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Financial Audit: Definition, Procedure & Requirements

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  • 0:05 What is a Financial Audit?
  • 0:20 Reasonable Assurance
  • 0:50 Stakeholders
  • 1:18 Financial Audit Procedures
  • 2:20 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

When it comes to protecting an organization's assets, stakeholders are very interested in making sure things are done right. In this lesson, you'll learn about financial audits, including what they are, why they occur, and how they are done.

Definition of Financial Audit

A financial audit is an independent, objective evaluation of an organization's financial reports and financial reporting processes. The primary purpose for financial audits is to give regulators, investors, directors, and managers reasonable assurance that financial statements are accurate and complete.

Reasonable Assurance

Financial audits provide reasonable assurance, but not absolute guarantees. Through a variety of different audit procedures such as interviews, observation, and test work, financial auditors can determine if controls and processes needed to produce accurate financial statements are in place. If the controls and processes are in place, then they can conclude that the financial statements are accurate and reasonable, but they still can't guarantee that there were no human errors or miscommunications that may lead to a mistake.

Stakeholders

There are many different groups of stakeholders that want to make sure the financial statements they see are accurate and complete. Regulators want to make sure organizations comply with applicable laws and present their financial health accurately for tax reasons. Investors select investments based on financial health, so their investments are only as good as the information they have. Managers and directors want to be assured that there are controls in place to stop assets from being misused or lost.

Financial Audit Procedures

The first step of a financial audit is to determine the scope of the audit. The scope defines the boundaries of the audit, usually by specifying the time period being audited and the accounts or processes being tested. Once the scope is determined, the auditors plan their audit by deciding how they will gather information. This may include interviewing key people, observing processes as they take place, or recalculating financial statement balances by taking a sample of transactions.

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