- Learn about the importance of internal and external audits for accounting processes
- Get a ready-to-use checklist for conducting an internal audit
- Know how HighRadius helps accounting teams be audit-ready, always
Auditors – external or internal – are the referees of our financial system. They play an essential role in ensuring that an organization adheres to global accounting standards and prevents fraudulent activities. While the accounting process helps present the company’s financial position, audits help ensure the financial reports are accurate and compliant for the company’s clients, customers, shareholders, and other stakeholders.
What is an Accounting Audit & Why is it Important?
An accounting audit is an examination of the organization’s financial information which is conducted by an independent auditor with the aim to ensure that the information is represented fairly and accurately and in accordance with accounting standards.
Accounting audits play an important role in achieving transparency in business operations and increasing investors’ confidence in the business’ growth.
Here are 10 major goals of an accounting audit:
- To achieve transparency in business operations and drive accountability
- To develop a practice of having an audit trail for each transaction
- To have an independent and fair opinion on how the business works and delivers results
- To ascertain the quality of financial statements
- To deliver 360 feedback on the business process operations
- To attract new and potential investors or stakeholders for the business
- To ensure compliance with tax laws, regulations, and all applicable accounting standards like International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP)
- To provide assurance to stakeholders that the financial statements are reliable
- To identify areas for improvement in the company’s financial reporting and internal controls
- To detect and prevent fraud and other financial irregularities
Different Types of Accounting Audit
Every organization goes through two kinds of accounting audits – internal audits and external audits.
Internal Accounting Audit
External Accounting Audit
Conducted by internal auditors who are employees of the organization
Conducted by external auditors who are independent of the organization
Focuses on reviewing the organization’s internal controls, risk management & operational activities
Focuses on examining & verifying the accuracy & fairness of the financial statements
Aims to provide recommendations for improving processes, identifying areas of risk & ensuring compliance with internal policies and procedures
Aims to provide an opinion on whether the financial statements are presented in accordance with accounting principles and regulations
Not mandatory & can be performed at the discretion of the organization
Mandatory for publicly-held businesses & may be requested by investors & lenders
Provides feedback & guidance to management for improving efficiency & effectiveness
Helps enhance the credibility & reliability of financial information for stakeholders
Step-By-Step Accounting Audit Process
The external accounting audit process differs based on the size of the organization, the complexity of the audit, and any specific requirements or regulations applicable to the industry or jurisdiction. Here are 6 common steps that are followed globally for external audits:
Planning and Goal-Setting
After engaging an external auditor, the organization sits with them to discuss the level of engagement, process, and objectives of the auditing process. They also set a timeline for the audit so that the organization can prepare by conducting an internal audit.
Requesting for financial information
After the audit plan gets a go-ahead, the auditor draws up a list of financial documents that he needs to conduct the audit. The audit may ask for documents like previous audited reports, bank statements, ledgers, receipts, board meeting minutes, organizational charts, etc. These documents help the auditor gain an overview of the organization’s overall business operations.
Performing audit and on-site examination
Once the auditor receives all required documents, he starts executing the planned audit procedures, which may include examining financial records, conducting interviews, testing internal controls, and verifying transactions. The purpose is to gather evidence to support the auditor’s opinion on the financial statements.
He examines data samples in the transaction records for anomalies. This is a test of how well the organization’s internal controls are working.
Analyzing the findings and preparing an audit report
Based on his examination, the auditor drafts a report where he mentions instances of any proof of fraud, financial mismanagement, corrected reports, wrong processes or accounting policies, etc. he found during the audit. If he has any suggestions for improving the internal controls of the organization, he includes them in this report.
7 Step Accounting Audit Checklist
To perform an internal accounting audit, your team can follow these steps and ensure that your organization is ready for an external audit.
- Clearly define the focus of the audit and establish the questions you want the audit to answer
- Put together an audit team with the necessary skills and knowledge to conduct the audit effectively
- Create a list of all the documents, processes, and other variables you’ll need to review
- Collect information via research, employee interviews, and other methods
- Evaluate the organization’s system of internal controls to assess the risk levels of different functional areas
- Analyze the evidence collected during the audit procedures and evaluate its impact on the organization’s operations
- Prepare an audit report that summarizes the findings and conclusions of the audit
How HighRadius Helps You Improve Accounting Audit & Compliance
HighRadius’ AI-powered accounting software helps accounting teams achieve day zero month-end close, up to 90% reconciliation accuracy, andreal-time anomaly detection and resolution.
It also enables accountants to show their work by adding attachments that are tagged to the financial close,account reconciliation, and anomaly tasks they are working on.
Task logs create an audit trail that shows all the changes made to each task in chronological order along with details of the user account (accountant) from where the changes were made.
With HighRadius, your accounting team can beaudit-ready, anytime and focus on high-priority tasks rather than spending time on preparing for audits.
1. What are the 4 common phases in an accounting audit process?
A typical external or internal audit has four stages – planning, fieldwork, reporting, and follow-up. The accounting audit process is designed to ensure that the financial statements are examined thoroughly and accurately, providing stakeholders with confidence in the reliability of the financial information.
2. What are the 4 C’s of auditing?
The four C’s of internal audit are Compliance, Cybersecurity, Competitiveness, and Culture. Although, it’s important to note that these sets of 4 C’s are not universally defined or standardized.
3. What are the three key areas of auditing?
Financial statements, internal controls, and compliance are three areas of auditing. It’s important to note that the areas of focus in an audit can vary depending on the nature of the audit, industry-specific requirements, and the organization’s objectives.
4. What are basic audit principles?
Confidentiality, integrity, objectivity, independence, and competence are the basic principles that auditors must follow when conducting examinations. These principles help ensure that the audit is conducted efficiently, effectively, and with integrity.