Auditors put into place sound, specific procedures to ensure that subordinates review corporate processes efficiently. Audit procedures enable corporate reviewers to get a peak at a company’s internal procedures and mechanisms, providing them with a systematic way to test financial accounts for accuracy. Audit procedures include control tests and analytical procedures as well as tests of account balances and details.
Analytical procedures enable auditors to identify numerical relationships and trends among financial data. These procedures also allow corporate reviewers to verify that these trends are consistent from one period to another. For example, an auditor may note that a company’s expenses averaged 50 percent of total sales over the last five years. Using analytical procedures, the auditor may question the accuracy of current year’s data if expenses increase to 80 percent of total revenues. Analytical techniques ensure financial accuracy. Incorrect accounting reports undermine investors’ confidence and trust in corporate operating results, which are essential elements that corporate management takes into account when drawing up funding strategies.
By testing internal controls, auditors familiarize themselves with a company’s decision-making mechanisms, with a special emphasis on how personnel resolve conflicts and address operating risks. A control is a set of directives that department heads rely on to prevent losses resulting from fraud, theft, errors and technological breakdowns. To test corporate controls effectively, auditors use skills and expertise that they hone through on-the-job training, academic instruction and professional certification. Reviewing internal policies enables auditors to ensure that companies run law-abiding businesses.
Tests of Account Details
Tests of account details provide insight into a firm’s bookkeeping practices, enabling auditors to lift the veil on corporate financial reporting policies. During testing, auditors ensure that journal entries conform to accounting norms, such as generally accepted accounting principles and international financial-reporting standards. For example, an auditor testing customer-receivables account details ensures that bookkeepers debit and credit the appropriate accounts. Customer-receivables is an asset account that corporate accountants report in a statement of financial position, also called a balance sheet.
Tests of Account Balances
A test of account balance indicates to auditors whether individual ledger accounts add up to financial statement accounts. For example, an auditor wants to review a company’s “property, plant and equipment” account balance. PPE is a long-term asset account indicated on a corporate balance sheet. As the end of the year, the company’s PPE account balance might be $1 million. The auditor performs an in-depth test to ensure that all individual sub-accounts in the PPE account are accurate. After adding up four sub-account balances—machinery ($100,000), commercial property ($600,000), equipment ($150,000) and corporate cars ($150,000)—the reviewer determines that the PPE account balance is accurate.