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A financial audit is conducted to provide an opinion whether "financial statements" (the information being verified) are stated in accordance with specified criteria. Normally, the criteria are international accounting standards, although auditors may conduct audits of financial statements prepared using the cash basis or some other basis of accounting appropriate for the organization. In providing an opinion whether financial statements are fairly stated in accordance with accounting standards, the auditor gathers evidence to determine whether the statements contain material errors or other misstatements.

The audit opinion is intended to provide reasonable assurance, but not absolute assurance, that the financial statements are presented fairly, in all material respects, and/or give a true and fair view in accordance with the financial reporting framework. The purpose of an audit is to provide an objective independent examination of the financial statements, which increases the value and credibility of the financial statements produced by management, thus increase user confidence in the financial statement, reduce investor risk and consequently reduce the cost of capital of the preparer of the financial statements.

In accordance with the US GAAP, auditors must release an opinion of the overall financial statements in the auditor's report. Auditors can release three types of statements other than an unqualified/unmodified opinion. The unqualified auditor's opinion is the opinion that the financial statements are presented fairly. A qualified opinion is that the financial statements are presented fairly in all material respects in accordance with US GAAP, except for a material misstatement that does not however pervasively affect the user's ability to rely on the financial statements. A qualified opinion can also be issued for a scope limitation that is of limited significance. Further the auditor can instead issue a disclaimer, because there is insufficient and appropriate evidence to form an opinion or because of lack of independence. In a disclaimer the auditor explains the reasons for withholding an opinion and explicitly indicates that no opinion is expressed. Finally, an adverse audit opinion is issued when the financial statements do not present fairly due to departure from US GAAP and the departure materially affects the financial statements overall. In an adverse auditor's report the auditor must explain the nature and size of the misstatement and must state the opinion that the financial statements do not present fairly in accordance with US GAAP.

Financial audits are typically performed by firms of practicing accountants who are experts in financial reporting. The financial audit is one of many assurance functions provided by accounting firms. Many organizations separately employ or hire internal auditors, who do not attest to financial reports but focus mainly on the internal controls of the organization. External auditors may choose to place limited reliance on the work of internal auditors. Auditing promotes transparency and accuracy in the financial disclosures made by an organization, therefore would likely reduce such corporations concealmeant of unscrupulous dealings.

Internationally, the International Standards on Auditing (ISA) issued by the International Auditing and Assurance Standards Board (IAASB) is considered as the benchmark for audit process. Almost all jurisdictions require auditors to follow the ISA or a local variation of the ISA.

Financial audits exist to add credibility to the implied assertion by an organization's management that its financial statements fairly represent the organization's position and performance to the firm's stakeholders. The principal stakeholders of a company are typically its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in knowing that the financial statements are presented fairly, in all material aspects. An audit is not designed to provide absolute assurance, being based on sampling and not the testing of all transactions and balances; rather it is designed to reduce the risk of a material financial statement misstatement whether caused by fraud or error. A misstatement is defined in ISA 450 as an error, omitted disclosure or inappropriate accounting policy. "Material" is an error or omission that would affect the users decision. Audits exist because they add value through easing the cost of information asymmetry and reducing information risk, not because they are required by law (note: audits are obligatory in many EU-member states and in many jurisdictions are obligatory for companies listed on public stock exchanges). For collection and accumulation of audit evidence, certain methods and means generally adopted by auditors are:

Overview

1. Posting checking
2. Testing the existence and effectiveness of management controls that prevent financial statement misstatement
3. Casting checking
4. Physical examination and count
5. Confirmation
6. Inquiry
7. Observation
8. inspection
9. Year-end scrutiny
10. Re-computation
11. Tracing in subsequent period
12. Bank reconciliation
13. Vouching
14. Verification of existence, ownership, title and value of assets and determination of the extent and nature of liabilities

Phase I Plan and Design an Audit Approach

1. Accept Client and Perform Initial Planning.
2. Understand the Client's Business and Industry.
3. What should auditors understand?
1. The relevant industry, regulatory, and other external factors including the applicable financial reporting framework
2. The nature of the entity
3. The entity's selection and application of accounting policies
4. The entity's objectives and strategies, and the related business risks that may result in material misstatement of the financial statements
5. The measurement and review of the entity's financial performance
6. Internal control relevant to the audit
4. Assess Client's Business Risk
5. Set Materiality and Assess Accepted Audit Risk (AAR) and Inherent Risk (IR).
6. Understand Internal Control and Assess Control Risk (CR).
7. Develop Overall Audit Plan and Audit Program

Phase II Perform Test of Controls and Substantive Test of Transactions

1. Test of Control: if the auditor plans to reduce the determined control risk, then the auditor should perform the test of control, to assess the operating effectiveness of internal controls (e.g. authorisation of transactions, account reconciliations, segregation of duties) including IT General Controls. If internal controls are assessed as effective, this will reduce (but not entirely eliminate) the amount of 'substantive' work the auditor needs to do (see below).
2. Substantive test of transactions: evaluate the client's recording of transactions by verifying the monetary amounts of transactions, a process called substantive tests of transactions. For example, the auditor might use computer software to compare the unit selling price on duplicate sales invoices with an electronic file of approved prices as a test of the accuracy objective for sales transactions. Like the test of control in the preceding paragraph, this test satisfies the accuracy transaction-related audit objective for sales. For the sake of efficiency, auditors often perform tests of controls and substantive tests of transactions at the same time.
3. Assess Likelihood of Misstatement in Financial Statement.

Notes

1. At this stage, if the auditor accept the CR that has been set at the phase I and does not want to reduce the controls risk, then the auditor may not perform test of control. If so, then the auditor perform substantive test of transactions.
2. This test determines the amount of work to be performed i.e. substantive testing or test of details.

Phase III Perform Analytical Procedures and Tests of Details of Balances

1. where internal controls are strong, auditors typically rely more on Substantive Analytical Procedures (the comparison of sets of financial information, and financial with non-financial information, to see if the numbers 'make sense' and that unexpected movements can be explained)
2. where internal controls are weak, auditors typically rely more on Substantive Tests of Detail of Balance (selecting a sample of items from the major account balances, and finding hard evidence (e.g. invoices, bank statements) for those items)

Notes

1. Some audits involve a 'hard close' or 'fast close' whereby certain substantive procedures can be performed before year-end. For example, if the year-end is 31 December, the hard close may provide the auditors with figures as at 30 November. The auditors would audit income/expense movements between 1 January and 30 November, so that after year end, it is only necessary for them to audit the December income/expense movements and 31 December balance sheet. In some countries and accountancy firms these are known as 'rollforward' procedures.

Phase IV Complete the Audit and Issue an Audit Report
After the auditor has completed all procedures for each audit objective and for each financial statement account and related disclosures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This highly subjective process relies heavily on the auditor's professional judgment. When the audit is completed, the CA CPA must issue an audit report to accompany the client's published financial statements.