Does ‘audit’ haunt you? Are you overwhelmed to know what is the audit cycle so you can prepare beforehand to face it?

The audit cycle is an essential accounting procedure auditors employ to review a company’s financial statements and related data. It includes several actions to confirm the accuracy of your business’s monetary information.

Separate activities in the audit cycle can be scheduled at different periods. For instance, inventory counts and accounts receivable assessments might happen in October and November.

Read about the IRS & state audit representation.

How Does the Audit Cycle Work?

The audit cycle consists of many individualized phases:

Identification Process

The organization meets with auditors to determine which accounting areas require examination.

Audit Methodology

The procedures for gathering data for examination are decided upon by auditors.

Audit Fieldwork

Auditors test and contrast accounting samples during fieldwork.

Management Review Meeting

The company’s management team hears the auditors’ findings, which are summarized in an audit report. The report draws attention to any disparities in the financial statements.

Special Considerations

Publicly traded companies frequently use independent accounting firms to conduct audits. They confirm the company’s financial stability.

Audited financial statements must certify a publicly listed company’s financial integrity. This satisfies investors’ need for reliable information.

Auditors evaluate the internal control framework to assist in identifying high-risk areas.

Accounting Cycle vs. Audit Cycle

The accounting cycle deals with the preparation of financial statements. In contrast, the audit cycle is concerned with verifying their accuracy.

The accounting cycle consists of several phases, starting with a transaction and concluding with its inclusion in the financial statements. These processes involve documenting transactions through journal entries and general ledgers.

On the other hand, the purpose of the audit is to verify these financial statements. The likelihood of arithmetic mistakes has decreased due to developments in computerized accounting systems and standard accounting procedures, improving the efficiency of the audit process.

An Illustration: What is the Audit Cycle?

Examine an audit conducted for XYZ Ltd., a modest manufacturing business. This is a condensed summary of this company’s audit cycle:

Planning

The auditor looks at the activities of XYZ Ltd., including its:

• Key individuals
• Organizational structure
• Financial reporting procedures
• Manufacturing sector

A strategy for the audit is created, detailing the audit’s goals, objectives, and schedule.

Risk Assessment

The auditor finds possible hazards by using techniques such as:

• Inventory value
• Revenue recognition
• Management override of controls

During the audit, greater resources are allocated to high-risk areas, including revenue recognition and inventory value.

Testing

The auditor examines controls such as:

• Sales invoice validation processes
• Inventory counting protocols
• Physically counting goods
• Balancing inventory records with general ledger accounts
• Confirming sales transactions

Analysis and Evaluation

Possible misstatements are indicated by discrepancies between physical inventory counts and inventory records. Records of sales made without the required authorization are also kept. The auditor assesses the materiality of these concerns and their possible influence on the financial statements.

Reporting

Substantial misstatements in inventory and revenue accounts have been identified. An audit report and qualified audit opinion have been prepared. The research identifies gaps in the company’s control system and suggests ways to strengthen its protocols.

Follow-Up

Following the release of the audit report, the auditor ensures that XYZ Ltd. takes the suggested steps to resolve the concerns found and validates the improvements during the subsequent audit cycle.

The Bottom Line

Comprehending what is the audit cycle is crucial for guaranteeing the reliability and correctness of a business’s financial reports. A thorough grasp of the audit cycle offers important insights into financial procedures. It supports corporate accountability and transparency, regardless of your role in the financial industry – business owner, investor, or financial expert.

Contact L&Y Tax Advisors, LLC. to smoothly run your company’s financial operations!