A financial audit is a review of a company’s financial statements and other data to ensure their accuracy and validity. Auditors use different audit tests to analyze and prove their client’s financial information. Two overarching test types include analytical procedures and substantive tests of detail. Another audit test focuses on internal controls, which are the procedures a company uses to protect its information from fraud and abuse. Each group of audit tests involves a specific set of tasks or activities meant to uncover improprieties.
Analytical procedures include comparisons, financial ratios, and reviewing source information. Comparisons take two sets of information — one from the current period and one from a previous period — and determine if the current information is grossly different than the other period. Auditors may also look at budgets, forecasts, or other predictive information to determine if these were significantly different than previous periods. Reviewing source documents allows an auditor to review paperwork for different transactions from many different customers. Audit tests that include heavy use of substantive procedures are often more subjective as the tests rely on auditor interpretation.
Audit tests also include substantive tests of detail. These procedures are mathematical in nature, attempting to remove subjectivity from the audit process. Auditors typically select a sample batch of transactions from different accounting information. The use of ratios and recalculations allow auditors to determine if the company is operating close to other companies in the industry. Significant operating differences found in these audit tests can indicate a need for further review.
Substantive audit tests of detail may also involve collecting information from a client’s vendors and customers. Auditors ask these groups to declare the money owed by the company or to the company, respectively. The purpose of this test is to document whether or not the company maintains accurate accounting records. Flaws in this test require a second sample so auditors can determine how pervasive the problem is in the company. Documentation regarding these errors removes auditor subjectivity as the information proves accounting errors.
Testing internal controls is often the last set of audit tests completed by auditors. A review of internal controls starts with interviewing a company’s management team and employees. Audit tests then require a review of internal control procedures to determine if statements made coincide with stated policy. Auditors then test internal controls by reviewing information prepared directly beneath them. Observing employees working under the controls may also be a part of these tests.