What is a financial statement audit, and why do companies need one?

What the interviewer wants to hear

• Independent examination of financial statements
• Aims for reasonable, not absolute, assurance
• Results in an opinion on true and fair view
• Builds trust for shareholders, lenders, regulators and tax authorities
• Required by law for companies in India and the UAE

Model answer

A financial statement audit is an independent examination of a company’s financial statements by a qualified auditor, who gathers evidence and gives an opinion on whether they show a true and fair view in line with the reporting framework, such as Ind AS or IFRS. The auditor aims for reasonable assurance, which is high but not absolute, because audits use sampling and judgement and some fraud is hard to detect. Companies need audits because the people who rely on the accounts, shareholders, banks, investors, tax authorities and regulators, are not the people who prepare them. An independent opinion reduces the risk of relying on misstated numbers. In India the Companies Act requires every company to have a statutory audit, and in the UAE companies are generally required to have their accounts audited too. A good audit also gives management useful feedback on controls.

More easy Auditor questions

• What are financial statement assertions? Give examples for a balance and for a class of transactions.
• What are internal controls, and why do auditors care about them?
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• What types of audit opinion can an auditor give, and when is each used?
• What is the difference between tests of controls and substantive procedures? Give an example of each.
• What procedures can an auditor use to obtain audit evidence?
• What does professional skepticism mean to you? Give an example of applying it.
• What does an audit engagement letter contain, and why does it matter?
• What are the main threats to auditor independence, and how are they managed?