Topic
Audit and Financial Control
An audit mindset does not ask whether a number is right, but how one can be sure that it is. Financial control builds that confidence from inside the company, within the processes that produce financial information: the control system that keeps records complete, reconciliations timely and reports consistent.
This page looks at how that mindset, carried over from the audit sector, applies to the finance function inside a company.
What does an audit mindset bring to the finance function?
| The audit question | Its counterpart in the finance function |
|---|---|
| Where is the evidence for this number? | Every material balance supported by a reconciliation |
| Which process could produce a wrong number unnoticed? | Identifying key control points |
| Does the control exist on paper, or in practice? | Tracking who performs each control, and when |
| What is unusual inside the data? | Analysis across all of the accounting data |
These questions are asked not for an outside review but so that the company can rely on its own reports. I describe how control points are identified in key control points in financial processes.
Financial close control matrix
A good finance function builds control into the process, not onto the end of reporting. The framework I use to structure the monthly close matches each close step with a control and a piece of evidence:
| Close step | Control | Evidence | Frequency |
|---|---|---|---|
| Bank accounts | Bank reconciliation | Reconciliation, statement | Monthly |
| Receivables and payables | Ageing and balance confirmation | Ageing report, confirmations | Monthly / quarterly |
| Inventories | Count and costing check | Count sheets, cost report | Periodic |
| Accruals | Cut-off check | Accrual listing | Monthly |
| Fixed assets | Depreciation and movement check | Movement schedule | Monthly |
| Tax accounts | Return-to-ledger reconciliation | Returns, account listing | Monthly |
| Trial balance and statements | Analytical review | Comparison with prior period and budget | Monthly |
| Reporting | Statement–note consistency check | Checklist | Periodic |
The aim is not more controls, but making sure that behind every material number there is a control and evidence. For the calendar and pace of the close, see the monthly close.
Does the control system exist on paper, or in practice?
A control has to exist in practice, not on paper. Three questions are enough to see whether a control is working: Who performs it? When? Where is the evidence? If these cannot be answered, the control is defined but not operating.
Documentation: the trace of a control
The value of a control lies in being traceable. Which data was used, which procedure was applied and what conclusion was reached should be documented in a standard, reusable structure. I describe how to build that structure in What makes a good audit working paper?
Data analytics and technology
Because accounting data is now digital and structured, review can move from samples to every entry. Indicators such as weekend postings, round amounts, reverse balances and unusual account combinations can be scanned across every journal entry. I give examples in What can e-ledger data reveal?, apply them in the E-Ledger Analysis Engine, and cover statement consistency checks in the TFRS/IFRS Reporting Software.
I discuss what technology will and will not change in audit in How will AI change audit?
Frequently asked questions
Is financial control accounting’s job?
Not only accounting’s. Records are kept in accounting, but controls such as documents arriving on time, approvals and inventory counts need sales, purchasing and the warehouse to take part. The finance function is responsible for designing and monitoring these controls.
Is a control system only for large companies?
No. The scale of control varies with the size of the company, but the need does not. In a small company segregation of duties may be limited; management review and regular reconciliations then become even more important.