What are the Phases of the Audit Process?


Phases of the Audit Process


Financial audits dig deep into a company’s financial situation, probing accounting records, internal controls policies, cash holdings and other sensitive financial areas. Publicly-traded corporations are subject to external financial audits on a regular basis, and even privately owned small businesses can be subjected to an external financial audit by the IRS or other government authority. Knowing how to perform a financial audit on your own books can help you to prepare for a possible external audit, keep your accounting system in order and discourage internal fraud and theft.

Planning the Scope of the Audit

In the planning phase, the auditor makes an effort to understand what kinds of documentation are needed, collects documents from previous audits and gathers preliminary statements from involved parties. During the planning phase, the auditor also begins to plan the scope of the audit and to determine what the objective of the audit is. In some non-sensitive cases, a letter is sent to the internal organization’s auditing committee to let the group know that an audit is forthcoming.

Conducting a Preliminary Review

The auditor begins to evaluate the way that a company operates and takes into account the organization’s internal processes. If any of these processes do not allow the auditor to perform the audit as well as he had planned, he may adapt to accommodate for the differences between his assumptions and the way the organization actually operates. For example, if an auditor comes in with the assumption that only a select few employees have access to the organization’s bookkeeping software, when in actuality many employees have access, he may need to reevaluate how he plans to perform the audit.

The auditor holds an entrance conference with the organization being audited and will incorporate any recommendations made by the organization, if appropriate. Some of the processes that might be discussed include how an internal accountant approves purchases with petty cash, how an employee receives access to a company credit card and how mileage is reimbursed.

Completing the Fieldwork

The auditor will begin to interview employees in different areas of the organization to understand its general practices and processes. The auditor often performs this work on site. The auditor begins to be able to determine, during this phase, if the organization’s operations and processes are working as effectively as they should.

The auditor also clearly identifies the areas that are not in compliance, or that are less effective than they need to be. For example, he may notice that an organization is not keeping records or filing documents as federal or local law mandates.

Producing a Written Audit Report

All of the work done during the first three phases culminates in the production and delivery of the audit report. In addition to identifying areas in need of improvement, the audit report also includes recommendations that list the processes the organization can follow to improve the way it operates.

For example, an auditor may recommend that an organization add an extra layer of approvals before a supervisor is able to okay purchases. An exit conference is held between the auditor and upper-level management to discuss the results of the audit.


-Chad Buleen