Unsure about what your upcoming financial statement audit entails? The auditors at GCS Malta have outlined it for you in the following article.

Understanding the Entity

During a first-year audit, auditors will allocate significant time to gain an insight into the entity under review, its operations and its internal control environment. Therefore, following an initial kick-off meeting, auditors are expected to communicate with divisional managers to obtain a detailed overview of the processes in place within the entity. During these meetings, management must delve into the steps and stages involved to carry out certain procedures.

One particular audit technique typically adopted during these discussions is the walkthrough test. This prompts the auditor to examine one specific transaction from start to finish. In doing so, auditors can identify potential weaknesses in internal controls and areas of higher risk, which may be prone to misstatements of a material nature. In this manner, the suitable audit procedures and testing which must be carried out are planned out accordingly. After which, auditors should be better placed to determine the information and supporting evidence to be obtained to perform the necessary audit procedures and tests.

Audit Testing & Evidence

Depending on the company’s size, management should be prepared to receive several requests from different members of the audit engagement team throughout the audit. It is therefore crucial that management learns how to efficiently fulfil such requests on time since these can overload employees’ daily job tasks.

Furthermore, it is imperative that the audit client undergoes adequate preparation before an audit begins, particularly by ensuring that proper evidence for all transactions that occur within the entity is kept all-year-round by employees. Since auditors typically test a sample of items predominantly on a random basis, it is essential to bear in mind that any transaction taking place within the entity can be chosen for testing and further investigation; this may range from a small insignificant invoice to a much more complex and prominent transaction. Therefore, adequate documentation should always be maintained to ensure that sufficient evidence and explanation can be provided to auditors on time to avoid any undue delays within the audit process if raised as an audit query. Such evidence may include but is not limited to purchase and sale invoices, up-to-date signed contract agreements, proof of payments, cheque copies and the underlying rationale for accounting estimates.

Pinpointing Areas of Deficiencies and Means for Improvement

Auditors are required to communicate identified control deficiencies noted throughout the audit to management and those charged with governance. These are usually communicated and pointed out as part of a management letter. Such points are designed to provide management with the necessary guidance to strengthen their internal controls and overall policies, thus ensuring a stable control environment. Aside from pinpointing the deficiencies noted, auditors typically provide recommendations on which management is expected to comment on they intend to implement these in the upcoming months in time before the next audit commences. These are not only aimed at reducing the risk of fraud within the company but also ensure a smoother audit in the year to come.

Why GCS Malta?

At GCS Malta, our exceptional auditing team can aid you with any of your auditing queries. Contact us today for more information.

Article by Shannon Muscat