Financial Statement Audit: A Guide for New Zealand Businesses

A financial statement audit provides independent assurance over an organisation’s financial reporting. It involves the examination of financial statements and supporting evidence to determine whether the statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

For businesses in New Zealand, a financial statement audit may be required by legislation, regulation, an organisation’s governing documents or other circumstances. It can also provide valuable confidence to shareholders, directors, lenders, investors and other stakeholders.

A financial statement audit is more than checking whether figures add up. Auditors assess financial information, consider risks of material misstatement, examine supporting evidence and use professional judgement to form an independent audit opinion.

What Is a Financial Statement Audit?

A financial statement audit is an independent examination of an organisation’s financial statements.

The auditor obtains sufficient appropriate audit evidence to form a conclusion about whether the financial statements are materially misstated. New Zealand’s auditing standards are based on International Standards on Auditing (New Zealand), or ISAs (NZ). ISA (NZ) 200 sets out the overall responsibilities of an independent auditor conducting an audit of financial statements.

The financial statements being audited may include information such as:

• Statement of financial position
• Statement of profit or loss and other comprehensive income
• Statement of changes in equity
• Statement of cash flows
• Notes to the financial statements

The exact presentation depends on the applicable reporting framework and the nature of the organisation.

Why Is a Financial Statement Audit Important?

Financial statements are used by a range of stakeholders to understand an organisation’s financial position and performance.

An independent audit can increase confidence in that information by providing an objective assessment from an appropriately qualified auditor.

For management and directors, the audit process can also highlight areas where financial reporting processes, documentation or controls may need attention.

For external stakeholders, an independent auditor’s report provides additional assurance when evaluating financial information.

However, an audit provides reasonable assurance, not absolute assurance. An audit is not designed to guarantee that every error or instance of fraud will be identified.

What Does a Financial Statement Audit Cover?

The scope of a financial statement audit depends on the organisation, its financial statements and the risks identified during the engagement.

Auditors may examine areas such as:

Revenue

Auditors may assess whether revenue has been appropriately recorded and recognised and whether supporting documentation exists.

Expenses

Expenses may be tested to determine whether they are genuine, properly recorded and appropriately classified.

Assets

The audit may include examination of cash, receivables, inventory, property, plant and equipment and other assets.

Liabilities

Auditors may examine loans, trade payables, provisions and other obligations to determine whether liabilities are appropriately recorded.

Equity

Share capital, retained earnings and other equity balances may be reviewed against relevant records.

Accounting Estimates

Some financial statement amounts require management judgement. Examples can include provisions, impairment assessments and certain valuations.

Related-Party Transactions

Auditors may review relationships and transactions with related parties because these can require specific disclosure and accounting considerations. ISA (NZ) 550 specifically addresses auditors’ responsibilities relating to related-party relationships and transactions.

How Does a Financial Statement Audit Work?

Although the exact process varies, a financial statement audit generally follows a structured approach.

1. Audit Engagement

The auditor and client establish the terms and scope of the engagement.

The auditor also considers whether the engagement can appropriately be accepted or continued.

2. Audit Planning

Planning is an important part of the audit process.

The auditor develops an overall audit strategy and audit plan based on an understanding of the organisation and the circumstances of the engagement. ISA (NZ) 300 specifically addresses the auditor’s responsibility to plan an audit of financial statements.

3. Understanding the Business

The auditor develops an understanding of the organisation, its activities, financial reporting processes and relevant internal controls.

This helps the auditor identify areas where there may be a higher risk of material misstatement.

4. Risk Assessment

The auditor assesses risks that could result in material misstatements in the financial statements.

Higher-risk areas generally require greater audit attention.

5. Audit Testing

The auditor performs procedures to obtain evidence supporting the financial statement amounts and disclosures.

Testing may involve examining documents, confirming balances, observing processes, performing calculations, analysing transactions and carrying out other audit procedures.

6. Evaluation of Evidence

Audit evidence is evaluated to determine whether it provides an appropriate basis for the auditor’s conclusions.

