A financial audit is an examination of the main economic transactions that are presented in the accounts at a given date prepared under an accounting framework of International Financial Reporting Standards or also known as IFRS, with the purpose of providing an opinion on the reasonableness of the financial statements as a whole.
What are the Objectives of Financial Auditing?
The objective of the financial audit is to provide confidence to users (shareholders, customers, suppliers, among others) in the financial statements. This confidence is achieved through an expression, by the financial auditor, of an opinion on whether the financial statements have been prepared in accordance with the accounting framework, for which the following should be taken into account:
- The auditor must be satisfied that the financial statements as a whole are free from material misstatement, whether due to fraud or error.
- If there are material errors, the auditor must communicate them to management so that they can make the necessary corrections to the financial statements so that their financial statements are reasonably presented.
What are the activities carried out in the Financial Audit?
The review of the financial auditor is carried out in accordance with International Standards on Auditing (ISA) through different activities such as :
- Planning the audit so that it is carried out effectively by obtaining knowledge of the business, evaluating the risks associated with the financial statements and preparing the audit programs.
- Execute the procedures presented in the audit programs, through control tests and substantive tests in order for the financial auditor to be able to conclude, through his professional judgment, whether the financial statements as a whole are reasonably presented.
- Communication of the findings identified during the audit of accounting, tax and/or legal aspects to the Administration, so that they can evaluate their timely correction.
Conclusion of the Financial Audit
Upon completion of the audit procedures and subsequent communication of the main findings identified, the audit opinion is prepared in which the opinion of the independent auditor is expressed, and may be an unqualified opinion, with qualifications or abstention from opinion. Likewise, an internal control letter is prepared in which the control observations related to accounting, tax and/or legal aspects are detailed, so that the Administration can execute the improvement recommendations in the short term.
Why is it necessary for entities to carry out Financial Audits?
Financial audits allow companies to know if their accounting processes are adequate to prepare and prepare financial statements (statement of financial position, statement of comprehensive income, statement of changes in equity and cash flow statement) in accordance with the applied accounting framework.
A financial audit allows to know those accounting processes that do not have basic controls and, therefore, could generate voluntary or involuntary errors, generating erroneous decision making by the Administration.
The financial audit provides reasonable assurance to users in the financial statements, allowing companies to give confidence mainly in the following:
- General Shareholders’ Meeting
- Participate in tenders with state and/or private entities
- Apply for loans with financial institutions
- Processes of splits and takeovers
- Stock Transfers
- Due diligence
- Liquidation processes