Audit Cycle

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What is the Audit Cycle?

The audit cycle is the procedure in which auditors of an organization review the financial statements and find gaps in the current processes so that appropriate corrections can be made; The steps or stages in the audit ensure that it is performed diligently and the report publishes information whose validity can be determined and is accurate.

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Explanation

Organizations usually appoint an external auditor to perform an audit of the organization's internal processes so that there is no bias. An audit cycle has different steps that the auditor needs to perform so that the audit can be performed accurately and no tampering with data is done, which would depict the wrong image of the organization. Not all tasks need to be performed simultaneously since one task at a time proves to be the most efficient way to perform an audit.

Example: If Process A, which deals with payments, is being audited in August, Process B, which deals with procurement of raw materials, may be audited anytime after the audit of Process A is completed.

Audit Cycle

If you want to learn more about Auditing, you may also consider taking courses offered by Coursera –

  1. Auditing I: Conceptual Foundations of Auditing
  2. Auditing II: The Practice of Auditing

Stages of Audit Cycle

Even though it is termed a cycle, it is not a continuous process. The process is quite straightforward, and the different stages are as mentioned below:

Stages of Audit Cycle

#1 - Planning

The most important phase of an audit cycle is planning, where the audit is planned as to the aim of the audit and what criteria are best suited to arrive at the aim. Auditors need to plan well in advance on the timelines for the audit to provide a tentative date of completion to the management for their report to be published.

#2 - Sample Collection

Once the plan is chalked out, the auditor's approach the owners of a particular process/business unit to provide samples of the data that the auditor is looking for. It can be any random date, and the auditors can gauge from these samples if there are any anomalies in the same process for different dates. The auditor has the right to dig deep into the process unless he is satisfied with the explanation given by the process owners.

#3 - Draft Report Creation

The auditors' role is to create a draft report based on the findings as soon as the samples are collected. The auditor needs to report any fraud or illegal acts or anything equivalent in this report. Corrected material, disagreements with the management about estimates and accounting policies and any significant difficulties encountered should be reported in the report. Any corrections/suggestions in the current procedure will be given to the process owners, who will have their own set of procedures before the corrections/suggestions are implemented on their end.

#4 - Additional Requirements

Suppose the auditor requires any more information, he still can request the additional requirements to be furnished. While preparing the report, the auditor may find the need for evidence of a representation made by the process owner. If the additional requirements are not furnished, the auditor might report the inability to provide any supporting evidence for any claims made. Amendments to the report can be made at this stage; however, there will be no room for correction after this step.

#5 - Publishing Report

The final report is published only after being reviewed by the auditors, the management, and the process owners. The report is published to the management and investors, who then study the report and provide their suggestions. A process-wise report is not published to the investors; instead, a consolidated report of all the process and financial statements are published for the investors since it can be confusing for the investor to go through the report drilling down the minute procedures in the process.

Benefits

  • The audit cycle ensures that the auditing is carried out smoothly and that no process leaks are involved.
  • It gives the authority to the auditor to question the current procedures and norms.
  • The audit process can be tracked efficiently, ensuring no delay in the activities and timely completion of the complete audit.
  • Focuses on the systematic approach rather than many things at a time. As a result, the outcome of the audit cycle is a reliable report.

Disadvantages

  • The audit cycle relies on data provided by an unrelated team/entity/business unit. The authenticity may or may not be verified.
  • If a misrepresentation is not identified, it is a flaw on the auditor's side, and the whole audit cycle will be questioned on the integrity and accuracy of the report.
  • It is time-consuming since it focuses on auditing tasks performed by others and requires sample collection, which is dependent on when the process owners provide the samples. If the correct samples are not provided, the auditor would need to chase for the requirements again and perform the same checks previously performed for the incorrect samples.
  • The report generated after the audit cycle is completely dependent on the samples and data furnished by the business units/process owner, which can be masked or misrepresented, thereby creating an incorrect report published to the investors. The auditor's knowledge also plays an important role in the final report.

Conclusion

The audit cycle is a process that helps in efficiently auditing a process, a business unit, or the business as a whole. It focuses on the procedures or stages that the auditor must follow to arrive at an unbiased report based on the evidence furnished and their understanding of the business. It enables the auditors to depict the progress of the audit to the management.