An integrated audit is a comprehensive auditing process that combines the audit of financial statements with the audit of a company’s internal control over financial reporting. This type of audit was introduced by the Sarbanes-Oxley Act (SOX) of 2002 in the United States.
The integrated audit has two main objectives:
- Financial Statements Audit: The purpose of this audit is to verify the accuracy and fairness of a company’s financial statements. This includes an examination of the company’s balance sheet, income statement, and cash flow statement. The auditors will evaluate if the financial statements present a true and fair view of the company’s financial position, results of operations, and cash flows in accordance with the applicable financial reporting framework.
- Internal Control over Financial Reporting (ICFR) Audit: The goal of this audit is to assess the effectiveness of the company’s internal control structure and procedures for financial reporting. Internal controls are processes put in place by a company to ensure the integrity of financial and accounting information, meet operational and profitability targets, and transmit management policies throughout the organization. An ICFR audit includes testing controls to ensure they are working as intended and identifying any weaknesses that could lead to material misstatements in the financial statements.
The idea behind an integrated audit is that by understanding the internal controls, the auditor can more effectively audit the company’s financial statements, as they can place more (or less) reliance on the controls in place. This can potentially result in more efficient audits and better assurance about the accuracy of the financial statements.
Integrated audits are performed by external auditors who must be independent from the company being audited. In the U.S., the Public Company Accounting Oversight Board (PCAOB) provides standards for how these audits are conducted.
Example of an Integrated Audit
Let’s consider an example of a publicly-traded company, let’s call it AutoCorp, undergoing an integrated audit.
AutoCorp has hired the independent accounting firm, ABC Auditors, to conduct their integrated audit. ABC Auditors’ work will encompass both financial statement auditing and internal control auditing.
- Financial Statement Audit: ABC Auditors start by examining AutoCorp’s financial statements including the balance sheet, income statement, and cash flow statement. They check the accounting records and other evidence supporting the financial statements, such as invoices, contracts, and bank statements. They’ll confirm that the financial statements are prepared in accordance with generally accepted accounting principles (GAAP) and accurately reflect AutoCorp’s financial position and performance.
- Internal Control over Financial Reporting (ICFR) Audit: At the same time, ABC Auditors are also assessing AutoCorp’s internal controls. They’ll analyze the procedures AutoCorp has in place to prevent, detect, and correct material misstatements in their financial statements. For instance, they might review approval processes for expenditure, reconciliations of financial records, segregation of duties, and information system controls.For example, AutoCorp has a control that requires two signatures on checks above a certain amount. ABC Auditors would test this control by selecting a sample of checks and verifying that they have the required two signatures.
If ABC Auditors finds a significant weakness in AutoCorp’s controls, such as discovering that large checks have been issued with only one signature, they would consider this a deficiency in internal control. This would be reported to AutoCorp’s management and possibly its audit committee. It may also affect the auditors’ reliance on other controls and their overall opinion on the financial statements.
At the end of the audit, ABC Auditors issues a report that includes their opinion on both the financial statements and the effectiveness of the company’s internal control over financial reporting. If any material weaknesses in the internal control are identified, these must be disclosed in the audit report.
Remember, this is a simplified example, and a real integrated audit would be much more complex and would involve many more tests and procedures. But this should give you an idea of what an integrated audit involves.