How to Perform an Audit Review of Financial Statements

Auditing, or the systematic inspection of accounts, may be performed by internal or external agencies. Members of government institutions ensure the legality and accuracy of a company's financial reports by performing external audits. Businesses also hire impartial, external auditors from accounting firms as a way to ensure that financial statements are honest and error-free. Members of a company's accounting staff may conduct internal audits as a way to double-check the accuracy of financial statements. Quality internal audits help accountants correct financial statements before they are published and given to the public and government agencies.

Instructions

1. Designate an internal auditor or auditors. These employees will be responsible for conducting the audit and ensuring the accuracy of the financial statements. For effective internal control, auditors should be separate from the employees who prepared the financial statements.

2. Define the objectives of the audit. Audits may be to correct financial statements, ensure government compliance or examine the abilities of a company's accountants. Defining the objectives of the audit helps auditors know what to target when conducting the audit.

3. Gather and compare the four main financial statements for the time period that you're auditing. The four statements are balance sheets, retained earnings statements, income statements and statements of cash flow. Many of these statements should contain the same values, such as net income and stockholder equity.

4. Scan the statements looking for discrepancies and errors. Both sides of accounting equations should be equal; for example, assets should always equal stockholder equity plus liabilities. Differences in values among the statements also indicates faulty accounting.

5. Conduct a horizontal analysis of the financial statements. Horizontal analysis means comparing the numbers on current statements to the numbers on statements from previous accounting time periods. Ensure that any extreme discrepancies are explained.

6. Ensure that the statements comply with generally accepted accounting principles. Also known as GAAP, this set of principles is the legal standard in the United States for preparing and reporting accounting information. Both the Financial Accounting Standards Board and the Securities and Exchange Commission help to create and oversee GAAP.

7. Report the findings of your audit. Create an official report detailing the findings of the audit. State whether the results show satisfactory or unsatisfactory accounting on the statements. Unsatisfactory accounting includes errors, unethical reporting and failure to comply with GAAP.

Tips & Warnings

• International generally accepted accounting principles, or IGAAP, is a set of global accounting standards.

References

• "Financial Accounting, Sixth Edition"; Jerry J. Weygandt et al.; 2008
• Meeks International: Audit of Financial Statements

Resources

• Federal Accounting Standards Advisory Board: Authoritative Source of Guidance