What is financial auditing?

We received a lot of question asking us what is financial audit? What does a financial audit involved? We will try to explain in a layman term.

Background:

Company ABC is a publicly listed company. They have hired their own accountants to preare the financial statements, including: income statement, balance sheet, cash flow statement on a monthly basis.

Question:

How does the public know if the financial statement prepared by Company ABC is appropriate and in accordance with accounting standard.

Financial audit:

This is when the financial auditor come in and play a major role, where they review the financial statemetn close process of the Company's, review the accouting treatments and policies, and give you their own opinion on the financial statement. The opinion of the auditor is whether " the financial statement is fairly stated". "Fairly stated", in substance, implies that certain tolerable errors are expected.

Life without auditor:

The financial statement prepared by Company ABC may be prepared on a inappropriate manner/ not in accordance with accounting standard. However, since no professional personnel is conducting a review on the financial statement, the inappropriate financial statement will be accepted by the public.

Consequence of life without auditor:

The incorrect financial statement led to wrong decision being made by financial statement user.