Investors and financial-market participants generally rely on external reviews to know how companies operate and the financial soundness of their operations. Corporate reviewers use audit procedures to lift the veil on firms' activities, telling investors and the public what top management does behind closed doors. These procedures also enable regulators to monitor corporate compliance activities.
Audit procedures are techniques and steps that corporate reviewers use to assess a company's operating performance. Auditors keep a close eye on internal controls, financial systems and corporate accounting principles. Closely monitoring financial mechanisms helps auditors ensure that employees record operating data in accordance with accounting norms. In modern economies, "cooking the books" is a phrase that makes corporate management's blood run cold. Cooking the books, also known as fraudulent financial reporting, causes a firm to incur losses resulting from investor lawsuits and regulatory penalties.
Accounting norms and government regulations provide the conceptual framework that auditors rely on to draw up testing procedures. In short, audit procedures usually come from regulatory guidelines and financial reporting principles. Internal auditors perform testing procedures in accordance with Institute of Internal Auditors standards, corporate policies and industry practices. The U.S. Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) regulate the work of external auditors, also known as financial reviewers.
Audit procedures are cardinal tools that reviewers use to adeptly perform tasks. Without adequate procedures, auditors may miss material deficiencies in a company's operations. In auditing terminology, a material deficiency is a significant risk item that may cause a firm to report inaccurate financial information. Failure to spot important operating problems may cause a public accounting firm to incur losses originating from SEC and PCAOB fines. Audit supervisors also use testing procedures to evaluate the work of subordinates.
Internal Control Tests
Internal control tests enable auditors to ensure that a corporation's operating systems are adequate. System adequacy prevents operating losses and helps companies thrive and expand. Auditors take an in-depth look at corporate financial systems, ensuring that accounting summaries adhere with industry norms. These standards include generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).
Tests of Account Details
A test of account details ensures that all journal entries in an account are correct and in line with GAAP and IFRS. For example, an auditor tests the customer receivables account balance. The auditor reviews all ledger entries relating to corporate customers and adds them up to ensure accuracy. Ledgers are two-sided accounting forms (debits and credits) that bookkeepers use to record operating transactions.
Tests of Account Balances
Auditors test account balances to ensure that individual account amounts add up correctly to account totals. For example, an external auditor reviews a company's short-term asset amounts. The auditor reviews corporate cash, accounts receivable and inventories amounts, ensuring that the total short-term asset amount corresponds to the sum of all three accounts.