it shows your company's diligence and will make it easier to apply for loans or funding in the future.
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What makes up the financial audit?
The procedure of carrying out a financial audit involves a number of phases.
These include planning the audit to be conducted, determining how finances are controlled internally, testing and evaluating the compliance, and reporting the findings.
See further details on the four key phases of financial auditing below:
Firstly, the independent organisation will come up with a plan of action that will involve the method they will collect data to form an opinion about the company's financial situation. Usually, a sample reflecting a point in time in the life of the company is collected and financial transactions and documents related to this period are then looked at.
The next step involves taking a look at the internal controls of the organisation. The auditor will meet with managers and directors to demand information, look closely at records, and watch financial procedures in action. This means that the entire Accounts department could be involved in the reporting process. Without seeing how the department works, the auditor cannot give a true statement about the financial status of the organisation.
The penultimate phase, testing, means checking whether the internal controls are working or not. An auditor requests more details about the goings on within the company returns to the company for more inspections (sometimes frequent visits are necessary), and watches how financial procedures are being performed in-house. If the evidence demonstrates the correct compliance, the auditor determines that the company is accurate in their ability to successfully detect and prevent errors.
Finally, once the three stages above have been completed, the auditor gives a conclusion on how the company adheres to regulated accounting standards. The audit usually offers one of the following conclusions: an unqualified approval, a qualified approval, a disclaimer, or an adverse finding. The first is considered as the best result possible and the last is the worst possible outcome.
Financial Auditor: A Profession
Independent financial auditors are professional individuals who are not on the payroll of your company and do not have a stake in your business' outcome. It is vital that auditors are completely unbiased as they carry out their investigations, as they have a duty to report their findings morally and legally. Financial auditors can perform an external or an internal audit for you.
Who fits the bill for becoming a financial auditor?
As an auditor, your responsibility will be to provide an independent guarantee that an organisation's risk management, governance and control processes are up to scratch by using investigation methods, which means that the findings often fall on your shoulders alone.
Auditing can also include a consulting service, advising management on how to improve their systems and processes, so it is vital that the individual has much expertise on the subject and can offer valid information that is relative to the company and its financial dealings.
The work of an internal auditor differs to that of external auditors as they look at more than just financial and accounting risks.
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The Responsibilities Of An Auditor
While responsibilities may vary from organisation to organisation, your main duties will involve the following (taken from the Prospects job profile page):
- attending meetings with auditees
- travelling to different sites to meet relevant staff and obtain documents and information
- researching and assessing how well risk management processes are working and recording the results using software such as Microsoft Word and Excel
- providing ad hoc advice and guidance to managers and staff at all levels, sometimes by delivering courses and training sessions
- performing risk assessments on key business activities and using this information to guide what should be covered in audits
- anticipating emerging issues through research and interviews and deciding how best to deal with them
- providing support and guidance to management on how to handle new opportunities
- agreeing recommendations with relevant staff members to make improvements to operations and helping to secure backing for them in meetings
- preparing reports to highlight issues and problems and distributing the reports to the relevant people
- assessing how well the business is complying to rules and regulations and informing management of any issues that need addressing
- managing a variety of stakeholders and their expectations through regular communications.
Suitable candidates must show that they are able to use their own initiative, as they will be working independently much of the time. However, they will also get the chance to interact with other members of audit committees. They must also have a great eye for detail, be analytical, have strong ethics and sound judgement, be a great communicator, be highly organised, able to work in pressurised situations and be flexible.
While you will most probably work normal office hours, there may be some overtime required.
Many auditing jobs are based in London and other big cities, but as so many organisations need internal auditing, opportunities are available in smaller towns as well. Professional auditors will be expected to look the part and follow the usual business dress code.
What Qualifications Are Required?
This career is open to most college or university graduates but a degree, foundation degree, diploma or other qualification in one of the following subjects may be considered beneficial and could help you to secure future promotions:
As a professional in the accounting field, you will need to be up to speed with key financial terms like financial statements, government auditing standards, revenue, fiscal year, stakeholder, misstatement, accounting principles, taxes, disclosure, international standards, year-end, assurance services, audit risk, financial records, corrective action, bookkeeping, liability and shareholder, to name but a few!
How Much Does A Financial Auditor Earn?
Newly qualified internal auditors can expect to earn salaries of between £22,000 to £35,000 while those with more experience can raise this to £32,000 to £53,000 per annum.
Managers or directors often earn in excess of £70,000.
Preparation For A Financial Audit
Financial audits are not small or insignificant affairs.
Money and its appropriate use can make or break your business and its reputation, so being well-prepared for your audit is very important. That said, if you know that your financial dealings are completely ethical then you should have nothing to worry about.
It is important to know that even the smallest financial oversight can send you to prison, as it is your duty to be compliant with regulations. This is why financial audits are critical and quite daunting at the same time.
As a company director, you should read up on why financial audits are necessary as you will then learn that their primary purpose is to prove that you are doing your job correctly. Auditors are on your side, so long as you are working ethically!
If you want to learn more, why not check out our other accounting-based blogs about accounting basics, key accounting concepts, basic accounting terminology, how to read a profit and loss sheet, and double-entry bookkeeping and accounting principles.