RICHARD A. CHICHAKLI      

What is Financial Audit

Financial audit refers to the Independent audit, which is the process of evaluating whether the entity's financial statements are fairly presented in accordance with an identified generally accepted set of accounting standards applicable under particular geographic or political jurisdiction. Among the most commonly used standards are the Generally Accepted Accounting Principles (GAAP) applicable in the United States and the International Accounting Standards and which are used in several countries around the world.   

The audit of financial statements is designed to test the statements’ assertions in relation to:

1. Presentation and disclosure: Financial statements are properly classified, described and disclosed in conformity with the applicable generally accepted accounting standards

2. Existence or occurrence: Assets and liabilities are real and the transactions recorded are valid

3. Rights and obligations: The assets are owned by the company and the liabilities are obligations of the company

4. Completeness: All transactions and accounts that should have been recorded have been recorded

5. Valuation or allocation: All accounts have been included in the financial statements at the appropriate amounts

The outcome of the Financial Audit process is a report expressing the auditor's opinion concerning the soundness of the entity's presentation of its financial statements. The report is intended for stakeholders, investors, regulators, and the other external users of the entity's financial statements. Accordingly, financial audit is a must for public stock companies, and certain other regulated private-stock entities. The financial audit is an exhaustive process based on the test of records, therefore, financial audit might be "costly" to conduct for a privately-help small start-up business. However, there are other types of audit that maybe more suitable for small private-stock entities.

Other Types of Audit

Internal / Operational Audit

Operational Audit is a feasible start for a small business, and prior to undergo an independent audit. The accountant performing an operational audit can provide valuable input to improve the company's internal control system, which, in turn shall provide the independent auditor with the level of reliability of controls needed to perform the independent audit with less testing and lesser cost to the client.

Internal audit can be performed on many aspects of the operations or the company's information system and it is less costly than the independent audit because of the limited liability assumed by the auditor, in comparison to independent audit. The chart below may be of some help to compare audits