Statutory audits are required by governmental agencies or industry regulators. Banks, insurance companies and brokerage firms provide audited statutory financial statements periodically. Statutory audit procedures are varied, and include understanding a business entity's operating environment and controls. Audit procedures also could require auditors to test internal mechanisms as well as account balances and details of accounts.
Understand Operating Environment
An auditor checks to see whether an organization's internal practices agree with industry guidelines and regulatory criteria, and that they are ethical. An auditor learns about internal processes by sending questionnaires, surveys, checklists and formal notifications, such as "request letters," to segment or departmental employees. A "request letter" asks an employee to provide specific information about a policy, a process, a task, a department or an activity related to the area being audited. For example, an auditor might ask a risk manager at Bank ABC to provide information on the bank's market risk calculation methodologies.
An auditor learns about a business entity's operating controls by asking employees, industry consultants or external auditors. For example, an audit expert reviewing a bank or brokerage firm's risk management practices could seek advice and information from the company's accountants, tax specialists, risk managers, financial analysts and traders. An auditor also could learn more about a business entity's controls by reading industry publications or prior years' audit reports and working papers. For example, an auditor reviewing EZ Insurance Company's operations might read a magazine about the financial services industry.
A specialist conducting a regulatory audit of a financial institution evaluates whether corporate procedures and controls -- operating mechanisms for fraud or error prevention -- agree with industry practices and standards set by regulators. An auditor also checks that such controls are adequate, performing properly and understood by all employees involved in processes. For example, an auditor might check review company ABC's payroll department practices to ensure that three individuals sign all checks totaling at least $10,000.
Test Account Balances
An auditor performs tests on account balances to ensure that financial reports are not materially misstated -- that is, error-free -- and comply with regulatory standards, industry practices and statutory principles. Such principles relate only to regulatory statutes, and they could be different from generally accepted accounting principles. Misstatements indicate accounting errors or mathematical inaccuracies in financial reporting and presentation.
Test Account Details
An auditor performs tests of accounts and balances on a bank's, an insurance company's or a hedge fund's account balances to check that such balances and corporate financial statements are accurate and complete. Complete financial reports include a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of shareholders' equity.
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