The primary objective of an audit of the books is to validate the financial information management provides. Employees, owners and potential investors rest easier knowing that accounting professionals agree with management's opinion of the company's financial position. Lenders and insurance agents typically offer more favorable terms to companies with audited financial statements and a clean audit opinion.
No two audits are the same. During the initial stages of an audit, auditors try to gain an understanding of the company and the business environment it operates in. Auditors will look at how competitive the industry is, the company's place within the industry and the company's past financial performance. Analyzing this information allows auditors to identify the biggest areas of risk -- the areas where financial information is most likely to be incorrect or misstated. Auditors can then design the audit to focus on these specific risk areas.
After evaluating general company risks, an auditor will test the quality of company internal controls. For example, an auditor will check how securely the accounting information system is set up and ask how important accounting duties are supervised and segregated. Stellar internal controls will catch employee accounting mistakes and deter employees from intentionally misreporting information. Weak internal controls mean a higher risk of misstatement, which means the auditor should check a higher number of transactions.
Auditors use substantive procedures to "substantiate" the dollar value of each account on the balance sheet. Unfortunately it's usually not feasible for auditors to check every single company transaction for the year they're auditing. Auditors generally use a sample-based method to check an adequate cross section of company transactions. They'll test more transactions in the area they deem high-risk. When testing transactions, auditors look at evidence and documents that support the assertion. For example, they may ask management for the sales order and copy of a check to verify a customer payment. They'll look at the details and events surrounding transactions to ensure the information was recorded at the right time in the right account.