Financial audit (Basic)

(I) Introduction

What is a Financial Audit? (Basic)

A financial audit is an independent examination of an organization’s financial statements (such as income statement, balance sheet, and cash flow). 

The main purpose is to:

•  Check whether the financial statements are accurate and reliable.
•  Ensure they are prepared according to accounting standards and laws.
•  Build trust for shareholders, investors, government, and other stakeholders. 

 Key Points (Basic)

1. Objective → To confirm that the financial statements show a true and fair view of the company’s financial position.
2. Who does it? → External auditors (independent professionals) or internal auditors.
3. Why important?
4. • Prevents fraud or errors.
   • Helps management make correct decisions.
   • Builds credibility with banks, investors, and regulators.

👉 In short: A financial audit = Checking the company’s money reports are correct, legal, and trustworthy.

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(II) Financial Audit Plan

An audit plan is like a roadmap the auditor prepares before starting the audit. It tells what will be checked, how, and when. Key elements in an Audit Plan:

• Objectives → What the audit is trying to achieve (e.g., verify financial statements).
• Scope → Which areas, accounts, and periods will be covered.
• Risk assessment → Identify high-risk areas (like cash, revenue, inventory).
• Audit strategy → Decide how much testing and what methods to use.
• Resources & schedule → Assign staff, time, and deadlines.

Example: Planning to check cash transactions more deeply if the company handles a lot of cash.

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(III) Financial Audit Procedures

Audit procedures are the actual steps and tests auditors perform to gather evidence.

Types of Audit Procedures:

1. Risk assessment procedures → Understand the business, controls, and risks.
2. Test of controls → Check if internal controls (e.g., approval system, signatures) work properly.
3. Substantive procedures → Directly check the numbers in the financial statements. 

Common Examples:

• Inspecting financial records (invoices, receipts, ledgers).
• Confirming balances with banks or suppliers.
• Recalculating totals.
• Observing inventory count.
• Asking management questions (inquiries).

🌟 In short:

• Audit Plan = Preparation (what, how, when).
• Audit Procedures = Actions taken to collect evidence and confirm accuracy.

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(IV) Audit Evidence

Audit Evidence means the information auditors collect to prove whether financial statements are correct or not.

Characteristics of good audit evidence:

• Relevant → It must relate to the item being checked.
• Reliable → It must come from trustworthy sources.
• Sufficient → Enough evidence must be collected.

Examples of Audit Evidence:

• Financial records (invoices, receipts, ledgers).
• Bank confirmations (letters from the bank).
• Physical inspection (counting inventory).
• Written representations (letters from management).
• Observations (watching how transactions are handled).

(V) Audit Documentation

Audit Documentation means the records auditors keep about their work and evidence. It is sometimes called the “working papers” of the auditor.

Purposes of documentation:

1. To show what work was done.
2. To prove that the audit followed standards.
3. To help future audits (reference).
4. To support the audit opinion.

Examples of Audit Documentation:

• Audit plan and procedures.
• Notes on meetings with management.
• Checklists and working papers.
• Copies of important documents (contracts, confirmations).
• Results of tests performed.

🌟 In short:

• Audit Evidence = What auditors collect to check accuracy.
• Audit Documentation = How auditors record their work and keep proof.

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(VI) Audit report

After completing an audit, auditors must report their findings to the company’s management and stakeholders.

(A) Main Purpose

• To communicate whether the financial statements are true and fair.
• To highlight weaknesses in internal controls.
• To give recommendations for improvements.

(B) Types of Audit Reports

1. Unqualified Opinion (Clean Report) → Financial statements are correct and fairly presented.
2. Qualified Opinion → Mostly correct, but with some exceptions.
3. Adverse Opinion → Financial statements are wrong or misleading.
4. Disclaimer of Opinion → Auditor cannot give an opinion (not enough evidence).

(C) Key Contents of Audit Report to Management

• Audit opinion (true & fair or not).
• Scope of the audit (what was checked).
• Findings (errors, weaknesses, fraud risks).
• Recommendations (how to fix problems).

(VII) Management Letter

Apart from the formal audit report, auditors often prepare a Management Letter.

This includes:

• Internal control weaknesses.
• Operational inefficiencies.
• Suggestions for better financial practices.

🌟 In short:

• Audit Report = Formal opinion about financial statements (clean or not).
• Reporting to Management = Also shares findings, risks, and recommendations to help improve the company.