ISA (NZ) 500 addresses audit evidence and requires auditors to design and perform procedures to obtain sufficient appropriate evidence on which to base their audit opinion.

7. Completion and Review

The auditor evaluates identified misstatements, reviews the financial statements and considers whether the evidence obtained supports the proposed audit opinion.

8. Auditor’s Report

The final stage involves issuing an independent auditor’s report containing the auditor’s opinion and other required information.

ISA (NZ) 700 deals with the auditor’s responsibility to form an opinion on financial statements and the form and content of the resulting auditor’s report.

What Is an Auditor’s Opinion?

One of the main outputs of a financial statement audit is the auditor’s opinion.

An unmodified opinion generally indicates that the auditor concludes that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

An audit opinion can also be modified in certain circumstances.

Qualified Opinion

A qualified opinion may be issued when the auditor identifies a material issue but the matter is not pervasive to the financial statements, or when sufficient appropriate audit evidence cannot be obtained and the possible effects are material but not pervasive.

Adverse Opinion

An adverse opinion is issued when the auditor concludes that misstatements are both material and pervasive to the financial statements.

Disclaimer of Opinion

A disclaimer may be issued when the auditor cannot obtain sufficient appropriate audit evidence and concludes that the possible effects could be both material and pervasive.

ISA (NZ) 705 addresses circumstances where an auditor determines that a modification to the audit opinion is necessary.

Who Needs a Financial Statement Audit in New Zealand?

Not every New Zealand business automatically requires an annual financial statement audit.

Whether an audit is required depends on factors such as the organisation’s legal structure, size, ownership, regulatory status and applicable legislation.

Certain entities have specific financial reporting and audit obligations. These can include some large companies and entities subject to financial markets regulation.

Businesses should assess their individual circumstances and applicable requirements rather than assuming that the same audit obligations apply to every organisation.

Financial Statement Audit Standards in New Zealand

Financial statement audits in New Zealand are conducted under the applicable New Zealand auditing standards.

The XRB’s auditing standards include ISAs (NZ), which establish requirements and guidance for different aspects of an audit.

Some important standards include:

• ISA (NZ) 200 – Overall objectives of the independent auditor
• ISA (NZ) 220 – Quality management for an audit
• ISA (NZ) 300 – Audit planning
• ISA (NZ) 500 – Audit evidence
• ISA (NZ) 550 – Related parties
• ISA (NZ) 600 – Group financial statement audits
• ISA (NZ) 700 – Forming an opinion and reporting
• ISA (NZ) 705 – Modifications to the auditor’s opinion

These standards work together to establish the requirements for planning, performing and reporting on financial statement audits.

What Documents Are Needed for a Financial Statement Audit?

Preparing the necessary information in advance can make the audit process more efficient.

Depending on the organisation and audit scope, auditors may request:

• Trial balance
• General ledger
• Bank statements
• Bank reconciliations
• Accounts receivable reports
• Accounts payable reports
• Inventory records
• Fixed asset register
• Loan statements
• Payroll records
• Tax information
• Major contracts
• Board or governance minutes
• Supporting documents for significant transactions
• Details of related-party transactions

The exact requirements vary depending on the organisation and the auditor’s assessment of risk.

Financial Statement Audit vs Review

A financial statement audit and a financial statement review are different types of engagements.

An audit is designed to provide reasonable assurance through audit procedures and an independent audit opinion.

A review generally provides a lower level of assurance and involves different procedures.

The appropriate engagement depends on the organisation’s requirements and the applicable legal or reporting framework.

Businesses should therefore establish whether they need an audit, review or another form of assurance before engaging a professional.

Benefits of a Financial Statement Audit

A financial statement audit can provide several benefits beyond meeting a reporting requirement.

Increased Confidence in Financial Reporting

An independent opinion can increase confidence in the financial information presented by an organisation.

Improved Financial Processes

The audit process may identify weaknesses in accounting procedures, documentation or controls.

Better Governance

Audit findings can provide useful information to directors and those responsible for governance.

