The audit of financial statements plays a crucial role in building and maintaining investor confidence and unlocks value for businesses. Well-executed audits help enhance value beyond the scope of formal financial reporting.
The audit of financial statements also strengthens the credibility of the information provided by businesses to investors, creditors, and parties as required by the law. Within organizations, the audit of financial statements provides the board of directors and management with a deeper understanding of the business and the risks it faces.
So, what is the audit of financial statements? What is the process, and how can RSM Vietnam assist businesses in financial statement audits? In the following article, RSM Vietnam introduces businesses to the fundamental aspects of financial statement audits, including their objectives, audit targets, audit cycles, and audit methods.
Table of contents:
II. The Financial Statement Audit Cycle
III. Audit Methods
IV. Financial Statement Audit Procedures
V. How can RSM Vietnam support your business?
I. What is Financial Statement Audit?
1. Definition of financial statement audit
Financial statement audit is a distinctive activity within the field of auditing, with the specific objective of "providing an opinion confirming whether the financial statements present a true and fair view in all material respects, based on applicable accounting standards and prevailing (or accepted) accounting practices, and comply with relevant laws." The criteria for evaluating financial statement audits are the accounting standards and auditing standards.
The auditing of financial statements is typically conducted by auditing firms to serve various stakeholders who require information from the financial statements, such as management, government agencies, banks, investors, sellers, and buyers.
2. Object of Financial Statement Audit
The object of financial statement audit includes financial statements (comprising: the balance sheet/income statement, statement of comprehensive income, statement of cash flows, and the notes to the financial statements) and supplementary schedules as required by law.
3. Objectives of Financial Statement Audit:
General Objective: It is understood as seeking audit evidence to provide an opinion on the truthfulness and reasonableness of the information presented in the financial statements.
Overall Audit Objectives: This involves an examination and evaluation of the overall financial statement amounts, based on general management representations regarding the information obtained through actual examination at the audited entity. This also includes consideration of other general objectives, including objectives related to accuracy, completeness, valuation, classification of presentation, and rights and obligations.
Financial statement audit aims to enhance the credibility of the financial statements for users or readers and helps businesses undergoing audits identify their errors and deficiencies. This, in turn, helps them find solutions to address and rectify these issues, thereby reducing tax-related risks and enhancing the quality of the accounting team and the financial information of the audited business.
II. The Financial Statement Audit Cycle
Financial statement audit includes the following fundamental cycles:
Audit of the sales and cash collection cycle.
Audit of the purchasing and payment cycle.
Audit of the inventory cycle.
Audit of the payroll and employee benefits cycle.
Audit of the fixed assets and construction cycle.
III. Audit methods
Because each type of audit serves different specific purposes, has different audit subjects, and involves different auditor-client relationships, the way to combine the basic audit methods varies. ACF Vietnam's audit methods are designed to comply with financial statement audit standards and are adjusted to suit the specific characteristics of clients' industries and business areas.
In financial statement audits, the basic audit methods are deployed in a combined or more detailed manner depending on the specific situation throughout the audit process.
During the audit process, audit methods are divided into two categories:
1. Basic Testing: This is an audit procedure designed to detect significant errors at the foundational data level. Basic testing includes:
Detailed examination (of transaction groups, account balances, and explanatory information).
Fundamental analytical procedures.
2. Control Testing: This is an audit procedure designed to assess the effectiveness of control activities in preventing, detecting, or correcting significant errors at the foundational data level.
IV. Audit procedures
In the financial statement audit, to gather sufficient and appropriate audit evidence to serve as a basis for the auditor's conclusion regarding the fairness and reasonableness of the information in the financial statements, and to ensure the efficiency, cost-effectiveness, and effectiveness of each audit, auditors must establish specific procedures for that audit.
