What is a Financial Audit and Why is it Important?

Published on: Mar 30, 2023 by Mara Ragland, CPA

Updated on: April 5, 2024

What is a Financial Audit?

A financial audit is an independent examination of an organization's financial statements and records.

The purpose of a financial audit is to provide assurance that an organization's financial statements are accurate, reliable, and compliant with relevant laws, regulations, and accounting standards. Financial audits are typically conducted by external auditors who are independent of the organization being audited.

The process involves reviewing and verifying the accuracy and completeness of the organization's financial records, testing the organization's internal controls, and evaluating the overall financial reporting process. The results of a financial audit are typically reported in an audit report which includes an opinion on the fairness and reliability of the financial statements.

A GUIDE TO AUDITS: PREP, PLANNING, AND POST-AUDIT TIPS

Why Financial Audits are Crucial for an Organization

1. Meet Legal or Regulatory Requirements

In some cases, an organization may be required by law to undergo a financial audit, such as publicly traded companies or organizations that receive government funding.

2. Improve Financial Reporting

A financial audit can help identify errors or misstatements in a company's financial statements and provide recommendations for improving the accuracy and clarity of the information presented.

3. Identify and Address Financial Risks

Financial audits can help a company identify and address potential financial risks such as fraud or mismanagement of assets.

HOW AUDITORS EVALUATE FRAUD RISKS

4. Improve Internal Controls

A financial audit can help a company identify weaknesses in its internal controls and recommend improvements to reduce the risk of errors or fraud.

5. Attract Investors

A financial audit can provide reassurance to potential investors that a company's financial statements are reliable and accurate.

6. Increase Credibility and Transparency

A financial audit can increase the credibility and transparency of a company's financial information, which can improve relationships with stakeholders such as customers and suppliers.

Benefits to Conducting a Financial Audit

Improved Accuracy and Reliability	A financial audit helps to ensure that an organization's financial statements are accurate and reliable, which is important for stakeholders (such as investors and lenders) who rely on this information to make decisions.
Enhanced Credibility	A financial audit can enhance an organization's credibility and reputation by providing assurance to stakeholders that the organization's financial statements are reliable.
Improved Internal Controls	A financial audit can identify weaknesses in an organization's internal controls, which can then be addressed to improve the overall efficiency and effectiveness of the organization.
Enhanced Decision-Making	A financial audit can provide management with valuable insights and information that can be used to make more informed business decisions.
Compliance with Laws and Regulations	A financial audit can help an organization ensure that it is in compliance with relevant laws and regulations, which can help to mitigate risk.

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Financial Audit Checklist

This checklist is a general outline regarding the steps a company should execute if a financial audit is performed on their business. These steps will vary depending on company size, industry, and relevant standards and regulations that may apply.

1. Gather the Necessary Financial Documents

Examples may include bank statements, tax returns, accounts payable and receivable, payroll records, and other financial documents relevant to the audit.

2. Make Sure All Financial Records are Complete and Accurate

This may include reconciling accounts, correcting errors, and preparing any necessary adjusting entries.

3. Review Internal Controls and Processes

Review segregation of duties, physical controls, and system controls to ensure they are sufficient and functioning as intended.

INTERNAL CONTROLS MATTER - HERE'S WHY

4. Identify and Review Significant Transactions or Events Since Last Audit

Examples include significant purchases or sales, changes in management, or other events that could affect financial statements.

5. Familiarize Yourself with the Audit Process

This would include learning about specific standards and regulations that apply to your organization. You may need to consult with your auditor or seek guidance from a professional organization.

6. Designate a Point of Contact on the Audit Team

Make sure they have access to all the necessary personnel and information they request.

7. Communicate with the Audit Team

Provide the auditor with any requested information and answer questions in a timely manner to ensure a smooth and efficient audit.

EFFECTIVELY COMMUNICATING WITH THE AUDIT COMMITTEE

8. Review the Draft Audit Report

Address any issues or concerns found by the audit team.

Whether your company conducts a financial audit as a requirement or to get a better idea of where the business sits financially, the benefits will help your organization grow. Contact one of our professionals for more information.