FREQUENTLY ASKED QUESTIONS
This is a short list of our most frequently asked questions
1: What is an audit?
A financial audit, or more accurately, an audit of financial statements, is the review of the financial statements of a company or any other legal entity (including governments), resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented. Financial audits are typically performed by firms of practicing accountants due to the specialist financial reporting knowledge they require. The financial audit is one of many assurance or attestation functions provided by accounting and auditing firms, whereby the firm provides an independent opinion on published information.
2: Why do audits exist?
Financial audits exist to add credibility to the implied assertion by an organisation’s management that its financial statements fairly represent the organization’s position and performance to the firm’s stakeholders (interested parties). The principal stakeholders of a company are typically its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in ensuring that the financial statements are accurate.
The audit is designed to reduce the possibility that a material misstatement is not detected by audit procedures. A misstatement is defined as false or missing information, whether caused by fraud (including deliberate misstatement) or error. “Material” is very broadly defined as being large enough or important enough to cause stakeholders to alter their decisions.
3: What does an audit entail?
Planning and risk assessment.
To understand the business of the company and the environment in which it operates. What should auditors understand?
- The relevant industry, regulatory, and other external factors including the applicable financial reporting framework
- The nature of the entity
- The entity’s selection and application of accounting policies
- The entity’s objectives and strategies, and the related business risks that may result in material misstatement of the financial statements
- The measurement and review of the entity’s financial performance
- Internal control relevant to the audit
To determine the major audit risks (i.e. the chance that the auditor will issue the wrong opinion). For example, if sales representatives stand to gain bonuses based on their sales, and they account for the sales they generate, they have both the incentive and the ability to overstate their sales figures, thus leading to overstated revenue. In response, the auditor would typically plan to increase the rigour of their procedures for checking the sales figures.
Internal controls testing.
To assess the operating effectiveness of internal controls (e.g. authorisation of transactions, account reconciliations, segregation of duties) including IT General Controls. If internal controls are assessed as effective, this will reduce (but not entirely eliminate) the amount of ‘substantive’ work the auditor needs to do (see below).
- In some cases an auditor may not perform any internal controls testing, because he/she does not expect internal controls to be reliable. When no internal controls testing is performed, the audit is said to follow a substantive approach.
- This test determines the amount of work to be performed i.e. substantive testing or test of details.
To collect audit evidence that the management assertions (actual figures and disclosures) made in the Financial Statements are reliable and in accordance with required standards and legislation
- Where internal controls are strong, auditors typically rely more on Substantive Analytical Procedures (the comparison of sets of financial information, and financial with non-financial information, to see if the numbers ‘make sense’ and that unexpected movements can be explained).
- Where internal controls are weak, auditors typically rely more on Substantive Tests of Detail (selecting a sample of items from the major account balances, and finding hard evidence (e.g. invoices, bank statements) for those items)
- To compile a report to management regarding any important matters that came to the auditor’s attention during performance of the audit.
- To evaluate and review the audit evidence obtained, ensuring sufficient appropriate evidence was obtained for every material assertion.
- To consider the type of audit opinion that should be reported based on the audit evidence obtained.
4: Why do entities need an audit?
An audit gives an entity a sense of comfort, not only in the numbers that are presented to the shareholders but also in the form of a comment by the auditor as to the efficiency and effectiveness of internal controls within the business to determine if there are any weaknesses or inefficiencies present.
At Lockhat Incorporated, we aim to add value on all our audit engagements and we are in a prime position to advise you on ways in which you can improve your business’ cash flows, profitability, internal controls and legal compliance.
As auditors, we are bound in terms of our code of conduct, to keeping up to speed with the latest accounting, tax and legal regulations which affect business. We can use this knowledge to continuously advise you of ways to keep your business ahead of the pack
5: Why are audits expensive, because I don’t get any value out of my audit?
Costing for audits is generally based on time spent by the relevant personnel, level of skill and responsibility and investment in technology required. Auditing by its very nature can be time consuming and thus costly, but with prior notice, it is possible to commercially negotiate set fees, budgets or retainers with us so as to budget your expenditure.
As a general rule, we try to conduct our audits with a strong emphasis on value added to the client by means of a concluding management letter on all our audit engagements. This should point out to you what we have uncovered in the audit and recommendations by us, on what can be done to improve the businesses position. You may find this procedure different to other audit firms, and this is precisely how we aim to define our service.