An interim audit is an examination of a company’s financial records and procedures conducted during the company’s fiscal year, but before the end of the year. This is usually performed in addition to the year-end audit and is designed to reduce the workload and time taken for the year-end audit by identifying and addressing issues earlier.
The scope of an interim audit may cover a wide range of areas such as:
- Verification of Transactions: The auditor may examine a sample of financial transactions that have occurred during the year to verify their accuracy.
- Internal Control Review: The auditor might review the company’s internal controls and procedures to ensure they are operating effectively.
- Assessment of Risks: The auditor may use the interim audit to identify areas of significant risk that require special attention during the year-end audit.
- Estimation of Audit Materiality: The auditor may estimate the materiality level to be applied during the year-end audit.
The interim audit can help to detect errors or irregularities early, giving the company an opportunity to correct them before the year-end audit. The interim audit can also make the year-end audit process more efficient, as the auditor can focus more on high-risk areas having already reviewed lower-risk areas during the interim audit. However, it’s important to note that an interim audit does not replace the need for a year-end audit, which provides a more comprehensive review of the company’s financial statements.
Example of an Interim Audit
Suppose Company A’s fiscal year ends on December 31. The external auditors typically conduct the year-end audit in the first quarter of the following year to verify the financial statements of the company.
However, to spread the audit work and improve the efficiency of the year-end audit, the external auditors decide to conduct an interim audit in September. During the interim audit, the auditors review several aspects of the company’s financial records and operations, such as:
- Examining transactions: The auditors select a sample of transactions from the first half of the year and confirm their accuracy. They verify the supporting documents and ensure these transactions have been correctly recorded in the books.
- Reviewing internal controls: The auditors assess the company’s internal control systems, such as the process for approving expenditures or the procedures for safeguarding assets. If they identify any weaknesses, they bring these to the attention of management so corrective actions can be taken before year-end.
- Testing inventory: The auditors perform a physical count of the inventory to verify its existence and condition.
- Identifying areas of risk: The auditors identify areas that may require special attention during the year-end audit, such as complex accounting estimates or high-value transactions.
The findings of the interim audit will guide the auditors’ work during the year-end audit and can help make that process more efficient and focused. For Company A, the interim audit also provides an opportunity to address any issues or weaknesses identified, ensuring a smoother year-end audit process.