External Audit and Preparation of Financial Statements in Accordance with IFRS
An external audit is an independent examination of an organization's financial records, books and statements by a certified public accountant (CPA) or an external auditing firm. The purpose of the external audit is to provide assurance to stakeholders, such as shareholders, investors, and creditors, that the financial statements are prepared in accordance with the applicable financial reporting framework, which in this case is the International Financial Reporting Standards (IFRS) which is applied in Suadi Arabia Under The Saudi Organization for Chartered and Professional Accountants (SOCPA) .
The IFRS is a set of global accounting standards developed by the International Accounting Standards Board (IASB) that provide guidance on how to prepare and present financial statements. These standards ensure consistency and comparability in financial reporting across different countries and industries.
To prepare financial statements in accordance with IFRS, companies need to follow several key steps:
Identify the applicable IFRS standards: The first step is to identify the relevant IFRS standards that apply to the entity's specific industry and transactions. The IASB regularly updates and releases new standards or amendments, so it is crucial to stay updated with the latest changes.
Gather financial information: The company needs to gather all the necessary financial information, including transactions, assets, liabilities, revenues, and expenses, for the given period. This involves collecting data from various sources within the organization, such as accounting systems, bank statements, and invoices.
Apply IFRS requirements: Once the financial information is gathered, the company needs to apply the specific requirements of IFRS to prepare the financial statements. This includes applying appropriate measurement, recognition, and disclosure criteria for various items, such as revenue recognition, impairment of assets, and fair value measurements.
Implement internal controls: To ensure the accuracy and reliability of the financial statements, companies need to establish robust internal controls. These controls help in safeguarding the assets, preventing fraud, and promoting accurate financial reporting. External auditors often review and test these internal controls as part of their audit procedures.
Prepare financial statements: Based on the collected financial information and applying the relevant IFRS requirements, the company prepares the financial statements. The primary financial statements under IFRS include the statement of financial position (balance sheet), statement of comprehensive income (income statement), statement of cash flows, and the statement of changes in equity.
External audit: After the financial statements are prepared, an external auditor is appointed to conduct an audit. The external auditor reviews the financial statements, performs various audit procedures, and expresses an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with IFRS. This opinion enhances the credibility and reliability of the financial statements for external users.
In summary, external audit and the preparation of financial statements in accordance with IFRS involve identifying applicable standards, gathering financial information, applying IFRS requirements, implementing internal controls, preparing financial statements, and undergoing an external audit. This process ensures that companies adhere to the global accounting standards and provide reliable financial information to stakeholders.
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