A Detailed Financial Audit Checklist for Your Firm (+Free Template)

The government, investors, and other stakeholders rely on your audit opinion for their regulatory and investment decisions.

However, achieving accurate audit opinions is becoming increasingly challenging. In 2023, the PCAOB found deficiencies in 46% of the financial audits. That’s a 6% increase from the previous year.

With increasing complexity of financial instruments, this trend may continue if audit professionals effectively utilize project management tools, such as checklists, to organize their work.

The following financial audit checklist will give you the mental clarity to consistently present a true and fair view of financial statements and help businesses comply with all relevant regulations.

What Is a Financial Audit and Why Is It Essential?

A Financial Audit is the independent examination of a company’s financial statements to determine the accuracy and completeness of the financial records. In the United States, financial statements are typically reviewed under Generally Accepted Accounting Principles (GAAP).

Financial audits assist clients in:

1. Detecting Fraud: Financial audits expose business practices that might lead to mismanagement of resources.
2. Improving Decision-making: Financial audits provide businesses with data to address financial risks and misconduct.
3. Attracting Investors: Companies looking to raise funds want to assure investors of their profit potential. Financial audits allow them to present the data that communicates these potentials.
4. Meeting Regulatory Requirements: Ultimately, audits help publicly traded companies provide financial statements that comply with GAAP.

The success of your audit engagements is critical to the entity’s understanding of its financial health and compliance with state and federal regulations.  Therefore, the audit process must be efficient.

Challenges in Conducting Financial Audits Without a Checklist

As a list of the steps your team needs to complete a financial audit, the absence of a financial audit checklist creates several problems for the average team member, including:

a. Risk of Missing Critical Steps

The audit process can last anywhere from a few weeks to several months. Naturally, your team members can forget where they left things off (in a particular project), especially considering they have other projects to work on.

Financial audit checklists structure your audit projects, allowing your team members to check off tasks upon completion.

b. Inefficiencies Due to Lack of Organization

When there isn’t a central place to collect and organize client documents and information, your team members will waste precious time trying to access the resources they need to complete tasks.

This can affect your judgment of the client’s financial reporting.

c. Increased Likelihood of Errors or Non-Compliance

You may remember everything you need to complete each audit engagement, but your team members won’t. If you remember all the recent amendments to audit regulations and frameworks, your team members may not.

Checklists are created to reflect your client’s compliance needs. It will show your staff what to do, get, and test at every stage, improving the accuracy of your audit process.

A Detailed Financial Audit Checklist

The steps of a typical financial audit are:

1. Planning Phase

• Initial Client Meeting

The audit engagement begins with a meeting with your new client, where you define the objectives, scope, methodology, and timeline.

When done well, this meeting will set the tone, expectations, and timelines for the engagement and allow you and your client to make adequate arrangements for a smooth audit engagement.

• Engagement Letter Preparation & Signing

The engagement letter allows you to define (in writing) the objectives, scope, and other terms of the engagement, such as the client’s and auditor’s expectations and responsibilities.

Most accounting practice management software solutions will have an engagement letter feature that quickens and standardizes your engagement letters, making it easier to customize and tailor them to each client as you see fit.

• Draft and Share a Document Request List Detailing All Required Financial and Operational Documents

Following the signing of an engagement letter, you should request all the documents and information (previous audit reports, receipts, meeting minutes, bank statements, ledgers, etc.) for the work.

With practice management software, you should be able to send a list of the files and information you need from your client in advance.

Combined with the automated reminders feature, you will not need to call or email an entity to follow up on your requests manually.

2. Risk Assessment

• Review of Prior Year Audit Work Papers

Reviewing your client’s prior year working papers gives more context to an entity’s financial statements.

The working papers will also help you understand the recurring compliance risks and the level, scope, and procedure of previous audits in the company, which will guide your approach.

• Preliminary Analytical Procedures

This is where you analyze the entity’s prior year report and the company’s operating environment to understand the likelihood of misstatement, especially when auditing a client in specialized industries (like banking and insurance, agriculture, etc.).

