Talk:Financial audit

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Contents 1 Discussion 2 US GAAP terms vs UK GAAP terms 3 Steps 4 Financial audit 5 Major changes 6 Moved audit tests 7 Audit tests 7.1 Balance Sheet 7.2 Income Statement 7.3 Statement of Changes In Equity (Int) 7.4 Cashflow Statement 8 Significant audit firms

[edit] Discussion

Where shall types of audit opinion be included in this article? this is important Tassieroy 17:06 Sep 23, 2006

This is perhaps problematic as they differ from country to country. Matthew 11:16, 23 September 2006 (UTC)

I have to differentiate external and internal audit. Current affairs could be added Thomas 21:48 May 10, 2003 (UTC)

This commentary is very US-centric in terms of narrative. May be worth someone with knowledge of international accounting standards having a go.

I'm French... Thomas 12:09, 29 September 2005 (UTC)

Probably worth having separate page for Internal Audit which isn't just finance focused - Internal Auditors can look at any systems, processes and controls - not just financial ones. Deathowl 12:25, 18 Nov 2004 (UTC)

I'd second that - for instance, from the UK perspective there is no mention of Companies Act, and British auditors do not sign audit reports to indicate that the financial statements are 'fairly presented'.

The article also reads very much as still being in draft form - is it worth putting some kind of notification to this effect at the top of the article so that any readers naive to accountancy do not make the wrong assumptions.

Also, is there a particular reason for the list of the Big 4 being ordered the way that it is? I would have thought either alphabetical order or by international audit turnover (with figures provided - but this and the ordering would need to be amended each year) would be the most obvious ways of presenting the list. --Matthew 12:53, 29 Mar 2005 (UTC)

Well, being an accounting student from New Zealand of several years [and now recently learning audits], I'll see what I can do to improve the situation. Hmm, someone should probably note something about Sarbanes Oxley too. Haoie 07:31, 13 September 2005 (UTC)

I have been doing some finance units as part of my postgrad business course here in Australia. What makes the studying extra hard is we seem to use the UK and the US terms in equal measure, so there are often two or three ways of referring to something.

Maybe we could make an explicit cross ref to wikidictionary and ensure all the terms are listed there Jenny MacKinnon 04:10, 5 December 2005 (UTC)

[edit] US GAAP terms vs UK GAAP terms

I've added a table. Please note that I am from the UK - so whilst my UK accounting terms knowledge is solid - my knowledge of US common usage is limited to the few US GAAP audits I've worked on - please correct any discrepancies :-) Deathowl 12:25, 18 Nov 2004 (UTC)

e.g.

US accounting term	UK accounting term
Facilities or Fixed Assets	Fixed Assets
Inventory	Stock
Receivables / Accounts Receivable	Debtors / Sales Ledger
Payables / Accounts Payable	Creditors / Purchase Ledger
Stockholders' Equity or Shareholders' Equity	Shareholders' Funds
Income Statement	Profit and Loss Account
Revenue	Turnover

[edit] Steps

The first step noted is an interim review. Prior to the commencement planning is required. Planning is an essential step required for any financial audit.

[edit] Financial audit

Re the punishment handed out to Arthur Andersen - in this case for the audit of Enron.

Andersens are a victim of a culture that doesn’t support financial audit. The public sector leads the way of course.

In the UK, for example, the Taxpayers’ Alliance reported that nearly 20% of public spending in 2004 was wasted (£81bn). Official watchdogs didn't point this out. The effectiveness of watchdogs, who are appointed to act on the public’s behalf, seems a crucial matter for debate.

As for the wasted money in the European Union, the director-general of Internal Audit there was warned: “We have ways of breaking people like you”.

Under some pressure last year, the UK government issued a consultation document to try to change the loose culture among public servants. This document, the draft Civil Service Bill, may come to nought; but significantly it is the first time in 150 years that such a legislative step to control public spending was thought necessary. Things must be bad.

There is little political will to protect financial audit that acts for taxpayers. Arthur Andersen became victims of this attitude - who's next?

