What is Auditing?
Auditing is a vital process in any organization, to begin with. The process can be performed by either an internal or an External auditor depending on the need of the organization. Moreover, many firms have invested in the auditing sector by employing well-qualified employees as internal auditors to ensure that everything aligns in the auditing sector. Proper auditing in an organization is conducted along different phases which are consequential. The result of one Auditing phase has an impact in one way or another on the other auditing phases.
Stages of Auditing Process: 9 Phases of an Audit Cycle
An audit cycle is the accounting process that auditors employ to review the financial information of the company. Audit Cycle includes the steps that an auditor will make sure that the company’s financial information is right or not before releasing any financial statements. The phases of an audit cycle include:
1. Auditing Planning Phase
Just as in many other projects, planning is a vital process for the success in any organization. This is due to the fact that, auditing phase aligns all the documentations necessary for the development of a perfect strategy that will run through the entire auditing process.
This is the stage where you need to know about your client. You need to understand the limit of the client and his other inherent qualities and attributes. This will facilitate an understanding of their role as well as the nature of services that each party is expected to handle.
At this stage, an engagement letter will highlight the responsibilities that need to be accomplished by each party.T he engagement letter is usually sent by the auditor to the client. The letter will address issues that relate to the development of an audit program, audit strategy and an audit plan. However, the planning process continues within the entire organization and in other phases.
2. Conducting a Preliminary Review
In the preliminary review stage, the auditor analyses the organization internal control processes. This ensures that the auditor streamlines some processes in the organization that may hinder the performance of the audit. In some scenarios, it may not be an easy task for the auditor to streamline all the changes required. In such instances, it will be necessary for the auditor to accommodate some of his assumptions with the methodologies through which the organization operates.
The auditor can choose to conduct a preliminary review in issues such as the reimbursement of cash, the number of employees who have gained access to the organization bookkeeping software etc. However, the auditor needs to have a better audit background in order to conduct an excellent preliminary review. Moreover, sufficient audit background may aid the auditor to design the nature and timing of the audit.
3. Assessing the risks of misstatement
After conducting a preliminary review, auditors utilize the information acquired to develop a better client understanding. The assessment procedures are mainly performed during the assertion and the overall financial level. Some of the salient issues which are considered during this level include:
- The identification of what could go wrong during the auditing phase.
- The percentage of the confidence level that the auditing process will go wrong.
4. The Benefits of Risk Assessment
It gives a clear eye view of the possible risks that may occur in a business. Generally, there are two types of risks that are associated with material misstatement which include the inherent and control risks. Control risks are not easily detected and prevented. Moreover, inherent risks relate the susceptibility of material misstatement to the relevant assertion level.
After conducting an overall risks assessment, the auditors should be able to develop a good system capable of detecting a material misstatement. They should be certain if the system is strong based on the assessed risks of account balances and various transaction.
5. Conducting the tests of control
This is tests which preliminary determine if the key controls in an organization are well designed. Consider this analogy which will explain the test of control. An accounting department X is tasked with the responsibility of documenting all serial numbers of shipping documents.
A test of control will ensure that all shipping expenses are recorded in the relevant documents before being posted in the relevant journals. This will avoid the occurrence of misstatement which may affect the auditing process.
6. Performing the general (substantive) procedures
The general substantive procedure aids in comparing account balances. They also reduce the chances of risks emerging in an organization. The substantive procedure determines whether balances posted in the respective account are actual. Most auditors perform substantive procedures even after conducting a test of control due to the following reason:
They provide evidence about given claims relating to account balances.
They help in the gathering of evidence and link between different accounting and non-accounting data
They aid in the determination of instances when expected and non-expected auditing changes will happen.
7. Finalizing the audits
A great number of tests and procedures are conducted while completing the audit. Both analytical, substantive and test of control are re-performed again. At this stage performing the test of financial data will be important, you may choose to re-review invoices, disbursement, and other simple and last minute checkups on financial books of account, When finalizing the audit, you may develop some conclusion for the financial presentation.
8. Reporting the Audit
The auditor is required to provide a comprehensive report of the whole auditing process. The report is provided to the board of directors or the company shareholders. The auditor must align to the professional-auditing reporting principles. Most auditors design new financial statements which are accompanied by supporting documentation. This will be vital for organization management. The documentation may also highlight the strength and weaknesses found in the internal controls.
The audit reports provide a list of all areas that need to be improved in an organization alongside providing a list of processes that need to be incorporated in the organization system to boost their performance.
9. Summation phase
At this stage, the auditor maintains the original documentation regarding the audit. He also gets signatures from the management team for the information reported in the financial statements.
In conclusion, auditing is a complex process that is substantiated into several phases. Each and every stage is vital for a successful audit.
