Financial statement audit is a procedure conducted annually by a company that is required to do so or voluntarily expresses such intention.
The audit is carried out by a certified auditor appointed by the relevant authorities of the company or firm. When is it necessary to conduct such an audit? What does such an audit look like? Why is it worth conducting, and what are the objectives of the auditor? How to prepare for a financial statement audit?
When is it necessary to conduct a financial statement audit?
Only annual financial statements, which include cash flow statements, are subject to audit. Therefore, the obligation to conduct audits applies to the same companies that are required to prepare these statements. These include banks, credit institutions, credit unions, insurance companies, payment institutions, electronic money institutions, joint-stock companies (with exceptions), and other entities such as limited liability companies, partnerships, limited partnerships, civil partnerships, and other companies owned by individuals that employ more than 50 people, have assets totaling at least 2.5 million euros in the financial year, or have sales revenues equal to or exceeding 5 million euros.
Additionally, audits must be performed by acquiring companies or newly established companies if the financial statements were prepared for the year in which the merger occurred. Auditing of financial statements is also mandatory for companies maintaining accounting books that have chosen the balance sheet method for tax purposes to determine exchange rate differences.
How does the financial statement audit proceed?
The course of the financial statement audit is determined by the certified auditor who selects specific audit procedures. The audit is a complex process consisting of several stages. The first is the acceptance of the assignment by the auditor after its analysis. The next step is to sign an agreement with the company’s management for the audit and evaluation of the financial statements. The agreement is concluded based on a resolution approving the financial statements by the body that approves them. After signing the agreement, the certified auditor can start working.
The audit begins with familiarizing oneself with the company and its environment, including internal controls. Then, the auditor plans the audit procedures. Primarily, they must determine the “overall materiality,” which is the highest amount of distortion that could be included in the financial statements without affecting the economic decisions of the users of the statements. The next stage involves conducting compliance tests, including examining the accounting system and internal controls. The final stage is to agree on the final version of the financial statements. Any discrepancies are discussed at the closing meeting of the audit, and the audit findings are presented by the certified auditor in the audit report.
Why is it worth conducting a financial statement audit? Basic objectives of an auditor
The main goal of the certified auditor is to confirm, based on the evidence gathered during the audit, whether the financial statements accurately and clearly depict the financial position, financial performance, and financial results of the company. They also confirm the compliance of the financial statements with the law and accounting principles, as well as the accuracy of the accounting records, which form the basis for preparing the financial statements.
It is worth conducting an audit of the financial statements, even if there is no legal obligation to do so, as it allows for the detection of any irregularities and the implementation of corrective actions before errors lead to serious consequences.
How to prepare for an effective and efficiently conducted audit?
Before the audit, it’s advisable to prepare all the documents that may be useful to ensure a quick and efficient process. The auditor will likely request the company’s articles of association or statutes, obtained permits and licenses, as well as minutes from the company’s meetings with resolutions, and extracts from the land and mortgage registers for owned properties.
Additionally, any contracts with counterparties, accounting policies within the company, regulations, and accounting evidence in the form of invoices and other documents may be helpful.