Support for Stakeholders

Audited financial statements may provide greater confidence to lenders, investors, shareholders and other stakeholders.

Identification of Potential Issues

Audit procedures may identify errors, inconsistencies or unusual transactions that require further attention.

It is important to remember that the auditor’s primary responsibility is to express an opinion on the financial statements. An audit is not primarily a management consulting exercise.

How Businesses Can Prepare for a Financial Statement Audit

Good preparation can help reduce unnecessary delays.

Businesses should maintain accounting records throughout the year rather than waiting until the audit begins.

Bank accounts should be reconciled regularly, supporting documents should be organised and significant transactions should have appropriate documentation.

Management should also ensure that the auditor receives requested information promptly and that questions are addressed clearly.

A well-organised accounting system can make it easier for auditors to obtain evidence and complete their procedures efficiently.

Choosing a Financial Statement Audit Firm

Choosing an appropriate auditor is an important decision.

Businesses should consider:

Relevant Experience

Look for an audit firm with experience working with organisations of a similar size, structure or industry.

Technical Expertise

The auditor should understand the applicable financial reporting framework and New Zealand auditing standards.

Independence

Independence is fundamental to an external audit. The auditor must be able to reach an objective conclusion without inappropriate influence or conflicts of interest.

Communication

Clear communication can make the audit process significantly easier for management and governance teams.

Audit Approach

Businesses should understand how the auditor plans to conduct the engagement, what information will be required and how findings will be communicated.

Overall Value

Cost is important, but it should be considered alongside the scope, expertise and quality of service offered.

How Aurora Financials Can Help

Maintaining accurate and well-organised financial records is an important part of preparing for a financial statement audit.

Aurora Financials can support New Zealand businesses with accounting and financial processes that help keep records accurate, reconciled and up to date.

From maintaining accounting records to preparing financial information, businesses can benefit from having reliable processes in place before an external auditor begins their work.

For organisations preparing for an audit, Aurora Financials can help establish more consistent financial processes and ensure that important accounting information is readily available.

This can help management approach the audit process with greater confidence while allowing the independent auditor to focus on the audit itself.

Final Thoughts

A financial statement audit provides an independent assessment of an organisation’s financial reporting and can play an important role in transparency, governance and stakeholder confidence.

The process involves planning, risk assessment, evidence gathering, testing, evaluation and independent reporting. New Zealand audits are conducted within an established framework of auditing standards issued by the XRB.

For businesses, good preparation is just as important as choosing the right auditor. Maintaining accurate records, reconciling accounts regularly and keeping supporting documentation organised can make the audit process more efficient.

Whether an audit is required by legislation or undertaken for other reasons, an effective financial statement audit can provide valuable assurance about the quality and reliability of an organisation’s financial reporting.

Frequently Asked Questions About Financial Statement Audit

1. What is a financial statement audit?

A financial statement audit is an independent examination of an organisation’s financial statements and supporting evidence. The auditor obtains sufficient appropriate evidence to form an opinion on whether the financial statements are materially misstated.

2. What does a financial statement audit include?

A financial statement audit may include examination of revenue, expenses, assets, liabilities, equity, accounting estimates, related-party transactions and financial statement disclosures.

3. Is a financial statement audit mandatory in New Zealand?

Not for every business. Audit requirements depend on factors such as the entity’s structure, size, ownership and regulatory obligations.

4. How long does a financial statement audit take?

The timeframe varies depending on the size and complexity of the organisation, the quality of its records, the scope of the audit and how quickly requested information is provided.

5. What is the difference between an audit and a review?

An audit provides reasonable assurance and results in an audit opinion. A review provides a lower level of assurance and involves different procedures.

6. What is an unmodified audit opinion?

An unmodified opinion means the auditor has concluded that the financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework. The auditor’s report also contains other required information and does not mean that every individual transaction has been verified.

7. What standards apply to financial statement audits in New Zealand?

Financial statement audits in New Zealand are conducted under applicable ISAs (NZ) and related requirements. XRB standards cover areas including auditor responsibilities, audit planning, evidence, quality management and reporting.