This is a thorough and comprehensive examination of a company’s financial records and internal controls by an independent auditor who will attest to the fairness and accuracy of the content of the financial statement. The purpose of this is to produce financial statements that are credible and external users can rely on as a fair representation of the company’s performance and condition. Auditing financial statements have three stages:

1. Planning and risk evaluation: An auditor must have an understanding of the business and the competitive environment in which it operates. The auditor uses this industry knowledge to determine if there are risks that could affect the validity of the financial statements.
2. Testing of internal controls: The auditor analyses the effectiveness of the company’s internal control procedures. The focus is on limits of employee authorizations, protection and preservation of assets and separation of duties. Control procedures are tested to determine their strength.
3. Substantive procedures: Auditors use a broad range of investigative procedures to verify the validity and accuracy of the company’s financial data.

Procedure:

• Conduct a ratio comparison with historical, forecasted, and industry results to spot anomalies.
• Review bank reconciliations, count on-hand cash, confirm restrictions on bank balances, issue bank confirmation.
• Confirm securities, review subsequent transactions, verify market value.
• Confirm account balances, investigate subsequent collections, test year-end sales and cut-off procedures.
• Observe the physical inventory count, obtain confirmation of inventories held at other locations, test shipping and receiving cut-off procedures, examine paid supplier invoices, test the computation of allocated overhead, review current production costs, trace compiled inventory costs to the general ledger.
• Observe assets, review purchase and disposal authorizations, review lease documents, examine appraisal reports, recalculate depreciation and amortization.
• Confirm accounts, test year-end cut-off.
• Examine subsequent payments, compare balances to prior years, recomputed accruals.
• Confirm with lenders, review lease agreements, review references in board of directors’ minutes.
• Examine documents supporting a selection of sales, review subsequent transactions, recalculate percentage of completion computations, review the history of sales returns and allowances.
• Examine documents supporting a selection of expenses, review subsequent transactions, and confirm unusual items with suppliers.