[edit] Major changes

I think the article attempts to describe an audit in too much detail. In reality the job is far less prescriptive (at least in the UK). E.g. the "5% chance of being wrong" is unhelpful. I could happily edit this to make it more focused (I'm a recently qualified auditor in a Big 4 firm) --Fastingbuddha 23:48, 23 January 2006 (UTC)

Didn't quite cut down the detail but did improve the accuracy --Fastingbuddha 01:16, 25 January 2006 (UTC)

I think there's something to be said for moving the detailed 'audit tests' section to its own article, and linking to that article from this one, in order to maintain the quality, focus and level of interest in this article. Any thoughts? --Fastingbuddha 13:40, 25 January 2006 (UTC)

[edit] Moved audit tests

I have removed the audit tests section for the reason above. It is pasted below, so if anyone wants to put it back (or in a separate article) they can. --Fastingbuddha 22:58, 28 January 2006 (UTC)

[edit] Audit tests

These tests are categorised by the section of the financial statements they might typically relate to.

[edit] Balance Sheet

• Assets

• • Non-Current Assets (Int & US) / Fixed Assets (UK)
    • Property, Plant and Equipment
  • Current Assets
    • Cash
      1. Bank reconciliation : Analysis of the amounts that are written in the books but not in the bank statements and conversely. The purpose is to be able to explain each difference between books and bank statements. Usually, as the audit occurs some months or weeks after the closing date, auditors get the last bank statements to check that discrepancies have disappeared. Above all the purpose is to check that revenues written only in the books are now in bank statements (which could mean that receivables have been indeed collected).
      2. Bank confirmation : To ensure that the amount for each bank account specified in the trial balance are right, auditors send a request to every bank of the company to get the current balance at the closing date. Banks usually mention the debts incurred by the company, current guarantees and people who have the power to transfer fund to and from the bank accounts.
      3. Petty cash inventory : Auditors just count the petty cash.
    • Accounts Receivable (Int & US) / Debtors (UK)
      1. Debtors Circularisation : Auditors select a sample of the largest debtors and send letters to those debtors requesting that they agree or disagree the balance, with an explanation. Due to some customers being disinclined to respond to such letters, especially where elements of balances are in dispute, this testing is generally combined with a review of cash receipts after the balance sheet date - in order to provide more substantive evidence that the balance sheet debtors figure is accurate.
      2. Review of the Bad Debt Provision : Auditors review the provision made by the customer against debtors for amounts unlikely to be recoverable, and discuss any significant balances with accounting staff. This is combined with a review of an aged version of the accounts receivable ledger to identify accounts/invoices which are significantly overdue. Where overdue amounts are not included in the bad and doubtful debt provision, the auditors will seek evidence that those debts are recoverable.
    • Intercompany receivables
    • Inventory (US) / Stock (UK)

• Liabilities

• • Current Liabilities
    • Accounts Payable (Int & US) / Creditors (UK)
      1. Supplier Statement Reconciliation : Auditors select a sample of suppliers and request a statement of the outstanding invoices and credit notes from each. These statements are then reconciled to the accounts payable ledgers maintained by the firm being audited, and any reconciling items investigated.
  • Non-current Liabilities
    • Long-term loans
    • Intercompany payables
    • Provision for risks and charges

• Equity

• • Capital
    1. Legal documents : Check that the legal documentation reflects properly changes in equity.
  • Revaluation reserve
  • Shareholders' Funds / Retained Earnings / Profit & Loss Reserve

[edit] Income Statement

• Income

• • Revenue (Int & US) / Turnover (UK)
  • Interest Income
    1. Financial interests : The purpose is to endorse the amount of financial interest charges and revenues. Usually, auditors perform a global test by calculating the average interest rate and the credit and debit balance throughout the year.
    2. Marketable securities : Auditors calculate that the gains and losses from purchase and sale of marketable securities are correct.

• Expenses

• • Cost of Sales
  • Administration expenses
    • Payroll
  • Distribution expenses
  • Interest Expense
  • Tax charge

• Exceptional items

[edit] Statement of Changes In Equity (Int)

Also known as Statement of Other Comprehensive Income (US) / Statement of Recognised Gains and Losses (UK).

• Capital and reserves at prior year
• Movement in capital and reserves
• Capital and reserves in current year

[edit] Cashflow Statement

• Operating cashflow
• Investing cashflow
• Financing cashflow

[edit] Significant audit firms

Is it a world or just a USA ranking ?

World, but good question. I've updated the table's headings accordingly. Matthew 22:28, 30 October 2006 (UTC)