What is the purpose of a financial audit?
The primary purpose of a financial audit is to provide an independent opinion of the organization’s financial statements, and to express an opinion on whether or not “the financial statements present fairly, in all material respects, the financial position of the organization.” It is important to note that the preparation of the financial statements “in accordance with generally accepted accounting principles” is the responsibility of the organization’s management and not the auditors. Their responsibility is only to express an opinion.
The auditors will review the underlying financial data by taking test samples to ensure that transactions have been recorded properly. This will include ensuring that internal documentation and third party documentation exists. For example for purchases of supplies, the auditors will ensure that approved purchase orders, packing slips, and invoices from the vendor exist.
An important part of the audit is to review internal controls to verify that there are no material weaknesses that could lead to misrepresentation of the financial statements or to fraud. An effective internal control system provides reasonable assurance that policies, tasks, behaviors and other aspects of an organization, enable its effective and efficient operation, and help to provide for better internal and external financial re-posting. Good internal controls will detect, prevent and correct errors or possible fraud. This will include reviewing the business related policies and procedures and testing to ensure that they are being followed. The auditors will also look to ensure that there are adequate separation of duties as well as cross-training in crucial areas. Another key responsibility of the auditors is to conduct fraud interviews with various members of the organization. The purpose of the interviews is to ensure that there is reasonable assurance that fraud does not exist within an organization.
I am proud to say that for the past five years there has been no disclosure of any material financial statement misrepresentations nor any material weaknesses in our internal controls during our audits.