Accounting and Finance Foundations

Unit 13

Accounting and Finance Foundations Unit 13: Auditing 1011

Auditing

Chapter 30

Lesson 30.6

Student Guide

Putting Auditing to the Test

Why do companies hire independent auditors to review their financial records? As we mentioned before,

the SEC requires that all publicly-owned companies in the U.S. be audited to ensure that the businesses’

financial statements are reliable, accurate, and complete. Managers, government agencies, investors, and

even creditors depend on it. These and other users of financial data rely on independent auditors to act

with honor and integrity in protecting the public interest. Plus, more so than ever, audits hold everyone—

including managers, employees, and other stakeholders who may have a vested interest in a company—

accountable for their actions.

Knowing all this, let’s walk through an audit from start to finish:

The ABC Company requested 4As Accounting to audit its financial statements for the year ending Decem-

ber 31, 20YY. In the first stage of the audit, 4As met with executives from the ABC Company and became

familiar with ABC’s business practices, products and services, and previous year’s financial statements.

4As also met with ABC’s audit team (created internally by ABC) to discuss some of management’s asser-

tions on the account balances. Finally, 4As identified the sampling of financial data that it would use to

evaluate ABC’s records.

In the second stage of the financial statement audit, 4As examined the company’s internal controls. The

auditors followed a sampling of transactions through the entire accounting cycle to determine if ABC’s

internal controls are affective.

Then, in the next stage, 4As compared recorded financial information with ABC management’s anticipated

results for the year. In addition, 4As contrasted the current year’s sales to prior years’ sales volumes.

Auditors also completed detailed analyses of transactions, confirmed that certain transactions occurred,

and evaluated account balances. Tests included examining invoices to support additions to the fixed asset

accounts during the year; comparing the current expenses with last year’s expenses and investigating

unusual fluctuations; reviewing the aged trial balance for significant past-due accounts; and performing

sales cut-off tests to obtain assurance that sales transactions were recorded in the proper period. 4As also

audited ABC investments to ensure that the investments were properly valued at the balance sheet date and

traced investment transactions back to the minutes of ABC Board of Directors meetings to determine that

the investments were properly authorized.

At this point in the audit, 4As had enough audit evidence to form an opinion for the ABC Company. 4As

concluded, based on the audit evidence that it had collected, that the financial statements were fairly stated

and were in accordance with GAAP. So, 4As developed an audit report offering an unqualified opinion.