The audit cycle is the accounting process auditors use to review a company’s important financial information. Companies use audits to verify their financial information is accurate and valid prior to releasing financial statements. Internal audits may be conducted by the company’s accounting staff for the purpose of management review. External audits are usually conducted by public accounting firms or private certified public accountants (CPA) to provide an objective opinion on the company’s financial and accounting processes. The audit cycle usually includes several steps, such as the identification process, audit methodology, fieldwork, management review meeting and the remedial audit process.
The identification process of the audit cycle determines the accounting processes needing to be reviewed per the company’s direction. This identification process usually involves company managers meeting with auditors and discussing the highest risk areas needing to be audited in the financial or accounting department. Company management will also discuss the goals needing to be achieved during the audit cycle. Once this step is complete, auditors will move into the audit methodology stage.
The audit methodology is stage helps auditors determine how they will collect information for review during the audit. Auditors may decide to interview company employees to determine how well they are trained and understand their role in the accounting process. Auditors may also request certain financial information from the accounting department that will be reviewed during the audit cycle’s fieldwork stage.
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The audit fieldwork stage is where the bulk of work is done by the auditors; they will usually test the accounting samples collected during the methodology stage. As they review these samples, the auditors will notate any variations from the company’s accounting policies and manuals. If too many variations are found in the initial accounting samples, auditors will be forced to pull a second sample for testing. Once the second sample has been reviewed auditors will move on to the management audit meeting.
During the management meeting process of the audit cycle, auditors will review the information regarding the accounting issues discovered during the fieldwork phase. Auditors may also suggest changes to the company’s internal accounting processes to limit the number of errors or misstatements in future accounting information. Significant changes resulting from material accounting misstatements may require auditors to schedule a remedial audit.
The audit cycle uses remedial audits to verify that any changes suggested by auditors have been properly implemented by the company. Remedial audits usually test the changes suggested by auditors during the initial audit’s management meeting. Once the company passes the remedial audit, auditors will close out the current audit cycle and issue an opinion on the company’s accounting processes.