Many company owners associate auditing with control and reporting. But what is an auditor actually looking for when reviewing a company’s accounting? And which areas typically receive the most attention?
Although the scope of an audit varies from one company to another, it has one primary objective: to confirm that the annual accounts present a true and fair view of the company’s financial position. To achieve this the auditor must examine a range of areas where errors or omissions may occur.
Is revenue recorded correctly?
One of the most important questions is whether all revenue has been booked correctly. An auditor will often review invoices, contracts and supporting payment documentation to verify that revenue has been recognized in the correct accounting period.
If a company records revenue too early or too late, its financial results may be misleading. As a result, accruals and other period-end adjustments often receive significant attention during an audit.
Is there documentation for the expenses?
All expenses recorded in the accounts must be supported by documentation. Therefore, the auditor will review supporting documents such as invoices, receipts and agreements.
Missing documentation may raise questions about whether an expense is tax-deductible or whether it is genuinely related to the business. Personal expenses incorrectly recorded in the company accounts are a common area of focus for auditors.
Do the bank accounts reconcile?
Bank reconciliation is a fundamental control in accounting. An auditor will normally verify that the balance shown in the accounting records matches the balance reported by the bank as of the balance sheet date.
Differences between the bank balance and the accounting records may indicate posting errors, missing transactions or other issues that require further investigation.
Are payroll and employee matters handled correctly?
Payroll is often a complex area subject to detailed regulations. An auditor may therefore examine whether salaries, holiday pay, tax withholdings and employer’s social security contributions have been calculated and reported correctly.
The auditor may also review whether the necessary employment contracts are in place and whether any employee benefits have been treated correctly for tax purposes.
Is VAT reported correctly?
Errors in VAT reporting are among the most common challenges companies face. Auditors will often test a sample of transactions to verify that the correct VAT rates have been applied and that the company is entitled to claim input VAT deductions.
If a company engages in international trade or provides specialized services, this area may require additional attention.
Are assets and liabilities valued correctly?
An auditor will also verify that the company’s assets and liabilities are recorded at appropriate values. This may include everything from accounts receivable and inventory to loans and other obligations.
For example, an auditor may examine whether the company has recorded investments as expenses even though they should have been capitalized as assets on the balance sheet. Incorrect classification can affect both the company’s financial results and the financial position presented in the accounts.
For companies holding inventory, the auditor will often review how inventory has been calculated and whether it actually exists.
Are internal controls and procedures adequate?
Although an audit primarily focuses on reviewing the financial statements, auditors will often assess the company’s internal procedures and control systems as well.
If one individual is responsible for invoicing, payments and bookkeeping the risk of errors may be greater than if these responsibilities are divided among several people. Strong internal controls not only contribute to more reliable financial reporting but can also reduce the risk of financial losses.
Auditing is about more than control
Many businesses view auditing as a legal requirement or administrative formality. However, the process can also provide valuable insights. An auditor’s review may identify weaknesses in procedures, opportunities for improvement and areas where the company faces increased risk.
For management, owners and other stakeholders an audit can therefore serve as an important mark of quality, providing greater confidence in the company’s financial reporting.
Contact us
Do you have questions about auditing, accounting or how to ensure that your company is well prepared for an audit? Our advisors are happy to assist with bookkeeping, internal controls and financial advisory services. Contact us today for a discussion about how we can support your business.