Typically, each audit procedure is divided into three steps:
Audit Planning
Audit Execution
Compilation, Conclusion, and Formation of the Audit Opinion
1. Audit planning:
RSM Vietnam initiates the audit planning process, which involves outlining the expected scope and approach for conducting the audit. The audit plan must be comprehensive and detailed, forming the basis for the audit program.
During this phase, starting from the audit invitation, the auditor will learn about the client to establish a contract or general plan. The auditor collects specific information about the client, assesses the internal control system, and assigns appropriately experienced and qualified audit staff within the team to execute the program.
Additionally, RSM Vietnam identifies and evaluates the risks of material misstatements due to fraud or error at the financial reporting and data source levels. This is achieved through an understanding of the audited entity and its environment, including internal controls, providing a foundation for designing and implementing procedures to address the assessed risks of material misstatements.
2. Audit Execution:
Participation in physical inventory count: Typically, at the end of the accounting year, the audit firm will participate in witnessing the client's physical inventory count, which includes counting cash, fixed assets, inventory, and other assets. This provides the basis for assessing the existence and valuation of the business's assets.
Auditors will use various technical methods adapted to each specific object to gather audit evidence. The essence of this process is the proactive and active implementation of audit plans and programs to provide an opinion on the truthfulness and reasonableness of the information in the financial statements based on sufficient and valid audit evidence.
This phase involves auditors performing audit procedures that are derived from various types of testing, including control testing, analytical procedures, and detailed testing. Audit procedures come in a wide variety and are determined based on the assessment of the client's internal control system, which leads to decisions on using different procedures. Specifically, RSM Vietnam will focus on verifying, examining, and scrutinizing the data, documents, records, and ledgers related to the figures in the financial statements, the financial data prepared by your company. Audit evidence will be collected as a basis for forming an opinion on the financial statements prepared by your company, while also assessing whether the internal control system of the company is being executed in accordance with the procedures.
3. Compilation, conclusion, and formation of the audit opinion:
This is the stage where the auditor issues the audit conclusion. These conclusions are included in the audit report or audit memorandum. To provide accurate opinions, auditors must perform specific tasks such as reviewing unexpected external liabilities, examining events occurring after the year-end date, assessing the continuity of the entity's operations, and gathering explanations from the Board of Directors.
RSM Vietnam will proceed with the following steps:
Summarize the issues and content that need to be discussed with the Board of Directors and relevant departments and provide any necessary adjustments or journal entries.
Consolidate the financial report figures before and after adjustments, prepare a draft of the post-audit financial report, and take responsibility for addressing events that occur after the audit report is prepared.
Depending on the results, auditors may issue two types of opinions: a qualified opinion and an adverse opinion on the audited financial statements. The audit report will be sent to the client.
Prepare a Management Letter addressed to the Board of Directors of the Company, outlining any outstanding issues, weaknesses, and errors identified during the audit process, and provide recommendations and solutions for improvement.
V. How can RSM Vietnam support your business?
RSM Vietnam provides independent audit services to enhance the confidence in the financial reporting activities of our client organizations.
Our proficient and experienced auditors work closely with clients and related parties to understand the ever-changing business environment.
We are committed to addressing fundamental issues and increasing value beyond the scope of financial reporting through our profound insights into the business operations that we bring to each audit project.
We apply an audit methodology based on established principles, reinforced by RSM Vietnam's commitment to integrity, independence, and professional ethics.
We equip our audit teams with advanced technologies to create a well-structured and risk-focused working process.
We focus on our clients' major business risks.
We support the audit process with our extensive experience in applying and interpreting accounting standards.
We identify industry trends, issues, and in-depth insights that can impact the accuracy and completeness of financial reports.
We have highly skilled professionals, a client-centric approach, and access to a global network of highly regarded auditors.
Our advisory content is always clear, concise, and relevant.
>>> See more Our Financial Reports Audit Services
RELATED CONTENTS:
Does your business need a financial statement audit?
What role does financial statement audit play for businesses?
Financial statement audit in the era of Industry 4.0