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Basic Steps in preparing an Audit Report

As discussed in the previous instalment, an Audit Report is an extremely complex process involving the co-operation of the accounting department, production staff and management. To better understand the rest of the picture, read here:
  • As a result of the review of control environment, assess the control risk as high, medium or low, and then prepare a detailed audit plan with the control risk assessment in mind. The detailed audit plan is prepared for each major financial statement area (Cash, Receivables, Fixed Assets, etc.)
  • Quantify the materiality level for this audit assignment which represents the dollar cut off for uncorrected errors identified during the audit, beyond which it is considered unacceptable for the financial statements. Professional experience combined with knowledge of GAAP lead to this cut off point.
  • Prepare an assessment of auditor independence, and determine if there are any unacceptable conflicts of interest. Bias must be eliminated in order for the audit to be legitimate.
  • Obtain a written management commentary on the financial performance of the company during the year under review.
  • Obtain and review all significant contracts and commitments made by the company during the year under review.
  • Conduct a "systems walk-through" for the purpose of documenting the major internal controls in place for the major financial systems in the company: revenue, purchases, payroll and inventory.
  • While following the detailed audit plan, maintain a list of adjusting entries needed to correct the financial statements for significant errors discovered during the audit. Obtain management approval for the implementation of these adjustments into the financial statements.
  • Prepare a commentary on the financial performance of each major area versus the prior year, including sales, payroll, operating expenses and net income. Also comment on the management commentary.
  • Discuss fraud prevention with management and document the results of the discussion.
  • Summarize the state of the internal controls at the company- are they sound or do they need to be developed?
  • Prepare draft audited financial statements and notes to the financial statements for discussion with management.
  • Submit a letter of representations for management's signature, which details the specific areas that management is confirming. For example "We confirm that related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of International Financial Reporting Standards."
  • Prepare a Highlights Memo of the Audit Report process.
  • Prepare a Management Letter which recommends various improvements in systems and procedures to management. The findings are not mandatory, but are highly recommended.
  • Prepare finalized Audited Financial Statements, taking into account any feedback obtained as a result of submitting the draft financial statements to management.
An Audit is a complex and difficult process- and Simkover and Associates are the CA firm that specializes in Small to Medium Sized Business Audits. Contact us today to learn more.
Basic Steps in Preparing an Audit Report- Part Two | Simkover and Associates Chartered Accountants in Markham, Ontario

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