An audit cycle is a procedure that seeks to verify the reliability of the financial information presented by a company. This, prior to the publication of its financial statements.
That is, an audit cycle has the objective of verifying that the financial data of a company are valid and exact, that is, that they reliably reflect the economic situation of the firm.
This procedure can be carried out by the accounting area of the organization itself (internal audit) or the work can be entrusted to a third party. In the latter case, it would be an external audit.
The idea of carrying out this accounting cycle is to identify and notify any questioning or inconsistency in the financial statements.
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At this point, we must remember that an audit is, in general, the process of exhaustive analysis of a company or organization. This, in order to study its characteristics.
Specifically, in the accounting field, which is what concerns us in this article, an audit is the review of the financial statements of a legal entity to confirm that they are correct. This is, in principle, that the information corresponds to reality. For example, if sales of 100,000 euros were recorded, this figure is true.
In addition, the audit will confirm whether the company has prepared its financial statements following the corresponding regulatory framework. That is, if the International Financial Reporting Standards (IFRS) – IFRS in the European Union or the GAAP in the United States were respected.
Once the audit cycle is complete, an opinion is issued. The idea is that the audited company takes it into account to make improvements or changes, for example, if they have detected possible (or potential) internal control problems.
Audit Cycle Phases
The phases of the audit cycle are as follows:
- Recognition: The accounting processes to be analyzed are determined. In addition, risk areas and audit goals are defined.
- Choice of methodology: It is decided how the data will be collected: interviews, surveys, submit requests for information, etc.
- Field work: Collection and analysis of the required data. The obtained samples are tested and compared.
- Presentation and review: Auditors will meet with managers. Modifications to procedures may be suggested. This, to avoid or reduce errors in accounting information.
- Corrective audit: This step is reached if faults of particular relevance have been identified. The company can then decide to implement the proposed changes. Once this is done, the auditors issue a final report regarding the company’s accounting processes.