Auditing is a systematic and independent examination of the financial records and operations of a company or organization to determine whether they are accurate and compliant with established criteria. Auditors aim to provide assurance that the information presented in the financial statements is free from material misstatements. To achieve this, they design audit procedures to obtain sufficient appropriate evidence to support their opinion.
There are seven main audit objectives that guide auditors in obtaining evidence and assessing the financial statements. Understanding these objectives helps auditors plan and perform the audit effectively to accomplish the overall goals.
1. Existence or Occurrence
The objective of existence or occurrence is to determine whether the assets, liabilities, and transactions recorded in the financial statements actually existed or occurred during the period under review. The auditor aims to obtain evidence that shows the transactions are valid and pertain to the entity.
Some audit procedures to assess existence include:
- Inspecting supporting documents such as invoices, receipts, and contracts
- Observing assets like inventory or equipment
- Obtaining third party confirmations from customers, banks, lawyers etc.
- Reviewing subsequent receipts or payments related to the transactions
By performing these procedures, the auditor verifies that the transactions and account balances presented in the financial statements relate to the company and are not fictitious or fraudulent entries.
Examples of Existence Testing
- Inspecting signed delivery notes to confirm receipt of inventory
- Observing the company’s property, plant and equipment
- Getting balance confirmations from the company’s banks and lenders
2. Completeness
The completeness objective aims to ascertain whether all transactions and accounts that should be included in the financial statements are actually included. Auditors want to be sure no valid transactions or balances are omitted either intentionally or unintentionally.
Some procedures auditors can perform to assess completeness include:
- Analytical procedures – Comparing balances to expectations based on prior periods or forecasts
- Testing journal entries – Tracing from source documents to accounting records
- Scanning accounting records near year end – Looking for unusual transactions
- Reviewing minutes of board meetings – Identifying matters affecting financial statements
This provides evidence that all transactions and events relating to the period audited are included in the financial statements and properly categorized and disclosed.
Examples of Completeness Testing
- Scanning cash disbursements near year end to find unrecorded expenses
- Reviewing minutes of board meetings to identify approvals of significant contracts or agreements
- Checking if inventory purchases near year end are recorded in the proper period
3. Accuracy
The accuracy objective aims to check whether the amounts and other data relating to recorded transactions and events have been recorded appropriately. Auditors want to verify the accuracy of amounts, categorization, timings, and other details related to recognized transactions and account balances.
Some audit tests to assess accuracy include:
- Examining the supporting documents and source records in detail
- Reperforming calculations made by the client
- Analytical review procedures to identify unusual balances
- Testing estimates for reasonableness
This provides assurance that not only are all valid transactions included but they are accurately measured and described in the financial statements.
Examples of Accuracy Testing
- Recomputing depreciation and amortization expense based on fixed asset records
- Agreeing amounts included for inventory to the underlying stock records and counts
- Checking the clerical accuracy of account reconciliations
4. Classification
The classification objective requires the auditor to assess whether transactions have been recorded in the proper accounts, and items have been appropriately categorized and disclosed in the financial statements.
Some audit procedures to test classification include:
- Reviewing transactions to verify they are coded to the appropriate general ledger accounts
- Examining proper presentation and disclosures based on the financial reporting framework
- Investigating significant or unusual account balances
- Assessing if cut-off procedures for determining account periods are appropriate
This helps confirm all components of the financial statements are properly classified and disclosed.
Examples of Classification Testing
- Checking that trade payables and accrued expenses are properly segregated
- Reviewing disclosures to assess if classification of leases as capital vs operating is appropriate
- Verifying that receivables from officers are separately disclosed
5. Cutoff
The cutoff objective requires the auditor to check if transactions have been recorded and recognized in the correct accounting period. This includes transactions occurring at period end and adjustments related to earlier periods.
Audit procedures for cutoff evaluation include:
- Reviewing transactions before and after year end to verify correct period recognition
- Examining adjusting journal entries for timing and accuracy
- Assessing whether the company’s revenue recognition policies are appropriate
- Testing revenue and expenses to ensure proper cutoffs between periods
Adequate cutoff testing provides assurance that revenues and expenses are recognized in the correct reporting period so assets, liabilities, and income are not understated or overstated.
Examples of Cutoff Testing
- Checking sales transactions for several days before and after year end
- Reviewing expense accruals to assess if the expense matches the period of occurrence
- Examining transactions in the first month of the subsequent period for prior period adjustments
6. Presentation and Disclosure
The presentation and disclosure objective requires the auditor to assess whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. This includes the form, arrangement, and information disclosed in the financial statements and accompanying notes.
Audit procedures directed at presentation and disclosure include:
- Evaluating whether the financial statements comply with the reporting standards and regulatory requirements
- Assessing if the disclosures provide adequate information for the users to understand them
- Checking classification, descriptions, and presentation of amounts in the statements and notes
- Comparing to prior period presentations and disclosures
This provides assurance that the financial statements include the required presentations, disclosures, and clarity of information necessary for fair representation.
Examples of Presentation and Disclosure Testing
- Verifying that notes describe significant accounting policies
- Assessing whether material uncertainties are adequately disclosed
- Evaluating if there is proper disclosure of related party transactions
7. Compliance
The compliance objective requires the auditor to determine whether the financial statements comply with the regulations, contractual agreements, and statutory requirements relevant to the entity. This ensures the entity adheres to compliance obligations when preparing its financial reports.
Audit procedures directed towards compliance may include:
- Reviewing debt agreements and covenants to check for violations
- Examining tax filings and payments to assess compliance with tax authorities
- Verifying compliance with regulatory bodies overseeing the entity
- Checking adherence to environmental and other laws and regulations affecting financial reporting
Testing for compliance provides assurance that the financial statements adhere to the various regulations and agreements binding the entity.
Examples of Compliance Testing
- Checking calculations for debt covenants such as debt-to-equity ratios
- Reviewing licenses and permits to operate facilities
- Verifying timely filing and payment of payroll taxes and deductions
Conclusion
These seven audit objectives guide auditors in obtaining reasonable assurance about whether the financial statements are free from material misstatement. Planning appropriate audit procedures to achieve these objectives allows the auditor to gather sufficient appropriate evidence to express an opinion on the fairness of financial statement presentation.
While audits are designed and performed to obtain reasonable assurance, there remains some risk that material errors and fraud will not be detected due to the inherent limitations of auditing. However, following authoritative auditing standards and guidelines helps minimize such risks for the auditor.
Adhering to the fundamental audit objectives of existence, completeness, accuracy, classification, cutoff, presentation and disclosure, and compliance allows the auditor to obtain reasonable assurance on which to base their audit opinion on the entity’s financial statements.