Auditing may not be the most popular activity, but it's a vital part of making sure your finances are in order.
But if this isn’t done effectively, it can cause more problems than it solves. If these activities aren't done diligently they can leave firms with an inaccurate, possibly overly-optimistic impression of their financial situation, which in turn leads to poor decision-making and the potential for lost revenue.
Here are a few bad habits you may have picked up over the years that you need to cut out of your processes immediately.
1. You don't start at the start
When setting out on an auditing process, what's the first thing you do? If it's looking at bank reconciliations or accounts, then chances are you're doing it wrong. Instead, the first step that must be completed is to conduct a full risk assessment.
This means ensuring you have a complete understanding of the environment, conduct thorough reviews to identify and eliminate any potential bias, ask questions about fraud, and plan out the analytics processes you'll use.
2. You ignore your risk assessment
So you've completed the risk assessment. That's great, but it's only going to be of use if you actually refer back to it throughout the process. If you just treat it as a tedious but necessary box-ticking exercise, then place it in a drawer never to be looked at again, you may as well not have done it in the first place.
This can be especially problematic if you rely on previous risk assessments, as these won't reflect any new risks that have developed in the meantime. Avoid this by highlighting in your risk assessment what the response would be and add it to a checklist to ensure it doesn't get overlooked.
3. You don't prioritize your risks
While on the subject of risk, it's important to remember not all risks are equal. Therefore, it's vital that you're able to identify and focus on the most significant risks and give them the attention they deserve.
Areas where there’s potential for material misstatements, won’t necessarily be classified as a significant risk but this depends on the type of business and the potential consequences. For example, could a misstatement be the result of illegal activity like fraud? When should allowances for bad debt be made? Identify these on the risk assessment form and focus your efforts accordingly.
4. Relying on balance sheet audits
Many auditors may go into a process with a clear idea of what they're going to do, which leads to them ignoring controls and relying too heavily on balance sheet audits that may not alert them to any issues until it's too late.
While this may seem like a convenient and time-saving way of conducting an audit, it can lead to serious problems. If, for instance, someone in the organization has been skimming cash from the business through unbilled receipts, an audit of the year-end bank reconciliation can spot the issue, but the money is still missing.
You can prevent this by keeping a close eye on controls and performing walkthroughs, which are comprehensive reviews of transaction cycles that evaluate internal controls to see if there are weaknesses that would allow errors or fraud to occur.
Cut out these bad habits and you'll be in a much better position to ensure your auditing processes are as thorough as possible and keep your finances running smoothly.