3. Fieldwork Preparation

• Schedule Fieldwork

Usually, financial audits are done following the preparation of the entity’s financial statements.

The earlier the audit is done, the better because the financial data is fresh in your auditee’s mind.

• Assign Team Roles and Responsibilities

This is where you assemble your audit team for the engagement. You’ll determine the staff in charge of testing procedures, audit review, and other aspects of the engagement.

Some firms will use staff auditors, senior staff auditors, audit management, and engagement partners for these respective roles.

Whatever your unique process looks like, the idea is to create a team to manage individual aspects of the engagement.

4. Fieldwork Execution

• Perform Substantive Testing

Now that all pre-fieldwork processes are done, you can begin reviewing everything that makes up the entity’s financial statements—transactions, balances, assets, liabilities, etc.—to prove their accuracy and completeness.

This includes:

• • Revenue Testing: assess revenue transactions (like date, amount, etc.) for revenue manipulation according to the relevant compliance framework.
  • Expense Testing:  observe the purchase transactions to see if there are improper authorizations or abnormal transactions and balances.
  • Payroll Testing: evaluate various aspects of the payroll processing and operation to ensure employees are promptly and adequately compensated.
  • Fixed Asset Verification: verify the costs, conditions, and depreciation of the assets the entity claims to have.
  • Inventory Testing (if applicable): if your client holds inventory, this is where you determine whether their financial records and inventory match.
  • Accounts Payable and Accruals Testing: Track accounts payable and accrual transactions to ensure all purchase orders, invoices, and payments are recorded.
  • Cash and Bank Balance Reconciliation: compare your client’s cash  on hand with their bank statement to account for cash items, resolve discrepancies, and ensure accurate financial records.
  • Equity Testing: verify share issuance, dividends, treasury stock transactions, and other equity-related transactions.
  • Detailed Analytical Procedures: carefully analyze all abnormal areas or events in the company, such as all high-risk areas, unusual transactions, and complex accounting.
  • Subsequent Event Review: analyze the events (from internal or external sources) that occurred after the balance sheet and before the financial statements and make disclosures where necessary.
  • Related Party Transactions: this is where you disclose the nature, amounts, and terms of financial activities between the company and the companies associated with it.

• Verify Internal Controls

How well are the financial procedures and policies preventing or detecting financial misconduct in the company?

This is where you test them to verify their effectiveness through observation, reperformance, inspection of evidence, computer-assisted audit techniques, etc.

• Prepare Audit Documentation

The audit documentation should clearly state the nature, purpose, timing, the accounting records reviewed, the approach, and conclusions (with evidence backing it up).

The audit documentation provides the basis for the audit report that follows. It should be detailed enough for an experienced auditor to understand.

5. Review Phase

• Initial Review by Audit Manager

This should focus on the connection between the documentation and conclusion and how these align with the audit report.

• Senior Review

The senior review will likely focus on the audit work papers to ensure they comply with generally accepted audit standards.

6. Reporting Phase

• Draft Audit Report

This is where you write the report by stating the accuracy and completeness of the financial information, the basis for your conclusions and room for improvement, and any issue worthy of note.

• Management Response Collection

The auditee should comment on the audit process and provide more context to the findings. Management should also state whether the findings and recommendations are relevant to their business.

• Finalize Audit Report

Add the management’s response to your audit report for issuance to the management and stakeholders.

7. Closing Phase

• Conduct Closing Meeting

The closing meeting allows you to explain the audit findings while they’re still fresh.

This should cover the auditee’s strengths, weaknesses, and areas for improvement.

• Archive Work Papers

Store the audit documentation in a safe, secure, and accessible location.

The auditee’s management may need to access the work papers in the future.

• Post-Audit Review

This is where you help the auditee understand how they can use the audit conclusions to improve their financial and compliance goals.

Your Free Financial Audit Checklist Template.