Financial Audit
Financial statement auditing and other assurance services
Assurance service
This type of service is an independent professional service provided by professional auditors or audit firms. The purpose of such services is to improve the quality of information in such a way that it is credible to decision makers and that they are able to make relevant (including economic) decisions based on the information provided. An effective relationship between business and stakeholders is based on that trust.
Compliant service means the conclusion of a professional auditor in order to increase the degree of reliability of the relevant information to the person concerned, in cases where the person concerned differs from the person responsible for the information provided.
Independence of audit and audit firms and their risks
The auditing firm must be independent in providing assurance services. The types of threats to independence are:
- Danger of personal gain - Occurs when the auditor's action is motivated by the pursuit of his or her own financial, emotional interests.
- Danger of self-confidence - arises when the auditor has to inspect the work or part of the work performed by him.
- Danger of unlawful protection - arises when the auditor presents himself as an advocate for the client's interests or as an advocate for the opposite position of the client's interests and not as an independent professional.
- Danger of Family Relationships - Occurs when the auditor is exposed to the risks and circumstances of a close relationship with a client.
- Threat of blackmail - arises when the auditor is under pressure from a client or other stakeholder or considers himself or herself to be under pressure.
Financial auditor risk prevention
There are these risk prevention measures that the auditor should use to reduce the relevant risk level to an acceptable low. Such tools might include:
- Use of the Code of Ethics for Professional Bureaucrats
- Develop a firm's internal manual
- Systematic training of its employees for its employees
- Existence of an audit committee in the client company
- Procedures for hiring a new client and extending the relationship with an existing client
- Separation of auditing and non-auditing service groups and introduction of an information barrier between them
- Periodic rotation of the firm
- Periodic rotation of the transaction partner
- Comparison of the compensation received by the firm from one client with the total income and to be able to identify risks based on the above
- Appoint a quality control reviewer to review the quality of the work performed
- Appointing an ethics partner within the firm
- Control of overdue debt of the client, before the start of the new period audit
It is important for the auditor to maintain professional skepticism in the audit process.
There are types of persuasive services
External Audit - In such a transaction, the audit firm audits the financial statements of the company, defines the regulatory framework for the preparation of the financial statements, which is then used as a criterion for the analysis of the financial statements. This process mainly involves obtaining sufficient and appropriate evidence. The result of such a transaction is a report prepared by the auditor outlining the auditor's opinion on the financial statements and the manner in which he or she was able to arrive at that opinion.
International Financial Reporting Standards
The opinion of the external auditor, presented in a positive form, is the conclusion that the financial statements are free from material misstatement and have been prepared in accordance with International Financial Reporting Standards. The external auditor's opinion implies the acquisition of reasonable assurance, which requires comprehensive, detailed testing and other relevant procedures to enable the auditor to obtain sufficient and appropriate evidence.
In many jurisdictions around the world, as well as in the Georgian legislature, conducting external audits is mandatory for certain categories of companies.
Company size category
In order to determine the statutory obligation to conduct an audit, a company size category must be defined. When determining the size category, the total amount of assets of the company, the revenues of the company and the number of employees in relation to the relevant period are taken into account. Similarly, the dynamics of the listed indicators over the years.
Limited Liability Transaction
Such a transaction is similar to an external audit transaction in the sense that the auditor obtains sufficient evidence to express an opinion here as well.
The opinion, in the case of limited liabilities, is presented in a negative form, where the auditor expresses the opinion that as a result of the work performed he did not pay attention to a circumstance that indicated to him the existence of material inaccuracies in the financial statements.
Limited Liability Deals provide low credit for interested parties
Stakeholders
Interested persons may be divided into persons outside and inside the relevant entity:
- External stakeholders
- External shareholders of the company,
- State bodies,
- Suppliers,
- Banks,
- Potential investors, etc.
In many cases, outside, interested parties want to be aware of the company's results to make sure the company meets their expectations. Banks and potential investors want to be aware of the risks the company faces as well as the measures that companies take to reduce such risks.
Internal stakeholders
- Company managers,
- Owners,
- Employed persons.
In addition to assurance services, other transactions include services such
- Agreed procedures,
- Compilation of financial statements,
- Consultations.
There are elements of persuasive service
- Tripartite relationship - auditor, stakeholder, person responsible for financial reporting
- Relevant issue to be discussed
- Relevant criteria
- Sufficient and suitable evidence
- The auditor's report for reasonable or limited credentials.
Overview of Internal Controls
In the course of assurance services, auditors often review the company's internal control systems and report any deficiencies identified to the company's management at the end of the transaction.
Proper operation of internal control systems is a means of preparing financial statements free from material misstatement.
The benefits of a trust service can be summarized as follows
- Trusting services increases the reliability of the information provided to the customer if the opinion of an independent professional regarding the information is published.
- Procedures performed during trust services help to identify issues that were previously unknown to those with the right to drive.
- As a result of the joint work of auditors and management, processes in the company are often improved. However, a clear separation of the role of auditor and manager is essential.
- Providing services, helps people with the right to manage to improve their work and raise the quality.
The following factors may be considered as disadvantages of compliant services
- A persuasive service cannot provide absolute assurance that the subject matter is absolutely free from error.
- Audits are often performed for a wide range of users, which may limit the degree of usefulness of the relevant information to specific stakeholders.
Conclusion on financial audit and assurance services
Audit and other assurance services are often required by the country's legislation, although its benefits are multifaceted. Many companies can take advantage of this and improve the effective work of management, financial reporting function, etc.
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