What Does an Auditor Actually Do
Understanding the auditor’s role and how an independent audit supports confidence in financial reporting
The word “audit” is familiar to most business owners and finance professionals, but what an auditor actually does is not always fully understood. An audit is sometimes viewed simply as checking numbers, reviewing invoices or finding mistakes in financial records. In reality, an auditor’s role is broader and involves understanding the business, assessing risks, evaluating evidence and forming an independent opinion on the financial statements.
For businesses, an audit can play an important role in strengthening confidence in financial reporting. Shareholders, investors, lenders, regulators and other stakeholders may rely on audited financial statements when evaluating an organisation’s financial position and performance.
Understanding what happens during an audit can also help management and finance teams prepare more effectively and work constructively with their auditors.
Understanding the Business and Its Environment
An audit does not normally begin with an auditor selecting invoices and checking calculations. Before detailed audit procedures are performed, auditors need to develop an understanding of the organisation and the environment in which it operates.
This may involve understanding:
Understanding the business helps auditors identify areas where there may be a greater risk of material misstatement in the financial statements.
Assessing Financial Reporting Risks
Every organisation is different, which means every audit involves different areas of focus.
Auditors perform risk assessment procedures to identify and assess risks that could result in material errors or misstatements in the financial statements. The objective is to focus audit attention and procedures on areas where the risk is considered more significant.
Depending on the business, areas requiring particular attention could include:
- Revenue recognition.
- Inventory valuation.
- Receivables and expected credit losses.
- Significant estimates and assumptions.
- Asset impairment.
- Provisions and contingencies.
- Related-party transactions.
- Complex contracts.
- Financial instruments.
- Going concern considerations.
The auditor uses this risk assessment to design the nature, timing and extent of further audit procedures.
Understanding and Evaluating Internal Controls
Internal controls are the policies, procedures and processes businesses use to help protect assets, maintain reliable records and reduce the risk of errors or inappropriate activities.
As part of an audit, auditors obtain an understanding of relevant controls over financial reporting. Depending on the audit approach, certain controls may also be tested.
For example, auditors may consider processes surrounding:
An audit is not designed to provide assurance on the effectiveness of all internal controls unless specifically required by the engagement. However, understanding relevant controls helps auditors determine how financial information is produced and where potential risks may arise.
Testing Transactions and Balances
Testing is one of the most visible parts of an audit.
Auditors obtain audit evidence by performing procedures on transactions, account balances and disclosures. They generally do not inspect every transaction. Instead, procedures are designed based on assessed risks, materiality and other audit considerations.
Testing may involve reviewing:
Auditors may also obtain confirmations directly from external parties, such as banks, customers or other relevant organisations.
The purpose is to obtain sufficient appropriate audit evidence to support the auditor’s conclusions.
Auditors Do More Than Check Documents
Auditing is not simply a process of matching invoices to accounting entries.
Auditors use a range of procedures depending on the area being examined. These may include inspection, observation, external confirmation, recalculation, reperformance, analytical procedures and inquiry.
For example, an auditor may:
Combining different forms of evidence helps auditors develop a more complete understanding of whether financial statement amounts and disclosures are appropriately supported.
Reviewing Accounting Estimates and Management Judgements
Not every number in financial statements comes directly from an invoice or bank statement.
Financial reporting often requires management to make estimates and judgements. These areas can receive significant audit attention because they may involve uncertainty and assumptions.
Examples can include:
- Expected credit losses.
- Asset impairment.
- Useful lives of assets.
- Provisions.
- Fair value measurements.
- Inventory provisions.
- Going concern assessments.
Auditors assess the methods, assumptions and data used by management where relevant and consider whether the resulting accounting treatment and disclosures are reasonable in the circumstances and consistent with the applicable financial reporting framework.
Considering Fraud Risk
Another common misconception is that the primary purpose of an audit is to detect every instance of fraud.
Auditors do consider fraud risk as part of a financial statement audit. They assess where fraud could result in a material misstatement and design procedures in response to identified risks.
This may involve considering areas such as:
- Management override of controls.
- Unusual journal entries.
- Revenue recognition.
- Significant or unusual transactions.
- Accounting estimates that may be susceptible to management bias.
However, an audit provides reasonable assurance, not an absolute guarantee, that the financial statements are free from material misstatement, whether caused by fraud or error.
Responsibility for preventing and detecting fraud primarily rests with management and those charged with governance through appropriate systems, controls and oversight.
Evaluating Whether the Financial Statements Are Properly Presented
Auditors do not focus only on individual account balances. They also evaluate the financial statements as a whole.
This includes considering whether financial information has been appropriately presented and disclosed in accordance with the applicable financial reporting framework.
The review may cover:
This stage is important because appropriate financial reporting involves both the amounts presented and the information disclosed alongside them.
Communicating with Management and Those Charged with Governance
Communication is an important part of the audit process.
Throughout the engagement, auditors may discuss significant matters with management and, where appropriate, those charged with governance.
These discussions can include matters such as:
Clear and timely communication can help management understand issues and provide the information needed to complete the audit efficiently.
Forming an Independent Audit Opinion
The final audit report is the result of the work performed throughout the engagement.
After evaluating the audit evidence obtained, auditors form an opinion on whether the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Unmodified: The auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Qualified: A material issue exists, but its effects are not considered pervasive to the financial statements.
Adverse: Misstatements are both material and pervasive.
Disclaimer of opinion: The auditor is unable to obtain sufficient appropriate audit evidence and the possible effects could be both material and pervasive.
The audit report therefore communicates the auditor’s independent conclusion to users of the financial statements.
What an Auditor Does Not Do
Understanding an auditor’s responsibilities is easier when businesses also understand their limitations.
A financial statement audit does not mean that the auditor:
Management remains responsible for preparing the financial statements, maintaining appropriate accounting records and internal controls, and providing auditors with the information required to perform their work.
How Can Businesses Prepare for an Audit?
A well-prepared organisation can make the audit process more efficient and reduce unnecessary delays.
Businesses can consider several practical steps:
Preparation should ideally take place throughout the year rather than beginning immediately before the audit.
Building Confidence Through Independent Assurance
An auditor does much more than check numbers. The audit process involves understanding the organisation, identifying financial reporting risks, evaluating relevant controls, testing evidence, challenging significant estimates and assessing whether the financial statements are appropriately presented.
The auditor’s independence is central to this process. By providing an independent opinion on the financial statements, an audit can enhance the credibility of financial information used by shareholders, lenders, investors and other stakeholders.
For management, understanding what auditors actually do can also lead to a more efficient audit process. Maintaining reliable records, strong financial reporting processes and clear supporting documentation throughout the year can make it easier to respond to audit requirements when they arise.
Crowe Bahrain can support organisations with independent audit and assurance services tailored to their business and reporting requirements. A well-planned audit approach can help organisations meet their financial reporting obligations while providing stakeholders with greater confidence in the information presented.