Main audit areas — practical overview
An audit of financial statements is not a review of every document one by one. The auditor works on the basis of risk assessment and materiality, focusing effort where an error or manipulation would have the greatest impact on the picture of the company.
Below is a practical overview of the areas most often tested in the audit of a limited liability company or joint-stock company. For each area, the table shows what the auditor looks for and what the finance team is expected to deliver.
| Area | What the auditor tests | What the company should provide |
|---|---|---|
| Revenue | Completeness, timing, consistency with accounting policy and actual transactions | Revenue breakdown by contract or product, sample invoices with delivery or acceptance evidence |
| Receivables | Valuation, impairment allowance, confirmations, classification between current and non-current | Customer balance confirmations, ageing report, collection history, contracts with major customers |
| Inventories | Existence, valuation, write-downs, slow-moving and obsolete items | Inventory count protocol, production cost calculations, cut-off documents around year-end |
| Liabilities and accruals | Completeness, correct period allocation, unrecorded liabilities and cut-off | Unpaid invoice listing, accrual schedule with rationale, bank confirmations |
| Provisions | Basis for recognition, amount, documentation of management judgement | Legal opinion on disputes, warranty calculations, risk analysis, historical settlements |
| Leases | Completeness of lease register, right-of-use asset and lease liability calculations where relevant | Full lease register, discount rate, annexes, renegotiations and reassessments |
| Taxes | Deferred tax, current income tax, local taxes and transfer pricing exposure | CIT calculation reconciled to book profit, temporary differences schedule, TP documentation |
| Fixed assets and intangibles | Existence, classification, depreciation, impairment indicators and testing | Fixed asset register, disposal records, impairment testing documentation |
| Subsequent events | Events requiring adjustment vs disclosure, completeness of note disclosure | Listing of material post-balance-sheet events, management decisions after close, updates on disputes and contracts |
| Notes and disclosures | Completeness, consistency with books and supporting documents, relevance to the reporting period | Updated accounting policy, draft notes ready for review before final sign-off |
How the auditor selects procedures
The depth of testing in each area depends on risk assessment and the materiality threshold set for the company. In lower-risk areas, the auditor may rely mainly on analytical procedures such as trend analysis, year-on-year comparisons and ratio review. In higher-risk areas, detailed testing of transactions and balances becomes necessary.
Notes and disclosures are as important as the numbers
Even accurate ledger balances are not enough for a clean opinion if the notes are outdated, incomplete or inconsistent with contracts and decisions taken by management. The auditor reviews not only the balances but also the narrative that explains them.
- Accounting policy still describes an old lease model although group reporting already changed.
- Litigation note does not include disputes started in the second half of the year.
- Management judgements and estimates are listed but the method and sensitivity of assumptions are not explained.
- Related-party note does not match the contracts actually signed with shareholders or group entities.
Where auditor questions come from — and how to reduce them
- Inconsistency between documents — the ledger balance does not reconcile to the subledger, or the note describes something differently from the contract.
- Missing documentation of judgement — management made a decision on a provision, impairment or classification, but there is no written rationale behind it.
- Material change without explanation — a line item moved significantly versus prior year and there is no analytical note explaining why.
The most effective way to shorten the audit is to prepare a short memo for each material year-on-year movement before fieldwork starts.
Common questions
See how this applies to your company
If you want to assess what this means for your company, prepare for audit or discuss a specific reporting issue, speak directly with a statutory auditor.