What is an audit?

What is an audit?

What is an audit? This is a logical question for companies that haven’t had audits done before. An audit is a control through investigation to determine if certains aspects of the business operations of a company are represented correctly in the reports. There are various kinds of audits. Reanda Netherlands specializes in financial audits, often the most requested and important type of audit.

What is a financial audit?

A financial audit examines the financial report of an organization. The annual report states several crucial pieces of information and tells all about the financial performance and position of the company over the past year. Naturally, it is of the utmost importance that this report is an accurate representation of the company’s financial position.

The purpose of a financial audit is to affirm that financial reports are done correctly and give an accurate representation of the company’s financial situation at a given time or date.

What is examined?

Financial reports consist of multiple components, such as the balance sheet, income statement, changes in equity, cashflow and several explanatory notes. A financial audit examines all these components to determine their accuracy and validate the figures and statements.

Why are audits performed?

In many cases, financial audits are performed because they are mandatory. For (international) companies in The Netherlands, a yearly audit is required when the company meets at least two of these three criteria:

  • A net turnover in excess of 12 million euros
  • A value of assets that exceeds 6 million euros
  • 50 or more employees

Even when audits are not mandatory by law or regulations, stakeholders such as banks, shareholders, investors or insurance companies can still request an audit. The purpose of a financial audit is to provide stakeholders with assurance. Furthermore, validation of the financial reports prevents future problems because decisions will be based on correct figures.

Internal audits versus external audits

An audit is done objectively and required to be performed by an external, licenced specialist: an audit firm such as Reanda Netherlands. Even though the auditor is always independent from the company, audits can be performed internal or external. An external audit means that the auditor is working off-site, purely acting as an external specialist.

What do audit reports look like?

An auditor gives a professionals, objective opinion about the company’s financial reports. The conclusions are summarized in an audit report. The report answers crucial questions, such as: are details of what the company owns and owes correctly represented in the financial reports? And: are profits and losses correctly assessed?

Even though an audit firm works thoroughly, it is not the responsibility of the auditor to check all facts and figures stated in the reports. This remains the responsibility of the management of the company. The audit is based on selective testing and conclusions are based on the financial report as a whole. Neither makes the auditor statements about strategic decisions, quality of direction and management, quality of governance or risk management.

What does the process look like?

The financial audit starts after the directors have approved the financial report. This report must comply with legal requirements and predetermined standards. In contrary to what is often thought, the auditor doesn’t immediately begin investigating the reports. In order to make the best objective judgement possible, the auditor will gather as much knowledge as possible about the company, its activities and the industry. This is done so that the auditor can determine if the management has done enough to prepare an accurate financial report.

The auditor then checks the financial report as a whole and determines whether or not the report is an accurate representation of the company’s financial position. The conclusion is explained with facts and observations, and presented to stakeholders.