Course of statutory audit

Read also our previous article about audit HERE.

The audit can be divided into (up to) five interrelated parts (we will describe each part in more detail below):

1) Audit planning

2) Interim audit

3) Physical inventory

4) Final audit

5) Audit conclusion

In the first phase, planning, it is crucial for the auditor to get to know the client's operations in the greatest detail. According to ISA 315 (International Standards on Auditing), the auditor is required to learn in detail about the company's internal processes (including processes that seemingly have no impact on the financial statements, such as the company's IT systems). Clients can therefore expect a variety of issues that they may not see a connection to the primary objective of the audit (the verification of the financial statements). This information is then analysed by the auditors to identify potential risks of material misstatement (although the primary objective of the audit is not to detect fraudulent behaviour, the auditor should be able to identify areas in the company's internal processes that could provide opportunities for fraud - these risk points are included in the management letter to the company at the end of the audit). The auditors then set an audit plan to follow.

The second phase is the pre-audit (we auditors more commonly use the term prefinal), which usually takes place during the audit period (if the company has a calendar year as its accounting period, prefinals usually take place in the fall), when the auditors audit a portion of the period (typically 9 to 10 months of the accounting period). During the pre-audit, most of the items tested are "flow-through" items from the financial statements (primarily revenues and expenses where no retrospective changes are expected). In addition, auditors perform tests of controls during the pre-final (these are not mandatory, but if effective, they can significantly save time and work on both sides). 

Between the prefinal and the main audit, inventories are usually carried out. In practice, the auditors regularly take part in inventory counts and, in the case of significant cash balances, in cash register counts. Should the auditor be unable to attend the inventory, several developments are possible - if the auditor is prevented from attending by the client, the auditor is required to state this in his/her opinion. Assuming that the auditor is unable to attend the inventory due to obstacles on his/her side (e.g. illness), he/she must attend the inventory at the earliest possible alternative date.

The main (final) audit shall follow any pre-final and final inventories. During the main audit, all significant items in the financial statements are tested, together with any areas identified by the auditor as being at risk. The auditors perform substantive or detailed tests, or an appropriate combination thereof. The course of the audit varies from engagement to engagement and it is therefore not possible to give a general indication of how the audit will proceed.

The last, but for many the most important, phase of the audit is the final phase - this is where the auditors check the company's financial statements (including the notes) to ensure that they correspond to reality, that they are prepared in accordance with legislation and that they do not contradict each other. Next, a letter is sent to the company's management and owners' representatives containing (among other things) significant risks in terms of the client's control environment, significant findings, a list of (un)corrected misstatements, confirmation of the independence of the audit team members, etc. The auditor then issues an auditor's report containing the auditor's opinion. This can take four forms -> unqualified opinion, qualified opinion, adverse opinion and disclaimer of opinion.

An unqualified opinion is the best possible opinion, which means that the financial statements give a true and fair view in all material respects.

If an unqualified opinion would be graded 1 in the classroom, a qualified opinion can be seen as a grade between 2 and 3 -> here the auditor states that, except for the matters stated, the financial statements give a true and fair view. These facts are then stated in the auditor's report - if we follow the school analogy, the auditor describes in his opinion that he would rate all parts of the accounts as '1', but with exceptions that he would rate worse; these exceptions are then stated and justified.

If we were to view an unqualified opinion with a grade of "2", a negative opinion would get a 5 in the classroom -> the auditor is stating here that the financial statements as a whole do not present a true and fair view. This doesn't necessarily mean that the whole of the accounts are wrong - but it does mean that the level of errors/omissions is so great that the accounts as a whole cannot be relied upon.

Rejection of the statement then occurs in a situation that in a school setting would best be evaluated by saying "failed the test". This opinion is issued in a situation where the auditor has been limited in his or her activities to the extent that he or she has been unable to objectively assess the state of the financial statements. These limitations usually result from the client's (non-)cooperation with the audit - the auditor himself is required to perform the audit with due care and therefore cannot fail to perform the audit and then issue a disclaimer of opinion (and although the title does not imply it, a disclaimer of opinion is also an opinion).

Finally, it should be said that the auditor does not have the power to prescribe anything to the client - his role is that of an adviser or an assurer, and although the client's statutory body can issue the statements in the form that he wants, the auditor must adjust the audit report and his opinion, which is an integral part of the financial statements, accordingly.