What is Auditing?

At its core auditing is simply an independent examination of financial and other information along with the systems and processes used to create the data in order to provide a level of assurance that they are materially true and correct. For a lot of new clients auditing is a new concept that they haven’t been exposed to before. They confuse auditors with general accountants and confuse a level of assurance with perfection. In fact, your auditor never signs off that everything is perfect but rather that based on their review it is materially true and correct which is a much lower standard than a colloquial perception or perfection.

When the community as a whole asks “what is auditing?”, they are usually thinking of financial audits as that is what auditing is known for in the modern zeitgeist. A financial audit is a common type of audit and is where a set of financial statements is reviewed and an opinion provided as to whether they present a true and correct view of the organization’s financial position and performance. It is important to note though that there exist many other types of audits such as regulatory audits of trust accounts, acquittals for government and other grants, community audits etc. All these audits at their core exist to build trust between an organisation or business and their stakeholders such as regulators, investors, lenders and of course, the wider public.

Auditors have a critical role to play in the Australian financial environment and represent the cornerstone of good corporate governance, financial transparency, and risk management.

What Is the Purpose of an Audit?

The type of audit will depend on the purpose, whether regulatory in nature or governance based. However, the primary purpose of an audit can be said to be independent assurance of the reports prepared by internal management. An audit will help to confirm that

• Financial reports are materially accurate and reliable
• That the financial reports and records comply with Australian Accounting Standards
• That the entity meets its legal and regulatory obligations such as AFSL audit requirements for financial licensees which have audit obligations far beyond the financial statements themselves
• Most importantly, external and internal stakeholders can have a high degree of confidence in the reported information

There is nothing about audits which guarantee that fraud does not exist or that there are no immaterial errors. Instead, the audit provides a reasonable assurance that the financial statements or other auditable data (for example trust accounts) are free from material misstatement, whether caused by error or fraud.

How Does Auditing Work?

Every audit is different in its completion and execution depending on the size and scope of the engagement, the level of inherent risk and how the planning process and risk assessment has progressed. However, while the exact steps will vary there are some fixed stages that exist in every audit process.

1. Audit Planning

Often considered one of the most important stages in the audit process, the planning phase involves your auditors getting a deep understanding of the business or organisation including its existing internal controls, record keeping and other systems and the regulatory environment in which it operates. As part of this planning process key risk areas are identified and an audit plan developed. This is done within a software system known as Caseware which is then used to complete the audit process.

2. Risk Assessment

Along with planning the audit, the auditor is required to assess the financial, operational, and compliance risks of the organisation based on their review of the organisation’s structure, processes and controls. Higher risk areas which have higher materiality will thus receive more detailed testing. This is known as a risk-based approach and ensures the audit is efficient as well as effective.

3. Testing and Evidence Gathering

Testing and Evidence gathering is where the auditor performs the detailed audit procedures including items such as:

• Reviewing balances against source documents, for example, closing bank balances to bank statements, assets on the balance sheet to their respective valuations, debtors’ figures to the ledgers etc.
• Reviewing invoices with transactions to ensure appropriate records are kept justifying the amount and allocation of transactions.
• Testing of internal controls and procedures to confirm that the entity’s financial procedures have been followed.
• Confirming balances with third parties such as writing to lawyers to confirm status of cases, writing to creditors to confirm balances etc.
• Analysing trends and variances to look for anomalies.

This evidence is all logged within the audit system and supports the conclusion and audit opinion reached.

4. Audit Opinion

Once the audit has been concluded, the auditor will provide a report stating their opinion on the financial statements, trust account or other object of the audit. This opinion can be unqualified, which is known as a clean audit. However, if issues have been discovered in the process, then this report may be qualified, meaning there are areas excluded from the auditors opinion or adverse where the audit has effectively been failed.

What Is an Independent Auditor?

Independence is the cornerstone of the auditor’s profession. An auditor must be a qualified professional; in Australia they require a designation of a Registered Company Auditor which is provided by ASIC. To check if a company has a Registered Company Auditor designation you can check on the ASIC website. As well as being appropriately qualified they must be independent of the entity that they are auditing, which precludes auditors accepting other engagements with the organisation outside of the audit itself. ASIC takes a dim view of auditors who breach these requirements and a history of expelling auditors who accept engagements where perceived or actual conflicts of interest exist.

Need Professional Audit Support?

Auditors Australia is a niche audit firm providing independent, high-quality audit services across a range of industries within Australia. Our team is passionate about helping our clients to meet their assurance obligations efficiently and professionally. Please feel free to reach out to one of our friendly staff today for a confidential review and quote on your work.