Written by Kady Potter
Posted on 08/08/2014

Six steps to an effective financial audit

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After outlining international auditing standards earlier in the week, we’re moving on to some quick steps on how to effectively conduct a financial audit. Having the capability to complete such an audit internally puts the business in a much stronger position when externally-commissioned audits take place. It also discourages internally-enabled fraud, and keeps accounts up-to-date and in good order.

Review internal reporting systems

Accounts and company finance details need to be accurate for a comprehensive audit to be carried out. If there’s an issue in the reporting cycle, it’s vital to hone in on this as quickly as possible. All documents, including invoices, receipts and bank statements, should be processed as soon as possible following their issue. If important pieces of data are not provided in good time, the internal accounting process itself becomes unreliable.

Check and evaluate data storage procedures

Electronic records of all transactions from the last financial year should be on file and readily available to keep things simple. Printed versions of this data would ideally have been copied in electronic form via scan or manual input.

Where there are archives of data from previous years, these should be just as easy to access. Under the Data Protection Act, personal information such as customer data must only be kept ‘for as long as necessary’.

Review accounting systems and processes

This step requires a steady and systematic approach. Navigate through each separate aspect of the accounting system to ensure that all necessary information is present.

Keep a close eye out for mistakes made through human error – it’s likely that you’ll detect at least one. The accounting system should ideally incorporate software to detect mistakes made in human input and correct them.

Gauge the current threats of fraud and risk

Which internal controls are currently in place to guard against financial risk? Where are the weak points, and how can these be dealt with?

Establish who holds the power and information to access financial records, and how each process is safeguarded to prevent thefts and discourage fraud. Customer confidentiality is a primary consideration, and the prospect of data leaks and tampering must not go un-investigated.

Compare internal and external records

While the scope of the audit should not reach that of separate external auditing, it’s important to be sure that financial data presented to shareholders and other interested parties matches what’s going on behind the scenes.

Check that the figures listed on internally-published cash holdings statements, financial performance records and income reports match those presented to external organisations. Directly compare purchase receipts from suppliers with internal records of these transactions, where applicable, to ensure that they present the same information.

Examine tax returns, reports and records

The length of time for which tax records must be kept on file varies from country to country – in the UK, it’s five years from the submission of the tax return.

Check that the tax reports submitted tally with internal records of returns and tax paid. Pay closer attention to areas in which figures are more likely to be artificially inflated, such as in expenses or annual revenues.


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